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SEBI Allows Open Offer and Delisting Together to Make M&A Easier for Companies

Sep 30, 2021 3:56 AM 4 min read

Acting on the recommendations of a discussion paper presented to the public back in June, SEBI has introduced a simpler framework for companies wishing to delist following an open offer.

Essentially, the new regime simplifies the entire process and allows the acquirer to announce both the open offer and the delisting simultaneously at a differential pricing.

What is an Open Offer?

An open offer involves the takeover of a listed company (the "target") by an acquirer. It is governed by SEBI's SAST (Substantial Acquisition of Shares & Takeover) Regulations, which were first notified in 1994. They were initially (pdf) meant to regulate hostile takeovers and competitive offers. Over time, as M&A became a preferred mode for raising capital and restructuring, these rules were accordingly modified.


What is the Open Offer Process?

When an acquirer, optionally with “persons acting in concert” (PAC), holds a certain stake in a company but wants to increase their combined shareholding, two scenarios emerge wherein the obligation to announce an open offer is triggered:

  1. If an acquirer (along with PACs, if any), who holds less than 25% of shares/voting rights in a target company, agrees to acquire shares that would increase their shareholding to above that number.
  2. If an acquirer (along with PACs, if any), who holds 25-75% in a target enterprise acquires more than 5% shares or voting rights in a single financial year.

FYI: Why “75%”? Because the Securities Contract (Regulation) Rules aka the SCRR cap the maximum non-public shareholding in a listed entity at 75%.

Basically, an open offer is  made  by  the  acquirer  to  the  shareholders  of  the target company inviting them to tender their shares in the latter at a specified price. The primary purpose of this exercise is to provide the existing shareholders of the  target  company with an exit option, given that a change in ownership and a substantial acquisition of shares would be underway.


What is Delisting?

As the word suggests, delisting involves the removal of listed securities from the concerned stock exchange. This can be involuntary (such as due to penal regulatory action) or otherwise.

But why would a company voluntarily delist itself? There are many possible reasons, such as increasing costs of remaining public, internal restructuring, unwillingness to meet the disclosure requirements etc. (Akin to why some startups are more than happy to not join the IPO bandwagon.)


Delisting Dilemmas

The current regulatory regime, as SEBI itself noted in its discussion paper, involves "directionally contradictory transactions [that] pose complexity in the takeover of listed companies and dissuade an incoming acquirer from seeking to acquire control over listed companies".

How so?

On the one hand, the SAST rules say that an acquirer cannot have more than 75% shareholding in a listed company (because, SCRR requirements). But on the other hand, the SEBI (Delisting of Equity Shares) Regulations state that delisting cannot be attempted unless an acquirer's shareholding reaches 90%.


  • One set of regulations (SAST) allows an acquirer to increase their holding in a target company to above 75% via an open offer.
  • Another set of regulations (SCRR) prohibits the acquirer from holding more than 75% in a listed entity. If this happens, they must reduce their stake to 75% within a year.
  • Another set of regulations (Delisting Regulations) stipulates that the delisting threshold is 90%.

This bewildering maze affects companies and secondary market investors alike. The latter would have to be shareholders in the target company, subject to an offer to buy shares from them (open offer), then an offer to sell shares to them (because, SCRR), and then again an offer to buy their shares (to comply with the Delisting Regulations)!

Talk about a Catch-22. Fortunately, SEBI’s new regime offers respite...


What Do the New Rules Say?

First and foremost, during the open offer stage, the acquirer “must state upfront in the first public announcement...whether delisting is intended or if the acquirer is desirous of retaining listed status for the Target Company”. This proposition is also subject to the approval of shareholders and stock exchanges.

Now, should an acquirer end up with 75-90% shareholding in the target firm post-open offer, they will be given an additional 12 months to pursue listing. (In the event that delisting is not intended, the 75% SCRR rule for non-public shareholders remains in place.)

The delisting price can be announced simultaneously with the open offer price (the former at a premium to the latter). At this point, there are two possibilities:

  • If the delisting is successful, all tendering shareholders will avail the delisting price. End of story.
  • If the delisting is unsuccessful, then all tendering shareholders will avail the open offer price. In this case, the acquirer can re-attempt a delisting (at six-month intervals, with the deadline being 18 months post-open offer). If still unsuccessful, they would naturally have to divest their stake to below-75%. End of story.

In the end, either way, shareholders benefit from the dual pricing. And companies - both acquiring and target - no longer have to be encumbered by over-contradictory regulations. This is expected to simplify and propel the M&A landscape in India, which has already had a more-than-eventful 2020.


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