What is IPO Lock in Period?

The IPO lock in period is when a class of shareholders, such as company promoters, employees, or pre-IPO investors, cannot sell their shares on the open market. This usually lies 90 to 180 days from the IPO date but may vary depending on regulatory guidelines and company policies.

For instance, the Securities and Exchange Board of India (SEBI) prescribes a one-year lock-in for promoter shares. This is to ensure that the investors retain their stake in the post-listing company when the company goes public.

 

Why Do IPOs Have a Lock-In Period?

Here is why the lock in period for IPO plays an important role during the process when a company is going public:

 

1. Market Stability

The lock in period for IPO helps avoid excessive selling pressure that hurts the stock price. If the shareholders were allowed to sell their shares immediately after the IPO, such large-scale sales would indicate that they did not have much faith in the company's future. This would plunge the stock price down.

 

2. Building Trust

By holding onto their shares during the lock in period, promoters and early investors demonstrate their commitment to the company's growth. This reassures new investors and traders of its long-term prospects.

 

3. Regulatory Compliance

Market regulators enforce IPO lock in periods to ensure fairness in the market and protection for retail investors from large-scale sell-offs by insiders that may bring down the price of a stock. During the pre IPO lock in period, investors cannot sell, pledge, or transfer their shares.

 

How Does the Lock-In Period Work?

The lock-in period starts once the IPO is live and the shares are allocated. The investors and shareholders are legally prohibited from selling their shares before the expiration of that period. In a six-month lock-in arrangement, insiders cannot sell their holdings, even if the stock performs extremely well.

Lock-up expiration marks a big step where, upon expiry, the restricted shareholders can start selling shares. It usually leads to increasing volumes that, in several instances, put pressure downward on the stock price with a rush in supply volume.

 

Conclusion

The IPO lock in period is important for market stability and the protection of investor's interests. Knowing its purpose and implications will help a retail investor make better decisions and give them more confidence in the IPO market. Remember that a short lock-in period could be a sign of a lack of trust, while longer durations usually signify faith in the company's continued performance.