Creeping Acquisition (Regulation 3(2))

Once an acquirer crosses the 25% gateway, the SEBI Takeover Code does not freeze its stake forever; it allows the holding to creep upward by a capped amount each year without a fresh open offer. Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 fixes that headroom at five per cent of voting rights in any financial year. The provision is deceptively short but conceals two examiners' favourites — the “gross acquisitions alone” rule that ignores intermittent sales, and the maximum-permissible-non-public-shareholding ceiling that overrides the 5% headroom. This chapter unpacks Regulation 3(2) word by word, traces how it differs from the consolidation trigger in Regulation 3(1), and tests it against SEBI orders and Supreme Court authority.

What "Creeping Acquisition" Means

Creeping acquisition is the gradual, year-on-year enlargement of an existing substantial holding without triggering a fresh open offer. The logic is that a shareholder who has already crossed the substantial-acquisition gateway, and against whom the public was once given an exit opportunity, should be allowed a measured annual headroom to consolidate — but not unlimited freedom to march towards control by stealth. The Takeover Code therefore draws a line: small annual increments are permitted; anything beyond the line is treated as a substantial acquisition demanding a public announcement under the open-offer trigger. The expression captures the visual idea of a holding that inches upward in small steps over time, each step lawful in isolation but cumulatively capable of shifting effective control if left unchecked.

The term itself is descriptive rather than statutory — the word "creeping" appears in market parlance and SEBI committee reports, not in the operative text of Regulation 3(2). The Achuthan Committee (Takeover Regulations Advisory Committee, 2010), whose report underpins the 2011 Code, expressly used "creeping acquisition limit" to describe the annual ceiling, carrying forward a concept that existed under the predecessor 1997 Regulations. For the genealogy of the provision, see the evolution from the 1997 Regulations.

Conceptually, the creeping limit reconciles two competing interests. The acquirer's interest is in being able to increase its stake incrementally to reflect its growing economic commitment to the company without the cost and disruption of a full open offer every time it buys a handful of shares. The public shareholder's interest is in not having control consolidated against them invisibly, without the chance to exit at a fair price. The 5% annual cap is the legislative compromise between these poles — generous enough to permit genuine consolidation, tight enough that any acquirer seeking to accumulate rapidly must come to the market openly.

The Bare Text of Regulation 3(2)

Regulation 3(2) provides: "No acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target company entitling them to exercise twenty-five per cent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations."

Three structural features deserve attention. First, the entry condition is a holding of 25% or more but below the maximum permissible non-public shareholding — the provision simply does not apply to those below 25%, who are instead governed by Regulation 3(1). Second, the measuring rod is a financial year, defined in Regulation 2(1)(i) as the twelve months commencing 1 April. Third, the trigger is acquisition of more than five per cent of voting rights, computed on a gross basis as the Explanation directs.

The 25%-to-MPNS Band: Who Is Covered

Regulation 3(2) operates only within a defined band. The floor is 25% — the substantial-acquisition gateway introduced by the 2011 Code (up from the 15% trigger of the 1997 Regulations). The ceiling is the maximum permissible non-public shareholding (MPNS), which under the Securities Contracts (Regulation) Rules, 1957 and the listing framework is ordinarily 75%, leaving a mandatory 25% public float. An acquirer at, say, 40% may creep; an acquirer already at 75% has no headroom because any further acquisition would breach the minimum public shareholding requirement.

The first proviso to Regulation 3(2) makes this ceiling explicit: "Provided that such acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding." In other words, even an open offer cannot be used as a device to breach the public-float floor; the 5% creeping headroom is always subject to the MPNS cap. The interaction with delisting, where the acquirer deliberately seeks to cross MPNS, is governed separately by Regulation 5A.

The Five Per Cent Per Financial-Year Headroom

The headroom is "more than five per cent of the voting rights" "within any financial year." Two points commonly trip up candidates. First, the limit resets each 1 April: an acquirer may add up to 5% in one financial year and a further (up to) 5% in the next, and so on, until it nears MPNS. The annual reset is what makes the acquisition "creeping" — a slow, lawful accretion across successive years. Second, the trigger is breach of the limit, not mere acquisition: acquiring exactly 5% or less is fine; it is acquisition of more than 5% in a financial year that compels a public announcement.

The choice of the financial year as the unit of measurement is deliberate and has practical consequences. Because the clock resets on 1 April, an acquirer can lawfully acquire just under 5% in late March and a further just-under-5% in early April — nearly 10% within a span of days — without breaching Regulation 3(2), since the two tranches fall in different financial years. This is not a loophole but a designed feature: the limit is annual, not rolling, and SEBI has not read a continuous twelve-month window into the provision. Candidates should resist the temptation to treat the limit as a rolling one; the statutory anchor is the financial year defined in Regulation 2(1)(i).

It is critical to grasp that the open-offer obligation, once triggered, is not for the excess sliver alone. The acquirer must make an open offer for the minimum offer size prescribed by Regulation 7(1) — at least 26% of the total shares of the target company. Thus a promoter who acquires 5.5% in a year to nudge its stake from 50% to 55.5% must, on breaching the limit, offer to buy a further 26% from the public. The disproportion between the small breach and the large offer obligation is precisely what makes Regulation 3(2) a powerful deterrent against stealthy consolidation. It converts a marginal overshoot into a substantial and expensive compliance event, ensuring that acquirers calibrate their purchases carefully and stop short of the line unless they are prepared to extend a full exit to the public.

The "Gross Acquisitions Alone" Rule

The single most tested feature of Regulation 3(2) is its Explanation, which dictates how the 5% is computed. Clause (i) states: "gross acquisitions alone shall be taken into account regardless of any intermittent fall in shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights owing to fresh issue of shares by the target company." This is the no-netting rule. If an acquirer buys 4% in April, sells 3% in June, and buys 4% again in September, its net increase is only 5% — but its gross acquisitions total 8%, and the open-offer obligation is triggered.

The rationale is anti-avoidance: were netting permitted, an acquirer could repeatedly churn shares to accumulate control while keeping its year-end net figure within 5%. SEBI's consistent position, articulated through interpretive guidance and adjudication, is that gross purchases are counted, ignoring intervening sales and ignoring dilution caused by the company issuing fresh capital. A candidate should be able to state crisply: buys add to the count; sales do not subtract. The only relief from this severity comes through the specific exemptions in Regulation 10, discussed below.

The Explanation also clarifies the second limb of the no-netting rule, which is frequently overlooked: dilution does not reduce the count either. Suppose an acquirer holds 30% and the target makes a fresh issue to outsiders that dilutes the acquirer to 27%; if the acquirer then buys back up to its original 30% from the market, those purchases still register as gross acquisitions even though the acquirer's percentage holding has merely returned to where it began. The provision measures acquisitions, not net movement in percentage terms, and treats a fall caused by dilution as irrelevant to the gross tally. This asymmetry — sales and dilutions are ignored, purchases are always counted — is the conceptual heart of the rule and the point on which examination problems most often turn.

Fresh Issues, Preferential Allotment and the Pre/Post Rule

Clause (ii) of the Explanation addresses acquisition through fresh issuance: "in the case of acquisition of shares by way of issue of new shares by the target company, or where the target company has made an issue of new shares in any given financial year, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition." So if a promoter holding 30% subscribes to a preferential issue and emerges with 38%, the acquisition for Regulation 3(2) purposes is the 8-percentage-point jump, breaching the 5% limit and triggering an open offer (unless an exemption applies).

A noteworthy temporary relaxation arrived during the pandemic. By the SEBI (SAST) (Amendment) Regulations, 2020 (notified 16 June 2020), a proviso was inserted into Regulation 3(2) permitting acquisition beyond 5% and up to 10% of voting rights for the financial year 2020-21 only, and only in respect of acquisition by a promoter pursuant to a preferential issue of equity shares by the target company. This COVID-era measure was designed to let promoters infuse capital into distressed listed companies without a mandatory open offer; it was confined to FY 2020-21 and to the preferential-allotment route, and did not become a permanent feature. Candidates should note it as a discrete, time-limited carve-out rather than a general loosening of the 5% rule.

Distinguishing Regulation 3(1): Initial Trigger vs Consolidation

Regulation 3(1) and Regulation 3(2) are two halves of the same gatekeeping scheme but operate at different stages. Regulation 3(1) is the initial substantial-acquisition trigger: no acquirer may cross 25% (taken together with persons acting in concert) without an open offer. Regulation 3(2) is the consolidation trigger for those already above 25%: it polices the pace of further accumulation. The full architecture of the 25% gateway is examined in the chapter on the 25% threshold.

Regulation 3(3) bridges the two by providing that for the purposes of sub-regulations (1) and (2), an acquisition by any person such that that person's individual shareholding exceeds the stipulated thresholds also attracts the open-offer obligation, irrespective of whether there is a change in the aggregate shareholding of the persons acting in concert. This prevents a PAC group from reshuffling holdings internally to defeat the limits — a member crossing a threshold in its own name triggers the offer even if the group's combined stake is unchanged.

Carve-Outs: Regulation 10 Exemptions and Passive Increases

Not every acquisition that breaches 5% leads to an open offer. Regulation 10 lists automatic exemptions from the obligations under Regulations 3 and 4, several of which are relevant to creeping acquisition. Inter-se transfers among qualifying persons (such as immediate relatives, or persons named as promoters in the shareholding pattern for at least three years, subject to pricing and disclosure conditions) are exempt, as are acquisitions in the ordinary course by underwriters and certain scheme-based acquisitions. Reg 10(4) further protects an existing 25%-plus holder against an open offer where its voting rights increase merely passively — for instance, through a buy-back by the target company — provided the increase is not the result of a voluntary acquisition and certain conditions, including no acquisition of control, are met.

These carve-outs interact with the gross-acquisition rule: an exempt acquisition does not count towards the 5% limit, but a voluntary market purchase always does. Where a promoter wishes to consolidate by a larger margin in a single stroke rather than creep, the proper route is the voluntary open offer under Regulation 6, which carries its own eligibility and cooling-off conditions.

Creeping Breach and the Sanctity of the Offer: Akshya Infrastructure

The leading authority on the consequences of a creeping breach is Securities and Exchange Board of India v. Akshya Infrastructure Pvt. Ltd., (2014) 11 SCC 112. Akshya, part of the promoter group of MARG Limited, made successive market acquisitions between 2006 and 2011 that breached the 5% creeping-acquisition limit then prescribed under the 1997 Regulations, obliging it to make a public announcement and comply with the open-offer machinery. After SEBI conveyed its comments on the draft letter of offer following considerable delay, Akshya sought to withdraw the offer on the ground that the prolonged process and changed market conditions had rendered it uneconomical.

The Securities Appellate Tribunal permitted withdrawal, but the Supreme Court reversed, holding that a public offer once triggered cannot be withdrawn merely because it has become commercially unattractive to the acquirer. Permitting withdrawal on economic grounds would defeat the very purpose of the Takeover Code — protecting public shareholders and preserving the integrity of the open-offer mechanism. Akshya Infrastructure is therefore the standard authority for two propositions tested in examinations: that a creeping-acquisition breach hardens into a binding open-offer obligation, and that such an obligation is not escapable on grounds of unprofitability.

Purposive Reading of the Code: Swedish Match

Although decided under the 1997 Regulations and concerning an indirect acquisition rather than a creeping one, Swedish Match AB v. Securities and Exchange Board of India, (2004) 11 SCC 641, supplies the interpretive temper that courts bring to the Takeover Code as a whole. The Supreme Court upheld SEBI's direction that Swedish Match make a public offer to Wimco's shareholders, emphasising that the Takeover Regulations are investor-protection legislation to be construed purposively so as to secure the exit right of public shareholders whenever a substantial acquisition or change in control occurs.

The principle that the Code is to be read to advance, not frustrate, the public-shareholder exit informs how SEBI and the SAT approach the anti-avoidance features of Regulation 3(2) — in particular the gross-acquisition rule and the pre/post-allotment computation. An acquirer cannot use technical netting or structured issuances to defeat the 5% limit because the courts read the provision through the protective lens that Swedish Match articulated. For the way this purposive approach extends to acquisitions routed through holding structures, see indirect acquisition.

A Worked Computation

Consider Promoter P holding 48% of Target T on 1 April. During the financial year P makes the following on-market trades: buys 2% in May; buys 2% in July; sells 1% in August; buys 2% in November. The naive net figure is 2 + 2 − 1 + 2 = 5%, apparently within the limit. But under Explanation (i) only gross acquisitions count and the August sale is ignored: gross purchases total 2 + 2 + 2 = 6%, which exceeds 5%. P has breached Regulation 3(2) and must make an open offer for at least 26% under Regulation 7(1), subject to the MPNS ceiling.

Now vary the facts: P holding 48% subscribes to a preferential issue and emerges holding 55%. Under Explanation (ii) the quantum of acquisition is the difference between pre-allotment (48%) and post-allotment (55%) percentages — that is, 7 percentage points — again a breach. Had this occurred in FY 2020-21 through a preferential issue, the now-lapsed proviso would have raised the permissible headroom to 10%, so 7% would have been within limit; outside that window, the 5% ceiling governs and an open offer is required absent an exemption.

Interplay With Continual Disclosure (Regulation 29)

Creeping acquisition does not operate in isolation from the disclosure regime. Under Regulation 29(2), any acquirer holding 5% or more whose shareholding changes by 2% or more must disclose the aggregate holding and the change to the target company and the stock exchanges within two working days. These disclosure pegs run parallel to, and reinforce, the Regulation 3(2) limit: the market is alerted to incremental consolidation well before the 5% creeping ceiling is reached, and SEBI can monitor whether the gross-acquisition count is approaching the trigger.

Failure to make timely disclosures is itself an actionable default attracting monetary penalty under the SEBI Act, independent of any open-offer breach. In practice, many SEBI adjudication orders against promoters arise from simultaneous violations — breaching the creeping limit without an open offer and failing to make the corresponding Regulation 29 disclosures — underscoring that the substantive limit and the procedural disclosure obligations are complementary safeguards. The disclosure pegs of 5% and 2% should not be confused with the 25% gateway or the 5% creeping limit; they serve a transparency function and are triggered at lower thresholds and on a per-transaction-band basis rather than annually.

Consequences of a Breach and SEBI's Remedial Powers

Where Regulation 3(2) is breached without an open offer, the default does not simply lapse with time. Under Regulation 32 and the directions powers in the SEBI Act, the Board can direct the defaulting acquirer to make a delayed open offer along with interest for the period of delay, computed to compensate public shareholders for the lost opportunity to exit at the proper time. SEBI may, in addition or alternatively, direct divestment of the shares acquired in violation, restrain the acquirer from exercising voting or other rights over the excess shares, and impose monetary penalties. The remedy is calibrated to the protective object of the Code: the preferred outcome is to restore the exit opportunity that the public shareholders were denied.

The principle that a triggered offer cannot be wished away is reinforced by SEBI v. Akshya Infrastructure Pvt. Ltd., (2014) 11 SCC 112, discussed below, where the Supreme Court refused to let an acquirer escape an obligation it found uneconomical. Equally, the purposive lens of Swedish Match AB v. Securities and Exchange Board of India, (2004) 11 SCC 641, means that SEBI's remedial directions are read generously in favour of investors. An acquirer cannot, therefore, treat a creeping breach as a calculated risk to be settled cheaply later; the combination of delayed-offer-plus-interest, possible divestment, and penalty makes deliberate non-compliance commercially unattractive.

Common Examination Pitfalls

Several recurring errors should be guarded against. First, confusing the floor: Regulation 3(2) applies to holders of 25% or more; the 5% headroom is unavailable to a sub-25% acquirer, who is instead governed entirely by Regulation 3(1). Second, applying netting: the gross-acquisition rule in Explanation (i) is absolute — intervening sales and dilutions are disregarded. Third, treating the open-offer size as the excess sliver: the obligation, once triggered, is for the minimum 26% under Regulation 7(1), not for the 0.5% by which 5% was overshot.

Fourth, over-generalising the 2020 relaxation: the 10% preferential-issue headroom was confined to FY 2020-21 and to promoter preferential allotments only, and has lapsed. Fifth, forgetting the MPNS ceiling: even within the 5% headroom, the first proviso forbids any acquisition that would push the aggregate above the maximum permissible non-public shareholding. A clean answer states the band (25% to MPNS), the limit (more than 5% per financial year), the computation (gross only, pre/post for fresh issues), and the consequence (open offer for at least 26%). For the broader machinery this feeds into, return to the SEBI Takeover Code hub.