Takeover of Listed Companies
REGULATORY FRAMEWORK
Takeover of companies whose securities are listed on recognised stock exchanges in India is governed by SEBI, not merely by the Companies Act.
Such takeovers are specifically regulated under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Before planning a takeover of a listed company, the acquirer must understand the compliance requirements under the SEBI takeover regulations.
The acquirer must also comply with the requirements of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR).
The takeover must be in accordance with the relevant provisions of the Companies Act, 2013.
If the acquirer is a person resident outside India, additional compliances may arise under the Foreign Exchange Management Act, 1999 (FEMA).
As per Regulation 38 of SEBI LODR, the listed entity is required to maintain minimum public shareholding (MPS).
The MPS requirement is prescribed under Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957.
Minimum Public Shareholding
Minimum Public Shareholding (MPS) means that a listed company must maintain at least 25% of its total paid-up share capital with the public.
If public shareholding falls below 25%, the listed company is mandated to restore it to 25%.
This restoration must be done only through the methods prescribed under Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957.
Exception: This requirement does not apply to entities listed on the Innovators Growth Platform (IGP) without making a public issue
Important Definitions under the SAST Regulations , 2011
Target Company
Section 2(z) of the SAST Regulations 2011 defines Target Company.
A target company refers to a company whose shares are listed on a stock exchange.
The term is not limited to companies incorporated under the Companies Act.
It also includes a body corporate or corporation.
Such body corporate or corporation may be established under:
A Central legislation,
A State legislation,
A Provincial legislation that is currently in force.
Persons Acting in Concert
Section 2(q) of the SAST Regulations 2011 defines Persons Acting in Concert (PAC).
Persons acting in concert (PAC) are two or more persons who share a common objective or purpose.
Their common objective is to acquire shares or voting rights, or to exercise control over a target company.
This common objective may arise from an agreement or understanding.
Such agreement or understanding can be formal or informal.
The persons may act directly or indirectly.
They co-operate with each other in acquiring shares or voting rights in the target company.
They may also co-operate in exercising control over the target company.
Acquirer
Section 2(a) of the SAST Regulations defines Acquirer.
An acquirer is any person who acquires or agrees to acquire an interest in a target company.
The acquisition may be direct or indirect.
The person may acquire shares, voting rights, or control over the target company.
The acquisition can be made by the person himself, or through PACs or together with PAcs.
Even an agreement to acquire shares, voting rights, or control is sufficient to treat a person as an acquirer.
Shares
Shares mean equity shares of a target company.
These equity shares must carry voting rights.
The term shares also includes any security that gives its holder the right to exercise voting rights in the target company.
Explanation:
For this purpose, shares are not limited to physical or demat equity shares.
Depository receipts that carry an entitlement to exercise voting rights in the target company are also included within the meaning of shares.
SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS
Regulation 3 of the SAST Regulations, 2011 provides for Substantial acquisition of shares or voting rights.
3(1). Trigger of Open Offer on Acquisition of 25% or More Voting Rights
An acquirer cannot freely buy shares in a target company beyond a point.
If the acquirer’s shareholding, together with persons acting in concert (PACs), reaches or crosses 25% of the voting rights, special rules apply.
Once this 25% threshold is crossed, the acquirer cannot continue the acquisition silently.
The acquirer must make a public announcement stating its intention to acquire shares.
The acquirer must also make an open offer to the public shareholders of the target company.
This open offer gives public shareholders a chance to exit by selling their shares to the acquirer.
The acquisition can proceed only after complying with the requirements laid down in the SEBI Takeover Regulations.
3(2). Creeping Acquisition Framework After Crossing 25% and Linked Exceptions
Where an acquirer, together with (PACs), already holds 25% or more of the voting rights in a target company, but holds less than the MPS non-public shareholding then:
The acquirer cannot freely increase its shareholding in the target company.
The acquirer and PACs may acquire only up to 5% additional voting rights in any one financial year.
Acquisition beyond 5% voting rights in a financial year is not permitted without further compliance.
To acquire more than 5% voting rights in a financial year, the acquirer must make a public announcement of an open offer.
Such open offer must be made strictly in accordance with the SEBI Takeover Regulations.
Maximum Permissible Non-Public Shareholding
The maximum permissible non-public shareholding is calculated on the basis of the minimum public shareholding (MPS) requirement.
This is done under the Securities Contracts (Regulation) Rules, 1957 (SCRR).
Rule 19A of SCRR requires all listed companies, other than public sector companies, to maintain at least 25% public shareholding.
Since public shareholding must be minimum 25%, the remaining 75% can be held by non-public shareholders.
Therefore, the maximum permissible non-public shareholding in a listed company (other than a public sector company) is 75% of the share capital.
Non-public shareholding is typically held by promoters and promoter group entities.
Promoter
The term “promoter” has the same meaning as assigned under the SEBI (Issue of Capital and Disclosure Requirements) Regulations.
The definition of promoter also includes members of the promoter group.
One-Time COVID-Era Relaxation in Creeping Acquisition Limits (FY 2020–21)
As an exception, acquisition beyond the normal creeping acquisition limit was allowed.
During the financial year 2020–21, an acquirer was permitted to acquire more than 5% but up to 10% of the voting rights in a target company.
This relaxation was not general and applied only for FY 2020–21.
The benefit was available only to promoters of the target company.
The acquisition had to be made pursuant to a preferential issue of equity shares by the target company.
Acquisitions outside these conditions continued to be governed by the normal 5% creeping acquisition limit.
Absolute Cap Based on Maximum Permissible Non-Public Shareholding
Even where an acquisition is otherwise permitted, there is an absolute cap on how much can be acquired.
The acquirer cannot acquire shares or voting rights, and cannot even enter into an agreement to acquire shares or voting rights,
if such acquisition would cause the aggregate shareholding to exceed the maximum permissible non-public shareholding.
This restriction applies irrespective of the mode of acquisition.
Exemption for Acquisitions Pursuant to IBC-Approved Resolution Plans
A further exception is provided for certain acquisitions.
Where shares or voting rights are acquired pursuant to a resolution plan:
And such resolution plan is approved under section 31 of the Insolvency and Bankruptcy Code, 2016, then
The acquisition is exempt from the restriction contained in the proviso to Regulation 3(2).
This means the acquirer is not bound by the cap linked to maximum permissible non-public shareholding under that proviso.
3(3). Open Offer Obligation Based on Individual Shareholding Thresholds
Where an individual person acquires shares resulting in his own shareholding crossing the prescribed thresholds then:
Such acquisition attracts an obligation to make an open offer under sub-regulation (1) and sub-regulation (2).
This obligation arises even if there is no change in the aggregate shareholding of the acquirer along with persons acting in concert (PACs).
The focus is on the individual shareholding of the acquirer, not merely the collective holding.
3(4). Exemption for Promoter Acquisitions under Chapter VI-A of SEBI (ICDR) Regulations
The regulation does not apply to acquisition of shares or voting rights of a company.
Such acquisition must be made by promoters or shareholders who are in control of the company.
The acquisition must be in accordance with Chapter VI-A of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Where these conditions are satisfied, the open offer obligations under this regulation are not attracted.
3(5). Modified Threshold for Companies Listed on the Innovators Growth Platform
With respect to listed entities on the Innovators Growth Platform (IGP).
The usual 25% threshold mentioned in this regulation is modified.
Wherever this regulation refers to Twenty-five Percent: It shall be read as Forty-nine percent for IGP-listed entities.
As a result, open offer obligations for IGP-listed entities arise only when the 49% threshold is crossed, instead of 25%.
CREEPING ACQUSITIONS
Creeping acquisition refers to the gradual increase in shareholding of an acquirer in a listed company after already crossing a specified threshold.
Under the SEBI SAST Regulations, 2011, an acquirer who already holds 25% or more voting rights can still acquire shares, but only up to a limited extent.
The law allows such an acquirer to purchase not more than 5% of the voting rights in one financial year.
This limited increase without triggering a full takeover offer is called creeping acquisition.
If the acquirer wants to buy more than 5% in a financial year, a public announcement and open offer becomes mandatory.
Creeping acquisitions are permitted without an open offer only because they are small, controlled, and gradual.
The purpose of this concept is to prevent sudden or stealth takeovers while still allowing promoters or acquirers to slowly consolidate their holding.
Limits for Creeping Acquisitions
While calculating acquisition limits for creeping acquisition under Regulation 3(2), gross acquisitions or purchases are considered.
This means the total shares acquired during the period are counted.
Any temporary or intermittent fall in shareholding is ignored.
Such fall may occur due to disposal/sale of shares by the acquirer.
It may also occur due to dilution of voting rights because of a fresh issue of shares by the target company.
Even if shareholding goes down in between, the entire acquisition is still counted for determining whether the creeping acquisition limit is breached.
ACQUISITION OF CONTROL
Where an acquirer seeks to acquire control over a target company, directly or indirectly:
Such acquisition of control cannot be carried out freely.
It must be preceded by a public announcement of an open offer for acquiring shares of the target company.
This obligation applies irrespective of whether the acquirer acquires or holds any shares or voting rights.
The public announcement and open offer must be made in accordance with the SEBI Takeover Regulations.
OPEN OFFER PROCESS
Public Announcement, Escrow Creation, and Detailed Public Statement Obligations
In most acquisition scenarios, except certain cases of indirect acquisitions, a public disclosure obligation is triggered.
On the day the triggering event occurs, the acquirer must make a Public Announcement.
The Public Announcement must be made to SEBI.
It must also be made to all stock exchanges where the shares of the target company are listed.
Within 5 working days from the date of the Public Announcement, the acquirer must take further steps.
The acquirer must create an escrow account in accordance with the regulations.
After creation of the escrow account, the acquirer must publish a Detailed Public Statement (DPS).
The DPS must be published in newspapers as prescribed.
A copy of the DPS must also be submitted to SEBI.
Filing of Draft Letter of Offer and Opening of the Open Offer
Within 5 working days from the publication of the Detailed Public Statement (DPS), the acquirer must act further.
The acquirer, through the manager to the offer, is required to file a draft letter of offer with SEBI.
The draft letter of offer is filed for SEBI’s observations.
After receiving SEBI’s observations, the acquirer must incorporate the changes suggested by SEBI, if any.
The letter of offer is then dispatched to the shareholders of the target company.
The dispatch is made to shareholders as on the identified date.
The open offer must open not later than 12 working days from the date of receipt of SEBI’s observations.
Open Offer Schedule, Payment Obligations, and Post-Offer Disclosures
The acquirer must issue an advertisement announcing the final schedule of the open offer.
This advertisement must be published one working day before the opening of the offer.
The open offer shall remain open for 10 working days from the date it opens.
Within 10 working days from the closure of the offer, the acquirer must make payments to the shareholders whose shares have been accepted.
After completion of payments, the acquirer is required to make further disclosure.
A post-offer advertisement, containing details of the acquisitions, must be published.
This post-offer advertisement must be published within 5 working days from the completion of payments under the open offer.
INDIRECT ACQUISITION FOR SHARES AND CONTROL
5(1). Indirect Acquisition of Shares or Control
Where a person acquires shares, voting rights, or control in any company or entity, and
Such acquisition enables that person, together with persons (PACs), to exercise or direct the exercise of voting rights or control over a target company,
To an extent that would otherwise trigger an obligation to make a public announcement of an open offer under Regulations 3 or 4,
Then such acquisition shall be treated as an indirect acquisition of shares, voting rights, or control over the target company.
The indirect acquisition attracts the same open offer obligations as a direct acquisition.
5(2).
Certain indirect acquisitions that are so significant that they are treated as direct acquisitions.
Even though the acquisition is technically indirect, the law looks at the economic importance of the target company in the overall transaction.
The assessment is made on the basis of the most recent audited annual financial statements.
If the target company forms more than 80% of the value of the entity or business being acquired, then:
The transaction is no longer treated as a mere indirect acquisition.
The 80% test can be satisfied in any one of the following ways:
(a). The net asset value of the target company is more than 80% of the consolidated net asset value of the entity or business being acquired.
(b). The sales turnover of the target company is more than 80% of the consolidated sales turnover of the entity or business being acquired.
(c). The market capitalisation of the target company is more than 80% of the enterprise value of the entity or business being acquired.
If any one of the above conditions is met, the indirect acquisition is deemed to be a direct acquisition of the target company.
As a result, the acquirer must comply with all open offer obligations applicable to a direct acquisition.
This includes compliance with timing, pricing, and all other procedural requirements under the takeover regulations.
How Open Offer is Determined in Indirect Acquisitions
In cases of indirect acquisition, the requirement to make an open offer is determined by:
Looking at the voting rights and/or control acquired in the target company.
It is not determined merely at the percentage acquired in the intermediate entity.
The quantum of acquisition in the target company cannot be calculated on a pro-rata basis in indirect acquisitions.
What matters is control and effective voting rights, not mathematical proportioning.
Illustration 1 (Indirect acquisition triggering open offer):
X acquires 40% shares of Y along with majority control of Y.
Y holds 70% shares of Z, a listed company, along with majority control of Z.
By acquiring control of Y, X indirectly acquires control over 70% of Z.
Therefore, X is required to make an open offer to the shareholders of Z.
Illustration 2 (No additional open offer obligation):
X already holds 40% shares and majority control of Y.
X further acquires an additional 10% shares of Y.
This does not result in X acquiring control over any additional shares of Z beyond the existing 70% held by Y.
Hence, no fresh open offer obligation arises for Z.
It is incorrect to compute X’s additional acquisition in Z as 10% of 70% (i.e., 7%) on a pro-rata basis.
X does not acquire any additional shares or voting rights in Z, either directly or indirectly, by merely increasing its stake in Y.
Illustration 3 (Change in control triggering open offer):
A and B are in joint control of X.
X holds majority control of Y, and Y holds 70% shares and control of Z.
A acquires sole control of X due to cessation of control by B.
As a result, A indirectly acquires sole control of Z through X and Y.
In such a case, the change from joint control to sole control amounts to a fresh acquisition of control.
Consequently, an open offer obligation is triggered for the shareholders of Z.
