What is an IPO lock-up period and how long is it?
You may have come across the term 'lock-in period’ or ‘lock-up period’ in different contexts, usually in cases pertaining to money matters. In case of an initial public offering (IPO) too, there is a lock-in (also referred to as lock-up) period requirement for promoters and other shareholders. Here we try and elaborate on what a lock-up period in an initial public offering is and what is the duration of the same. Read on to find out more.
In common parlance, a lock-in period a duration for which one is not allowed to withdraw any sum invested in a scheme or a business venture. In the case of an IPO, the promoters are required to adhere to a minimum lock-in requirement as outlined under the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines.
What is an IPO?
An IPO or initial public offering is the process by which a private company goes public, i.e., its shares are sold to the general public for the first time. Thereafter, the company’s stock gets listed on the exchanges and it goes on to become a publicly traded share. This is a common way by which companies raise fresh capital for operational needs or to implement their fresh business plans.
IPO lock-up period
When a company goes public (files for an IPO), its shares are available for sale to the public for the first time. Markets regulator SEBI requires promoters to have a contribution of not less than 20% of the post-issue capital. Such contribution on the part of the promoters is locked in for a period of 3 years.
The lock-in period in an IPO begins from the date of allotment in the proposed public issue of shares and the end date is taken as three years from the date of allotment.
If the promoter's contribution in the share issue exceeds the minimum (20%) requirement, that excess portion is also to remain locked-in, but only for a period of one year. The entire pre-issue capital held by all others also remains locked in for a period of one year from the date of allotment in the IPO.
Idea behind having a lock-in period
The idea behind having a lock in requirement in the post-issue period is to limit the fluctuations in the share price of the newly listed company as its stocks debut on the exchanges.
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