Lock-In & Restriction on Transferability

PART IV: LOCK-IN AND RESTRICTIONS ON TRANSFERABILITY

Regulation 115. Lock-in of specified securities held by the promoters

• Lock-in of Promoters’ Specified Securities

  1. The specified securities held by the promoters cannot be transferred for the period prescribed under the ICDR Regulations.

  2. This period of non-transfer is referred to as the “lock-in period”.

  3. During the lock-in period, the promoters cannot sell, transfer or otherwise dispose of the locked-in specified securities, subject to the exceptions permitted under the regulations.

  4. The exact duration of the lock-in depends on the category of securities and the applicable provision that follows.

Example:

• If promoters hold 10 lakh specified securities and the applicable lock-in period is 18 months, those securities cannot ordinarily be transferred during those 18 months.

(a).

• Lock-in of Minimum Promoters’ Contribution

  1. The minimum promoters’ contribution must be locked-in for 18 months.

  2. This includes promoters’ contribution made through:

     1. Promoters themselves.

     2. Alternative Investment Funds (AIFs), where applicable or

     3. Foreign Venture Capital Investors (FVCIs), where applicable.

  3. The 18-month lock-in period is calculated from the date of allotment of the Further Public Offer (FPO).

  4. During this period, the locked-in specified securities cannot ordinarily be transferred, subject to the exceptions permitted under the regulations.

• Example:

  1. FPO allotment date = 1 July 2026.

  2. The 18-month lock-in runs from 1 July 2026.

  3. The minimum promoters’ contribution would remain locked-in until the expiry of the prescribed 18-month period.

• Longer Lock-in for Capital Expenditure

  1. If the majority of the issue proceeds, excluding the Offer for Sale (OFS) portion, is proposed to be used for capital expenditure, a longer lock-in period applies.

  2. In such a case, the promoters’ contribution must remain locked-in for 3 years.

  3. The 3-year period is calculated from the date of allotment in the Initial Public Offer (IPO).

  4. The OFS portion is excluded when determining whether the majority of the issue proceeds will be used for capital expenditure.

  Example:

  1. Total issue proceeds = ₹100 crore.

  2. OFS portion = ₹20 crore.

  3. Amount considered for this test = ₹80 crore.

  4. If more than ₹40 crore of this ₹80 crore is proposed to be used for capital expenditure, the 3-year lock-in requirement applies.

(b).

• Lock-in of Promoters’ Excess Holding

  1. Promoters’ holding above the minimum promoters’ contribution is also subject to a lock-in.

     1. This excess holding must remain locked-in for 6 months.

     2. The 6-month period applies only to the portion of promoters’ holding that exceeds the minimum promoters’ contribution.

     3. Therefore, the minimum promoters’ contribution and the excess promoters’ holding have different lock-in periods.

• Example:

  1. Promoters hold 30 lakh shares after the issue.

  2. Minimum promoters’ contribution = 20 lakh shares.

     1. Excess promoters’ holding = 10 lakh shares.

     2. The 20 lakh shares forming the minimum contribution are subject to the applicable longer lock-in.

     3. The additional 10 lakh shares are locked-in for 6 months.

• Longer Lock-in for Excess Promoters’ Holding

  1. Normally, promoters’ holding above the minimum promoters’ contribution is locked-in for 6 months.

  2. However, the lock-in becomes 1 year if the majority of the issue proceeds, excluding the Offer for Sale (OFS) portion, is proposed to be used for capital expenditure.

     1. The 1-year period is calculated from the date of allotment in the Initial Public Offer (IPO).

     2. The OFS portion is excluded when determining whether the majority of the issue proceeds will be used for capital expenditure.

     3. This applies specifically to the excess promoters’ holding, meaning the shares held above the minimum promoters’ contribution.

• Example:

  1. Promoters’ minimum contribution = 20 lakh shares.

  2. Promoters’ total holding = 30 lakh shares.

  3. Excess promoters’ holding = 10 lakh shares.

  4. If the majority of the non-OFS issue proceeds is proposed to be used for capital expenditure, the additional 10 lakh shares remain locked-in for 1 year from the IPO allotment date.

(c).

• Lock-in of SR Equity Shares

  1. SR equity shares held by promoters remain locked-in until they are converted into ordinary equity shares.

     1. The conversion must result in equity shares having the same voting rights as ordinary shares.

     2. Therefore, the lock-in continues even after the normal promoter lock-in period if the SR equity shares have not yet been converted.

     3. The conversion and continued holding must also comply with the other applicable requirements of the ICDR Regulations.

• Example:

  1. A promoter holds 10 lakh SR equity shares with superior voting rights.

  2. The shares are converted into ordinary equity shares with the same voting rights as other ordinary shares after 2 years.

  3. The SR equity shares remain locked-in until that conversion takes place, subject to compliance with the other applicable requirements.

Explanation:

• Capital Expenditure

  1. For this purpose, “capital expenditure” includes spending on long-term assets and infrastructure.

  2. It includes:

     1. Civil work.

     2. Miscellaneous fixed assets.

     3. Purchase of land.

     4. Purchase of buildings.

     5. Purchase of plant and machinery.

     6. Other similar capital assets.

  3. It also includes repayment of existing loans that were taken specifically for such capital expenditure.

  4. Therefore, repayment of a loan used to finance eligible capital expenditure can also be treated as capital expenditure for this purpose.

• Example:

  1. An issuer borrowed ₹20 crore to purchase plant and machinery.

  2. The issuer later uses ₹20 crore from the issue proceeds to repay that loan.

  3. Since the original borrowing was for capital expenditure, the repayment can be included as capital expenditure under this definition.

Regulation 116. Lock-in of specified securities lent to stabilising agent under green shoe option

• Exception for Securities Lent Under Green Shoe Option

  1. The lock-in requirements do not apply to specified securities that are lent to the stabilising agent for the Green Shoe Option.

     1. This exception applies from the date on which the securities are lent to the stabilising agent.

     2. The exception continues until the securities are returned to the promoter or pre-issue shareholder who originally lent them.

     3. The return of the securities must be made in accordance with Regulation 153(5) or Regulation 153(6).

     4. Therefore, the securities are not treated as being subject to the normal lock-in restrictions while they are temporarily lent for the Green Shoe Option.

• Example:

  1. A promoter lends 1 lakh specified securities to the stabilising agent for the Green Shoe Option.

  2. The securities are lent on 1 July.

  3. They are returned to the promoter on 20 July in accordance with Regulation 153(5) or (6).

  4. The lock-in requirements under this part do not apply to those securities from 1 July to 20 July.

• Lock-in After Return of Securities

  1. The lock-in exemption ends when the specified securities are returned to the promoter or pre-issue shareholder.

     1. From the date of return, the securities become subject to the lock-in requirement again.

     2. Only the remaining portion of the original lock-in period has to be completed.

     3. The period for which the securities were lent to the stabilising agent is therefore not counted towards the lock-in period.

• Example:

  1. Suppose the required lock-in period is 18 months.

  2. The promoter lends the securities for the Green Shoe Option after 6 months.

  3. The securities remain with the stabilising agent for 2 months.

  4. When they are returned, the promoter must continue the lock-in for the remaining 12 months.

Regulation 117. Lock-in of party-paid securities

• Lock-in of Partly Paid-up Specified Securities

  1. Under circumstances, the specified securities held by the promoters are partly paid-up then:

     1. The amount called-up on these securities must be less than the amount called-up on the specified securities issued to the public.

     2. In such a case, the lock-in does not end merely because the normal lock-in period has passed.

     3. The securities must first become “pari passu” with the specified securities issued to the public.

     4. “Pari passu” means that the securities have the same rights and are at the same level in terms of the amount called-up as the securities issued to the public.

     5. Once they become pari passu, the 18-month lock-in period begins.

     6. The securities therefore remain locked-in for 18 months from the date they become pari passu.

• Example:

  1. Promoters’ shares are called-up to ₹5 per share.

  2. Publicly issued shares are called-up to ₹10 per share.

     1. The promoters’ shares are therefore not pari passu with the public shares.

     2. Later, another ₹5 is called on the promoters’ shares, making them fully equivalent to the public shares.

     3. The 18-month lock-in is then counted from the date the promoters’ shares become pari passu.

Regulation 118. Inscription or recording of non-transferability

• Marking of Locked-in Securities

  1. Certificates of specified securities that are subject to lock-in must carry the inscription “non-transferable”.

  2. The certificate must also clearly specify the applicable lock-in period.

     1. This makes it clear that the securities cannot be transferred during the prescribed lock-in period.

     2. Where the specified securities are held in dematerialised form, the issuer must ensure that the lock-in is recorded by the depository.

     3. Therefore, whether the securities are in physical or dematerialised form, the lock-in must be properly recorded.

• Example:

  1. If promoters’ shares are locked-in for 18 months, the physical certificate must mention “non-transferable” and specify the 18-month lock-in period.

  2. If the same shares are held in dematerialised form, the issuer must ensure that the 18-month lock-in is recorded in the depository system.

Regulation 119. Pledge of locked-in specified securities

• Pledge of Locked-in Specified Securities

  1. Specified securities held by promoters that are under lock-in may be pledged as collateral security for a loan.

  2. SR equity shares are specifically excluded from this facility.

  3. The loan must be granted by one of the following:

     1. A scheduled commercial bank.

     2. A public financial institution.

     3. A systemically important non-banking finance company (NBFC) or

     4. A housing finance company.

  4. The pledge is permitted only subject to the conditions that follow this statement.

• (a). Pledge for Financing Issue Objects

  1. This condition applies where the promoters’ specified securities are locked-in under clause (a) of Regulation 115.

     1. The loan must be granted to: The issuer company; or Its subsidiary or subsidiaries.

     2. The purpose of the loan must be to finance one or more objects of the issue.

     3. The pledge of the promoters’ specified securities must be one of the conditions imposed by the lender while sanctioning the loan.

     4. Therefore, the promoters can pledge their locked-in specified securities when the pledge is required as security for a loan taken by the issuer or its subsidiary to finance the stated issue objects.

  2. Example:

     1. An issuer raises ₹100 crore through an IPO, with ₹60 crore proposed for purchasing new machinery.

     2. The issuer obtains a ₹40 crore loan from a scheduled commercial bank to finance this object.

     3. The bank requires the promoters to pledge their locked-in specified securities as a condition of sanctioning the loan.

     4. The pledge can be permitted because the loan is for financing an object of the issue and the pledge is a condition of the loan.

• (b). Pledge of Securities Locked-in Under Regulation 115(b)

  1. Under circumstances where the promoters’ specified securities are locked-in under clause (b) of Regulation 115, those securities may be pledged as collateral security for a loan.

  2. The pledge must be connected with the sanction of the loan.

     1. The lender must specifically require the pledge of the specified securities as one of the terms or conditions for sanctioning the loan.

     2. Therefore, the promoters cannot simply pledge the locked-in securities on their own and rely on this exception.

     3. The pledge must form part of the lender’s conditions for granting the loan.

     4. The securities continue to remain subject to the applicable lock-in requirements even though they have been pledged.

     5. The key requirement is that the pledge itself must be a term of the loan sanction.

• Example:

  1. A promoter holds specified securities that are locked-in under Regulation 115(b).

  2. The promoter applies for a loan from an eligible lender.

     1. The lender agrees to grant the loan only if the promoter pledges these locked-in securities as collateral.

     2. The promoter can pledge the securities because the pledge is expressly included as a condition of the loan sanction.

     3. The fact that the securities are pledged does not by itself remove their lock-in.

Regulation 120. Transferability of locked-in specified securities

• Transfer of Locked-in Promoters’ Securities

  1. Under circumstances where specified securities held by promoters are locked-in under Regulation 115, they may be transferred to certain permitted persons.

  2. SR equity shares are excluded from this transfer facility.

  3. The transfer may be made to:

     1. Another promoter;

     2. A person belonging to the promoter group;

     3. A new promoter; or

     4. A person in control of the issuer.

  4. The transfer is subject to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

  5. Therefore, the transfer must also comply with the applicable takeover regulations.

  6. The transfer does not mean that the lock-in disappears.

  7. The securities continue to remain subject to the applicable lock-in requirements even after being transferred to the permitted person.

• Example:

  1. Promoter A holds 10 lakh ordinary specified securities that are locked-in.

  2. Promoter A transfers them to Promoter B.

  3. The transfer can be permitted because Promoter B is another promoter.

  4. However, the securities continue to carry the applicable lock-in and do not become freely transferable merely because they changed hands.