Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

What it does

The Regulations give the public shareholders of a listed company a chance to exit when someone takes a significant stake or control. They do it by compelling the acquirer to make an open offer to buy more shares at a price the Regulations fix. They also require disclosure, so that the market knows when a person's holding crosses a threshold.

The main triggers are three. An acquirer who, with the persons acting in concert, would hold shares or voting rights of twenty five per cent or more must make an open offer, under regulation 3. An acquirer who already holds between twenty five and seventy five per cent can acquire up to five per cent more in a financial year without an offer, which is the creeping acquisition route. And an acquirer who takes control of a listed company must make an open offer whatever the size of the shareholding, under regulation 4. An offer is generally for at least twenty six per cent of the total shares of the target. Regulation 5 treats an indirect acquisition of shares or control, such as a purchase higher up a group, as an acquisition of the listed company.

The Regulations also set the minimum price of an open offer by reference to prices paid and market prices, and provide the exemptions, for example for certain inter se transfers among promoters and for acquisitions under a scheme of arrangement approved by a court.

Who it binds

Acquirers, persons acting in concert with them, the target company, its promoters and directors, and the merchant banker who manages an offer. Disclosure duties under regulation 29 fall on a person who acquires shares or voting rights of five per cent or more, and on later changes in the holding. The Regulations apply to a company listed on a stock exchange in India.

What has changed, and when

The Regulations were notified in September 2011 and took effect in October 2011, replacing the 1997 takeover regulations. They have been amended since. The main structure of triggers and offer size has stayed. A reader should check the current consolidated text for the thresholds and the pricing rules.

What turns on it in practice

The capital markets practice on this site advises on capital raising, listing compliance and continuing obligations under Indian securities law. For an acquirer, the first question in any share purchase of a listed company is whether the Regulations are engaged at all, and by what route. A subscription to a preferential allotment, a purchase from a promoter, a pledge invoked by a lender and a transaction abroad that moves control of a foreign holding company can each engage the Regulations, and the answer depends on whether the acquirer crosses a threshold or acquires control, and whether an exemption is available.

The second question is timing. An open offer takes months, runs on a timetable set by the Regulations, and requires an escrow of the consideration. A deal that has to close by a certain date has to be built around that timetable.

The Regulations sit beside the Securities and Exchange Board of India Act, 1992, the listing obligations regulations, the insider trading regulations and the intermediaries regulations, and a transaction in a listed company often engages several of them. The wording of "control" and "persons acting in concert" is the area where the most disputes arise.