The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 lay down the statutory framework governing acquisition of shares, voting rights, and control in listed companies in India. Issued by the Securities and Exchange Board of India, these regulations are designed to ensure transparency in takeovers and to safeguard the interests of public shareholders by providing them a fair exit opportunity.
Applicability of the Regulations
The takeover regulations apply to direct and indirect acquisition of:
- shares,
- voting rights, or
- control
in a target company whose shares are listed on a recognised stock exchange in India.
The regulations govern acquisitions through agreements, market purchases, preferential allotments, or any arrangement that results in acquisition of voting power or control.
Key Definitions Under the Regulations
Understanding certain defined terms is essential:
- Acquirer: Any person who acquires or agrees to acquire shares, voting rights, or control, either individually or along with persons acting in concert.
- Persons Acting in Concert (PAC): Persons who cooperate with a common objective of acquiring shares or control, pursuant to an agreement or understanding.
- Control: Includes the right to appoint a majority of directors or to control management or policy decisions, directly or indirectly. Mere holding of a managerial position does not constitute control.
- Target Company: A listed company whose shares or control are being acquired.
- Frequently Traded Shares: Shares with at least ten per cent trading turnover during the twelve months preceding the relevant public announcement.
Substantial Acquisition of Shares and Voting Rights
Acquisition Beyond 25 Per Cent
An acquirer is required to make a public announcement of an open offer when acquisition of shares or voting rights, together with holdings of PAC, entitles the acquirer to exercise twenty-five per cent or more of the voting rights in the target company.
Creeping Acquisition Beyond Five Per Cent
Where an acquirer already holds twenty-five per cent or more but less than the maximum permissible non-public shareholding, acquisition of more than five per cent voting rights in any financial year also triggers an open offer obligation. For this purpose:
- Only gross acquisitions are considered.
- Dilution due to fresh issue of shares does not reduce the acquisition count.
- In case of allotment of new shares, the increase in voting rights percentage is treated as acquisition.
Acquisition of Control
Irrespective of shareholding levels, any acquisition of control over a target company requires the acquirer to make a public announcement of an open offer. This applies even where the numerical shareholding thresholds are not crossed.
Indirect Acquisition of Shares or Control
An acquisition is considered indirect when control or voting rights in a target company are acquired through acquisition of another entity.
Where the target company constitutes a substantial portion of the acquired entity, based on net asset value, turnover, or market capitalisation, the indirect acquisition is treated on par with a direct acquisition for the purposes of timing, pricing, and compliance requirements.
Size of the Open Offer
- The open offer must be for at least twenty-six per cent of the total shares of the target company.
- The total number of shares is calculated as on the tenth working day from the closure of the tendering period.
- The offer must be made to all public shareholders, excluding the acquirer and persons acting in concert.
Voluntary Open Offer
An acquirer holding twenty-five per cent or more but less than the maximum permissible non-public shareholding may voluntarily make an open offer, subject to:
- minimum acquisition equivalent to ten per cent of voting rights, and
- post-offer shareholding remaining within permissible non-public limits.
During the offer period, the acquirer cannot acquire shares other than through the open offer.
Determination of Offer Price
The offer price must not be lower than the highest of the prescribed pricing parameters, which include:
- the highest negotiated price under any acquisition agreement,
- the highest price paid during the preceding specified periods,
- the volume-weighted average market price for frequently traded shares, and
- valuation-based price determination where shares are not frequently traded.
Where applicable, pricing must also factor in outstanding convertible instruments and any additional consideration paid in any form.
Mode of Payment of Consideration
The offer consideration may be paid through:
- cash,
- listed equity shares,
- listed secured debt instruments,
- convertible debt securities, or
- a combination of the above.
Where shareholders are provided with multiple payment options, full disclosure and justification must be provided in the offer documents.
Delisting Pursuant to an Open Offer
An acquirer making an open offer may seek delisting of the target company, provided:
- the intention to delist is declared upfront,
- the delisting offer complies with applicable delisting requirements, and
- shareholders are paid the applicable price depending on the outcome of the delisting process.
Failure of delisting does not remove the obligation to complete the open offer.
Persons Restricted from Making Open Offers
The regulations restrict certain persons from making open offers or entering into transactions that trigger open offer obligations, including:
- wilful defaulters, and
- individuals declared as fugitive economic offenders.
Exemptions From Open Offer Requirements
Specified acquisitions are exempt from open offer obligations, including:
- inter se transfers among qualifying promoters and persons acting in concert,
- transmission of shares by way of inheritance or succession,
- acquisitions pursuant to court- or tribunal-approved schemes, and
- acquisition by lenders pursuant to enforcement of pledge.
Such exemptions are available only on fulfilment of prescribed pricing and disclosure conditions.
Regulatory Importance
The takeover regulations ensure:
- transparency in acquisition of corporate control,
- equal treatment of public shareholders,
- orderly conduct of takeovers, and
- confidence in the securities market.
Compliance with these regulations is critical for acquirers, promoters, and listed companies to avoid regulatory action and financial exposure.
Source:
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 dated 23/09/2011