Lock-In Clauses: When You Cannot Exit or Sell (India)

A lock-in clause stops a party from exiting a deal, or transferring what they hold in it, for a fixed period, no matter what changes. You will meet it in three places: a founder's equity in a shareholders' agreement, a promoter's shareholding after an IPO under SEBI's rules, and a tenant's right to vacate a commercial lease. The one thing most people get wrong: they assume a lock-in is automatically enforceable because it is written down and both sides signed it. In India it is not that simple. A lock-in that binds only one side, or that turns into a punishment rather than a genuine estimate of loss, runs into Section 74 of the Indian Contract Act, 1872, the same provision that limits liquidated damages generally. This guide (published by Adira, which makes contract review and CLM software, so we have a commercial stake in you understanding lock-ins well, but this explainer stands on its own) covers all three contexts, the statute, and a real case on lease lock-ins.

Plain meaning

A lock-in clause takes a right you would normally have, to sell your shares, to walk away from a lease, to quit and take your options with you, and freezes it for a set window. You cannot transfer, terminate, or exit the thing during that window, even if you want to and even if the other side would let you.

Three lock-ins share this shape but protect different interests. A founder lock-in in a shareholders' agreement (SHA) stops a founder from selling their shares for a period, usually 3 to 5 years, so investors are not left holding stock in a company its builders have already cashed out of. A promoter lock-in under SEBI's IPO rules stops promoters from selling their shareholding right after listing, so public shareholders are not left holding a stock its insiders dumped in week one. A lease lock-in stops a commercial tenant from vacating before an agreed date, so a landlord who gave fit-out concessions or a lower rent for a long commitment gets the term they priced for.

Who it protects and what triggers it

Each lock-in protects the party who gave something up in exchange for the other side's continued presence.

In an SHA, investors negotiate the founder lock-in because they invested in the team, not just the idea. The trigger is usually the passage of time from the funding round, sometimes combined with a "good leaver / bad leaver" test: if a founder is later terminated for cause, fraud, or serious breach, their equity is treated as a bad-leaver forfeiture case rather than a clean exit.

In an IPO, SEBI locks in promoter shareholding to protect retail investors who buy in relying on promoter skin in the game. The trigger is the date of allotment in the public issue, and the clock runs automatically under the regulation, not something a company can waive by agreement.

In a commercial lease, the landlord wants the lock-in because concessions, a fit-out period, capped escalation, a lower base rent, were priced assuming a minimum tenancy. The trigger is the tenant's notice to vacate, or actual vacation, before the lock-in end date.

What to look for

Four things decide whether a lock-in is a fair trade or a trap:

1. Does it bind both sides, or just one? A lease lock-in that stops the tenant from leaving but lets the landlord terminate or re-enter freely during the same period is structurally one-sided. Ask: read the clause with "Landlord" and "Tenant" swapped, does it still make sense, or does only one party carry an obligation?
2. What is the consequence of breaking it, and is it proportionate? Most lock-ins attach a genuine consequence, forfeited deposit, "balance rent," forfeiture of unvested equity, rather than a bare prohibition. That consequence is itself tested under Section 74, so a number unrelated to plausible loss is as vulnerable as an uncapped liquidated damages clause.
3. Is there a carve-out for genuine hardship or a "good leaver" exit? A founder lock-in with no exception for death, disability, or a negotiated buyout is harsher than one with a defined good-leaver path.
4. Does the period meet, or fall short of, any regulatory minimum? For promoter lock-ins, there is a statutory floor. A lock-in shorter than SEBI's minimum is not a negotiable term, it is a compliance failure.

A quick test: find the lock-in clause, then Ctrl+F for the other party's name within it or the two clauses around it. If the other side never appears with a matching restriction or exit right, you are looking at a one-sided lock-in, the most common red flag in this category.

The Indian position: no lock-in statute, but Section 74 caps the penalty

There is no standalone Indian statute regulating lock-in clauses in SHAs or leases as a category, they are contractual terms, valid under ordinary freedom of contract. Where India steps in is the back end: whatever penalty a lock-in breach triggers is capped by Section 74 of the Indian Contract Act, 1872, which reads:

"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for." Source: Section 74, Indian Contract Act, 1872

For a lease lock-in, this means balance rent or deposit forfeiture is enforceable in principle, but a court can still ask whether the figure is a genuine estimate of the landlord's loss rather than a punitive number, exactly as it would for any liquidated damages clause. A founder lock-in's bad-leaver forfeiture faces the same scrutiny if challenged as a penalty rather than a genuine pre-agreed exit mechanism.

Promoter lock-ins after an IPO sit outside Section 74, because they are a regulatory requirement, not a negotiated penalty. Regulation 16 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 requires the minimum promoters' contribution, at least 20% of post-issue capital, to be locked in for 18 months from allotment, extended to 3 years if over half the fresh-issue proceeds fund capital expenditure. Promoter shareholding above that minimum is locked in separately for 6 months. Source: SEBI ICDR Regulations, 2018 (Chapter III, restriction on transferability). These periods are a floor, not a starting point for negotiation.

A named Indian case: lock-in as a genuine pre-estimate, upheld

DAG Private Limited v Ravi Shankar Institute for Music and Performing Arts, decided by the Delhi High Court on 29 May 2023 (O.M.P. (COMM) 274/2022), is a useful case because the lock-in clause survived challenge. The dispute involved a lease of institutional land in Chanakyapuri, New Delhi, where the tenant vacated before the lock-in period ended. The landlord's arbitral award required balance rent for the unexpired lock-in period. The tenant challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing, relying on Kailash Nath Associates v DDA, that Section 74 required separate proof of actual loss.

The Delhi High Court upheld the award. It reasoned that a lock-in period serves both sides, the tenant gets guaranteed possession, the landlord gets a guaranteed income stream in return, and that balance rent for early exit during that period is itself a genuine pre-estimate of the landlord's loss, built into the deal at signing, not a separate penalty requiring fresh proof. Source: DAG Private Limited v Ravi Shankar Institute for Music and Performing Arts, Delhi High Court, 29 May 2023 (Indian Kanoon).

Read against Kailash Nath Associates v DDA ((2015) 4 SCC 136), the case that governs Section 74 generally, the rule is this: a lock-in penalty tied to the actual, foreseeable value of the bargain survives; one that is a round, unconnected number does not.

Red flags

Normal	Red flag	Why it matters
Lock-in binds both parties for the same period	Lock-in binds only the tenant; landlord keeps a free termination or re-entry right	A one-sided lock-in extracts a commitment without giving one back
Early-exit penalty is balance rent, or a defined multiple, for the actual unexpired period	Flat, large forfeiture with no link to time remaining	Courts assess whether the sum is a genuine pre-estimate; an unconnected number invites reduction under Section 74
Founder lock-in has a defined good-leaver exit (death, disability, buyout at fair value)	No good-leaver carve-out; every exit is treated as forfeiture	Removes any commercial off-ramp and raises the odds of a challenge
Promoter lock-in matches or exceeds the SEBI minimum (18 months MPC, 6 months excess holding)	Offer document implies a shorter lock-in, or a side deal to release shares early	Regulation 16 lock-ins are not waivable by private agreement
Lock-in period is proportionate to the concession given	Long lock-in (5+ years) with no matching concession	A lock-in with nothing given in exchange is hard to justify as a genuine bargain
Consequence of breach is a specific formula	Consequence is vague, or says loss need not be proved at all	"No proof of loss required" language does not override Section 74 in substance
Lock-in states what happens if the other party breaches first	Lock-in is silent on this	Silence leaves open whether a locked-in party can exit penalty-free when the other side is at fault

Bad clause → better clause

Bad: "The Tenant shall not terminate this Lease or vacate the Premises for 60 months from the Commencement Date ('Lock-in Period'). In the event of early vacation for any reason, the Tenant shall forfeit the entire Security Deposit and pay the Landlord liquidated damages of 12 months' rent, regardless of whether the Landlord has suffered any loss. This Lock-in Period shall not restrict the Landlord's right to terminate this Lease under Clause 14 (Termination for Convenience) at any time."

What is wrong: the lock-in binds only the tenant, since the landlord keeps a free termination right; the exit penalty is a flat 12 months' rent unconnected to time remaining; and the "regardless of loss" language does not survive Section 74 scrutiny under Kailash Nath Associates v DDA.

Better: "Neither party may terminate this Lease during the period of 60 months from the Commencement Date ('Lock-in Period'), except under Clause 12 (Termination for Cause). If the Tenant vacates before the end of the Lock-in Period other than under Clause 12, the Tenant shall pay rent for the remaining unexpired months, reduced by any rent the Landlord recovers from re-letting, provided the Landlord takes reasonable steps to re-let. If the Landlord terminates other than under Clause 12 during the Lock-in Period, the Landlord shall refund the Security Deposit in full and reimburse the Tenant's documented fit-out costs on a straight-line basis for the unexpired period."

What changed: the restriction binds both parties for the same window; the exit payment is tied to the unexpired period and offset by mitigation, tracking DAG v Ravi Shankar Institute; and a landlord exit during the lock-in now carries a symmetric, defined cost.

How it interacts with related clauses

• Vesting. A founder lock-in and an equity vesting schedule run on different clocks: lock-in restricts transfer of shares already held, vesting controls when shares are earned. Check both dates; a founder can be fully vested but still locked in from selling.
• Liquidated damages. The financial consequence of breaking a lock-in, balance rent, forfeiture, a bad-leaver discount, is a liquidated damages clause in substance and is tested the same way under Section 74, whatever it is called.
• Termination. A lock-in is meaningless if a broad termination-for-convenience clause lets either side exit anyway during the locked period. Read the two together; one should carve out the other.

You can mark up how a lock-in interacts with termination and liquidated-damages clauses directly in a document, for free, using Weave, before you sign or send a lease or SHA back for negotiation.

US and global contrast

US commercial leases use lock-in-equivalent terms too, usually called a non-cancellable or minimum guaranteed term, with early exit typically framed as acceleration of the remaining rent, subject to a common-law duty to mitigate that most US states impose on landlords. Founder and promoter lock-ins exist in US venture deals as well, but IPO lock-ups typically run 180 days under an underwriter agreement rather than a securities regulator's rule, shorter than SEBI's 18-month floor for Indian promoters, though private lock-up terms can run longer.

The structural difference is the one that runs through Indian contract law generally: the US and English tradition still tests a penalty against a strict genuine-pre-estimate standard and can void it outright if it fails. India, since 1872, does not void a harsh lock-in penalty, it caps what can be recovered at reasonable compensation under Section 74, as DAG v Ravi Shankar Institute shows in practice.

FAQ

Is a lock-in clause enforceable in India if it only restricts one party? It can still be enforceable, courts do not strike down a clause purely for being one-sided. But a one-sided lock-in is far more likely to be challenged, and any penalty it carries is tested under Section 74 for whether it is a genuine pre-estimate of loss, which a court can reduce.

What happens if a tenant breaks a lease lock-in in India? Typically the landlord can recover the security deposit and claim balance rent for the unexpired lock-in period, reduced by whatever the landlord recovers by re-letting. DAG v Ravi Shankar Institute confirms balance rent tied to the actual unexpired period is treated as a genuine pre-estimate of loss and needs no separate proof each time.

How long is a promoter lock-in period after an IPO in India? Under Regulation 16 of the SEBI ICDR Regulations, 2018, the minimum promoters' contribution (at least 20% of post-issue capital) is locked in for 18 months from allotment, extended to 3 years if over half the fresh-issue proceeds fund capital expenditure. Promoter shareholding above that minimum is locked in for 6 months. These are regulatory floors, not negotiable.

Can a founder negotiate their way out of a lock-in in a shareholders' agreement? Sometimes, if the SHA includes a good-leaver mechanism, a defined exit for reasons like death, disability, or a buyout at fair value. Without one, an early exit is usually treated as a bad-leaver event and priced accordingly, often at a discount or outright forfeiture.

Is a lock-in the same as a non-compete? No. A lock-in restricts exiting or transferring an existing position, shares, a lease, for a period. A non-compete restricts starting a competing activity after exit. They often sit near each other but are tested differently, since non-competes face their own restraint-of-trade limits under Section 27 of the Contract Act.

Does a lock-in clause need a specific penalty amount to be valid? No, but if it has no stated consequence at all, it is closer to a statement of intent than an enforceable restriction. Most workable lock-ins pair the restriction with a defined, proportionate consequence, so both sides know what early exit actually costs.

This guide gets you to understanding what a lock-in clause does across a lease, an SHA, and an IPO, and how Indian law treats the penalty it carries. It does not tell you whether a specific lock-in period or forfeiture formula in your document would survive challenge, that depends on the facts, the sector, and how the figure was arrived at, and is not legal advice. Talk to a lawyer before you sign, rely on, or try to enforce a lock-in clause in a live deal.