Lock-In Restrictions on Transferability

PART IV: LOCK-IN AND RESTRICTIONS ON TRANSFERABILITY

Regulation 16. Lock-in of specified securities held by the promoters

16(1).

• The specified securities held by the promoters are subject to a lock-in.

  1. During the lock-in period, the promoters cannot transfer these securities.

  2. The lock-in will remain in force for the period prescribed under the applicable provisions.

• The specific lock-in periods are stipulated as follows:

(a).

• Lock-in Period for Minimum Promoters’ Contribution

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

     1. The 18-month period starts from the date of allotment in the initial public offer.

     2. The lock-in requirement covers the promoters’ own contribution.

     3. It also covers the contribution made by AIFs, FVCIs, scheduled commercial banks, public financial institutions and IRDAI-registered insurance companies.

  2. A non-individual public shareholder holding at least 5% of the post-issue capital is also covered.

     1. An individual or non-individual entity forming part of the promoter group, other than the promoter(s), is also covered.

     2. Therefore, the entire minimum promoters’ contribution, including permitted contributions from these other persons or entities, remains locked in for 18 months.

• Example:

  1. The IPO allotment takes place on 1 January.

  2. The 18-month lock-in period starts from 1 January.

  3. The minimum promoters’ contribution remains locked in until the completion of 18 months from the allotment date.

• Three-Year Lock-in Where Issue Proceeds Are Mainly Used for Capital Expenditure

  1. The normal lock-in period for minimum promoters’ contribution is 18 months.

     1. If the majority of the issue proceeds, excluding the offer for sale portion, is proposed to be used for capital expenditure, a longer lock-in period applies.

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

     3. The 3-year period begins from the date of allotment in the initial public offer.

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

• Example:

  1. Suppose the issue proceeds, excluding the offer for sale portion, amount to ₹100 crore.

  2. The company proposes to use ₹60 crore for capital expenditure.

  3. Since the majority of the relevant issue proceeds is proposed to be used for capital expenditure, the promoters’ contribution will be locked in for 3 years.

(b).

• Lock-in of Promoters’ Holding Above the Minimum Contribution

  1. Promoters may hold shares beyond the minimum promoters’ contribution required under the regulation.

     1. The portion held by promoters above the minimum required contribution is also subject to lock-in.

     2. This excess promoters’ holding must remain locked in for 6 months.

  2. The 6-month period starts from the date of allotment in the initial public offer.

• Example:

  1. The post-issue capital is ₹100 crore.

  2. Promoters are required to contribute a minimum of ₹20 crore.

     1. Promoters actually hold ₹30 crore after the IPO.

     2. ₹20 crore represents the minimum promoters’ contribution.

     3. The additional ₹10 crore represents promoters’ holding in excess of the minimum contribution.

  3. This additional ₹10 crore remains locked in for 6 months from the date of IPO allotment.

• One-Year Lock-in Where Issue Proceeds Are Mainly Used for Capital Expenditure

  1. The promoters’ holding above the minimum promoters’ contribution is normally locked in for 6 months.

     1. If the majority of the issue proceeds, excluding the offer for sale portion, is proposed to be used for capital expenditure, the lock-in period becomes 1 year.

     2. The 1-year period starts from the date of allotment in the initial public offer.

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

• Example:

  1. Suppose the issue proceeds, excluding the offer for sale portion, are ₹100 crore.

  2. The company proposes to use ₹60 crore for capital expenditure.

  3. Since the majority of the relevant proceeds is proposed to be used for capital expenditure, the excess promoters’ holding is locked in for 1 year.

Explanation:

• Capital Expenditure

  1. Capital expenditure includes spending on assets and activities that create or improve long-term assets of the company.

     1. It includes expenditure on civil work.

     2. It includes expenditure on miscellaneous fixed assets.

     3. It includes purchase of land.

     4. It includes purchase of buildings.

     5. It includes purchase of plant and machinery.

     6. It also includes repayment of existing loans taken specifically for such capital expenditure.

16(2).

• Lock-in of SR Equity Shares

  1. SR equity shares remain under lock-in until they are converted into ordinary equity shares.

     1. The converted equity shares must have voting rights equal to those of ordinary shares.

     2. The SR equity shares must also satisfy the lock-in period specified under sub-regulation (1).

     3. The later of these two events determines when the lock-in ends.

  2. Therefore, the lock-in continues until the SR equity shares are converted and the applicable lock-in period is completed, whichever happens later.

• Example:

  1. SR equity shares are converted into ordinary equity shares after 18 months.

  2. The applicable lock-in period under sub-regulation (1) is 3 years.

  3. The lock-in will continue until the completion of 3 years because that occurs later.

Regulation 17. Lock-in of specified securities held by persons other than the promoters

17(1).

• The entire pre-issue capital held by persons other than the promoters shall be locked-in.

  1. The lock-in period is six months from the date of allotment in the IPO.

  2. During this period, such pre-issue shares cannot be transferred.

• This requirement applies specifically to pre-issue capital held by non-promoters.

• Provided that nothing contained in this 17(1) shall apply to:

(a).

• Equity Shares Allotted to Employees Before the IPO

  1. Equity shares allotted to employees before the IPO can be considered for minimum promoters’ contribution.

     1. The employee may be a current employee or may no longer be an employee.

     2. The shares must have been allotted under an employee stock option scheme.

     3. They may also have been allotted under an employee stock purchase scheme.

  2. Shares allotted under a stock appreciation right scheme are also covered.

     1. The scheme or option must have existed before the initial public offer.

     2. The issuer must make full disclosures regarding the options or scheme.

  3. These disclosures must comply with Part A of Schedule VI.

• Example:

  1. An employee receives equity shares under the company’s employee stock option scheme before the IPO.

  2. The employee later leaves the company before the IPO.

  3. The shares can still qualify because the rule covers both current and former employees.

  4. The issuer must have made the required disclosures regarding the scheme in the offer document.

(b).

• Equity Shares Held by an Employee Stock Option Trust

  1. Equity shares held by an employee stock option trust can be considered for minimum promoters’ contribution.

     1. Equity shares transferred by the trust to employees can also be considered.

     2. The transfer must happen because employees have exercised their options.

     3. The employees may be current employees or former employees.

  2. The shares must be transferred in accordance with the employee stock option plan.

  3. The same treatment applies to shares transferred under an employee stock purchase scheme.

  4. It also covers shares transferred under a stock appreciation rights scheme.

• Example:

  1. An employee stock option trust holds equity shares of the issuer.

     1. An employee exercises their stock option under the company’s approved plan.

     2. The trust transfers the relevant equity shares to the employee.

  2. Those shares can be considered for minimum promoters’ contribution, provided the transfer is made in accordance with the applicable scheme.

• Lock-in of Equity Shares Allotted to Employees

  1. Equity shares allotted to employees are subject to the applicable lock-in requirements.

  2. The lock-in requirements are governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

  3. Therefore, employees cannot freely transfer the allotted equity shares until the applicable lock-in period is completed.

(c).

• Equity Shares Held by Venture Capital Funds and AIFs

  1. Equity shares held by a Venture Capital Fund can be considered for minimum promoters’ contribution.

     1. Equity shares held by a Category I AIF can also be considered.

     2. Equity shares held by a Category II AIF can also be considered.

     3. Equity shares held by a Foreign Venture Capital Investor (FVCI) can also be considered.

• Lock-in of Equity Shares Held by VCFs, AIFs and FVCIs

  1. Equity shares held by a Venture Capital Fund, Category I AIF, Category II AIF or FVCI must be locked in.

     1. The lock-in period must be at least 6 months.

     2. The 6-month period starts from the date on which the securities were purchased.

  2. The requirement applies to equity shares counted towards minimum promoters’ contribution.

Explanation:

(i).

• Calculation of Six-Month Lock-in for Converted Equity Shares

  1. Equity shares may have arisen from the conversion of fully paid-up compulsorily convertible securities.

     1. In such a case, the holding period of the convertible securities is also counted.

     2. The holding period of the resultant equity shares is then added to it.

     3. Therefore, both holding periods together are considered for calculating the 6-month period.

  2. The convertible securities are treated as fully paid-up when the entire consideration payable on them has already been paid.

  3. No further consideration should be payable at the time of conversion.

• Example:

  1. An FVCI holds fully paid-up compulsorily convertible securities for 4 months.

     1. The securities are then converted into equity shares.

     2. The FVCI holds the resulting equity shares for another 2 months.

     3. The combined holding period is 6 months.

  2. Therefore, the 6-month holding requirement is satisfied.

(ii).

• Calculation of Six-Month Lock-in for Converted Equity Shares

  1. Equity shares may have arisen from the conversion of fully paid-up compulsorily convertible securities.

     1. In such a case, the holding period of the convertible securities is also counted.

     2. The holding period of the resultant equity shares is then added to it.

     3. Therefore, both holding periods together are considered for calculating the 6-month period.

  2. The convertible securities are treated as fully paid-up when the entire consideration payable on them has already been paid.

  3. No further consideration should be payable at the time of conversion.

• Example:

  1. An FVCI holds fully paid-up compulsorily convertible securities for 4 months.

     1. The securities are then converted into equity shares.

     2. The FVCI holds the resulting equity shares for another 2 months.

     3. The combined holding period is 6 months.

  2. Therefore, the 6-month holding requirement is satisfied.

• But this is subject to the following conditions:

• (a).

  1. Bonus Shares Issued from Existing Free Reserves and Share Premium

     1. Bonus shares can be considered for minimum promoters’ contribution when they are issued out of eligible free reserves or share premium.

        1. The free reserves and share premium must already exist in the issuer’s books of account.

        2. These reserves must exist as at the end of the financial year immediately preceding the financial year in which the draft offer document is filed with SEBI.

     2. Therefore, reserves created during the financial year in which the draft offer document is filed cannot be considered for this purpose.

  2. Example:

     1. The draft offer document is filed during FY 2026–27.

     2. The relevant financial year immediately preceding it is FY 2025–26.

     3. The free reserves and share premium must have existed in the books as at 31 March 2026.

     4. Bonus shares issued from such existing reserves or share premium can satisfy the stated requirement.

• (b).

  1. Bonus Shares Not Issued from Revaluation Reserves or Unrealised Profits

     1. Bonus shares can be considered for the relevant requirement only when they are not issued from revaluation reserves.

     2. Bonus shares issued by using unrealised profits of the issuer are also not eligible.

        1. Therefore, the bonus shares must come from eligible free reserves or share premium.

        2. Revaluation reserves cannot be used for issuing eligible bonus shares.

        3. Unrealised profits cannot be used for issuing eligible bonus shares.

  2. Example:

     1. A company has ₹10 crore in eligible free reserves and ₹5 crore in revaluation reserves.

     2. Bonus shares issued from the ₹10 crore free reserves can qualify.

     3. Bonus shares issued from the ₹5 crore revaluation reserves cannot qualify.

(iii).

• Bonus Shares Arising from Employee Schemes

  1. For clauses (a) and (b), equity shares also include bonus shares issued against certain employee-related equity shares.

     1. This includes bonus shares issued against equity shares allotted under an employee stock option scheme.

     2. It also includes bonus shares issued against equity shares allotted under an employee stock purchase scheme.

  2. Bonus shares issued against equity shares allotted under a stock appreciation right scheme are also included.

• Example:

  1. An employee receives equity shares under an employee stock option scheme.

  2. The company later issues bonus shares against those equity shares.

  3. The bonus shares are also treated as equity shares for the purposes of clauses (a) and (b).

17(2).

• Recording Securities as Non-Transferable During Lock-in

  1. The specified securities must remain locked in as required under 17(1).

     1. If the lock-in cannot be created in the usual manner, the depositories must record the securities as “non-transferable”.

     2. The issuer must instruct the depositories to make this “non-transferable” record.

  2. The securities must remain marked as “non-transferable” for the entire applicable lock-in period.

• Example:

  1. Promoters’ securities are required to remain locked in for 18 months.

     1. The lock-in cannot be technically created in the normal manner.

     2. The issuer instructs the depository to mark those securities as “non-transferable”.

  2. The securities cannot be transferred during the 18-month lock-in period.

Regulation 18. Lock-in of specified securities lent to stabilising agent under the green shoe option

• Exemption from Lock-in for Securities Lent Under Green Shoe Option

  1. The lock-in requirements do not apply to specified securities lent to the stabilising agent.

     1. The securities must be lent for the purpose of the Green Shoe Option.

     2. The exemption starts from the date on which the specified securities are lent.

     3. The exemption continues until the securities are returned to the original lender.

  2. The securities must be returned in accordance with of Regulation 57(6) and 57(7).

• Example:

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

     1. From the date of lending, the lock-in requirement does not apply to those securities.

     2. The exemption continues while the securities remain with the stabilising agent.

  2. Once the securities are returned to the promoter, the applicable lock-in requirements apply again.

• Lock-in After Return of Securities

  1. The specified securities are exempt from lock-in while they are lent to the stabilising agent.

     1. Once the securities are returned to the lender, the lock-in requirement starts applying again.

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

  2. The period for which the securities were lent is not counted towards the lock-in period.

• Example:

  1. The required lock-in period is 18 months.

     1. The securities are lent to the stabilising agent for 4 months.

     2. The securities are then returned to the lender.

  2. The lender must keep the securities locked in for the remaining 14 months.

Regulation 19. Lock-in of party-paid securities

• Lock-in of Partly Paid-up Specified Securities

  1. Specified securities subject to lock-in may be partly paid-up.

     1. The amount called-up on these securities may 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 until the specified securities become pari passu with the securities issued to the public.

     3. “Pari passu” means that the securities have the same rights and are treated equally with the securities issued to the public.

  2. After the securities become pari passu, a further period of 3 years must be completed.

  3. Therefore, the lock-in ends only after 3 years from the date on which the securities become pari passu with the public securities.

• Example:

  1. Promoters hold partly paid-up shares on which ₹5 per share has been called up.

     1. Public investors receive shares on which ₹10 per share has been called up.

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

     3. The promoters later pay the remaining ₹5 per share and the shares become pari passu.

  2. The 3-year period is then counted from the date the shares become pari passu.

Regulation 20. Inscription or recording of non-transferability

• Recording the Lock-in on Specified Securities

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

     1. The certificate must also mention the applicable lock-in period.

     2. This ensures that the securities cannot be transferred during the lock-in period.

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

• Example:

  1. A promoter holds specified securities that are locked in for 18 months.

  2. If held in physical form, the certificate must state “non-transferable” and mention the 18-month lock-in period.

  3. If held in dematerialised form, the issuer must ensure that the depository records the applicable lock-in.

Regulation 21. Pledge of locked-in specified securities

• Pledging of Locked-in Specified Securities

  1. Specified securities held by promoters and subject to lock-in may be pledged as collateral for a loan.

  2. SR equity shares are excluded from this facility.

     1. Therefore, only specified securities other than SR equity shares can be pledged.

     2. The loan must be granted by a scheduled commercial bank.

     3. A public financial institution can also grant the loan.

  3. A systemically important non-banking finance company can also grant the loan.

  4. A housing finance company can also grant the loan.

  5. The pledge is permitted only subject to the conditions specified in the following clauses.

• The conditions are as follows:

• (a).

• Pledge of Securities for Financing the Objects of the Issue

  1. The specified securities are locked in under clause (a) of Regulation 16.

     1. The loan must be granted to the issuer company or its subsidiary or subsidiaries.

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

     3. Pledging the specified securities must be one of the conditions for sanctioning the loan.

  2. Therefore, the promoters can pledge the locked-in specified securities when the loan is directly connected with financing the objects of the issue.

• Example:

  1. An issuer company needs a loan to finance one of the objects stated in its IPO.

  2. A bank grants the loan to the issuer company.

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

  4. The promoters can pledge those securities, provided the other requirements are satisfied.

• (b).

  1. Pledge of Securities Locked in Under Regulation 16(b)

     1. The specified securities must be locked in under clause (b) of Regulation 16.

        1. The specified securities may be pledged as collateral for a loan.

        2. The pledge of the specified securities must be one of the terms of sanction of the loan.

     2. Therefore, the pledge must be specifically included as a condition for granting the loan.

  2. Example:

     1. Promoters hold specified securities that are locked in under Regulation 16(b).

        1. They apply for a loan from an eligible lender.

        2. The lender requires the promoters to pledge these specified securities as a condition for sanctioning the loan.

     2. The promoters can pledge the securities subject to the other requirements of the regulation.

• Lock-in After Invocation of Pledge

  1. The lock-in continues even if the pledge over the specified securities is invoked.

  2. Invocation of the pledge may result in the securities being transferred to the lender or another transferee.

  3. The transferee also becomes subject to the remaining lock-in period.

  4. The transferee cannot transfer the specified securities until the applicable lock-in period expires.

• Example:

  1. A promoter pledges locked-in shares to a bank as security for a loan.

     1. The promoter defaults on the loan and the bank invokes the pledge.

     2. The shares are transferred to the bank.

     3. The shares remain locked in even after the transfer.

  2. The bank cannot transfer the shares until the original lock-in period has expired.

     Regulation 22. Transferability of locked-in specified securities

• Transfer of Locked-in Specified Securities

  1. The transfer of locked-in specified securities must comply with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

     1. Specified securities held by promoters and locked in under Regulation 16 may be transferred.

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

     3. A promoter can transfer such locked-in securities to another promoter.

  2. The securities can also be transferred to a person belonging to the promoter group.

  3. The securities can also be transferred to a new promoter.

     1. Specified securities held by persons other than promoters and locked in under Regulation 17 may also be transferred.

     2. Such securities can be transferred to another person who already holds specified securities that are locked in.

     3. The securities being transferred and the securities already held by the transferee must remain locked in together.

• Continuation of Lock-in After Transfer

  1. The lock-in period continues even after the specified securities are transferred.

  2. The transferee becomes subject to the remaining lock-in period.

     1. The transferee cannot transfer the specified securities during this remaining period.

     2. The transferee can transfer the securities only after the applicable lock-in period has expired.

• Example:

  1. A promoter transfers locked-in securities to another promoter.

  2. The securities have 8 months of lock-in remaining at the time of transfer.

  3. The transferee must keep the securities locked in for those remaining 8 months.

  4. The transferee cannot transfer the securities during those 8 months.