Concept Of Lock-In-Period For Investments

By: Alimpan Banerjee, National Law University, Jodhpur

The Indian economy has undergone a lot of turbulence in the recent times.  Events like the depreciating rupee, slump in GDP growth, lack of foreign investments etc. have all together forced the policy makers to consider major economic reforms. A positive announcement in this regard was the recent declaration by the Prime Minister Manmohan Singh with regard to major changes in Commercial laws and policy to revive the bullish spirit in the economy. There has also been a change of guard in the Ministry of Finance with Pranab Mukherjee moving to Raisina Hill so we can expect an overhaul of the policy measures affecting investor confidence in the economy. In this article of mine I discuss some recent changes ushered in with regard to the Lock-in-period on investments in various sectors along with the need to extend these reforms to some sectors where the policies continue to be antiquated.  The Lock-in-period affects investments in a major way because as a concept it refers to two possible meanings. The first meaning is used in the context of a minimum period during which a loan cannot be paid off without incurring expenses. It is used as a tool for generating at least a fixed amount of return and setting off the administrative costs of extending a loan. The term Lock-in-period for commercial transactions is also used in the sense of a fixed period where the interest rate is kept constant by the lender irrespective of market situations; it helps to minimize the risk and volatility factors of an investment. Thus, as is evident from the above discussion the period of lock-in used in any of its two senses is a crucial factor in any investment or Corporate policy from the perspective of the issuer and holder both. Let us now look at some of the recent changes introduced in this area by the Govt.

Reduction of Lock-in-period for Long Term Infrastructure Bonds: A move to bolster investments

The maximum permissible limit for Foreign Investment in the Long Term  Infrastructure bonds is USD 25 billion(Rs.1,12,095) but the investments as of May 2012 stood only at Rs 15,287 crores which is about 13.64% of the overall limit. There was a need to bolster investment in this sector and with that end in mind the Government in June 2012 has introduced a reduction in the Lock-in-period for investments in Long-Term Infrastructure bonds to 1 year as compared to the limit of 3 years prescribed earlier. The Lock-in-period for investments up to a maximum limit of USD 10 billion in the Infrastructure Debt Fund (IDF) has also been reduced to one year now.

This has been supplemented by further changes where overseas investors can now bring in up to USD 3 billion into mutual fund debt schemes which invest up to 25 per cent of their assets in infrastructure. Earlier, QFI's could invest only in those schemes which invest 100% of their assets in infrastructure projects. At present, the top 10 debt schemes of mutual funds invest 18% of their assets in the infrastructure space.

Besides, FIIs can now invest up to USD 12 billion in long-term infra bonds which have a lock-in period of one year with a residual maturity of 15 months. Earlier FIIs were allowed to invest USD 5 billion in these bonds with a residual maturity and lock-in of one year. Besides, they could invest another USD 7 billion in bonds with residual maturity and lock-in of three years. [1]

The logical outcome of these changes would be an increase in the investor confidence in the economy as they can now be assured of fixed returns on their investments irrespective of market volatility. This in turn will boost the infrastructure sector which has been suffering from the lack of capital and policy paralysis for quite some time now.

SEBI’s Clarification: Will it affect the volume of IPO's?

The SEBI recently issued a clarification on being requested by MCX-Exchange for an informal guidance on the applicability of the exemption of the one-year lock-in period for ex-employees on the pre-existing share capital.  The request by MCX-Exchange was specifically with regard to the interpretation of Regulation 37 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the "SEBI Regulations"). It stated that all shares held by employees of a company under the ESOP system would be exempted from the one-year lock-in period on pre-existing share capital for companies about to issue an IPO.

The clarification enquired was with regard to the fact as to whether the term "employee" enshrined in the regulations would also include ex-employees.  The SEBI in unequivocal terms stated that the shares held by the ex-employees have to locked-in and will not get any kind of exemption under the guidelines. These guidelines have been construed to be harsh towards the ex-employees by some observers. But, it definitely follows the rationale embedded in Company Law which states that it is the continued employment that confers the benefit of free transferability without lock-in.[2]

This might have a potential impact on the volume of IPO's being registered in the Indian capital markets as the free transferability of shares in private companies which is considered the epitome of company jurisprudence has been substantially reduced. The only positive outcome however, is the fact that the ambiguity has been removed by the SEBI removing the confusion in the minds of the investors.

Lock-in period for FDI in Real Estate: Need for Reform

The Department of Industrial Policy and Promotion in its press note released in 2005 stated two requirements for FDI in the real estate sector. Firstly, a minimum capitalization of USD 10 billion for wholly owned subsidiaries and USD 5 billion for Joint Venture companies all to be brought in within 6 months of commencement of business. More, importantly the original investment could not be repatriated within three years of the period after completion of minimum capitalization. The rationale cited for the period of Lock-in was to ensure the entry of only those players in the market who want to make long term investments in the construction industry.

Some confusion as to the term "original investment" arose where the Government had earlier through a release stated that it would cover only the initial investments. But doing a volte face in 2005 the ambit of the term was extended to include the entire investments brought in through FDI. Though, this move may be beneficial to the investee companies it deprives the investors of exit options that might be contractually available to them.[3]

In conclusion, I would like to state that the mood of the economy has changed and the economic and commercial policies of the Government have to be reoriented keeping that in mind. The need of the hour is to attract credible foreign investments that would revive the condition of the economy and ensure stability in society. The recent changes in the Lock-in period of long-term infrastructure bonds are a welcome step but similar provisions in other sectors also need to be modified and harmonized into the larger national need of economic revival.

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 http://articles.economictimes.indiatimes.com/2012-06-25/news/32409274_1_infrastructure-bonds-foreign-investment-infrastructure-debt-fund
2http://indiacorplaw.blogspot.in/2012/08/ipo-lock-in-on-esop-shares.html
3http://indiacorplaw.blogspot.in/2009/07/lock-in-for-real-estate-fdi-clarified.html