[Khushi Patel is a 4th year BBA LLB student at Gujarat National Law University, Gandhinagar]
India’s IPO pipeline continues to surge, driven not only by resilient market sentiment but also by the growing prevalence of pre-IPO placements and secondary exits by early-stage investors seeking to crystallize gains ahead of listing. In 2025 alone, nine of the 86 companies that went public collectively raised about ₹716 crore through such pre-IPO placements, almost double the ₹387 crore mobilized in all of 2024. Market analysts view this as a sign of deepening investor participation and a sustained appetite for early-entry opportunities, fuelled by the perennial “fear of missing out” on the next potential market blockbuster.
As India’s equity markets mature, the regulatory architecture must strike a careful balance between two imperatives: firstly, ensuring credible lock-in mechanisms that reinforce long-term investor confidence and market integrity; and second, reducing the procedural friction that issuers, depositories, and investors frequently encounter in navigating the IPO process. Lock-ins, while intended to ensure market stability and align investor incentives, often introduce operational rigidity, particularly when technical or procedural constraints hinder compliance despite bona fide efforts by issuers.
Against this backdrop, the Securities and Exchange Board of India’s (SEBI) November 2025 Consultation Paper on amendments to the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018 (“ICDR Regulations”)proposes a subtle but meaningful recalibration. By refining the lock-in regime applicable to pre-issue shareholdings, SEBI seeks to ease compliance and enhance the ease of doing business in public offerings, without diluting the underlying framework of investor protection that anchors India’s capital markets.
The Existing Framework under Regulation 17 of the SEBI ICDR Regulations
Under the ICDR Regulations, lock-in mechanisms have been synonymous with the public issue regime. Currently, regulation 17 of the ICDR Regulations mandates that the entire pre-issue capital held by persons other than the promoters shall be locked in for a period of six months from the allotment date in the IPO, with longer lock in periods for promoters and promoter groups depending on the classification of shares. The lock-in requirement serves to prevent speculative dumping of pre-listing holding, align interests of pre-IPO investors with the long-term performance of the company, and support market stability at listing.
However, the practical and commercial implications of lock-in requirements have been challenging. One recurring issue is that the systems operated by depositories may not allow the “lock-in” tag to be created in respect of certain shares, particularly those under pledge or shares held by large numbers of dispersed pre-listing shareholders. This creates a last-mile operational obstacle for issuers and can delay filings, jeopardise listing timetables and restrict pre-IPO investors’ exit timeline.
SEBI’s Proposal
SEBI’s Consultation Paper posits a targeted amendment to regulation 17 of the ICDR Regulations. The proposed proviso reads:
“Provided further that, in cases where lock-in of the specified securities cannot be created, the depositories, upon receipt of instructions from the issuer, shall record such securities as ‘non-transferable’ for the duration of the applicable lock-in period.”
The proposed formulation recognises the operational constraints inherent in the current lock-in tagging process and introduces a functionally equivalent mechanism by allowing depositories to record securities as “non-transferable” when a formal lock-in tag cannot be created. It shifts the responsibility for compliance onto issuers, who must instruct depositories accordingly, and onto the depositories themselves to ensure proper implementation.
Rationale for the Proposal and Market Impact
The proposed amendment primarily seeks to reduce procedural friction in the IPO process, particularly in cases where pre-issue shareholdings are dispersed across a large investor base or encumbered by pledges that complicate system-level tagging. Through this proposal, SEBI aims to address these operational hurdles while maintaining regulatory discipline. This pragmatic shift aligns with the regulator’s broader “ease of doing business” agenda, which seeks to streamline compliance without compromising substantive oversight.
For institutional and strategic pre-IPO investors, the change provides much-needed clarity and predictability. Even when the depository systems cannot implement a conventional lock-in tag, the existence of a recognised alternative mechanism ensures that compliance obligations are not left in limbo. This, in turn, enables investors to plan listing timelines and post-IPO liquidity strategies with greater confidence.
Crucially, the proposal does not dilute the investor protection framework that underpins the lock-in regime. The six-month prohibition on transfer for pre-issue, non-promoter shareholdings continue to apply in full with changes only to the enforcement mechanisms. The substitution of a “non-transferable” marking for the formal lock-in tag thus preserves intent while ensuring long-term commitment from early investors while parallelly reducing procedural rigidity.
At a structural level, the amendment distributes compliance responsibilities between issuers and depositories. Issuers are expected to initiate the process by issuing instructions, amending their articles of association, and notifying lenders or pledgees to ensure that lock-in restrictions survive any invocation or release of pledged shares. Depositories, in turn, must operationalise these instructions through system reforms and oversight. This dual-track approach reflects a recognition of real-world market functioning, balancing regulatory enforceability with operational feasibility.
Critical Analysis of the Proposal
While SEBI’s proposal is a step in the right direction, its success will ultimately depend on the clarity of its implementation framework. The most immediate concern relates to liability and enforcement. If a depository fails to record the non-transferable status correctly, or if an issuer neglects to issue precise instructions, the question arises as to who bears responsibility for non-compliance. The final regulations will need to explicitly apportion regulatory and legal accountability between issuers, merchant bankers, and depositories to prevent interpretational disputes or compliance gaps.
The tracing of pledge-holders and release events in the proposed regime implicitly assumes that issuers will continuously monitor the status of pledged shares and ensure that, upon invocation, the pledgee remains bound by the residual lock-in period. This places a significant monitoring burden on issuers and calls for a robust disclosure and audit trail mechanism to ensure that lock-in restrictions are not inadvertently circumvented during pledge enforcement or transfer events.
For companies with a large and fragmented shareholder base, particularly those with thousands of pre-IPO investors, operational complexity will remain a concern. Amending the articles of association and securing requisite shareholder consents can be time-consuming, even if the “non-transferable” route provides some procedural relief. Issuers will, therefore, need to allocate additional time and resources to coordinate effectively with depositories and shareholders to ensure seamless compliance.
Transparency and investor communication are equally critical. The offer document must clearly articulate the adopted framework, detailing the amendments to the articles of association, the issuance of notices to lenders and pledgees, and the process of marking securities as non-transferable. Any ambiguity in disclosure may lead to confusion among investors, potential grievances regarding delayed liquidity, and even post-listing disputes.
A comparative perspective further highlights that India continues to follow a relatively stringent approach to lock-ins. In several other jurisdictions, regulators favour escrow or conditional release mechanisms, which provide flexibility while still protecting market integrity. Although SEBI’s proposal introduces a degree of procedural adaptability, it retains the core six-month lock-in period for non-promoter pre-issue holdings indicating a cautious, incremental reform rather than a wholesale liberalisation.
Finally, transition issues will need careful management. For issuers already in the IPO pipeline at the time of notification, it remains uncertain whether the new framework will apply prospectively or allow for transitional relief. Coordination between SEBI, depositories, and merchant bankers will be essential to prevent listing delays and ensure a smooth handover to the revised system.
Recommendations for Issuers and Pre-IPO Investors
For Issuers
For issuers, proactive planning at the board-approval stage of an IPO will be critical to ensure compliance with the amended framework. The articles of association should be suitably amended well in advance to explicitly provide for the treatment of pledged shares as subject to lock-in, the automatic continuation of the lock-in obligation upon invocation of a pledge, and the mechanism by which depositories are to record shares as “non-transferable” where a formal lock-in tag cannot be created. Early integration of these provisions into the corporate documents will prevent last-minute legal and procedural hurdles. Issuers should also ensure that the Draft Red Herring Prospectus and Red Herring Prospectus clearly disclose the adopted mechanism, including the issuer’s responsibilities, depository coordination process, and implications for pre-IPO shareholders.
For Pre-IPO Investors
For pre-IPO investors, including venture capital and private equity participants, the proposed amendment underscores the need for early engagement with issuers. Investors should review and consent to the necessary amendments in the articles of association and ensure that their shareholder or pledge agreements are aligned with the new compliance framework. Given that the six-month lock-in period for non-promoter holdings continues to apply, investors must plan liquidity strategies accordingly and avoid assuming that procedural flexibility translates into shorter holding timelines. It would also be prudent for investors to seek contractual assurances or comfort from issuers and merchant bankers confirming that the depository marking process, whether through tagging or non-transferability, will be properly implemented to safeguard compliance and prevent post-listing transfer restrictions from being contested.
Conclusion
SEBI’s proposed amendment to the lock-in framework under the ICDR Regulations is a pragmatic recognition of operational realities in today’s complex pre-IPO ecosystem. By offering an alternative mechanism, the regulator eases a key bottleneck without diluting the substantive policy commitment to lock-in. For pre-IPO investors and issuers this change offers improved clarity on scheduling certainty and process efficiency. However, its ultimate success will depend on clear implementation rules, robust depository system coordination and transparent disclosure of substitution mechanisms. In substance and spirit, the amendment signals SEBI’s recognition that sustainable market integrity is best achieved not through rigid formality, but through adaptable, transparent, and well-supervised compliance mechanisms.
– Khushi Patel