IPO Lock-in Period in NEPSE: What Investors Need to Know

When a company goes public, it issues an initial public offering (IPO), which allows it to raise money by selling shares to the public. However, not all shareholders can sell their shares immediately after the IPO. 

Some shareholders, such as corporate executives, directors, major shareholders, promoters, and project-affected locals, are subject to a lock-in period, which restricts them from selling, transferring, or disposing of their shares for a certain duration after the IPO. 

In this article, we will explain what an IPO lock-in period is, why it is important, how it affects the stock price, and what risks investors should be aware of when investing in a company during its IPO lock-in period.

An IPO lock-in period is a contractual agreement or a regulatory requirement that prevents certain shareholders from selling their shares for a specified period after the IPO. The main purpose of an IPO lock-in period is to stabilize the market price of the shares and to align the interests of the shareholders with the long-term success of the company.

An IPO lock-in period can vary depending on the company and its IPO details. In Nepal, the lock-in period usually lasts for three years following the IPO allotment to the general public. During this period, the shareholders are not allowed to sell or transfer their shares, except for some valid reasons, such as paying off tax debts or complying with legal obligations.

The IPO lock-in period applies to different sectors and shareholders in Nepal. For sectors such as hydropower, investment, manufacturing and processing, and hotels, which are listed on the Nepal Stock Exchange (NEPSE) only, the lock-in period applies to both the promoters and the project-affected locals who receive a certain percentage of the shares as a reservation. 

For other sectors, such as banking, insurance, finance, microfinance, and development banks, which are also listed on the Securities Board of Nepal (SEBON), the lock-in period applies only to the promoters, as there is no reservation for the locals.

The IPO lock-in period is intended to maintain market stability and to prevent short-term trading. By restricting the supply of shares in the market, the IPO lock-in period helps to avoid a sudden influx of shares that could cause sharp fluctuations in the stock price. This is especially important for new companies that may be more volatile and have less established track records.

The IPO lock-in period also ensures that the shareholders are committed to the sustained growth and prosperity of the company. By holding their shares for a longer period, the shareholders signal their confidence in the company and its future prospects. This can attract more investors and increase the demand for the shares, which can boost the stock price.

Moreover, the IPO lock-in period allows the company to focus on its core business activities and long-term goals, rather than worrying about the short-term market reactions. The company can also use the IPO proceeds to invest in its expansion, innovation, and development, which can enhance its competitive advantage and profitability.

When the IPO lock-in period expires, the shareholders who were previously restricted can sell their shares in the market. This can have a significant impact on the stock price, depending on the number of shares sold and the market conditions.

If many shareholders decide to sell their shares after the IPO lock-in period expires, the supply of shares in the market will increase, which can put downward pressure on the stock price. This can happen if the shareholders want to cash out their profits, diversify their portfolio, or reduce their exposure to the company. The shareholders may also have a more accurate and updated insight into the company's performance and outlook, which can influence their decision to sell or hold their shares.

On the other hand, if the shareholders choose to retain their shares after the IPO lock-in period expires, the stock price may increase. This can happen if the shareholders believe that the company has a strong potential and a bright future, and that the current stock price undervalues the company. The shareholders may also want to benefit from the dividends that the company may distribute, depending on its profitability. By holding their shares, the shareholders demonstrate their loyalty and trust in the company, which can attract more investors and increase the demand for the shares.

It is rare for the IPO lock-in period to be extended or shortened, but it can happen under certain circumstances, usually to adjust to the changing market conditions or to meet the shareholders' demands who may need to sell their shares for valid reasons.

Investors who buy shares of a company during its IPO lock-in period should be aware of the risks and challenges that may arise. One of the main risks is the uncertainty and volatility of the stock price, especially around the expiration of the IPO lock-in period. 

The stock price may fluctuate significantly depending on the supply and demand of the shares, as well as the market sentiment and expectations. Investors should be prepared for the possibility of a sharp decline or increase in the stock price, and have a clear investment strategy and risk tolerance.

Another risk is the lack of liquidity and transparency of the shares. During the IPO lock-in period, the number of shares available in the market is limited, which can make it difficult for investors to buy or sell their shares at their desired price and time. The shares may also have a low trading volume and a high bid-ask spread, which can affect the profitability and efficiency of the transactions. 

Moreover, the information and disclosure of the company may be limited or delayed, which can make it hard for investors to evaluate the company's performance and prospects.