Mandatory Open Offer Size (Regulation 7)

Regulation 3 and Regulation 4 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 tell you when an open offer is triggered; Regulation 7 tells you how large that offer must be. The headline number is deceptively simple, a minimum of twenty-six per cent of the target's total shares, but the regulation carries a web of caps, provisos and consequences that examiners love to test. This chapter unpacks the 26% mandatory floor, the 10% voluntary offer, the maximum permissible non-public shareholding ceiling that quietly governs the whole arithmetic, the proportionate reduction mechanism, and the judicial gloss that has hardened around offer size since the regime replaced the 1997 Code.

Where Regulation 7 sits in the scheme

The SAST architecture separates the question of liability from the question of quantum. Regulations 3, 4 and 5 create the obligation to make an open offer, the substantive triggers being a substantial acquisition of 25% or more of voting rights, an acquisition of control, and an indirect acquisition. Regulation 6 supplies the optional route of a voluntary offer. Once any of these provisions bites, the acquirer must turn to Regulation 7 to compute the size of the offer and to Regulation 8 to compute the price. The two are independent variables: a perfectly priced offer that is undersized is non-compliant, and vice versa.

This division matters because aspirants frequently conflate the trigger threshold with the offer size. The 25% figure in Regulation 3(1) is the line that, when crossed, compels an offer; the 26% figure in Regulation 7(1) is the minimum quantum the resulting offer must seek. They are different numbers serving different functions, and Regulation 7 is the provision that governs only the second. For the upstream question of when the duty arises, see Trigger for Open Offer; for the full regulatory map, see the SEBI Takeover Code hub.

Regulation 7(1): the 26% minimum floor

Regulation 7(1) provides that the open offer for acquiring shares made by an acquirer and persons acting in concert under Regulation 3 and Regulation 4 shall be for at least twenty-six per cent of the total shares of the target company, taken as of the tenth working day from the closure of the tendering period. Three features deserve attention. First, it is a floor, not a ceiling, an acquirer is free to offer for more, and indeed often does so where the strategic objective is to acquire a controlling block or to consolidate. Second, the percentage is computed against "total shares" of the target as on the reference date, which builds in any change in the share base (such as conversion of convertible instruments or issue of shares) up to the tenth working day after the tendering period closes, rather than freezing the denominator at the announcement date. Third, the obligation attaches to the acquirer together with persons acting in concert, so concert-party holdings cannot be used to fragment or dilute the offer obligation.

The drafting choice of a fixed statutory minimum, rather than a sliding scale tied to the size of the acquisition, reflects a deliberate policy that the exit opportunity for public shareholders should be substantial and predictable. The acquirer cannot tailor a token offer to the precise size of the triggering acquisition; whether the trigger is a hair over 25% or a large block, the minimum exit window opened to the public is the same 26%.

Why 26% and not 20% or 100%

The 26% figure is an artefact of the transition from the 1997 Regulations, under which the minimum offer was 20% of the voting capital. When the Takeover Regulations Advisory Committee chaired by C. Achuthan submitted its report in 2010, it recommended a radical move to a 100% open offer, the logic being that a change of control should entitle every public shareholder to a complete exit at the control premium, not merely a pro-rata partial exit. SEBI, however, declined to adopt the 100% proposal, principally because requiring acquirers to fund the purchase of the entire public float would have made control acquisitions prohibitively expensive and would have shrunk the pool of feasible acquirers in a market where leveraged acquisition finance was thin.

The compromise was to raise the minimum from 20% to 26%. The choice of 26% is not arbitrary: when combined with a pre-existing holding at or near the 25% trigger, a successful 26% offer can push an acquirer past the 50% mark and confer clear majority control, while still leaving a meaningful public float intact. This evolution is treated more fully in Introduction and Evolution from the 1997 Regulations; for the present chapter the takeaway is that 26% is a calibrated policy figure balancing minority exit against acquirer feasibility.

Regulation 6 and the size of a voluntary offer

Regulation 7 governs the quantum of mandatory offers under Regulations 3 and 4, but the SAST scheme also permits a voluntary open offer under Regulation 6. A voluntary offer is available to an acquirer who already holds 25% or more but less than the maximum permissible non-public shareholding, and who has not acquired any shares of the target in the immediately preceding fifty-two weeks without attracting an obligation to make an open offer. The minimum size of a voluntary offer is different: it must be for at least such number of shares as would entitle the holders to exercise an additional ten per cent of the total shares of the target, subject to the overall cap that the offer cannot take the acquirer past the maximum permissible non-public shareholding.

The voluntary route carries its own discipline. An acquirer who has made a voluntary offer is barred, except by way of another voluntary offer, from acquiring further shares for a period of six months after completion of the offer. The interaction between the 26% mandatory floor and the 10% voluntary minimum is a favourite examination point: the smaller voluntary minimum exists because a Regulation 6 offer is, by definition, made by someone already inside the gate consolidating an existing position, rather than by a new entrant seizing control. The mechanics of creeping consolidation that frame this provision are developed in Creeping Acquisition.

The 75% ceiling: maximum permissible non-public shareholding

The single most important constraint sitting above Regulation 7 is the maximum permissible non-public shareholding. Under the listing framework and the Securities Contracts (Regulation) Rules, 1957, every listed company (other than specified public sector undertakings) must maintain a minimum public shareholding of 25%, which means non-public (promoter and acquirer) holding cannot ordinarily exceed 75%. Regulation 7 is expressly subordinated to this ceiling. An open offer, however large the acquirer might wish it to be, cannot be structured so as to take the acquirer's resulting holding above the maximum permissible non-public shareholding.

This produces a familiar squeeze in practice. An acquirer who already holds, say, 60% and triggers a fresh obligation cannot make a full 26% offer, because acceptance in full would carry the holding to 86%, well past 75%. Regulation 7 therefore caps the offer at the headroom available below the ceiling. The denominator on which the cap operates is the same "total shares" reference used in Regulation 7(1), and the cap is applied through the proportionate reduction mechanism examined below. The interaction between the 26% floor and the 75% ceiling is the analytical heart of the regulation: the floor sets the minimum the public must be offered, while the ceiling can compress that offer downward where the acquirer is already heavily invested.

Proportionate reduction under the proviso to Regulation 7(4)

Where a full open offer would breach the 75% ceiling, the offer is not simply abandoned; it is scaled down. Regulation 7(4) and its proviso provide that the offer size is reduced proportionately so that the acquirer's resulting shareholding on completion does not exceed the maximum permissible non-public shareholding. In a typical letter of offer this appears as a recital that "the open offer size is subject to a proportionate reduction in accordance with the first proviso to Regulation 7(4) such that the resulting shareholding of the acquirer and the PACs on completion does not exceed 75% of the voting share capital."

The reduction is proportionate in the literal sense: every tendering shareholder has the same fraction of their tendered shares accepted, so that the burden of the cap is shared pro-rata across the public rather than borne by whoever tenders last. This preserves equality of treatment, a foundational principle of the takeover regime, while reconciling the acquirer's offer with the listing requirement. Aspirants should be able to perform the arithmetic: identify the acquirer's pre-offer holding, compute the headroom to 75%, and recognise that the offer is limited to that headroom with proportionate acceptance among tendering shareholders.

Where the ceiling is breached: the 12-month dilution duty

In some situations the acquirer's holding will exceed the maximum permissible non-public shareholding even after proportionate reduction, for example where the triggering transaction itself (such as a large negotiated block or an inter-se promoter transfer combined with the offer) pushes the holding above 75%. Regulation 7(4) then requires the acquirer to bring the non-public shareholding back down to the permissible level within the period stipulated under the Securities Contracts (Regulation) Rules, 1957, generally read as a maximum of twelve months from the completion of the open offer.

Two corollaries follow. First, the acquirer cannot use the open offer as a device to corner the entire float and then sit above the ceiling indefinitely; the public character of the listing must be restored within the year. Second, where the acquirer's intent is in fact to take the company private, that ambition cannot be pursued through Regulation 7 at all. Regulation 7(5) bars an acquirer who, pursuant to the offer, acquires shares taking the holding beyond the maximum permissible non-public shareholding from making a voluntary delisting offer under the delisting regulations unless a period of twelve months has elapsed from the date of completion of the offer. The open offer route and the delisting route are kept distinct, and the 26% offer cannot be repurposed as a backdoor delisting.

Regulation 7(6): who may participate in the offer

Regulation 7(6) clarifies that shares tendered in an open offer are to be accepted from all shareholders other than the acquirer, the persons acting in concert with the acquirer, and the parties to any underlying agreement (including persons deemed to be acting in concert). The provision prevents the acquirer or its concert parties from tendering into their own offer to manufacture acceptances or to manipulate the proportionate-reduction arithmetic. The offer is, in substance, an exit window opened exclusively for the genuine public, which is the entire rationale of the mandatory-offer obligation.

This dovetails with the definitional machinery of the Code. Whether a particular shareholder is a "person acting in concert" determines both whether their holding is aggregated for the trigger and whether they are excluded from tendering under Regulation 7(6). The concept is examined in detail in Definitions, and its mishandling is a recurring source of enforcement action.

Offer size in indirect acquisitions

The 26% floor applies with equal force where the trigger is an indirect acquisition under Regulation 5, that is, where control of the target is acquired through the acquisition of an upstream entity. The size of the resulting open offer is still computed under Regulation 7 against the total shares of the listed target. What changes in an indirect acquisition is principally the timing of the public announcement and the price computation, not the 26% size. Under the 1997 regime the leading authority on indirect acquisitions was Swedish Match AB v. SEBI (2004), where the Supreme Court upheld SEBI's direction that the foreign acquirer make a public offer to the shareholders of the Indian listed company whose control had been acquired indirectly through an overseas transaction. While the case arose under the older 20% offer and the 1997 Regulation 10, its principle, that an indirect change of control cannot escape the open-offer obligation owed to public shareholders, carries forward into the 2011 scheme and informs how Regulation 7 sizing attaches to Regulation 5 triggers. The detailed treatment of upstream triggers appears in Indirect Acquisition.

Offer size and the bar on withdrawal

A practical dimension of "offer size" is the acquirer's temptation, when the market price falls below the offer price, to abandon or shrink the committed offer. The courts have closed this door firmly. In SEBI v. Akshya Infrastructure Pvt. Ltd. (2014), the Supreme Court held that a voluntary open offer, once made, cannot be withdrawn merely because it has become economically unviable; the grounds for withdrawal are confined to the narrow circumstances enumerated in Regulation 23 (the 2011 successor to Regulation 27(1) of the 1997 Code), namely statutory refusal of a required approval, death of the sole acquirer, or conditions becoming impossible to fulfil for reasons beyond the acquirer's control.

The principle was reinforced in Pramod Jain v. SEBI (2016), where the Supreme Court refused to permit withdrawal of a hostile public offer for Golden Tobacco Ltd. on grounds of economic unviability, observing that the deletion of the old "impossibility of performance for economic reasons" ground was deliberate. The combined effect is that the committed offer size is sticky: an acquirer who announces an offer for 26% (or more) is locked into that quantum, save in the narrow exits the regulation allows. Examiners use these cases to test the proposition that the integrity of the offer, both its existence and its size, is protected against acquirer second-thoughts.

Conditional offers and minimum acceptance

Regulation 7 fixes the size the acquirer must offer to buy; it does not guarantee that the acquirer will end up buying that much, because acceptance depends on how many public shareholders tender. The SAST scheme permits, in defined circumstances, a conditional offer, an offer conditional upon a minimum level of acceptance. Where such a condition is permitted and the stipulated minimum acceptance is not achieved, the acquirer is relieved of the obligation to acquire any shares and the underlying agreement that triggered the offer stands rescinded. This is an important qualification to the 26% concept: the 26% is the minimum the acquirer must seek, but a validly conditional offer can lapse entirely if public response falls below the announced threshold.

The conditional-offer mechanism is hedged with safeguards to prevent its use as a tactical escape from a mandatory offer; in particular, an acquirer who has signed an underlying agreement cannot use an unrealistically high minimum-acceptance condition to defeat the exit the public is entitled to. The general rule remains that a mandatory offer for 26% is unconditional as to acceptance, and conditionality is the carefully bounded exception.

Size versus price: keeping Regulation 7 and Regulation 8 distinct

Because both are essential to a valid offer, students often blur Regulation 7 (size) with Regulation 8 (price). They answer different questions. Regulation 7 asks: how many shares must the public be invited to sell? The answer is a minimum of 26% (or 10% for a voluntary offer), subject to the 75% ceiling and proportionate reduction. Regulation 8 asks: at what price must those shares be bought? The answer is the highest of a set of statutory benchmarks, including the negotiated price under the triggering agreement, the highest price paid by the acquirer in the look-back period, and the volume-weighted average market price over defined windows.

The independence is consequential. An acquirer cannot trade a higher price for a smaller offer, nor a larger offer for a lower price; each parameter must independently satisfy its own minimum. The 1997-era jurisprudence under Swedish Match illustrates the point on the price side, where the Court engaged with the floor price owed to Wimco shareholders, while Akshya Infrastructure and Pramod Jain protect the size and existence of the offer. Together they show a regime that polices both dimensions to ensure the public receives a fair and adequately sized exit.

A worked example

Suppose an acquirer holds 24% of a target and signs an agreement to acquire a further 8%, taking the holding to 32% and crossing the 25% trigger under Regulation 3(1). The acquirer must make an open offer. Under Regulation 7(1) the minimum offer size is 26% of the target's total shares. There is no ceiling problem here, because even full acceptance would carry the holding to 58% (32% plus 26%), comfortably below 75%; the full 26% offer proceeds without proportionate reduction.

Now vary the facts: the acquirer already holds 58% and signs to acquire a further block of 5%, taking it to 63% and (because it remains a substantial acquirer) attracting an offer obligation on the relevant facts. A full 26% offer would notionally carry the holding to 89%, breaching the 75% ceiling. Regulation 7(4)'s proviso compels proportionate reduction: the offer is capped at the 12% headroom between 63% and 75%, and tendering shareholders have their shares accepted pro-rata. If, instead, the negotiated block itself took the acquirer above 75%, the acquirer would additionally have to dilute back below the ceiling within twelve months under Regulation 7(4) and would be barred from a delisting offer for twelve months under Regulation 7(5). Working these scenarios is the most reliable way to internalise how the floor, the ceiling and the reduction mechanism interlock.

Exam strategy and common traps

For judiciary and CLAT-PG purposes, anchor the answer on four numbers and their sources: 26% (Regulation 7(1) mandatory minimum), 10% (Regulation 6 voluntary minimum), 75% (the maximum permissible non-public shareholding ceiling under the SCRR, 1957), and twelve months (the dilution and delisting periods under Regulation 7(4) and 7(5)). The classic trap is to state the offer size as 25%, confusing it with the trigger threshold, or as 20%, importing the repealed 1997 figure. A second trap is to forget that the 26% floor is read down by the 75% ceiling through proportionate reduction.

On case law, deploy Akshya Infrastructure and Pramod Jain for the proposition that the committed offer cannot be withdrawn or shrunk for economic reasons, and reserve Swedish Match for the indirect-acquisition and price context, taking care to flag that it was decided under the 1997 Regulations. Finally, always separate size (Regulation 7) from price (Regulation 8) and from trigger (Regulations 3 to 5); an answer that keeps these three axes distinct will read as far more authoritative than one that runs them together.