SEBI Takeover Code: Regulations for Acquisitions in India

Introduction: Protecting Minority Shareholders

When someone acquires control of a company, minority shareholders face a new reality—a new controlling entity making decisions that affect their investment.

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, commonly called the Takeover Code, protects minority shareholders by requiring acquirers to make an open offer—giving public shareholders a chance to exit at a fair price.

Understanding the Takeover Code is essential for anyone involved in acquiring significant stakes in listed Indian companies.

What is the Takeover Code?

Purpose

The Takeover Code ensures:

1. Exit opportunity for public shareholders when control changes
2. Fair price for shares offered
3. Disclosure of substantial acquisitions
4. Orderly process for change of control

Legal Framework

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

• Replaced the 1997 regulations
• Based on Achutan Committee recommendations
• Multiple amendments since 2011

Key Concepts

Target Company: Listed company whose shares are being acquired

Acquirer: Person (or persons acting in concert) acquiring shares/control

Persons Acting in Concert (PAC): Persons cooperating to acquire shares or control

Shares: Voting shares carrying voting rights

Triggers for Open Offer

Trigger 1: Initial Trigger (25% Threshold)

Rule: Acquiring 25% or more of voting shares triggers mandatory open offer.

Example:

• Acquirer holds 10%
• Acquirer buys additional 16%
• Total becomes 26%
• Open offer triggered ✓

Trigger 2: Creeping Acquisition (5% in a Year)

Rule: If holding is already 25% or more but below 75%, acquiring more than 5% in any financial year triggers open offer.

Example:

• Acquirer holds 30%
• Acquirer can acquire up to 5% (to 35%) without open offer
• Acquiring 6% triggers open offer ✓

Trigger 3: Control Acquisition

Rule: Acquiring control over a company triggers open offer, regardless of shareholding percentage.

What is Control?

• Right to appoint majority of directors
• Right to control management or policy decisions

Example: Even with 10% shareholding, if acquirer gains right to control board composition, open offer triggered.

Trigger 4: Indirect Acquisition

Rule: Acquiring control of a company that itself holds significant stake (or control) in a listed company triggers open offer.

Example:

• Company A holds 51% of listed Company B
• Acquirer buys 51% of Company A
• This is indirect acquisition of Company B
• Open offer required for Company B

Open Offer Requirements

Offer Size

Minimum: 26% of total shares of target company

Important: This is minimum; acquirer can offer for more shares.

Offer Price

Minimum Price Calculation:

Offer Price = Highest of the three components

Frequently Traded vs Infrequently Traded

Frequently Traded:

• 10% + shares traded in last 2 years
• Use market-based pricing above

Infrequently Traded:

• Less than 10% traded
• Fair value to be determined by independent valuer
• Various valuation methods (book value, comparable, DCF)

Open Offer Process

Timeline:

Escrow Requirement

Purpose: Ensure acquirer has funds to complete open offer

Amount:

• If cash consideration: 25% of total consideration
• Minimum: ₹25 crore or 10% of consideration

Forms:

• Cash deposit with scheduled bank
• Bank guarantee
• Liquid mutual funds

Exemptions from Open Offer

Automatic Exemptions

1. Inter-se Transfer Among Promoters

• Transfer within promoter group
• Subject to conditions (no change in control of target)

2. Rights Issue

• Acquiring shares in rights issue
• If doesn’t exceed entitlement

3. Preferential Allotment

• Under Sections 42/62 of Companies Act
• Subject to conditions

4. ESOP/ESPS

• Employee stock schemes
• Up to limits

5. Buy-back

• Crossing threshold due to company buy-back
• Not acquirer’s action

6. Scheme of Arrangement

• Under court/NCLT approval
• Subject to conditions

Exemptions Requiring SEBI Application

1. Resolution Plan Under IBC

• Insolvency resolution
• NCLT approval required

2. Government Disinvestment

• Strategic sale by government
• SEBI grants exemption

3. Acquisition by Government

• For strategic/policy reasons

4. White Knight Defense

• Competitive bid in hostile takeover
• Subject to conditions

Conditions for Exemptions

Commonly Required:

• Shareholders’ approval (special resolution)
• Voting by public shareholders (majority of minority)
• Disclosure requirements met
• No fraudulent intent

Competing Offers

When There’s Competition

If another acquirer makes competing bid:

• Must be within 15 working days of first DPS
• Must be for same or higher percentage
• Open offer period extended

Upward Revisions

Acquirers can revise offer upward:

• Price can be increased
• Offer size can be increased
• Must be before 3 working days before closure
• Original acquirer can counter-revise

Withdrawal of Offer

Limited circumstances:

• Statutory approval denied
• Death of sole acquirer (individual)
• SEBI permits withdrawal for reasons recorded

Disclosure Requirements

Shareholding Disclosure

Initial Disclosure:

• Within 2 working days of acquiring:
  • 5% or more, or
  • 2% change if already above 5%

Continual Disclosure:

• Any change of 2% or more
• Within 2 working days

Public Announcement

Contents:

• Identity of acquirer and PACs
• Shares held and proposed to acquire
• Offer price and basis
• Purpose of acquisition
• Source of funds
• Financial details of acquirer

Hostile Takeovers in India

What Makes It Hostile?

Target board opposes the acquisition.

Defenses Available (Limited)

In India, defenses are limited:

• Seeking competing bidder (white knight)
• Recommending rejection to shareholders
• Challenging in court/SEBI

Not Available (Unlike US):

• Poison pills
• Staggered board
• Golden parachutes (for defense purpose)

Notable Hostile Cases

Board’s Role in Hostile Offer

Independent Committee:

• Form committee of independent directors
• Evaluate offer
• Recommend to shareholders

Fiduciary Duty:

• Act in shareholders’ interest
• Cannot frustrate offer purely for management benefit

Delisting vs Open Offer

Comparison

Delisting After Open Offer

If after open offer, acquirer holds 90%+, can proceed with delisting (subject to reverse book building or regulatory provisions).

Penalties for Non-Compliance

SEBI Powers

For Violations:

• Adjudication proceedings
• Monetary penalties
• Directions (disgorgement, prohibition)
• Prosecution

Specific Penalties

Practical Considerations

For Acquirers

Planning:

1. Know your triggers (when does open offer apply?)
2. Plan funding (escrow, offer cost)
3. Engage advisors early (merchant banker, lawyer)
4. Timing matters (market conditions, offer price)

Cost Calculation:

• Open offer cost = 26% of shares × Offer price
• Plus: Advisor fees, communication costs, escrow cost
• Budget for upward revision possibility

For Target Companies

When Approached:

1. Form independent committee
2. Engage advisors (financial, legal)
3. Evaluate offer fairly
4. Communicate with shareholders
5. Consider alternatives

Board Duties:

• Fiduciary duty to shareholders
• Cannot frustrate offer for personal reasons
• Provide recommendation

For Shareholders

When Open Offer Announced:

1. Read letter of offer carefully
2. Compare offer price with market
3. Consider future prospects under new control
4. Decide to tender or hold
5. Act within tendering period

Recent Amendments and Trends

Key Recent Changes

2020 Amendments:

• Pricing norms for indirect acquisitions
• Voluntary open offer provisions
• Exemption framework modifications

Trends:

• Increasing use of IBC route (exemption from open offer)
• Cross-border acquisitions requiring careful structuring
• SEBI scrutiny of PAC arrangements

Emerging Issues

• Definition of control (especially in tech companies)
• Virtual AGMs and consent requirements
• Cryptocurrency and digital assets
• ESG considerations in takeovers

Key Takeaways

1. 25% trigger: Acquiring 25%+ requires open offer
2. 5% creeping: Above 25%, can’t acquire >5% per year without offer
3. Control trigger: Acquiring control triggers offer regardless of %
4. Minimum offer: 26% of shares
5. Offer price: Higher of acquirer’s price, 60-day VWAP, 2-week VWAP
6. Exemptions available: Inter-se, rights issue, schemes, IBC
7. Penalties are severe: Up to ₹25 crore or 3x gain

Disclaimer

This article is for educational purposes only. SEBI regulations are complex and frequently amended. Consult qualified legal advisors for specific transactions. This is not legal advice.

Frequently Asked Questions

Q: Can acquirer buy more than 26% in open offer? A: Yes, acquirer can offer for more than minimum 26%. The 26% is the floor, not the ceiling.

Q: What if shareholders don’t tender in open offer? A: Offer still completes. Acquirer acquires whatever is tendered. Remaining shareholders continue with their shares.

Q: Is promoter bound by open offer price? A: If promoter is selling, the price to promoter cannot exceed open offer price. Promoters can participate in open offer at the offer price.

Q: Can offer price be reduced? A: No, offer price can only be revised upward, not downward.

Q: What triggers control acquisition? A: Right to appoint majority directors, right to control management/policy decisions, ability to control board composition. It’s substance over form.

Q: How is indirect acquisition calculated? A: If acquirer gains control of company holding shares of listed target, open offer triggered for target. Pricing norms apply based on circumstances.

The Takeover Code is designed to ensure fair treatment of all shareholders when someone seeks to gain control of a company. It balances the acquirer’s right to pursue strategic acquisitions with minority shareholders’ right to exit at a fair price. Understanding its provisions is essential for anyone navigating M&A in India’s listed company space.