Pledged, But Locked: Rethinking IPO Lock-Ins

[Sumedha is a student at Maharashtra National Law University, Mumbai.]

The Securities and Exchange Board of India (SEBI) recently amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations) on 21 March 2026 (March 2026 Amendments), followed by issuing the Ease of Doing Business Circular on 8 April 2026 (EODB Circular). These changes, although technical, are intended to facilitate the lock-in of pledged shares. While this may seem like a minuscule change, it has a wide-ranging impact on the security market.

Regulation 242 of the ICDR Regulations had already permitted the pledge of locked-in securities as collateral by promoters for loans from scheduled commercial banks, public financial institutions, systemically important non-banking financial companies and housing finance companies, subject to specified conditions. Thus, the ability to pledge locked-in shares is not a novel regulatory concession. What has been introduced via these recent amendments is the mechanism for depositories to implement the lock-in for shares held by persons other than promoters which have been pledged. Conventionally, it was not possible for depositories to create a lock-in over such securities, which created a bottleneck in the IPO sphere.

The March 2026 Amendments addressed this very issue by inserting Regulation 17(2) which states that depositories may earmark securities as “non-transferrable” for the duration of the applicable lock-in period where a lock-in cannot be created. The subsequent circular clarified the operational aspect of these mechanisms. 

A bird’s eye view of these amendments shows that they are not merely an administrative fix, but reflect a deeper shift in SEBI’s regulatory philosophy, from formalistic compliance to an outcome-based regulation.

When is a Lock-In Really a Lock-In?

Lock-ins serve a critical function in the IPO framework by ensuring that promoters retain some skin in the game. They restrict transfers by promoters and certain pre-IPO shareholders to align incentives between insiders and public investors. They function like a signalling mechanism, ensuring that those who are the most familiar with the company’s prospects remain economically committed to the enterprise post-listing.

Traditionally, lock-ins have been viewed as restrictions on transfer. If a shareholder could not sell or transfer securities, lock-in requirements were presumed to be achieved. The March 2026 Amendments challenge this view by acknowledging that the purpose of a lock-in is not the creation of a particular legal status in the depository system, rather it is the prevention of premature liquidity that may undermine investor confidence. If this objective is achieved, the regulatory purpose of a lock-in is fulfilled. Thus, a “non-transferrable” earmark rather than a conventional lock-in entry suffices and fills the gap in the regulatory framework with respect to non-promoters.

The March 2026 Amendments reflect an outcome-based regulation where regulators focus not on strict adherence to prescribed processes, but focus on the achievement of policy objectives. This distinction shows willingness on the part of SEBI to adapt regulatory mechanisms to market realities without abandoning substantive investor protection goals.

The Problem of Pledge Invocation

The question arises as to how the invocation of a pledge would play out during the lock-in period for securities held by non-promoters. The proviso to Regulation 242 of the ICDR Regulations states that the lock-in shall continue even after the invocation of the pledge and such transferee shall not be eligible to transfer the specified securities till the stipulated lock-in period has expired. This essentially means that invocation of the pledge is not prohibited during the lock-in period and the lender may invoke the same before the expiry of the lock-in period. The right to invocation is thus not extinguished by the lock-in. The lender or transferee acquires the shares upon invocation and steps in as the owner of the shares which remain locked-in. A similar regime has not been explicitly stated for shares pledged by non-promoters.

This raises the fundamental question of whether the lender becomes a locked-in shareholder. The logic of the March 2026 Amendments suggests the answer to be yes as the lock-in obligation does not apply merely to the owner but to the securities themselves. The EODB Circular seeks to ensure that even where pledged shares are involved, the restriction on transferability survives. This is consistent with the underlying rationale of lock-ins as if the invocation of a pledge automatically released securities from lock-in obligations, the restrictions could be potentially circumvented through structured financial arrangements, undermining the very objective of promoter commitment that lock-ins were designed to secure.

Nevertheless, the framework creates tension in the lending market as a lender accepting pledged shares would have to account for the possibility that it may receive securities that are not freely transferable until the expiry of the lock-in period upon invocation. The lender’s ability to realise value from the collateral is therefore limited. From a financial perspective, collateral derives its value not just from ownership, but also transferability. A share represents economic interest in a company, yet a locked-in share is not identical in value as one that is freely transferable as it is affected by extraneous factors of timing, pricing and enforcement outcomes that a freely transferrable share is not.

Consequently, lenders may need to adjust valuation methodology and risk assessment when accepting locked-in shares as collateral. The amendment while preserving regulatory objectives, shifts the burden of certain practical constraints onto the lender. However, lenders in the pre-IPO space are sophisticated parties who can price this risk into loan terms and covenant structures. The regulatory framework is designed to protect public investors, which is the objective that SEBI has rightly prioritised.

Implications for PE and VC Investors

The March 2026 Amendments may prove significant for private equity and venture capital investors involved in late-stage and pre-IPO financing as they are the direct beneficiaries, falling in the “non-promoter” category of pre-IPO investors. According to the EY-IVCA 2026 Report, PE/VC investments in India crossed USD 60.7 billion across 1,475 deals.  PE/VC exits rose to the second highest in 2025, with USD 32.9 billion across 257 exits. Pre-IPO rounds are now routinely structured 12–24 months before listing, with AIFs, family offices, and crossover funds all competing for access to late-stage companies. The pledging of pre-IPO shares as collateral for bridge financing is a natural feature of such structures, and with a pipeline of major listings anticipated in 2026, including PhonePe, Zepto, and Flipkart, the prevalence of such structures is likely to increase.

Prior to the amendment, the inability to create conventional lock-ins over pledged securities created regulatory uncertainty during IPO preparation as operational challenges at the depository level could complicate execution. The new framework tackles this concern by providing a mechanism through which pledged shares can remain subject to lock-in requirements.

This seemingly technical clarification may have broader market consequences as by reducing transactional uncertainty, friction in IPO execution is reduced which leads to better capital formation and improves access to financing for growing companies.

The reform thus strikes a balance between preserving investor protection while removing procedural obstacles that unnecessarily increase transaction costs, without diluting lock-in obligations. It ensures that lock-in obligations remain enforceable in situations where conventional mechanisms are not available.

Ease of Doing Business versus Investor Protection

Historically, ease of doing business and investor protection have been pitted against each other and construed as competing priorities. Measures intended to facilitate capital raising are frequently criticized for reducing safeguards, while stricter protections are accused of increasing compliance burdens. The March 2026 Amendments go to show that this relationship need not always be adversarial.

SEBI’s November 2025 consultation paper acknowledged that the depository gap was causing last-minute compliance failures for IPO-bound issuers, demonstrating a market problem. SEBI did not shorten lock-in periods, expand the categories of permissible pledgees or create new exceptions to the existing restrictions. Instead, it addressed a practical implementation challenge that had emerged at the intersection of depository infrastructure and IPO regulation. The result of this is a regulatory solution that preserves the substantive restriction while also preserving operational efficiency. 

The efficiency of the framework and its success depend on the implementation by depositories, issuers, merchant bankers and stock exchanges. The requirement for suitable provisions in articles of association, lender notifications and offer document disclosures as per the EODB Circular reflects an attempt to ensure that all stakeholders understand the continuing restrictions applicable to the pledged shares. The amendment represents a notable example of regulatory coordination between legal rules and market infrastructure.

Conclusion

The March 2026 Amendments can be best understood as a refinement of lock-in regulations rather than a reform of pledge law. SEBI has thus introduced a mechanism to ensure that lock-in objectives continue to operate even where conventional lock-ins cannot technically be created.

More significantly, the amendment reflects a broader evolution in the regulatory philosophy of SEBI. Rather than insisting on a particular procedural form, SEBI has prioritized preserving the economic effect of the restriction. The shift from “lock-in” to “non-transferability” might appear minute but it illustrates an increasingly pragmatic approach to securities regulation. However, clarity is still awaited on whether shares pledged by non-promoters can be invoked during the lock-in period, as no equivalent provision to Regulation 242 has been notified. 

SEBI should address this gap through a targeted amendment to Regulation 17 or a clarificatory circular that expressly states: (i) that invocation of a pledge over non-promoter locked-in securities during the lock-in period is permissible; (ii) that the lock-in obligation runs with the securities and binds the transferee post-invocation; and (iii) the disclosure obligations applicable to the transferee in such circumstances.

Ultimately, the amendment answers a deceptively simple question: when is a lock-in really a lock-in? SEBI’s answer to this question appears to be that it does not matter what label is attached to the security, as long as the investor remains unable to exit, the lock-in objectives are achieved. In the era of increasingly complicated financing arrangements, this is definitely the appropriate response.