What Is the Lock-In Period in IPOs?

Written by Jainam Resources

Last Updated on: July 10, 2025

Introduction

When a company goes public through an Initial Public Offering (IPO), it marks a significant milestone. However, what many investors may not realize is that there is often a restriction known as the “lock-in period” that plays a critical role in stabilizing the post-IPO market. The lock-in period is a specific duration during which investors are prohibited from selling or withdrawing their investments. This blog will delve into the concept of the lock-in period IPOs, its implications, and why it’s important for various types of investors, including those holding pre-IPO shares in India.

Understanding the Lock-In Period in IPOs

The lock-in period IPO, also referred to as the IPO lockup period, is a specified duration during which certain investors are restricted from selling their shares. This period typically lasts anywhere between 90 to 180 days, depending on the regulatory framework and agreements in place.

Objectives of the Lock-In Period

• Market Stabilization: Prevents significant selling pressure immediately after the IPO, allowing the stock to stabilize in the market.
• Investor Confidence: Ensures that early investors, such as promoters or pre-IPO shareholders, cannot cash out immediately, demonstrating their long-term commitment to the company.
• Regulatory Compliance: Acts as a safeguard against market volatility and protects retail investors in IPOs from sudden stock price fluctuations.

Types of Lock-In Periods

Lock-in periods vary across different investment instruments and serve distinct purposes depending on the type of investment:

1. Hedge Funds:

Hedge funds generally have no lock-in period as they cater to high-net-worth individuals (HNIs) and institutional investors.

These funds focus on maximizing returns through a variety of strategies, including long-short equity, arbitrage, and derivatives trading. The absence of a lock-in period offers flexibility to sophisticated investors who understand the risks involved.

2. Fixed Deposits (FDs):

Fixed deposits typically have a minimum maturity period, which varies depending on the issuing bank or financial institution.

Common lock-in periods range from 7 days to 10 years, depending on the type of FD. Investors receive guaranteed returns, making FDs a preferred choice for risk-averse individuals.

3 . Mutual Funds (ELSS):

Equity-Linked Savings Schemes (ELSS) come with a lock-in period of 3 years, which is the shortest among other tax-saving options under Section 80C of the Income Tax Act.

An equity-linked savings scheme offers dual benefits of wealth creation through equity investments and tax savings, making them an attractive option for retail investors.

4. Public Provident Fund (PPF):

PPF has a lock-in period of 15 years, during which the invested amount earns a fixed, tax-free return.

Partial withdrawals are permitted from the 7th financial year onward, offering some degree of liquidity. PPF is a long-term, government-backed investment ideal for risk-averse individuals looking for steady growth.

5. National Pension Scheme (NPS):

The lock-in period for NPS extends until the investor reaches the age of 60, aligning with its objective of retirement planning.

Investors can make partial withdrawals under specific conditions, such as higher education, medical treatment, or buying a house. NPS offers flexibility in investment choices and tax benefits, making it a comprehensive retirement solution.

Benefits of Investing with a Lock-In Period

Investments that come with a lock-in period offer several advantages, which can make them a strategic choice for disciplined investors:

1. Encourages Long-Term Investing and Commitment:

Lock-in periods promote a long-term investment mindset by restricting the premature withdrawal of funds.

This encourages investors to focus on their financial goals without being swayed by short-term market volatility.

The enforced discipline often leads to more stable portfolios and higher returns over time, helping investors achieve specific milestones like retirement, education, or homeownership.

2. Provides Tax Benefits:

Many investments with lock-in periods offer tax incentives, such as those under Section 80C of the Income Tax Act, of 1961.

For example, ELSS mutual funds provide both the benefit of tax savings and the potential for wealth creation. This dual advantage makes such investments particularly appealing for individuals looking to optimize their tax liabilities.

3. Contributes to Investment Ecosystem Stability:

By locking in funds, these investments reduce the chances of sudden withdrawals, which can lead to market instability.

This stability benefits the broader financial ecosystem, ensuring orderly functioning and sustained growth of markets and institutions.

4. Helps Investors Stay Committed to Their Goals:

The lock-in period acts as a psychological anchor, discouraging impulsive decisions driven by market panic.

Staying invested allows investors to reap the full benefits of compounding and long-term appreciation, especially in equity-linked products.

Types of Investors Affected by the Lock-In Period

The lock-in period is not uniform across all investor categories. Different types of investors in IPOs face varying restrictions:

Promoters and Promoter Groups:

• These are the primary stakeholders and founders of the company.
• SEBI mandates a lock-in period of up to one year for promoters’ shares in India.

Anchor Investors:

• Institutional investors brought in just before the IPO to instill confidence in the market.
• Their shares are usually locked in for 30 days post-IPO.

Pre-IPO Investors:

• These include private equity firms, venture capitalists, and other early investors.
• Lock-in periods for pre-IPO shares in India often last 6 months post-IPO.

Retail Investors in IPOs:

• Retail investors who buy shares during the IPO are not subject to any lock-in restrictions.
• However, they can be indirectly impacted by the lock-in expiration of other categories.

Pre-IPO Placement and the Lock-In Period

Pre-IPO placement is when companies sell shares to select investors, such as private equity firms or high-net-worth individuals, before the IPO. These pre-IPO shares are subject to a lock-in period to ensure these early investors don’t flood the market with shares immediately after the IPO.

Pre-IPO Shares in India

In India, pre-IPO shares typically come with a lock-in period of 6 months, as per SEBI regulations. This restriction helps maintain market stability and prevents a sudden oversupply of shares.

Benefits for Companies and Investors

• Companies: Generate funds and attract reputed investors who can lend credibility.
• Investors: Gain early access to potentially high-growth opportunities but must commit to the lock-in restrictions.

How the Lock-In Period Affects Pre-IPO Companies

For pre-IPO companies, the lock-in period ensures their long-term investors remain committed, reflecting stability and confidence in the company’s prospects. This is especially important for companies in India, where pre-IPO placements are a common practice to secure funding.

Challenges for Pre-IPO Investors

• Limited liquidity during the lock-in period.
• Risks associated with the stock’s post-IPO performance.

Lock-In Period Regulations in India

The Securities and Exchange Board of India (SEBI) governs the lock-in period for IPOs. Key regulations include:

Promoter’s Contribution:

• Minimum lock-in period: 1 year from the date of IPO allotment.

Anchor Investors:

• Minimum lock-in period: 30 days post-IPO.

Pre-IPO Shares:

• Minimum lock-in period: 6 months from the date of IPO allotment.

These guidelines are designed to balance investor protection and market stability.

Also, Check our Blog, What Is Pre IPO Investment?

Market Impacts of the Lock-In Period

The expiration of a lock-in period often creates significant market activity. The significance of the lock-in period lies in encouraging long-term investment commitments, which enhances portfolio stability and assists investors in achieving their financial goals. Additionally, the end of a lock-in period can have implications on market sentiment and share prices. Here’s how:

Stock Price Movements:

• Large volumes of shares may flood the market once the lock-in period ends, potentially leading to a decline in stock prices.

Retail Investors in IPOs:

• Retail investors may experience volatility in their holdings as institutional and pre-IPO investors offload shares.

Market Sentiment:

• Positive performance during the lock-in period can boost investor confidence.
• Conversely, poor performance may lead to mass sell-offs.

Strategic Considerations for Investors

Understanding the lock-in period IPOs can help investors navigate potential risks and opportunities:

Retail Investors:

• Monitor the end of the lock-in period for signs of increased volatility.
• Avoid panic selling; focus on the company’s long-term fundamentals.

Pre-IPO Investors:

• Assess the stock’s performance before the lock-in period ends.
• Plan your exit strategy based on market conditions and regulatory restrictions.

Long-Term Investors:

• Use the lock-in period to analyze the company’s growth trajectory and market sentiment.

How to Evaluate Companies with Lock-In Periods

When considering an IPO, pay attention to the following:

Pre-IPO Placement Details:

• Identify key investors and their shareholding commitments.
• Evaluate the terms and duration of the lock-in period.

Company Fundamentals:

• Examine financial health, revenue growth, and market position.

Market Sentiment:

• Analyse trends in the industry and similar IPOs.

Conclusion

During the lock-in period, IPOs play a vital role in stabilizing markets and safeguarding investor interests. For informed decisions, understanding its impact on promoters, pre-IPO investors, and retail participants is crucial. Jainam Broking Ltd. empowers investors with insights and expertise to navigate IPO opportunities confidently. Choose Jainam Broking Ltd. as your partner to achieve your investment aspirations.

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