Part 4: Substantial Acquisition & Takeover Code | Module 6

4.1 SAST Framework Overview

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 replaced the 1997 Takeover Code, introducing a clearer framework for acquisitions and mandatory open offers.

Regulatory Objectives

Shareholder Protection: Ensure minority shareholders get exit opportunity at fair price
Market Transparency: Timely disclosure of acquisitions and intentions
Level Playing Field: Equal treatment for all shareholders
Prevent Hostile Takeovers: Regulatory oversight on control changes

Key Terms

Term	Definition	Relevance
Acquirer	Person who acquires or agrees to acquire shares/voting rights/control	Primary obligated party
Target Company	Listed company whose shares are being acquired	Subject of takeover
Persons Acting in Concert (PAC)	Persons cooperating for acquisition of shares/voting rights/control	Combined holdings computed
Control	Right to appoint majority directors or control management/policy decisions	Triggers mandatory offer

4.2 Trigger Thresholds

Understanding when open offer obligations are triggered is fundamental to M&A advisory. The regulations prescribe specific shareholding thresholds.

Primary Triggers

3(1) - Initial Threshold Trigger

No acquirer shall acquire shares/voting rights which (together with PAC) would entitle them to exercise 25% or more of voting rights unless open offer is made.

3(2) - Creeping Acquisition Trigger

No acquirer holding between 25% to 75% shall acquire more than 5% additional voting rights in any financial year unless open offer is made.

4 - Control Trigger

Acquisition of control over target company triggers mandatory open offer, regardless of shareholding percentage.

The Three Triggers

25% Threshold: Crossing 25% voting rights
Creeping Limit: Acquiring 5%+ in a year when holding 25-75%
Control Acquisition: Acquiring control regardless of shareholding

Calculation Methodology

PAC Aggregation: Holdings of all persons acting in concert are combined
Voting Rights Basis: Calculation on voting rights, not equity shareholding
Diluted Basis: Include convertible instruments in certain scenarios
Financial Year: April 1 to March 31 for creeping acquisition calculation

Common Pitfall

The 5% creeping acquisition limit is calculated on the basis of voting rights at the END of the previous financial year. If the company issues additional shares during the year, the base for calculation doesn't change mid-year.

4.3 Open Offer Requirements

When triggered, the acquirer must make an open offer to acquire at least 26% of total shares from public shareholders at a minimum price determined by regulations.

Offer Size

7(1) - Minimum Offer Size

The open offer shall be made for at least 26% of total shares of target company, calculated on fully diluted basis.

Open Offer Timeline

Step	Action	Timeline
1	Public Announcement (PA)	Within 4 working days of triggering event
2	Detailed Public Statement (DPS)	Within 5 working days of PA
3	File Draft Letter of Offer with SEBI	Within 5 working days of PA
4	SEBI observations	Within 15 working days
5	Dispatch Letter of Offer	Within 5 working days of SEBI clearance
6	Tendering Period	10 working days
7	Payment to shareholders	Within 10 working days of closure

Escrow Requirements

To ensure offer commitment, acquirer must deposit escrow:

Cash Offer: 25% of offer consideration in cash escrow
Remaining: 25% may be bank guarantee
Timing: Before Public Announcement
Forfeiture: If offer fails due to acquirer default

4.4 Pricing Regulations

Open offer price must be at least the minimum price calculated under Regulation 8. Multiple parameters ensure fair value for minority shareholders.

Minimum Price Calculation

8(2) - Pricing Parameters

Minimum price is the highest of: (a) volume weighted average price (VWAP) paid by acquirer in 52 weeks, (b) highest price paid in 26 weeks, (c) VWAP of shares on stock exchange for 60 trading days.

Pricing Components

Component	Calculation	Look-Back Period
VWAP - Acquirer Purchases	Volume weighted average of acquisitions	52 weeks preceding PA
Highest Price - Acquirer	Highest price paid by acquirer	26 weeks preceding PA
Market VWAP	Exchange trading VWAP	60 trading days preceding PA
Negotiated Price	Price in trigger agreement	Applicable if trigger is agreement

Advisory Tip

When advising acquirers, track all purchases in the 52 weeks preceding planned acquisition. A single high-priced trade can significantly increase the minimum open offer price. Consider timing of market purchases carefully.

Frequently Traded vs. Infrequently Traded

For infrequently traded shares, additional valuation parameters apply:

Definition: Traded on less than 10% of trading days in preceding 60 days
Additional Requirement: Independent valuer certification
Fair Value: Book value, comparable company multiples considered

4.5 Exemptions from Open Offer

Certain acquisitions are exempt from open offer requirements under Regulation 10 and 11. Understanding these exemptions is crucial for transaction structuring.

Automatic Exemptions (Regulation 10)

Inter-se Transfer: Between promoters/PAC group (with conditions)
Rights Issue: Acquisition through rights issue entitlement
ESOP: Acquisition through employee stock options
Buyback: Consequent increase due to buyback
Scheme of Arrangement: NCLT approved schemes (with conditions)
Gift: Acquisition by way of gift from relative
Inheritance: Transmission on death

SEBI Approval Exemptions (Regulation 11)

Exemption Category	Conditions
Increase in Voting Rights	Due to buyback/capital reduction - no acquisition
Pursuant to SEBI Order	Disinvestment ordered by SEBI
Pursuant to Court/Tribunal Order	Scheme approved by NCLT
Acquisition from Government	Disinvestment of government companies
Bail-out Acquisition	Financially distressed company

Inter-se Transfer Conditions

Inter-se transfer exemption requires: (1) transferor and transferee both in PAC for 3+ years, (2) no change in aggregate holding of PAC, (3) public announcement of the transfer. Failure to meet any condition triggers open offer.

Delisting Offer Alternative

If acquirer intends to delist post-acquisition, they may opt for delisting under Delisting Regulations instead of SAST open offer, subject to:

Intent Declaration: Must be stated in Public Announcement
Reverse Book Building: Price discovery through delisting process
90% Threshold: Must achieve 90% shareholding for delisting

Key Takeaways

Three triggers: 25% threshold, 5% creeping acquisition, control acquisition
Open offer size: Minimum 26% of total shares on diluted basis
Pricing: Highest of VWAP-52wk, highest-26wk, market VWAP-60days
Escrow: 25% cash + 25% bank guarantee required before PA
Inter-se exemption: Requires 3-year PAC membership and no aggregate change
Creeping limit: 5% in FY, calculated on prior year-end voting rights base

Part 4 Assessment

Test Your Understanding

10 questions on SAST triggers, open offer, pricing, and exemptions

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