BT Explainer | What latest Sebi circular says on 'Mechanism for lock-in of pledged shares'

Market regulator Securities and Exchange Board of India (Sebi) has introduced a new framework to simplify compliance and enhance transparency in the treatment of pledged shares under capital market regulations. In a circular issued to stock exchanges, depositories, and merchant bankers on April 8, Sebi said that securities where a conventional lock-in cannot be enforced will now be tagged as "non-transferable" for the duration of the lock-in period, ensuring that such shares cannot be transferred until regulatory requirements are met.

The move follows amendments made on March 21 to the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2018. By introducing the "non-transferable" tagging mechanism, Sebi aims to strengthen regulatory oversight and ensure that promoters and other shareholders adhere to lock-in requirements even when shares are pledged with lenders.

Depositories have rolled out a detailed operational framework to implement the new mechanism. Issuers are now required to incorporate relevant provisions in their Articles of Association, inform lenders or pledgees about the restrictions, and ensure appropriate disclosures in offer documents. Sebi noted that depositories have already upgraded their systems to support the revised process, and market infrastructure institutions along with issuers have been directed to ensure full compliance.

Strengthening IPO discipline while improving ease of doing business

The regulator said the change is part of its broader effort to improve ease of doing business while safeguarding investor interests and reinforcing market discipline. By closing a regulatory gap, the framework ensures uniform enforcement of lock-in provisions across different categories of securities, particularly in IPOs and other capital market issuances. The step follows long-standing industry demand for clarity on the treatment of pledged shares during lock-in periods.

Separately, Sebi recently provided relief to companies planning to raise funds through public issues by granting a one-time extension for the validity of its observation letters, citing challenging market conditions amid geopolitical tensions in the Middle East. Under existing rules, companies must launch public issues within 12 to 18 months of receiving Sebi’s observations. However, issuers have faced difficulties in accessing capital markets due to subdued investor participation and heightened uncertainty.

Following representations from industry bodies, Sebi has extended the validity of observation letters set to expire between April 1, 2026 and September 30, 2026. These observation letters will now remain valid until September 30, 2026, providing companies additional time to proceed with fundraising plans while navigating volatile market conditions.