Mergers, Acquisitions, and Takeovers in India: Trigger Thresholds, Pricing Mechanics, and Exemptions (Part 2 of 4)

In public market transactions, mergers and acquisitions are governed by highly specific quantitative triggers and pricing formulas designed to prevent market manipulation and protect minority investors. This study note provides an authoritative, complete, and exam-oriented analysis of the triggers for mandatory open offers, the computation of offer sizes, the precise mechanisms for price determination, and the statutory exemptions under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the SAST Regulations).

1. Core Trigger Thresholds for a Mandatory Open Offer

Under the SEBI SAST Regulations, any substantial acquisition of shares, voting rights, or control over a listed company activates the requirement to make a public announcement of an open offer.

A. The 25% Substantial Acquisition Threshold

• The Basic Trigger: An acquirer, along with Persons Acting in Concert (PAC), is prohibited from acquiring shares or voting rights in a target company that would entitle them to exercise 25% or more of the voting rights, unless they make a public announcement of an open offer to acquire the shares of the target company from its existing public shareholders.
• The Creeping Acquisition Limit: An acquirer who already holds 25% or more but less than the maximum permissible non-public shareholding can acquire additional shares within specified limits (often referred to as creeping acquisition). However, such acquisitions must not exceed the aggregate limit that would take their total holding beyond the maximum permissible non-public shareholding.

B. The Control Trigger

• Any direct or indirect acquisition of control over the target company, irrespective of the acquisition of shares or voting rights, mandates an open offer.

2. Open Offer Size Requirements

When an open offer is triggered, the acquirer is legally mandated to offer to purchase a substantial portion of the remaining equity from the public to ensure minority shareholders have an equitable exit option.

A. Minimum Offer Size

• The 26% Rule: The open offer made by the acquirer and PACs for acquiring shares must be for at least 26% of the total shares of the target company.
• The Additional 10% Protection: The open offer must be for the acquisition of at least such number of shares as would entitle the holder to exercise an additional 10% of the total shares of the target company.
• Upper Limit Boundary: The size of the open offer must not exceed a number of shares that would result in the post-acquisition holding of the acquirer and PACs exceeding the maximum permissible non-public shareholding (minimum public shareholding requirements must be maintained).

B. Competing Offers

• If a competing offer is made by a rival bidder, the original acquirer who voluntarily made the public announcement of an open offer has the right to increase the number of shares for which their open offer has been made to any such number of shares as they deem fit.

3. Offer Price Determination Framework

Determining the "Offer Price" is one of the most critical aspects of M&A advisory. The SAST Regulations mandate strict pricing parameters to prevent acquirers from buying out promoters at a premium while offering retail investors a lower rate.

A. Direct vs. Indirect Acquisition Pricing

• Direct Acquisitions: Price parameters are calculated based on specific historical volume-weighted market prices, negotiated prices, and historical acquisition prices.
• Indirect Acquisitions: In an indirect acquisition, where the pricing parameters are not readily applicable, the offer price must be the fair price of the shares of the target company.
• Price Enhancement for Indirect Acquisitions: For indirect acquisitions, the offer price must stand enhanced by an interest rate of 10% per annum for the period between the date on which the primary acquisition was agreed upon and the date of the open offer.

B. Adjustments for Corporate Actions

The price parameters used to determine the offer price must be adjusted by the acquirer, in consultation with the manager to the open offer, for various corporate actions.

• Eligible Corporate Actions: These include issuances pursuant to rights issues, bonus issues, stock consolidations, stock splits, dividend payments, de-mergers, and capital reductions.
• Timing Cut-off: The adjustment is permitted only if the record date for the corporate action falls prior to 3 working days before the commencement of the tendering period.

C. The 26-Week Higher Price Rule

• If the acquirer or PACs purchase any shares of the target company in the open market during the 26 weeks after the tendering period at a price higher than the open offer price, they are liable to pay the difference to all the shareholders whose shares were accepted in the open offer.

D. Pricing for Special Share Classes

• Partly Paid-up Shares: The offer price for partly paid-up shares is calculated as the difference between the full offer price and the call-in-arrears (including unpaid calls and interest).
• Differential Voting Rights (DVRs): The price of equity shares carrying differential voting rights is determined collectively by the acquirer and the manager to the open offer.

4. Statutory Exemptions from Open Offers

Not all corporate transitions require an open offer. The SAST Regulations outline specific scenarios where acquisitions are exempt from the mandatory open offer obligation to facilitate restructuring, insolvency resolution, or seamless inter-promoter transfers.

A. General and Automatic Exemptions

• Insolvency and Bankruptcy Code (IBC): Any acquisition made pursuant to a resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code, 2016 is fully exempt from the open offer obligation.
• Other Exemptions: Regulations 10 & 11 provide a comprehensive list of automatic/general exemptions for specific categories of transfers (e.g., qualifying transfers between promoters, qualifying family successions, and transmissions).

B. SEBI-Granted Exemptions and Procedural Requirements

SEBI has the authority to grant ad-hoc exemptions or procedural relaxations on a case-by-case basis.

• Power to Grant Relaxation: SEBI may grant an exemption from the obligation to make an open offer or grant relaxation from strict compliance with procedural requirements after recording its reasons in writing.
• The Application Process:
  1. The acquirer must file a formal application with SEBI.
  2. The application must be supported by a duly sworn affidavit detailing the proposed transaction and the specific grounds for seeking the exemption.
  3. The acquirer or target company must pay a non-refundable application fee of Rs. 5 lakh.
  4. Payment Modes: Payment must be made via direct credit to SEBI’s bank account through NEFT, RTGS, IMPS, or any other mode allowed by the RBI, or via a demand draft or banker's cheque payable in Mumbai in favour of SEBI.
  5. Outcome: SEBI will hear the applicant, consider the facts, and pass a reasoned order either granting or rejecting the request, which is then published on the SEBI website.

5. Key Takeaways & Exam Pointers

• Trigger Threshold: The core trigger is 25% or more of voting rights.
• Offer Size: Must be for at least 26% of the target's total outstanding shares.
• Adjustments Cut-off: Price adjustments for corporate actions are allowed only if the record date is at least 3 working days prior to the start of the tendering period.
• Post-Offer Price Tracking: Acquirers must track their market purchases for 26 weeks after the tendering period; any purchase at a higher price triggers a retrospective payment obligation to public shareholders who tendered.
• Indirect Offer Price Interest: Indirect acquisitions require a 10% p.a. interest enhancement on the offer price from the primary transaction date.
• SEBI Exemption Fee: The non-refundable fee for seeking ad-hoc exemptions is Rs. 5 lakh, and the application must be backed by a sworn affidavit.

Important Formulas (Simple Line Format)

• Mandatory Open Offer Trigger = Acquirer and PAC Voting Rights in Target Company >= 25% of Total Voting Rights
• Minimum Open Offer Size = 26% of Total Shares of Target Company
• Partly Paid-up Share Offer Price = Offer Price - (Amount Due Towards Call-in-Arrears + Unpaid Calls Remaining + Unpaid Call Interest)
• Indirect Acquisition Price Interest Enhancement = Base Offer Price + (Base Offer Price * 10% * (Time Period / 365))