Promoter Contribution and Lock-in: SME and Main Board IPOs

Of all the rules a promoter meets on the way to listing, lock-in is the one that feels most personal. It decides how much of your own company you must keep, which of your shares count towards that minimum, how long you cannot sell, and whether you can borrow against what you hold. It also binds the friends, family and early investors who came in before the IPO. When the rules are understood two years out, they cost very little. When they are discovered three months before filing, they can force a re-cut of the cap table, a change in the issue structure, or an awkward conversation with an investor who thought they could exit on listing day.

This note sets out how minimum promoter contribution and lock-in work for SME and main board IPOs under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and how I plan the cap table around them. SEBI has changed the lock-in periods more than once in recent years, so I state the position at the time of writing and point you to the regulations for the final word. If you want the wider picture first, read my complete founder’s guide to the SME IPO.

The basic rule: promoters must keep skin in the game

SEBI’s logic is simple. The public is being asked to buy into a business run by the promoters, so the promoters must hold a meaningful stake after the issue and must not be free to sell out the moment the shares list. Two separate ideas do this work.

Minimum promoters’ contribution. On the main board, Regulation 14 requires the promoters to hold at least 20% of the post-issue capital. The SME chapter carries the same 20% requirement. Note the base: it is post-issue capital, not pre-issue. If you raise a larger fresh issue, the post-issue capital grows, and so does the number of shares that make up 20%. I have seen promoters who were comfortable at a small issue size find the arithmetic tight once the banker proposes a bigger fresh issue.

Where the promoters’ eligible holding falls short of 20%, the regulations allow the gap to be filled by certain specified categories of investors, such as Category I and II alternative investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions and insurance companies, within a cap and without those investors being named as promoters. The list of who may contribute and the cap have been amended over time, so check the current text of the regulation before building a plan around it. Promoters can also meet the requirement by subscribing in the issue itself; in that case the full amount, including premium, has to be brought in before the issue opens.

Lock-in. The 20% is then locked in, and so is the promoters’ holding above 20%, for different periods. Lock-in runs from the date of allotment in the IPO. The depositories record the shares as non-transferable for the period, so this is not a promise on paper; the shares simply cannot move in the demat system until the lock-in ends.

What does not count towards the 20%

This is where most of the planning happens. Holding 20% is not enough; the 20% has to be made up of eligible shares. On the main board, Regulation 15 lists what is ineligible, and the SME chapter has a parallel provision. In plain words, the following cannot be counted:

1. Shares acquired in the preceding three years for consideration other than cash, where revaluation of assets or capitalisation of intangible assets is involved. If you transferred a property or a brand into the company and received shares against a revalued figure, those shares will not help you meet the minimum.

2. Bonus shares issued in the preceding three years out of revaluation reserves or unrealised profits, or against shares that are themselves ineligible. A bonus from genuine accumulated profits on eligible shares is a different matter. The trap is the bonus that is funded by a book entry rather than by earned profit.

3. Shares acquired in the preceding one year at a price lower than the IPO price. If a promoter bought shares from an outgoing shareholder, or was allotted shares, within the last year at a price below the eventual issue price, those shares are ineligible. The regulation allows a cure: the promoter can pay the company the difference. This is the rule that catches last-minute consolidations, where a promoter buys out a relative or a small shareholder cheaply a few months before filing.

4. Shares allotted in the preceding one year at below the issue price in a company formed by converting a partnership firm or LLP. There is a specific relief where the partners were the promoters, there is no change in management, and the shares were allotted in lieu of capital that had stood in the firm for at least a year. If your business was a partnership until recently, this clause needs careful reading on your specific facts.

5. Shares that are pledged with any creditor. A pledged share cannot be counted towards the minimum. Many promoters of growing businesses have pledged shares for working capital or term loans. Those pledges need to be released, or the lender needs to accept other security, before the shares can be counted.

The practical point: identify early which of your shares are eligible, count them against 20% of the expected post-issue capital, and keep a buffer. If the eligible pool is thin, you want to know it while there is still time to fix it.

Lock-in periods on the main board

Regulation 16 sets the promoter lock-in, and it was significantly relaxed by SEBI’s 2021 amendment. Older articles and even some older offer documents still quote the previous periods, so be careful what you read. At the time of writing, the position is:

Minimum promoters’ contribution (the 20%): locked in for 18 months from the date of allotment. If the majority of the fresh issue proceeds, excluding the offer for sale portion, is proposed to be used for capital expenditure, the lock-in is three years.

Promoter holding above the 20%: locked in for six months from the date of allotment, or one year where the majority of the proceeds is for capital expenditure.

The capital expenditure test is worth noticing because it connects the objects of the issue to your own liquidity. A company raising money mostly for a new plant will have its promoters locked in longer than one raising mostly for working capital. That should not drive the objects, which have to follow the business plan, but it should be understood before the objects section of the offer document is drafted. I cover how the objects are written in my section-by-section guide to drafting the DRHP.

Pre-IPO shareholders who are not promoters: under Regulation 17, the entire pre-issue capital held by persons other than promoters is locked in for six months from the date of allotment. There are carve-outs. Shares sold in the offer for sale are not locked in, because they are sold in the IPO. Shares allotted to employees under an employee stock option scheme before the IPO are treated differently, subject to disclosure and conditions. Shares held by certain regulated investors, such as Category I and II alternative investment funds and foreign venture capital investors, have their own treatment, with the lock-in measured by reference to when they acquired the shares, again subject to conditions. Anchor investors in the IPO have a separate lock-in regime of their own.

Lock-in periods on the SME platform

The SME chapter did not follow the main board’s 2021 relaxation, and SEBI tightened parts of the SME framework in 2025. At the time of writing:

Minimum promoters’ contribution (the 20%): locked in for three years from the date of allotment.

Promoter holding above the 20%: released in stages rather than all at once. Under the 2025 amendment, 50% of the excess is released after one year and the remaining 50% after two years. Before that change the excess was released in one go after a year, and you will still see that in older SME offer documents.

Pre-IPO shareholders who are not promoters: the SME chapter locks in their pre-issue capital for one year from the date of allotment, not the six months that applies on the main board, subject to the carve-outs set out in that chapter.

The difference matters for investors who come in before an SME listing. A pre-IPO investor who assumed main board treatment will be locked in twice as long as they expected. Because the SME framework has been revised recently and the exchanges issue their own circulars on top, confirm the current periods with your lead manager when you start the process, and again before the DRHP is filed. My guide to SME to main board migration covers how a listed SME company’s shareholding is looked at if it later moves up.

Pledging and transferring locked-in shares

Lock-in stops a sale. It does not entirely stop a pledge, but the room is narrow. Under Regulation 21, locked-in shares may be pledged only with scheduled commercial banks, public financial institutions and certain categories of non-banking finance and housing finance companies, and only as collateral for a loan on specific terms:

Shares forming the 20% can be pledged only if the loan has been granted to the company or its subsidiary for financing one or more of the objects of the issue, and the pledge is a term of the loan sanction.

Promoter shares above the 20% can be pledged only if the pledge is one of the terms of sanction of the loan.

If the lender invokes the pledge, the shares move to the lender, but the lock-in does not disappear. The lender holds them subject to the remaining lock-in period. The same principle applies to transfers under Regulation 22: locked-in promoter shares can move between promoters, to members of the promoter group, or to a new promoter or person in control, but the lock-in continues in the hands of the person receiving them, and the Takeover Regulations still apply where relevant.

In practice, this means a promoter should not plan personal borrowing against listed shares in the first months after the IPO. The lock-in and the pledge rules together make that very difficult, and a lender will know it.

Planning the cap table 12 to 18 months before filing

Almost every lock-in problem I see traces back to something done in the year or two before filing, usually for a good reason, that nobody tested against these rules. This is the sequence I follow. It sits inside the larger timeline in my note on pre-IPO structuring over 18 months.

1. Fix who the promoters are. Promoter and promoter group status drive lock-in, disclosure and much else. Decide it early, document it, and do not let it drift. A family member who is later reclassified can change both the eligible pool and the lock-in map.

2. Build a model of the 20%. Take the likely range of fresh issue size and price, compute post-issue capital for each, and test whether eligible promoter shares cover 20% with a margin. Redo this every time the banker changes the issue size.

3. Stop non-cash allotments to promoters that involve revaluation. If assets must come into the company, get advice on timing and structure first. A three-year look-back is long.

4. Keep bonus issues clean. If a bonus is part of the plan, which is common to bring the share count and face value into a sensible shape, fund it from genuine free reserves, not from revaluation reserves.

5. Price every transfer to a promoter with the IPO price in mind. Any shares the promoters acquire in the last year at a price below the likely issue price will not count unless the difference is paid in. Consolidate family and minority holdings early, or be ready to pay the difference.

6. Release pledges. Map every pledge on promoter shares and agree with lenders how and when they will be released or replaced.

7. Dematerialise everything. The promoters’ pre-issue holding has to be in demat form before the offer document is filed, and lock-in is enforced through the depositories. Physical certificates sitting with relatives are a surprisingly common delay.

8. Check the holding period for any offer for sale. Shareholders who want to sell in the IPO generally need to have held their shares for a minimum period before the DRHP is filed, with specific exceptions. Anyone who intends to sell should be tested against this rule early.

9. Tell pre-IPO investors about lock-in in writing. Every term sheet and shareholders’ agreement signed in the two years before listing should say which platform is contemplated and that the investor’s shares will be locked in under the ICDR Regulations after listing. An investor who knows about a six-month or one-year lock-in on day one does not feel ambushed later. I cover how early rounds should be designed with a listing in mind in my note on cap table design from day one.

10. Plan the lock-in expiry calendar. Once the dates are known, the market knows them too. Lock-in expiry dates are disclosed, and a large block of shares becoming free on a known date is something investors watch. Promoters who have thought about it can explain, calmly and in advance, what they intend to do. That is far better than silence.

Common pitfalls

Relying on old numbers. The main board periods were cut in 2021 and the SME framework was revised in 2025. Old blog posts, old offer documents and even older advisors still quote superseded periods. Always check the current regulation.

Counting total holding instead of eligible holding. A promoter at 60% can still fail the 20% test if most of that 60% came from a revaluation-backed bonus or a recent cheap purchase.

Forgetting that issue size moves the target. The 20% is measured on post-issue capital. A late decision to increase the fresh issue can reopen a question everyone thought was settled.

Pledges discovered during due diligence. The lead manager and legal counsel will find every pledge. Releasing one takes lender approvals and time; start early.

Investor documents that promise liquidity at listing. Exit clauses that assume a pre-IPO investor can sell on listing day conflict with the regulatory lock-in. Those clauses need to be amended before filing. In practice, lead managers and the regulator expect special investor rights of this kind to fall away on listing.

Questions promoters ask me

Can I sell some of my shares in the IPO itself? Yes, through an offer for sale, subject to the holding period rules and, on the SME platform, the limits SEBI has placed on the size of the offer for sale. Shares sold in the offer for sale are not locked in because they leave your hands at allotment. What you keep must still meet the 20% test from eligible shares.

Does lock-in apply to shares I buy in the market after listing? The lock-in rules in the ICDR Regulations apply to the pre-issue holding and the minimum contribution. Purchases after listing are governed by the insider trading and takeover regulations and the company’s own trading window. Speak to the compliance officer before any promoter group member trades.

If my son joins as a promoter later, is he bound? If locked-in shares are transferred to him as a member of the promoter group, the lock-in continues in his hands for the remaining period. The transfer does not reset or end it.

Can I use locked-in shares as security for a personal loan? Generally no. Pledge of locked-in shares is permitted only with specified lenders and only on the conditions described above, which are tied to loans where the pledge is a term of sanction and, for the 20%, to loans funding the objects of the issue.

Bottom line

Promoters must hold at least 20% of the post-issue capital, made up of eligible shares, and that 20% is locked in: at the time of writing, 18 months on the main board (three years if the proceeds are mainly for capital expenditure) and three years on the SME platform. The excess promoter holding and the pre-IPO holdings of other shareholders are locked in for shorter periods that differ between the two platforms. Pledges of locked-in shares are narrow, and any transfer carries the lock-in with it. None of this is difficult if it is planned 12 to 18 months ahead: fix the promoter group, model the 20% on post-issue capital, keep bonus issues and promoter purchases clean, release pledges, and put the lock-in in writing for every pre-IPO investor. Because SEBI has revised these periods in recent years, confirm the current position under the ICDR Regulations with your lead manager and legal counsel before the DRHP is filed. If you are working through this for your own listing, the first call is usually 45 minutes.