Substantial Acquisition of Shares , Voting Rights or Control
Understanding Creeping Acquisition
Creeping Acquisition means a gradual increase in shareholding by an acquirer (along with persons acting in concert) without triggering an open offer, within a permitted limit.
It applies when the acquirer already holds 25% or more but less than the maximum permissible non-public shareholding.
The acquirer is allowed to increase their stake slowly over time.
This increase is capped at up to 5% of voting rights in a financial year.
As long as this limit is not exceeded, the acquirer does not need to make an open offer.
If the acquirer crosses this 5% limit, an open offer becomes mandatory.
Example:
Scenario 1:
A (acquirer) already holds 30% shares in a target company.
Since this is above 25%, A is allowed to use creeping acquisition.
During the financial year:
A buys 3% shares → holding becomes 33%
Later buys another 2% shares → holding becomes 35%
Total acquisition in the year = 5%
Since this is within the 5% limit, A does not need to make an open offer.
Scenario 2:
Now suppose A instead buys:
First 4%, then another 3% in the same year
Total acquisition = 7%
Since this exceeds 5%, A cannot rely on creeping acquisition.
A must make a public announcement and open offer before proceeding.
Regulation 3. Substantial acquisition of shares or voting rights.
3(1).
An acquirer cannot be viewed in isolation when acquiring shares or voting rights.
The law considers not only the acquirer’s individual holdings.
It also takes into account the holdings of persons acting in concert (PAC) with the acquirer.
The combined shareholding and voting rights are evaluated together.
While calculating shareholding, the acquirer’s existing holdings are taken into account.
This includes all shares and voting rights already held by the acquirer.
To this, the holdings of persons acting in concert (PAC) with the acquirer are added.
The total combined holding is then determined.
The combined holding of the acquirer and persons acting in concert (PACs) is evaluated after the acquisition.
This includes both existing holdings and newly acquired shares or voting rights.
If this combined holding reaches or exceeds 25% of the voting rights in the target company, a threshold is crossed.
This level of holding gives the ability to exercise significant influence or control.
Crossing this threshold is treated as a regulatory trigger under the law.
• On crossing this twenty-five per cent threshold, the acquirer is not permitted to proceed unless he makes a public announcement.
• The public announcement must be for an open offer to acquire shares of the target company.
• The open offer must be made strictly in accordance with the requirements and procedure laid down under the applicable regulations.
Example:
A (the acquirer) already holds 10% shares in a target company.
B and C are persons acting in concert (PACs) with A.
B holds 8%
C holds 7%
Before any new acquisition, their combined holding = 10% + 8% + 7% = 25%
Now, A plans to acquire an additional 2% shares.
After acquisition, the total combined holding becomes 27%.
Since this exceeds the 25% threshold, a regulatory trigger is activated.
As a result:
A cannot proceed freely with the acquisition.
A must first make a public announcement.
The announcement must be for an open offer to acquire shares from public shareholders.
The open offer must follow all SEBI (SAST) Regulations procedures and requirements.
3(2).
Under circumstances , an acquirer, along with PACs, already holds 25% or more but less than the max. permissible NPS in a target company then:
At this stage, the law allows the acquirer to gradually increase their stake, but only within limits.
During any financial year, the acquirer can acquire up to 5% additional voting rights without triggering major obligations.
This is commonly referred to as creeping acquisition.
However, if the acquirer wishes to increase their holding by more than 5% in the same financial year, the situation changes.
The acquirer must then make a public announcement before proceeding further.
This announcement is for an open offer to acquire shares from the public shareholders.
The entire process must be carried out strictly in accordance with the prescribed regulations.
In essence, once a significant level of control is reached, further substantial increases require giving an exit opportunity to public shareholders.
One-Time Relaxation (FY 2020–21)
There is a special relaxation provided for a specific period.
This relaxation applies only for the financial year 2020–21.
It allows an acquirer (specifically a promoter) to acquire more than 5% but up to 10% of voting rights in a year.
This is an exception to the usual 5% creeping acquisition limit.
However, it is subject to a specific condition.
The additional acquisition must be pursuant to a preferential issue of equity shares by the target company.
It does not apply to acquisitions through other modes (like market purchases).
Outside this limited scenario, the normal 5% limit continues to apply.
Cap on Maximum Non-Public Shareholding
The acquirer, along with persons acting in concert (PACs), must respect the maximum permissible non-public shareholding limit.
They cannot acquire additional shares or voting rights beyond this limit.
They are also not allowed to enter into any agreement that would result in crossing this limit.
The restriction applies to both actual acquisitions and proposed acquisitions.
The total (aggregate) shareholding after acquisition must not exceed the maximum permissible non-public shareholding.
Exemption for IBC Resolution Plans
An exception is provided for acquisitions under insolvency resolution.
This applies where the acquisition is made pursuant to a resolution plan.
The resolution plan must be approved under Section 31 of the Insolvency and Bankruptcy Code, 2016.
In such cases, the acquirer is exempt from the obligation mentioned in the proviso to Regulation 3(2).
This means certain restrictions or requirements under that proviso will not apply.
The exemption is intended to facilitate resolution of stressed companies without regulatory hurdles.
Example:
A company is undergoing insolvency proceedings under the Insolvency and Bankruptcy Code, 2016.
A resolution applicant (X) submits a resolution plan to take over the company.
The plan is approved by the NCLT under Section 31 of the Code.
Under this plan, X acquires 60% shares of the target company.
Normally, acquiring such a large stake would trigger restrictions or obligations under Regulation 3(2).
This could include limits on further acquisition or open offer requirements.
However, since the acquisition is pursuant to an approved resolution plan, the specific proviso restriction does not apply.
Explanation:
To determine the quantum of additional voting rights being acquired:
(i). Only Gross Acquisitions to be Considered
While calculating the quantum of additional voting rights acquired, only gross acquisitions are considered.
This means only the total shares acquired during the period are counted.
Any temporary reduction (intermittent fall) in shareholding or voting rights is ignored.
Such reduction may happen due to:
Sale (disposal) of shares, or
Dilution caused by fresh issue of shares by the target company
These decreases do not reduce the calculated acquisition amount.
Therefore, the focus remains on total purchases, not net change in holding.
(ii). Calculation in Case of Fresh Issue of Shares
Shares are acquired through a fresh issue by the target company, or the company issues new shares during the financial year.
As a result, the acquirer’s voting rights may change, even if they do not subscribe to all the new shares.
In such a situation, the usual method of counting acquisitions is not followed.
Instead, the focus shifts to the change in voting power.
The acquirer’s percentage of voting rights before allotment is compared with the percentage after allotment.
The difference between these two percentages is treated as the quantum of additional acquisition.
Example:
An acquirer starts the year with 30% shareholding.
During the year:
Buys 4% shares → holding becomes 34%
Sells 2% shares → holding becomes 32%
Buys another 3% shares → holding becomes 35%
Net increase = only 5% (from 30% to 35%)
But for regulation: Total (gross) acquisitions = 4% + 3% = 7%
Since 7% exceeds the 5% limit, the acquirer cannot rely on creeping acquisition and must make an open offer.
Example:
An acquirer holds 40% voting rights in a company.
The company issues new shares, and the acquirer subscribes to some of them.
After allotment, the acquirer’s holding increases to 46%.
Pre-allotment holding = 40%
Post-allotment holding = 46%
Quantum of acquisition = 46% − 40% = 6%
Since the increase is 6% (more than 5%), the acquirer cannot rely on creeping acquisition.
Therefore, the acquirer must make an open offer.
3(3).
A person acquires shares in a target company.
As a result, their individual shareholding crosses the specified thresholds.
This crossing of threshold is looked at independently.
It does not matter whether the combined (aggregate) shareholding with persons acting in concert (PACs) changes or not.
Even if the overall group holding remains the same, the individual crossing is sufficient.
In such a case, the person is required to make an open offer.
Therefore, the obligation is triggered based on individual holding crossing the threshold, not just group holding.
Example:
A, B, and C are persons acting in concert (PACs).
Their combined holding in a target company is 24%:
A holds 10%
B holds 8%
C holds 6%
Now, A acquires an additional 16% shares.
After acquisition:
A’s individual holding becomes 26%
Combined holding becomes 40%
Since A individually crosses the 25% threshold, an open offer obligation is triggered.
3(4).
Shares or voting rights are acquired by promoters or shareholders in control.
Such acquisition is carried out in accordance with Chapter VI-A of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
In this situation, the usual rules under this regulation do not apply.
This means the acquirer is exempt from obligations like making an open offer.
The exemption is granted because the acquisition is already governed by a specific regulatory framework.
3(5).
Higher Threshold for Innovators Growth Platform
The usual threshold under this regulation is 25%.
However, a different threshold applies to certain listed entities.
This applies where the company has listed its specified securities on the Innovators Growth Platform (IGP).
In such cases, every reference to “25%” is replaced with “49%”.
This means the trigger for obligations (like open offer) shifts to 49% instead of 25%.
Regulation 4. Acquisition of Control
Open Offer Requirement for Acquisition of Control
An acquirer seeks to obtain control over a target company, whether directly or indirectly.
Under such circumstances , regardless of the number of shares or voting rights held or acquired the following rules applies:
Even without significant shareholding, acquiring control alone is sufficient to trigger obligations.
Before acquiring such control, the acquirer must make a public announcement.
The announcement must be for an open offer to acquire shares from public shareholders.
The open offer must be conducted in accordance with the prescribed regulations.
Regulation 5. Indirect Acquisition of Shares & Control
5(1).
When a person acquires shares, voting rights, or control in another company or entity then:
This acquisition gives that person along with PAC the ability to exercise or direct voting rights or control over a target company.
The focus is on the ultimate effect of the transaction, not just the direct acquisition.
If such an acquisition results in a level of control or voting rights in the target company that would normally trigger an open offer then:
Tt is treated accordingly.
Even though the target company’s shares are not acquired directly, the law treats it as an indirect acquisition.
So , the acquirer is still required to make a public announcement of an open offer.
5(2).
When an acquisition is made indirectly through another company or entity.
The provisions relating to indirect acquisition are triggered.
The law then examines the significance of the target company within that entity.
If the target company represents more than 80% (based on the most recent audited financial statements), a special rule applies.
In such a case, the transaction is treated as a direct acquisition of the target company.
This applies notwithstanding anything else in the regulations.
As a result, all obligations applicable to direct acquisitions will apply.
This includes requirements relating to:
Timing of the open offer
Pricing of the offer
Other compliance requirements
The above rule can be triggered in the following cases:
(a).
Proportionate Net Asset Value Test
The net asset value (NAV) of the target company is identified.
The consolidated net asset value of the entity or business being acquired is also determined.
The target company’s NAV is then compared with the total NAV of the entity being acquired.
This comparison is expressed as a percentage.
It shows how much of the total value is contributed by the target company.
This helps assess the significance of the target company in the overall acquisition.
Example:
Company X plans to acquire Company Y.
Company Y has multiple businesses, including a target company (T).
From the latest audited financials:
Net Asset Value (NAV) of Company Y (consolidated) = ₹1,000 crore
NAV of Target Company (T) = ₹850 crore
Now calculate proportion:
850 / 1000 = 85%
This means the target company forms 85% of the total NAV of the entity being acquired.
Since this is more than 80%, the transaction is considered substantially focused on the target company.
Even though X is acquiring Company Y (indirectly), the law treats it as a direct acquisition of the target company (T).
As a result:
Open offer obligation is triggered
X must make a public announcement
The offer must comply with pricing, timing, and other SEBI requirements
(b).
Proportionate Sales Turnover Test
The sales turnover of the target company is identified.
The consolidated sales turnover of the entity or business being acquired is also determined.
The target company’s turnover is then compared with the total turnover of the entity being acquired.
This comparison is expressed as a percentage.
It shows how much of the total business activity comes from the target company.
Example:
Company X plans to acquire Company Y.
Company Y has multiple businesses, including a target company (T).
From the latest audited financials:
Total consolidated turnover of Company Y = ₹2,000 crore
Turnover of Target Company (T) = ₹1,700 crore
Now calculate proportion:
1,700 / 2,000 = 85%
This means the target company contributes 85% of total turnover.
Since this is more than 80%, the target company is the dominant business.
Even though X is acquiring Company Y (indirectly), the law treats it as a direct acquisition of the target company (T).
As a result:
Open offer obligation is triggered
X must make a public announcement
The offer must comply with all regulatory requirements
(c).
Proportionate Market Capitalisation Test
The market capitalisation of the target company is identified.
The enterprise value of the entity or business being acquired is determined.
The target company’s market capitalisation is compared with the total enterprise value.
This comparison is expressed as a percentage.
It shows how much of the total value is attributable to the target company.
Example:
Company X plans to acquire Company Y.
Company Y holds multiple businesses, including a target company (T).
From valuation data:
Enterprise value of Company Y = ₹5,000 crore
Market capitalisation of Target Company (T) = ₹4,200 crore
Now calculate proportion:
4,200 / 5,000 = 84%
This means the target company contributes 84% of the total value.
Since this is more than 80%, the target company is the dominant component.
Even though X is acquiring Company Y (indirectly), the law treats it as a direct acquisition of the target company (T).
As a result:
Open offer obligation is triggered
X must make a public announcement
The offer must comply with timing, pricing, and other regulatory requirements
Explanation:
Computation of Market Capitalisation (VWAP Basis)
For calculating the percentage under this clause, the market capitalisation of the target company must be determined carefully.
It is not taken as a single-day price.
Instead, it is based on the volume-weighted average market price (VWAP) of the shares.
The VWAP is calculated over a period of 60 trading days.
This 60-day period is counted before a specific cut-off date.
The cut-off date is the earlier of:
The date on which the primary acquisition is contracted, or
The date on which the intention or decision to acquire is publicly announced
The price must be taken from the stock exchange where the highest trading volume occurred during those 60 days.
Example:
Company X plans to acquire Company Y, which indirectly gives control over Target Company (T).
The relevant date is determined as:
1 June (date of public announcement of intention)
So, the 60 trading days before 1 June are considered.
During this period:
T’s shares traded mostly on NSE (highest volume)
The VWAP over 60 days = ₹200 per share
Total shares of T = 10 crore shares
Market capitalisation = ₹200 × 10 crore = ₹2,000 crore
This value is then used to compute the percentage under the 80% test.
REgulation 5A. Delisting Offer
5A(1).
Option to Delist Along with Open Offer
Suppose , An acquirer makes a public announcement of an open offer.
This may be due to:
Acquisition of shares or voting rights (Regulation 3),
Acquisition of control (Regulation 4), or
Indirect acquisition (Regulation 5)
In such a situation, the acquirer is given an additional option.
The acquirer may choose to delist the target company.
This can be done by making a delisting offer along with the open offer.
This is allowed notwithstanding (despite) anything in other regulations, including the Delisting Regulations.
However, the delisting must still be carried out in accordance with the specific procedure laid down under this regulation.
Declaration of Intent to Delist (Mandatory Timing)
An acquirer wants to delist the target company along with an open offer.
This intention must be clearly declared upfront.
The declaration must be made at two specific stages:
At the time of the public announcement (PA), and
At the time of the detailed public statement (DPS)
Simply deciding later is not allowed.
A subsequent declaration of intent to delist will not be valid.
Therefore, the acquirer must commit to delisting from the beginning of the process.
Special Rule for Indirect Acquisition (Delisting Declaration)
Under circumstance there is an indirect acquisition of a target company and it is not treated as a deemed direct acquisition under Regulation 5(2).
In such cases, the timing of declaration is slightly relaxed.
The acquirer is not required to declare the intention to delist at the stage of public announcement (PA).
Instead, the declaration can be made later.
It must be made at the time of the detailed public statement (DPS).
This is an exception to the general rule requiring early disclosure.
Example:
Company X plans to acquire Company Y (a holding company).
Company Y holds 40% stake in Target Company (T).
Through this transaction, X will indirectly gain control over T.
However, T does not form 80% or more of the value of Y.
So, this is an indirect acquisition, but not a deemed direct acquisition under Regulation 5(2).
X makes a public announcement (PA) for the open offer.
At this stage, X is not required to declare its intention to delist T.
Later, at the stage of the detailed public statement (DPS):
X decides to delist Target Company (T).
X declares this intention in the DPS.
This is valid and allowed under the exception.
Explanation 1:
The acquirer must not have had certain connections with the target company.
This restriction applies for the 2 years prior to the public announcement (PA).
During this period, the acquirer must not have been:
(i). A promoter, part of the promoter group, or in control of the target company
(ii). Directly or indirectly associated with the promoter, or any person in control
(iii). A person holding more than 25% shares or voting rights in the target company
If any of these conditions are violated, the acquirer cannot avail this route.
Explanation 2:
The acquirer shall not acquire joint control along with an existing promoter / person in control of the company.
5A(2).
The delisting offer obligations shall be fulfilled by the acquirer in the following manner:
(a).
Suppose , The acquirer makes an open offer and also intends to delist the target company.
In such cases, key documents must include pricing details.
These documents are:
The public announcement (PA)
The detailed public statement (DPS)
The letter of offer (LOF)`
All these documents must mention the open offer price.
This price must be determined as per Regulation 8 of the regulations.
In addition, they must also disclose an indicative price for delisting.
Timing of Price Disclosure (Indirect Acquisition Exception)
When an indirect acquisition. is not treated as a deemed direct acquisition under Regulation 5(2) then:
In such cases, the timing for disclosing prices is relaxed.
The acquirer is not required to disclose the open offer price and indicative delisting price at the stage of public announcement (PA).
Instead, these prices can be disclosed at a later stage.
They must be disclosed:
In the detailed public statement (DPS), and
In the letter of offer (LOF)
This is an exception to the general rule of early disclosure.
Indicative Delisting Price – Requirements
The indicative price for delisting must include a premium.
This premium should reflect the price the acquirer is willing to pay to delist the company.
The acquirer must provide full disclosure of the rationale and justification for this price.
The indicative price is not fixed and can be revised upwards.
Any upward revision must be made before the start of the tendering period.
Such revision must be properly disclosed to all shareholders.
Example:
An acquirer announces an open offer along with a delisting proposal for a target company.
The open offer price (as per regulations) is fixed at ₹100 per share.
The acquirer declares an indicative delisting price of ₹130 per share.
The ₹130 price includes a premium of ₹30 over the open offer price.
The acquirer explains the justification for this premium, such as:
Expected future growth of the company.
Strategic value of full control.
Industry valuation multiples.
Before the tendering period begins, the acquirer reviews market conditions.
The acquirer decides to increase the indicative price to ₹150 per share.
This upward revision is disclosed to all shareholders in advance.
Explanation:
The indicative delisting price must follow the method prescribed under the Delisting Regulations.
Specifically, it must be in accordance with clause (o) of Regulation 2(1) of the Delisting Regulations.
In addition, there is a minimum floor for the price.
The indicative price cannot be less than the book value of the company.
The book value must be calculated as per the method provided under Regulation 22(5) (Explanation) of the Delisting Regulations.
The objective is to make sure that the price is not set too low.
It provides a basic level of protection to shareholders.
(b).
When an acquirer makes an open offer along with a delisting offer.
Shareholders tender their shares in response to the offer.
The outcome depends on whether the delisting threshold (under Regulation 21 of Delisting Regulations) is achieved.
(i). If the delisting threshold is met:
The company is successfully delisted.
All shareholders who tendered shares are paid the indicative delisting price.
(ii). If the delisting threshold is NOT met:
Delisting fails.
The company continues to remain listed.
All shareholders who tendered shares are paid the open offer price
5A(3).
When a delisting offer is made along with an open offer and a delisting attempt does not succeed (threshold not met) due to the reasons set out below then:
In such a case, the acquirer must act promptly.
Within 2 working days of the failure, the acquirer must: make a public announcement of the failure
This announcement must be published in the same newspapers where the detailed public statement (DPS) was made.
After this, the acquirer must continue with the open offer process.
The acquirer must comply with all applicable provisions for completing the open offer.
The reasons are as follows:
(a).
Failure Due to Lack of Shareholder Approval
A delisting offer requires prior approval of shareholders.
This approval must be obtained in accordance with Regulation 11 of the Delisting Regulations.
If such approval is not received, the delisting offer cannot proceed.
As a result, the delisting attempt is treated as unsuccessful.
This failure occurs specifically due to non-receipt of required shareholder approval.
(b).
Failure Due to Lack of Stock Exchange Approval
A delisting offer requires prior in-principle approval from the relevant stock exchange.
This approval must be obtained under Regulation 12 of the Delisting Regulations.
If such approval is not received, the delisting process cannot proceed.
As a result, the delisting offer is treated as unsuccessful.
This failure occurs specifically due to non-receipt of stock exchange approval.
(c).
Failure Due to Non-Achievement of Threshold
A delisting offer requires a minimum threshold of shares to be tendered.
This threshold is specified under Regulation 21 of the Delisting Regulations.
If shareholders do not tender enough shares, the required threshold is not met.
As a result, the delisting offer is unsuccessful.
The company continues to remain listed on the stock exchange.
5A(4).
When competing offer is made under Regulation 20(1). the rights and obligations of the original acquirer are impacted.
In that case:
(a). Delisting not permitted:
The acquirer is not allowed to delist the target company.
(b). No interest liability:
The acquirer is not required to pay interest to shareholders for any delay caused due to the competing offer.
(c). Compliance and announcement:
The acquirer must comply with all applicable provisions of the regulations.
The acquirer must also make a public announcement regarding this situation.
This must be done within 2 working days from the date of the competing offer’s public announcement.
The announcement must be published in the same newspapers where the DPS was made.
5A(5).
Right of Withdrawal for Shareholders
When shareholders tender their shares in response to the offer made under 5A(1) then:
A subsequent announcement is made under 5A(3).
After this announcement, shareholders are given an option to reconsider.
They are allowed to withdraw the shares they had tendered.
This withdrawal must be done within 5 working days from the date of that announcement.
5A(6).
When a delisting offer is made by the acquirer and delisting attempt fails:
In the process , due to shares tendered in the offer, the acquirer’s shareholding increases.
As a result, the acquirer’s holding exceeds the maximum permissible non-public shareholding limit.
This creates a situation where the company remains listed, but public shareholding falls below the required minimum.
(a).
Further Attempt to Delist (Within 12 Months)
The delisting attempt fails, but the acquirer’s shareholding exceeds the maximum permissible non-public shareholding.
In such a case, the acquirer is given another opportunity.
The acquirer may make a further attempt to delist the target company.
This must be done in accordance with the Delisting Regulations.
The attempt must be made within 12 months from the date of completion of the open offer.
This option is available only if the acquirer continues to hold shares above the maximum permissible non-public shareholding limit.
(b).
Conditions for Successful Second Delisting Attempt
The acquirer makes a further attempt to delist the company.
This second attempt will be successful only if specific conditions are satisfied.
(i).
Threshold requirement:
The delisting threshold under Regulation 21 of the Delisting Regulations must be met.
(ii).
Additional requirement:
The acquirer must acquire at least 50% of the remaining (residual) public shareholding.
(c).
Obligation After Second Delisting Failure
The acquirer makes a further attempt to delist the company.
This second attempt also fails then under such circumstances:
The acquirer must restore compliance with minimum public shareholding (MPS).
This must be done in accordance with the Securities Contracts (Regulation) Rules, 1957.
The acquirer is given a time limit of 12 months.
This period is counted from the end of the 12-month period allowed for making the second delisting attempt (as mentioned in clause (a)).
(d).
Floor Price for Second Delisting Attempt
The acquirer makes a further (second) attempt to delist the company.
A minimum (floor) price must be determined for this attempt.
This floor price must be the highest of the following three values:
(i). The indicative price offered in the first delisting attempt
(ii). The floor price calculated under the Delisting Regulations at the time of the second attempt
(iii). The book value of the company, calculated as per the prescribed method
5A(7).
Application of Delisting Regulations (with Modifications)
The acquirer undertakes delisting of the target company.
This may be the first attempt or any subsequent attempt.
In such cases, the Delisting Regulations apply.
However, they apply mutatis mutandis (i.e., with necessary modifications).
This means the provisions are adapted to fit the situation, not applied rigidly.
If this regulation provides specific exceptions or different rules, those will prevail.
