Creeping Acquisition under SAST Regulations 2011

Topic 46 — Regulation 3: 25% Threshold, Creeping Limits, Open Offer Trigger & Exemptions | SEBI Law Officer

Regulation 3 of the SAST Regulations, 2011 contains the creeping acquisition provisions — one of the most important and most-tested provisions of the Takeover Code. It sets out: (i) the initial 25% threshold above which no acquisition is permitted without triggering a mandatory open offer; and (ii) the creeping acquisition limit — the maximum 5% per financial year that persons holding 25% to 74.99% can acquire without triggering an open offer. Understanding the arithmetic of creeping acquisition, the conditions attached to it, and its interaction with voluntary and mandatory open offers is essential.

1. Regulation 3(1) — Initial Threshold

Regulation 3(1): No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle such acquirer, along with persons acting in concert with him, to exercise twenty-five per cent or more of the voting rights in such 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 3(1) Rule: If (Acquirer + PAC) holding REACHES or CROSSES 25% → MANDATORY OPEN OFFER triggered

Analysis of Regulation 3(1):

The 25% threshold is cumulative: The calculation includes ALL shares already held by the acquirer and PAC — not just the shares being acquired in the current transaction.
Triggered at 25%, not above 25%: The obligation arises when the combined holding 'entitles' the acquirer to exercise 25% or more of voting rights. Even acquiring 1 share that takes the combined holding from 24.9% to 25% triggers the open offer.
Applies to voting rights, not economic rights: Non-voting shares (certain preference shares) do not count. The calculation is based on voting rights as a percentage of total voting capital.

Practical example of Regulation 3(1):

Scenario	Acquirer + PAC holding before acquisition	Shares being acquired	Post-acquisition holding	Open offer triggered?
Scenario 1	20%	4%	24%	No — below 25%
Scenario 2	20%	5%	25%	YES — exactly 25%
Scenario 3	20%	10%	30%	YES — above 25%
Scenario 4	25.1% (already above)	N/A	N/A	Creeping Reg 3(2) applies

2. Regulation 3(2) — Creeping Acquisition Limit

Regulation 3(2): No acquirer who, together with persons acting in concert with him, holds shares or voting rights entitling them to exercise twenty-five per cent or more but less than the maximum permissible non-public shareholding in the target company shall acquire additional shares or voting rights in such target company, unless such acquirer, along with the persons acting in concert with him, acquires such additional shares or voting rights through open market purchases not exceeding five per cent of the total shares or voting rights in the target company in any financial year.

Regulation 3(2) Rule: If (Acquirer + PAC) holds 25% to 74.99% → Can acquire up to 5% MORE per financial year WITHOUT open offer

Critical conditions for valid creeping acquisition under Regulation 3(2):

Condition	Explanation
Existing holding: 25% to 74.99%	The creeping acquisition privilege applies ONLY to persons already above the 25% threshold. Below 25%, any acquisition approaching 25% triggers Regulation 3(1).
Maximum 5% per financial year	The 5% limit is per financial year (April 1 to March 31). Multiple tranches during the year are aggregated — total must not exceed 5%.
Method: open market purchases only	Creeping acquisition must be through open market purchases on a recognised stock exchange — not through negotiated block deals, preferential allotments, or off-market transactions.
Upper limit: 74.99%	The combined holding cannot exceed 74.99% (the maximum permissible non-public shareholding — consistent with SEBI's 25% minimum public shareholding requirement).
Disclosure: within 2 working days	Every acquisition under creeping acquisition must be disclosed under Regulation 29 within 2 working days.

3. Creeping Acquisition — Worked Examples

Scenario	Holding (start of FY)	Acquisitions During FY	Post-acquisition	Open offer required?
A holds 30% in Target	30%	Acquires 4% in Q1 + 0.9% in Q3 = 4.9% total	34.9%	No — within 5%/year
B holds 40% in Target	40%	Acquires 3% in April + 3% in December = 6%	46%	YES — exceeded 5%/year by 1%
C holds 74% in Target	74%	Wants to acquire 1% more	75%	YES — would breach 74.99% cap; open offer required
D holds 60% in Target	60%	Acquires 5% in block deal (off-market)	65%	YES — method wrong; off-market acquisition not permitted under Reg 3(2)

4. Regulation 3(3) — Consolidation Acquisitions by Existing Holders Above 75%

Regulation 3(3): An acquirer who, together with persons acting in concert with him, has acquired shares or voting rights in a target company such that the aggregate shareholding of the acquirer and persons acting in concert exceeds the maximum permissible non-public shareholding, shall not further acquire any shares or voting rights in the target company.

Once the acquirer + PAC holding exceeds 74.99% (i.e., public shareholding falls below 25%), NO further acquisition is permitted. If already above 75%: the acquirer must increase public shareholding — not decrease it further.

5. The 74.99% Cap — Maximum Permissible Non-Public Shareholding

The phrase 'maximum permissible non-public shareholding' in Regulation 3(2) refers to the SEBI-mandated minimum public float requirement:

SEBI (LODR) Regulations + Rule 19A of SCRR: Minimum 25% public shareholding in all listed companies.
Therefore, maximum promoter/non-public holding = 75% (i.e., 100% − 25% minimum public = 75%).
In SAST, this is expressed as 74.99% to avoid rounding to 75% which might inadvertently breach the 25% minimum.
If the acquirer's holding is already at 74.99% or above, they CANNOT use Regulation 3(2) creeping acquisition at all.

6. Interaction with Voluntary Open Offer (Regulation 6)

An acquirer who holds 25% or more but wants to acquire MORE than 5% in a financial year — or acquire through methods other than open market — must make a voluntary open offer under Regulation 6. The voluntary open offer allows acquisition of up to 26% of the target company's shares (on top of existing holding) without specifically being triggered by a threshold breach.

7. Landmark Cases

📖 Nirma Ltd. v. SEBI SAT Order, 2011

Facts: Nirma Ltd. crossed the 25% threshold in a target company through a combination of open market purchases and a negotiated block deal — arguing that the block deal was a private transaction exempt from open offer.

Held: SAT upheld SEBI's view that the 25% threshold trigger under Regulation 3(1) applies to ALL acquisitions irrespective of the method. The block deal was not an exempt transaction under Regulation 10. Once the combined holding (including PAC) reaches 25%, the mandatory open offer is triggered.

Ratio: Regulation 3(1)'s 25% trigger applies to ALL acquisition methods. The method of acquisition determines only whether creeping acquisition under Regulation 3(2) is available — for the Regulation 3(1) trigger, any mode of reaching 25% activates the obligation.

📖 Subhkam Ventures (I) Pvt. Ltd. v. SEBI (2010) 1 COMP LJ 201 (SAT)

Facts: Whether acquisition of minority stake with protective veto rights constituted 'control' — and therefore triggered Regulation 3(1) mandatory open offer.

Held: SAT held that protective negative control rights (veto over extraordinary decisions) do NOT constitute 'control' under SAST. Therefore, Subhkam's acquisition did not trigger Regulation 3(1). The open offer obligation arises only when an acquirer has the ability to determine (not merely influence) management policy.

Ratio: The 'control' trigger in SAST requires ability to DETERMINE management decisions — not merely protective veto rights. This case clarified that strategic/financial investors can hold significant minority stakes with protective rights without being subject to the open offer obligation.

8. Model Examination Questions

Q1. Explain the creeping acquisition provisions under Regulation 3 of the SAST Regulations, 2011. When is the 25% threshold triggered and what are the conditions for creeping acquisition?

Creeping Acquisition — Regulation 3 SAST 2011

Model Answer — REGULATION 3(1) — INITIAL THRESHOLD: No acquirer (together with PAC) shall acquire shares that, combined with existing holdings, would result in 25% or more of voting rights — without making a mandatory public announcement of open offer. The 25% calculation is cumulative (all existing holdings + PAC + new acquisition). Triggered at 25% — even 1 share taking combined holding to exactly 25% triggers the obligation. REGULATION 3(2) — CREEPING ACQUISITION LIMIT: Persons already holding 25% to 74.99% (with PAC) may acquire up to 5% per financial year WITHOUT triggering an open offer — subject to: (i) acquisitions must be through OPEN MARKET PURCHASES ONLY (on recognised exchange — not block deals, preferential allotments); (ii) maximum 5% per financial year (April-March); (iii) combined holding must not exceed 74.99%. If any of these conditions is violated — method wrong (off-market) OR exceeds 5% OR would breach 74.99% — the acquisition triggers a mandatory open offer. REGULATION 3(3): Once holding exceeds 74.99%, NO further acquisition is permitted. WORKED EXAMPLE: Promoter holding 60% acquires 4% through open market in Q1 and 2% in Q3 = total 6% in one FY — exceeds 5% limit, triggers open offer for the excess. In Nirma v. SEBI (SAT 2011), SAT confirmed that Regulation 3(1)'s 25% trigger applies to ALL acquisition methods. In Subhkam Ventures (SAT 2010), protective veto rights did not constitute 'control' triggering open offer.

🎯 EXAM POINTERS — Topic 46: Creeping Acquisition [Regulation 3]

Regulation 3(1): Acquirer + PAC REACHES OR CROSSES 25% voting rights → MANDATORY open offer. Any method of acquisition.
Regulation 3(2): Already holding 25%-74.99% → can acquire UP TO 5% PER FINANCIAL YEAR without open offer.
Creeping acquisition conditions: ONLY open market purchases; max 5% per FY; cannot exceed 74.99%.
Financial year for creeping = April 1 to March 31. Multiple tranches aggregated.
74.99% cap = 100% − 25% minimum public float (SEBI LODR requirement).
Regulation 3(3): If holding EXCEEDS 74.99% → NO further acquisition permitted at all.
Off-market purchase, block deal, preferential allotment = NOT permitted for creeping acquisition.
Nirma v. SEBI (SAT 2011): Regulation 3(1) trigger applies to ALL acquisition methods.
Subhkam Ventures (SAT 2010): Protective veto rights ≠ 'control'. Open offer not triggered.
Key arithmetic: 5% per FY TOTAL for acquirer + ALL PAC combined — not 5% per entity.

← Topic 45: SAST Definitions — Acquirer, Target, Control, PAC | Next → Topic 47: Mandatory Open Offer [Regulations 3-4]

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