The Securities and Exchange Board of India, through a circular dated April 2, 2026, introduced a mechanism requiring securities under conventional lock-in restrictions to be tagged as "non-transferable" in depository systems for the duration of the lock-in period. The circular, addressed to stock exchanges, depositories, and merchant bankers, also extends the validity of observation letters on offer documents set to expire between April 1 and September 30, 2026.
Background
Lock-in requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, restrict promoters and other specified shareholders from transferring their shares for prescribed periods following an IPO or further public issue. However, the enforcement mechanism for these restrictions has historically relied on monitoring rather than infrastructure-level controls, creating instances where locked-in shares were inadvertently or deliberately transferred in violation of the lock-in conditions.
SEBI's move to implement a depository-level non-transferable tag addresses this enforcement gap by making it technically impossible to transfer locked-in securities until the lock-in period expires, rather than relying on post-facto detection and penalty mechanisms.
Key Provisions
The circular establishes the following framework:
Non-transferable tagging: Securities subject to conventional lock-in under SEBI (ICDR) Regulations will carry a "non-transferable" designation in depository systems. During the lock-in period, no transfer — whether through market sale, off-market transfer, pledge creation, or any other mechanism — can be executed.
Depository implementation: NSDL and CDSL are directed to implement the tagging mechanism in coordination with stock exchanges and registrars. The system will automatically remove the non-transferable tag upon expiry of the lock-in period.
Observation letter extension: Observation letters on offer documents expiring between April 1 and September 30, 2026, receive an automatic validity extension. This prevents issuers from needing to reapply during the transition period.
Pledged shares treatment: The circular clarifies that shares under lock-in cannot be pledged during the lock-in period, as the non-transferable tag extends to pledge creation, resolving an ambiguity in the prior framework.
Implications for Practitioners
For merchant bankers and compliance officers managing IPO and rights issue processes, the non-transferable tag eliminates the compliance risk of inadvertent lock-in breaches. However, promoters who had previously relied on pledging locked-in shares for financing purposes must restructure their borrowing arrangements, as the pledge route is now closed during the lock-in period.
Investment bankers advising on IPOs should factor the enhanced lock-in enforcement into discussions with promoters regarding post-listing financing plans. The inability to pledge locked-in shares reduces the promoter's collateral available for personal or group financing during the lock-in period.
Frequently Asked Questions
Can promoters still pledge their shares after the lock-in period expires?
Yes. The non-transferable tag is removed automatically upon expiry of the prescribed lock-in period. Once the tag is removed, shares become freely transferable and can be pledged, sold, or transferred in the normal course, subject to insider trading regulations and other applicable SEBI requirements.
Does the non-transferable tag apply to existing locked-in shares or only new issues?
The circular applies to all securities currently under lock-in as well as securities that will be subject to lock-in under future issues. Depositories are directed to implement the tagging for both existing and prospective lock-in holdings.