End of lock-in period

End of lock-in period

Subject: Economy

Context:

The share price of India’s 11 new-age tech companies, including Nykaa, Paytm is likely to be under pressure as $14 billion worth of locked-in shares in these companies will be available to be sold in the market.

Details:

Leading investors who had made pre-IPO bets are expected to exit or sell part of their holdings as they have lost appeal among investors  due to the Fed interest rate tightening.

Lock-in period

• Lock in period or lock up period refers to that period for which investments cannot be sold or redeemed.
• Lock-in periods are commonly used for hedge funds, IPOs of private equity, start-ups and few mutual funds.
• A lock in period does not define the tenure of investment.
• It is not just a restriction on investment but also an opportunity for new investors to grow.
• Lock in periods for different investment
  • Hedge Funds are usually kept for 30 to 90 days.
  • Public Provident Funds are kept for 15 years.
  • ELSS mutual funds are usually kept for 3 years.
  • Tax saving Fixed Deposits are locked in for 5 years.
  • 8% Government of India bonds are locked up for 6 years.

Importance of Lock In Period

• It will help the investors stick to the investment for some time and reap the benefits of long-term investing.
• Mutual funds have lock-in periods to induce stability in the mutual fund while preserving liquidity.
• Lock in periods can also come handy when one wishes to claim deductions in the income from these investments from income tax.
• For hedge funds, the lock up period gives the hedge fund manager time to exit investments that may be illiquid or otherwise unbalance their portfolio of investments too rapidly.
• For start-ups or companies issuing an IPO, the lock in period helps the company build a business model on a solid footing and show market resilience. The lock-up period post IPO prevents stock from being sold immediately when the share prices may be artificially high and susceptible to extreme price volatility.
• Having a lock in period for goal-based investment is good.

Lock-in period and pre-IPO investment

• Rules in India required a 1-year lock-in period for pre-IPO investors when these companies got listed.
•  SEBI (DIP) Guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.