Takeover Code (SEBI SAST)

The Takeover Code is one of the most consequential pieces of regulation in Indian capital markets, establishing the framework within which changes of control and significant stake acquisitions in listed companies must occur. Its primary objective is to protect the interests of public shareholders when a new entity seeks to acquire significant ownership or control of a listed company. The underlying principle is that public shareholders, who invested on the basis of the existing management and ownership structure, should have the opportunity to exit at a fair price if that structure changes materially.

The current version of the Takeover Code — the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 — replaced the earlier 1997 code and was largely based on the recommendations of the Takeover Regulations Advisory Committee (TRAC) chaired by C. Achuthan. The 2011 code introduced several refinements, including a higher initial trigger threshold for mandatory open offers (raised from fifteen percent to twenty-five percent), a minimum open offer size of twenty-six percent, and a comprehensive framework for voluntary open offers.

The mandatory open offer obligation is triggered in two primary situations. First, when an acquirer (along with persons acting in concert) acquires shares or voting rights that, together with existing holdings, aggregate to twenty-five percent or more of the total shares or voting rights of the target company. Second, when an acquirer who already holds between twenty-five percent and seventy-five percent of the target company's shares acquires more than five percent in any financial year — this is the "creeping acquisition" provision, which sets an annual limit on stake increases without a mandatory open offer. Both triggers are designed to ensure that public shareholders are not caught off-guard by rapid accumulation of control.

When a mandatory open offer is triggered, the acquirer must make an open offer to acquire at least twenty-six percent of the total shares of the target company from the public shareholders. The open offer price must be the highest of: the agreed price in the underlying transaction triggering the offer, the volume-weighted average price (VWAP) of the shares over the fifty-two weeks preceding the public announcement, the highest price paid by the acquirer for any acquisition in the twenty-six weeks preceding the public announcement, and the book value per share. This multi-pronged pricing methodology ensures the offer price is reflective of genuine market value.

An independent merchant banker (the manager to the offer) must be appointed to manage the open offer process, file the detailed public statement with SEBI and the stock exchanges, dispatch the letter of offer to all public shareholders, and ensure that the open offer escrow is funded. The entire open offer process, from public announcement to settlement, follows a prescribed timeline set out in the Takeover Code.