PEs seek relaxation in pre-IPO share lock-in norm from Sebi

Right now, pre-IPO shares are locked in for one year

Private equity (PE) investors want capital markets regulator Securities and Exchange Board of India (Sebi) to relax the lock-in requirement on pre-initial public offer (IPO) shareholding. 

The current regulations clash with their fund philosophy and often prevent them from getting time-bound exits.

Under the current Issue of Capital and Disclosure Requirements (ICDR) regulations, pre-IPO shares are locked in for a period of one year and the minimum contribution of promoters is locked for three years. Sources said PEs and venture capitalists (VCs) recently met Sebi seeking relaxation in the lock-in criteria, particularly in companies where they are construed as promoters by virtue of their rights and shareholding in the company.

Legal experts say the issue is more relevant in the new-age companies and start-ups, which don’t have promoters in the true sense and are largely incubated by various funds. They add the wide definition of “promoter” is creating difficulties for some investors. “The lock-in requirement could be creating hurdles for funds with limited life span.  In cases where the fund has to close and is also under a pre-IPO lock-in, it may end up violating the regulations,” said Rishabh Mastaram, founder, RGM Legal.

Experts say PE investors operate on a different strategy compared to a traditional promoter and are always on the lookout for exit opportunities, provided they get the right price. 

“PE and VC funds are strategic investors in a company. They make time-bound investments and if they want to exit a company through an IPO, there shouldn’t be any lock-in period on their stake just because they come under the definition of promoter,” said D Muthukumaran, chief executive officer (CEO), Aditya Birla Private Equity.

Acknowledging that PEs have approached them on the lock-in issue, a Sebi official said the regulator is yet to take a call on the issue and doesn’t want to make any relaxations that could lead to manipulation.

“The reason for lock-in of all the pre-IPO shares, and not necessarily shares held by PEs, is to ensure that the shares are not issued just before the IPO and are then sold at the time of the IPO or immediately after the closure of the IPO to take the benefit of exit on the IPO or immediately thereafter,” says Lalit Kumar, partner, J Sagar Associates, adding that there are certain exemptions given in specified cases. 

The wish list

* PEs and VCs have sought relaxations on the lock-in criteria

* PEs were concerned particularly about the companies where they are construed as promoters by virtue of their rights and shareholding in the company

* According to current norms, pre-IPO shares are locked in for a period of one year and the minimum contribution of promoters is locked for three years

* PEs say the current rules clash with their fund philosophy and often prevent them from getting time-bound exits