What is a Lock-In Period in IPO

Why Do IPOs Have a Lock-In Period

Let’s understand how it works.

Suppose there is a person X who bought NSDL shares in the pre-IPO market (unlisted market).

Now, NSDL decides to go public. The first step is that the company files a DRHP (Draft Red Herring Prospectus) with SEBI.

Even after filing the DRHP, you can still buy and sell NSDL’s unlisted shares in the market. But remember, once a DRHP is filed, the company must bring its IPO within 12 months, otherwise it has to file a fresh DRHP again.

Now, suppose NSDL files the DRHP and later announces the IPO date. That’s where the new story begins.

As soon as the IPO is officially announced, after some days, the shares’ ISIN (International Securities Identification Number) gets frozen, which means trading of NSDL shares in the unlisted market stops.

• If you had sold your shares before ISIN froze, that’s fine.

• But if you are still holding them when ISIN gets frozen, then you can only sell them after IPO listing.

But wait - there’s another condition.
According to SEBI guidelines if you held the shares from before the IPO, you can’t immediately sell them after listing. You need to hold them for a minimum of 6 months (lock-in period).

On the other hand, a person who applies in the IPO and gets shares through allotment can sell them anytime after listing, even on the very first day.

 Why Do IPOs Have a Lock-In Period

• To stop early investors from selling the stock for quick profit- Imagine if promoters or big early investors sold all their shares the moment IPO listed the stock price would crash badly. The lock-in period ensures they stay invested for some time.

• To build trust and confidence in the company’s future - When promoters keep holding their shares it shows they actually believe in the company’s long term growth this gives retail investors more confidence.

• To protect the stock from heavy ups and downs - If lakhs of shares suddenly hit the market on day one the price would swing like crazy. Lock-in prevents this chaos and keeps things stable.

What You Should Do (Conclusion)

So, what should we do and what things should we keep in mind before investing?

The advice is simple 

• If you are a short-term investor then the lock-in period becomes very important. You need to plan your exit before the ISIN (International Securities Identification Number) freeze otherwise you’ll be stuck holding those shares for 6 months unnecessarily.

• If you are a long-term investor then the lock-in period doesn’t affect you much because in long-term investing you need to think like a promoter, stay patient and believe in the company’s growth story.

• Always check the fundamentals of the company. Technical analysis won’t help much in the unlisted market.

• Do proper research and most importantly avoid overvalued companies because they have high chances of giving losses at the time of listing.

 In short: Be clear whether you are investing for the short term or the long term, plan accordingly. For more research, insights and investing in unlisted shares visit Sharescart.com