SEBI
Topic47 SAST Mandatory Open Offer Regulations 3 4
Mandatory Open Offer — Trigger Events & Obligations
Topic 47 — SAST Regulations 3 & 4: 25% Trigger, Control Trigger, 26% Offer Size & PA Obligations | SEBI Law Officer
Regulations 3 and 4 of the SAST Regulations, 2011 create the mandatory open offer framework — the heart of the Takeover Code. An acquirer who triggers the 25% threshold (Regulation 3) or who acquires 'control' (Regulation 4) must make a public announcement of an open offer for 26% of the target company's total shares. The mandatory open offer ensures that public shareholders receive a fair exit opportunity when control of a company changes. This topic is one of the highest-weightage areas in the SEBI Law Officer examination.
1. The Two Mandatory Open Offer Triggers
Two Independent Triggers: (1) Regulation 3 — 25% Shareholding Trigger | (2) Regulation 4 — Change of Control Trigger |
Trigger | Regulation | Condition |
|---|---|---|
Shareholding Trigger | Regulation 3(1) | Acquirer + PAC reaches or crosses 25% of voting rights in target company |
Creeping Trigger | Regulation 3(2) | Acquirer + PAC (already 25%-74.99%) acquires more than 5% in a financial year through any method; or acquires even 1 share through non-open-market methods |
Control Trigger | Regulation 4 | Acquirer acquires 'control' over the target company — regardless of shareholding percentage |
2. Regulation 4 — Control Trigger
Regulation 4: Notwithstanding anything contained in Regulation 3, no acquirer shall acquire, directly or indirectly, control over a target company unless such acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations. |
Regulation 4 is the control trigger — it operates independently of shareholding percentage. Key implications:
- Even below 25%: An acquirer who holds 10% but acquires 'control' (e.g., right to appoint majority directors) must make a mandatory open offer.
- Even with small additional acquisition: An acquirer already holding 24% who acquires 1% taking total to 25% triggers Regulation 3(1). But if that 1% also results in acquisition of 'control', Regulation 4 is independently triggered.
- 'Notwithstanding Regulation 3': Regulation 4 is additional — both Regulation 3 and Regulation 4 can apply to the same transaction.
3. Open Offer Size — 26% of Total Shares
Regulation 7(1): The acquirer shall make a public announcement of an open offer for acquiring at least twenty-six per cent of the total shares of the target company as at the tenth working day from the closure of the tendering period. |
The 26% offer size is a key feature of the 2011 Regulations:
- Why 26%?: 26% is the minimum shareholding that triggers a special resolution block under Companies Act 2013 (special resolutions require 75% approval; 26% holding can block them). The open offer gives public shareholders collectively enough shares to block the acquirer from passing special resolutions if tendering shareholders do not exit.
- Calculated on total shares: 26% of the total issued and paid-up share capital of the target company — not just the public float.
- Can be for more than 26%: The acquirer may offer to buy more than 26% — but cannot offer less.
- Subject to maximum non-public limit: The acquirer cannot acquire shares that would take their total holding above the maximum permissible non-public shareholding (74.99%).
4. Public Announcement (PA) — Regulation 13
Regulation 13(1): The acquirer shall, not later than two working days from the date of the agreement, receipt of board approval or any other triggering event, make a public announcement of an open offer for acquiring shares of the target company. |
The PA is the formal public notice of the open offer. Requirements:
Requirement | Detail |
|---|---|
Timing | Within 2 working days of the triggering event (SPA execution, board approval, etc.) |
Publication | In all editions of at least one English national daily + one Hindi national daily + one regional daily in the state where the target company's registered office is located |
Content | Identity of acquirer + PAC; details of target company; number of shares to be acquired; offer price; source of funds; conditions if any; timeline |
Simultaneous filing | PA must be simultaneously filed with SEBI, all stock exchanges on which target is listed, and the target company |
SEBI's role | SEBI examines the PA and may issue observations within a prescribed timeline — acquirer must incorporate SEBI's observations |
5. Detailed Public Statement (DPS) — Regulation 14
Regulation 14: Not later than five working days from the date of the public announcement, the acquirer shall publish a detailed public statement in the same newspapers as the public announcement. |
The DPS provides more detailed information than the PA, including:
- Complete financial details of the acquirer — audited financials, source of acquisition funding.
- Complete details of the target company — shareholding pattern, financial summary.
- Offer conditions — if any.
- Escrow account details — amount deposited and with whom.
- Offer opening and closing dates.
6. Letter of Offer — Regulation 18
Regulation 18: The acquirer shall, not later than fifteen working days from the date of the detailed public statement, file a draft letter of offer with SEBI. |
The Letter of Offer (LoO) is the formal offer document sent to all eligible shareholders:
- Contains all material information about the offer — acquirer background, target company, offer price, payment method, acceptance procedure, timeline.
- Must be sent to all eligible shareholders — registered as of a specified record date.
- Minimum 10 working days tendering period for shareholders to accept the offer.
- SEBI examines the draft LoO and issues observations — the final LoO incorporates SEBI's comments.
7. Complete Mandatory Open Offer Timeline
Day | Event | Regulation |
|---|---|---|
Day 0 | Triggering event (SPA signed / board approval / control acquisition) | — |
Day 0 + 2 WD | Public Announcement (PA) published in newspapers + filed with SEBI/exchanges/target | Reg 13 |
Day 0 + 7 WD | Detailed Public Statement (DPS) published in same newspapers | Reg 14 |
Day 0 + 22 WD | Draft Letter of Offer filed with SEBI | Reg 18 |
Day 0 + 37 WD | SEBI issues observations on LoO (within 15 WD of filing) | Reg 18(7) |
Day 0 + 42 WD | Final Letter of Offer dispatched to shareholders | Reg 18 |
Day 0 + 52–62 WD | Tendering period: minimum 10 WD open for shareholder acceptance | Reg 18(8) |
Day 0 + 72 WD | Payment to shareholders: within 10 WD of closure of offer | Reg 18(9) |
8. Escrow Account — Security for Open Offer
Regulation 17: Before making the public announcement, the acquirer shall create an escrow account and deposit therein a sum equivalent to the amounts stipulated in the regulations. |
The escrow account protects shareholders — ensuring the acquirer has the financial capacity to complete the open offer:
Offer Consideration | Escrow Requirement |
|---|---|
Up to ₹500 crore | 25% of total offer consideration |
Above ₹500 crore | 25% of first ₹500 crore + 10% of remaining amount |
Cash escrow form | Bank guarantee from scheduled commercial bank, or demand draft, or fixed deposit |
Release of escrow | Released only after completion of payment to tendering shareholders or withdrawal of offer |
9. Landmark Cases
📖 Jet Airways v. SEBI SAT Order, 2013 Facts: Etihad Airways' acquisition of a 24% stake in Jet Airways — whether certain management rights granted to Etihad constituted 'control' triggering Regulation 4 mandatory open offer. Held: SEBI held that the rights granted to Etihad (board nomination, veto over certain decisions, affirmative covenants) collectively constituted 'control' over Jet Airways. Mandatory open offer was required. SEBI examined the substance of the arrangement rather than its formal characterisation. Ratio: Acquisition of 'control' (Regulation 4) is assessed substantively — SEBI looks at the totality of rights acquired and their practical effect on management. Formal characterisation of rights as 'protective' does not prevent SEBI from finding control if the practical effect is management direction. |
📖 DSP Merrill Lynch Ltd. v. SEBI SAT Order, 2006 Facts: Whether an adviser to an acquirer in a takeover was jointly liable for the acquirer's failure to make timely public announcement under Regulation 13. Held: SAT held that the manager to the open offer (merchant banker) has independent regulatory obligations under SEBI (Merchant Bankers) Regulations and SAST. Failure of the manager to ensure timely compliance makes the manager jointly liable. SEBI can initiate action against the manager independently. Ratio: Manager to the open offer has independent obligations — not merely ministerial. The manager is not just a conduit but a co-guarantor of compliance with SAST timelines and disclosure requirements. |
10. Model Examination Questions
Q1. When is a mandatory open offer triggered under SAST Regulations, 2011? Discuss the open offer procedure with timelines.
Mandatory Open Offer — Triggers, Size & Procedure Model Answer — TRIGGERS: (i) Regulation 3(1): Acquirer + PAC reaches or crosses 25% voting rights — regardless of acquisition method. (ii) Regulation 3(2): Acquirer already holding 25%-74.99% acquires more than 5% in a financial year, or acquires through non-open-market methods. (iii) Regulation 4: Acquisition of 'control' over the target company — regardless of shareholding percentage. OFFER SIZE: Minimum 26% of total shares (Regulation 7). This ensures public shareholders can collectively acquire a special resolution blocking stake. PROCEDURE: PA within 2 working days (WD) of triggering event → DPS within 7 WD → Draft LoO filed with SEBI within 22 WD → SEBI observations within 15 WD → Final LoO dispatched → 10 WD tendering period → Payment within 10 WD of offer closure. ESCROW: Created before PA — 25% of total consideration up to ₹500 crore; 10% on remaining. In Jet Airways v. SEBI (SAT 2013), totality of management rights constituted 'control' triggering Regulation 4. In DSP Merrill Lynch v. SEBI (SAT 2006), manager to open offer has independent compliance obligations. |
🎯 EXAM POINTERS — Topic 47: Mandatory Open Offer [Regulations 3 & 4]
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← Topic 46: Creeping Acquisition [Regulation 3] | Next → Topic 48: Voluntary Open Offer [Regulation 6]
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