Open Offer under SEBI SAST Regulations: Triggers, Pricing & Process

Summary: An open offer is a public offer made by an acquirer to purchase shares from existing public shareholders of a listed company when the acquirer acquires a substantial stake in, or control over, the company. The legal framework is contained in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, commonly known as the Takeover Code, which replaced the 1997 Regulations and increased the initial mandatory open offer threshold from 15% to 25% of voting rights. The framework distinguishes ordinary market purchases from acquisitions crossing prescribed thresholds or resulting in acquisition of control. Key triggers include crossing 25% or more of voting rights, creeping acquisition beyond 5% in a financial year by existing holders of 25% or more, acquisition of control, indirect acquisition and voluntary offers. Mandatory offers generally cover at least 26% of the total voting share capital, while voluntary offers have a different minimum offer size. Regulation 8 prescribes pricing mechanisms, including the highest-price approach for frequently traded shares and valuation-based methodology for infrequently traded shares. The Takeover Code also provides a structured process covering appointment of the merchant banker, public announcement, escrow arrangements, detailed public statement, draft letter of offer, SEBI review, independent directors’ recommendations, tendering and payment settlement. Regulations 10 and 11 provide exemptions, while Regulations 19, 20 and 23 address conditional offers, competing offers and withdrawal. The framework also imposes responsibilities on the target company’s board and provides regulatory consequences for non-compliance, including penalties under Section 15H of the SEBI Act, 1992.

Understanding the concept of an Open Offer

An open offer is a public offer made by an acquirer to purchase shares from the existing public shareholders of a listed company at a specified price when the acquirer acquires a substantial stake in, or control over, that company. It is not a voluntary exercise or a matter of commercial choice. Once the prescribed threshold is crossed, the obligation to make an open offer arises automatically as a matter of law.

The legal framework governing this obligation is contained in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations“), more commonly referred to as the Takeover Code. Framed by the Securities and Exchange Board of India (“SEBI“) under the SEBI Act, 1992, the Regulations constitute one of the foundational pillars of India’s securities law regime governing acquisitions, changes in control, and ownership of listed companies.

The 2011 Regulations replaced the earlier SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, introducing several significant reforms. Among the most notable was the increase in the initial threshold for triggering a mandatory open offer from 15% to 25% of the voting rights in a listed company. This change, implemented pursuant to the recommendations of the Achuthan Committee, provided acquirers and existing promoters with greater flexibility to consolidate their shareholding before the statutory obligation to make an open offer is triggered, while continuing to preserve adequate protection for public shareholders when a substantial acquisition or change in control occurs.

A distinction must be drawn between an ordinary market purchase and an acquisition that triggers the Takeover Code. Shares of a listed company may ordinarily be acquired through stock exchange transactions without attracting an open offer obligation. The requirement to make an open offer arises only when an acquisition results in the acquirer crossing the prescribed thresholds under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or acquiring control over the target company. Accordingly, an investor may gradually acquire shares up to just below 25% of the voting rights—subject to the applicable disclosure requirements—without being required to make an open offer. However, once the acquisition crosses the 25% threshold or results in the acquisition of control, the obligation to make a mandatory open offer is automatically triggered. Thus, the distinction lies not in the act of purchasing shares, but in the extent of the acquisition and the level of control obtained.

The Rationale behind the mandatory Open Offer Requirement

The mandatory open offer requirement is rooted in the principle of protecting public shareholders during a substantial acquisition or change in control of a listed company. While an acquirer may already have acquired control through a negotiated transaction, the law requires it to extend a similar exit opportunity to public shareholders.

The rationale is that control carries a premium. When promoters sell their controlling stake, they often receive a price higher than the prevailing market price. Public shareholders, although equally affected by the change in control, do not ordinarily receive the benefit of this control premium.

The open offer addresses this imbalance by giving public shareholders an opportunity to exit at a price determined under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. It is, therefore, a statutory mechanism that promotes fairness, equal treatment of shareholders, and investor confidence, while ensuring that the benefits of a change in control are not confined solely to the outgoing promoters.

Key Triggers for an Open Offer

Under the SAST Regulations, an open offer is triggered when an acquirer (acting individually or together with Persons Acting in Concert / PACs) crosses specific threshold limits or acquires control.

Size of a Mandatory Open Offer

Once an open offer obligation is triggered, the next question is the extent of the offer. Under Regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, a mandatory open offer must be made for at least 26% of the total voting share capital of the target company.

The 26% threshold has been carefully calibrated. Since a mandatory open offer is generally triggered upon the acquisition of 25% or more of the voting rights or control of the target company, requiring an offer for an additional 26% ensures that public shareholders are provided with a meaningful exit opportunity, while maintaining a balanced ownership structure.

The position differs in the case of a voluntary open offer under Regulation 6. In such cases, the acquirer must make an offer for shares carrying at least an additional 10% of the voting rights, subject to compliance with the maximum permissible non-public shareholding limits. Unlike a mandatory open offer, which follows a statutory trigger, a voluntary open offer is initiated at the acquirer’s discretion to further consolidate its shareholding.

Pricing Methodology

The pricing of an open offer is one of the most significant aspects of the Takeover Code, as it ensures that public shareholders receive a fair exit price when there is a substantial acquisition or change in control. Regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 prescribes the methodology for determining the offer price. The underlying principle is that the offer price should not be lower than either the highest price paid by the acquirer for acquiring control or the prevailing market value of the shares.

Pricing of Frequently Traded Shares

For frequently traded shares, Regulation 8(2) adopts a “highest of” approach. The open offer price must be the highest of the following:

• the highest negotiated price per share under the agreement that triggered the open offer;
• the volume weighted average price (VWAP) paid or payable by the acquirer or persons acting in concert (PACs) for acquisitions made during the 52 weeks preceding the public announcement;
• the highest price paid or payable by the acquirer or PACs during the 26 weeks preceding the public announcement; and
• the volume weighted average market price of the shares for the 60 trading days immediately preceding the public announcement on the stock exchange where the shares are most frequently traded.

This methodology ensures that public shareholders receive the benefit of the most favourable benchmark and prevents an acquirer from relying on a lower historical or market price where a higher price has been paid for acquiring shares or control.

A share is regarded as frequently traded under Regulation 2(1)(j) if its trading turnover during the twelve calendar months preceding the month of the public announcement is at least 10% of the total number of shares of that class. Where this threshold is not met, the shares are treated as infrequently traded.

Pricing of Infrequently Traded Shares

In the case of infrequently traded shares, market quotations may not accurately reflect the fair value of the company. Accordingly, Regulation 8 requires the offer price to be determined on the basis of recognised valuation principles rather than historical trading prices.

The valuation takes into account factors such as the company’s book value, comparable trading multiples, earnings, industry-specific valuation parameters, and other generally accepted valuation methodologies. In practice, the valuation is typically supported by an independent valuation exercise undertaken by the manager to the offer or a qualified valuation expert to ensure that the offer price is fair and reasonable.

Pricing in Case of Indirect Acquisitions

Where the open offer arises pursuant to an indirect acquisition, Regulation 8(3) provides a separate pricing mechanism. Instead of computing the reference periods from the date of the public announcement, the relevant periods are calculated from the date on which the primary acquisition was contracted or publicly announced, whichever is earlier.

The Regulations also require appropriate adjustments to the offer price, including the addition of the per-share value attributable to the target company and, where applicable, an interest component for the delay between the indirect acquisition and the public announcement of the open offer. This ensures that public shareholders are not prejudiced merely because the acquisition of control occurred through an upstream transaction rather than a direct acquisition of shares in the target company.

End-to-End Operational Process & Timeline for an Open Offer

The open offer process operates on a strict timetable measured in working days (WD).

Step 1- Appointment of Manager & Public Announcement: Day 0.

• The acquirer appoints an independent, SEBI-registered Merchant Banker as the Manager to the Offer (Regulation 12).
• On the date of signing the transaction agreement, the acquirer submits the Public Announcement (PA) to the stock exchanges and the target company (Regulation 13).

Step 2- Escrow Account & Detailed Public Statement: Within 5 Working Days

• At least 2 working days prior to the Detailed Public Statement (DPS), the acquirer sets up an escrow account depositing 25% of the first ₹500 crore consideration plus 10% on any amount thereafter (Regulation 17).
• Within 5 working days of the PA, a Detailed Public Statement (DPS) is published in English, Hindi, and regional language national newspapers (Regulation 14).

Step-3- Draft Letter of Offer & SEBI Review: Within 5 Working Days of DPS.

• The acquirer files a Draft Letter of Offer (DLOO) with SEBI (Regulation 16).
• SEBI reviews the document and provides comments within 15 working days (Regulation 16(4)).

Step-4- Independent Directors’ Recommendation: 2 Working Days before Tendering.

• A committee of independent directors of the target company issues reasoned recommendations on whether the open offer price is fair to public shareholders. (Regulation 26)

Step-5- Tendering Period & Payment Settlement: Within 12 Working Days of SEBI Comments.

• The tendering window opens within 12 working days of receiving SEBI’s comments and remains open for 10 working days (Regulation 18).
• Within 10 working days after the tendering period closes, the acquirer completes all payments to shareholders who validly tendered shares (Regulation 21)

Exemptions from the Mandatory Open Offer Requirement

Although crossing the prescribed thresholds under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 generally triggers a mandatory open offer, the obligation is not absolute. The Takeover Code recognises that certain acquisitions do not result in a genuine change in control or do not adversely affect the interests of public shareholders. Accordingly, Regulations 10 and 11 provide for specific exemptions from the open offer requirement.

Automatic Exemptions

Regulation 10 exempts certain categories of acquisitions from the obligation to make an open offer, subject to the prescribed conditions and disclosure requirements. Some of the key exemptions include:

• Inter se transfers between qualifying persons, such as immediate relatives, promoters named as such for at least three years, and certain group companies satisfying common control and shareholding conditions.
• Acquisitions made in the ordinary course of business by registered intermediaries, including underwriters, merchant bankers acting as market makers and stockbrokers exercising a lien.
• Acquisitions pursuant to schemes of arrangement, including mergers and demergers approved by the National Company Law Tribunal (NCLT) or other competent authorities.
• Certain acquisitions arising from rights issues, buy-backs, and other transactions specifically exempted under the Regulations.

These exemptions recognise that such transactions generally do not involve a substantive change in ownership or control warranting an exit opportunity for public shareholders.

Discretionary Exemptions by SEBI

Apart from the automatic exemptions, Regulation 11 empowers SEBI to grant exemptions from the open offer obligation on a case-by-case basis. Where SEBI is satisfied that granting an exemption would be in the interests of investors and the securities market, it may exempt an acquisition subject to such conditions as it considers appropriate. This power is typically exercised in exceptional circumstances, such as government-directed restructurings or other transactions where strict compliance with the Takeover Code may not be warranted.

Conditional, Competing and Withdrawal of Open Offers

The Takeover Code also regulates situations where an open offer is made subject to conditions, where competing bids emerge, or where an acquirer seeks to withdraw an offer.

Conditional Open Offers

Under Regulation 19, an acquirer may make an open offer conditional upon receiving a specified minimum level of acceptances from shareholders. Where the acquisition is pursuant to a share purchase agreement, the agreement must provide that if the minimum acceptance condition is not fulfilled, the acquisition shall not proceed and the agreement shall stand rescinded. This enables an acquirer to avoid acquiring a stake that does not provide the intended level of ownership or control.

Competing Open Offers

The Takeover Code also permits competing bids. Under Regulation 20, any person may make a competing open offer within 15 working days from the date of the Detailed Public Statement (DPS) issued in respect of the first offer. Competing offers follow a synchronised timetable, ensuring that shareholders have a fair opportunity to evaluate all competing proposals before tendering their shares.

Withdrawal of an Open Offer

An open offer, once announced, cannot ordinarily be withdrawn. Regulation 23 permits withdrawal only in limited circumstances, including:

• refusal of a mandatory statutory approval required for the acquisition;
• death of the sole acquirer, where the acquirer is a natural person;
• failure of a condition precedent beyond the acquirer’s reasonable control resulting in termination of the underlying agreement; or
• such other circumstances as may be permitted by SEBI in the interests of investors.

The Supreme Court, in SEBI v. Akshya Infrastructure Private Limited (2014), reaffirmed that an open offer cannot be withdrawn merely because the transaction has become commercially unattractive. Once a public announcement is made, the obligation assumes a statutory character and may be withdrawn only in the circumstances expressly recognised by the Regulations.

Responsibilities of the Acquirer and the Target Company’s Board

The Takeover Code imposes obligations not only on the acquirer but also on the board of directors of the target company to ensure that the interests of shareholders are adequately protected during the offer process.

During the offer period, Regulations 24 to 26 restrict the target company’s board from undertaking extraordinary transactions, such as disposing of material assets or entering into significant arrangements outside the ordinary course of business, without obtaining shareholder approval. These restrictions preserve the value of the target company while the offer remains open.

Further, the board is required to constitute a committee of independent directors, which must provide reasoned recommendations on the open offer. These recommendations are required to be published at least two working days before the commencement of the tendering period and serve as an independent assessment to assist shareholders in deciding whether to accept the offer.

Consequences of non-compliance

Failure to comply with the mandatory open offer requirements attracts significant regulatory consequences. SEBI may direct the defaulting acquirer to make the delayed open offer together with interest payable to the eligible shareholders for the period of delay. In addition, SEBI may impose restrictions on the acquirer’s access to the securities market until compliance is achieved.

Further, Section 15H of the SEBI Act, 1992 empowers SEBI to levy monetary penalties for failure to make a mandatory public announcement or open offer. The penalty ranges from ₹10 lakh to ₹25 crore, or three times the amount of profits made, whichever is higher. The stringent penalty framework underscores the mandatory nature of the Takeover Code and serves as a strong deterrent against non-compliance.

In 2021, the SEBI Adjudicating Officer imposed a monetary penalty of ₹10 lakh for the delay in making the mandatory public announcement on Karvy Financial Services Limited in the matter of Regaliaa Realty Limited.

Common Practical Issues under the Takeover Code

Several recurring misconceptions arise in the implementation of the Takeover Code.

A common misunderstanding among investors is that an open offer automatically results in the delisting of the company or compels shareholders to tender their shares. In reality, participation in an open offer is entirely voluntary, and the company continues to remain listed unless a separate delisting process is undertaken in accordance with applicable law.

Acquirers, on the other hand, frequently overlook important regulatory requirements. Common errors include miscalculating the 5% creeping acquisition limit, failing to aggregate the shareholding of persons acting in concert (PACs), and assuming that control is determined solely by shareholding. In practice, contractual rights relating to board composition, management decisions or veto powers may themselves constitute “control” under Regulation 4, thereby triggering an open offer even where the prescribed shareholding threshold has not been crossed.

These issues highlight the importance of carefully analysing both the shareholding structure and the rights proposed to be acquired before undertaking any transaction involving a listed company.

Concluding remarks

The open offer framework under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 is a key safeguard that balances corporate acquisitions with the protection of public shareholders. By prescribing clear triggers, pricing norms, procedural requirements, and compliance obligations, the Takeover Code promotes transparency, fairness, and investor confidence.

As India’s capital markets continue to witness increasing M&A activity and strategic investments, a thorough understanding of the Takeover Code assumes critical importance for acquirers, promoters, listed companies, merchant bankers, legal advisors, and investors alike. Careful evaluation of acquisition structures, voting rights, contractual control arrangements, and regulatory exemptions is essential to ensure compliance with the SEBI SAST Regulations and to avoid significant legal and financial consequences. Ultimately, the open offer framework serves as a vital pillar of investor protection and market integrity, fostering confidence in the governance of listed companies and the broader securities market.

Authored by Pradyun Chakravarty, Partner and Co-authored by Mudit Jain, Associate at King Stubb and Kasiva