An open offer fixes how much an acquirer must pay departing shareholders — but Regulation 9 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 governs the equally consequential question of in what form that price is delivered. Cash is the gold standard, yet the Code deliberately permits payment in listed equity, rated secured debt and convertibles, subject to layered safeguards designed to ensure that a public shareholder forced to exit is never fobbed off with illiquid or worthless paper. This chapter unpacks each permitted mode, the mandatory cash-option triggers, the eligibility conditions for securities consideration, the rules on differential pricing and valuation, and how the payment promise is secured through escrow and judicially policed against opportunistic withdrawal.
Why the Mode of Payment Is Regulated at All
The mandatory open offer is the Takeover Code's central protective device: when an acquirer crosses the substantial-acquisition or control thresholds, the public shareholders of the target acquire a right to exit at a regulated price. (See our chapter on the trigger for an open offer and the 25% substantial-acquisition threshold.) That exit right would be hollow if the acquirer could discharge it in any currency it chose. A shareholder promised ₹100 in cash is in a fundamentally different position from one handed ₹100 worth of an unlisted, thinly traded or distressed security that cannot readily be sold.
Regulation 9 therefore sits alongside Regulation 8 (offer price) as the second pillar of consideration regulation. Where Regulation 8 answers “how much,” Regulation 9 answers “in what form, and on what conditions.” The policy is consistent throughout the Code: the public shareholder must be left no worse off in liquidity or value than if the acquirer had simply written a cheque. As the Supreme Court repeatedly stressed in the takeover jurisprudence — from Daiichi Sankyo Co. Ltd. v. Jayaram Chigurupati, (2010) 7 SCC 449, to Nirma Industries Ltd. v. SEBI, (2013) 8 SCC 20 — the open offer is a solemn, investor-protective obligation, not a commercial convenience the acquirer may shape to suit its balance sheet.
The Four Permitted Modes — Regulation 9(1)
Regulation 9(1) is an exhaustive menu. The offer price may be paid only: (a) in cash; (b) by issue, exchange or transfer of listed shares in the equity share capital of the acquirer or of any person acting in concert (PAC); (c) by issue, exchange or transfer of listed secured debt instruments issued by the acquirer or a PAC, carrying a rating not below investment grade from a credit rating agency registered with SEBI; or (d) by issue, exchange or transfer of convertible debt securities entitling the holder to acquire listed shares in the equity capital of the acquirer or a PAC; or a combination of these modes.
Two features deserve emphasis. First, every non-cash mode is anchored to listed securities (or, for convertibles, securities convertible into listed shares) — there is no room for unlisted paper, because unlisted scrip cannot be sold on a transparent market. The concept of “person acting in concert” that recurs here is examined in our definitions chapter; in Daiichi Sankyo v. Jayaram Chigurupati, (2010) 7 SCC 449, the Supreme Court clarified that PAC status demands a shared common objective to acquire, not mere affiliation. Second, secured debt must be investment-grade rated and convertibles must lead back to listed equity, so that the shareholder receiving paper always holds something with an ascertainable market value and a credible issuer.
Cash as the Default Currency
Cash is the simplest and least contentious mode, and the Code treats it as the baseline against which every other mode is measured. Where consideration is wholly or partly in cash, the acquirer's payment obligation is unambiguous and the escrow mechanism in Regulation 17 directly secures it. Most Indian open offers — whether triggered by a negotiated share-purchase agreement, by creeping acquisition, or by an indirect acquisition of the target through an upstream entity — are settled in cash precisely because it avoids the eligibility conditions, valuation disputes and rating requirements that attach to securities consideration.
The primacy of cash also surfaces in the fallback rules: at several points Regulation 9 provides that, if the conditions for paying in securities are not met, “the offer price shall be paid in cash only.” In other words, securities consideration is a privilege conditioned on stringent eligibility; cash is the residual entitlement that protects the shareholder whenever those conditions fail.
The Mandatory Cash Option — The 52-Week / 10% Trigger
The first proviso to Regulation 9(1) contains one of the Code's most important investor safeguards. Where the shares acquired by the acquirer and PACs during the 52 weeks immediately preceding the date of the public announcement, and paid for in cash, constitute more than 10% of the voting rights in the target, the open offer must include an option for the shareholders to receive the offer price in cash. The logic is one of parity: if the acquirer was willing to pay cash to selling shareholders in the recent run-up to the offer, it cannot relegate the remaining public shareholders to paper. To allow otherwise would permit the acquirer to discriminate between the negotiated sellers (paid cash) and the captive minority (paid scrip).
Crucially, the proviso also provides that a shareholder who does not exercise an option is deemed to have elected to receive cash. The default thus runs in the shareholder's favour: silence is read as a preference for the most liquid currency, not as consent to securities. This deeming rule prevents acquirers from exploiting shareholder inertia to push paper onto those who never affirmatively chose it.
The 52-week look-back period is deliberately co-extensive with one of the reference windows used in the offer-price computation under Regulation 8, so that the historical cash purchases that drive the offer price also drive the entitlement to a cash exit. The proviso also captures shares the acquirer has merely agreed to acquire, not only those actually acquired — a drafting choice that defeats the obvious avoidance device of deferring completion of a cash purchase until after the announcement. In practice, the cash-option trigger is satisfied in most negotiated takeovers, because the acquirer typically buys a substantial block from the outgoing promoters for cash before launching the open offer, and that block alone usually exceeds the 10% threshold.
Eligibility Conditions for Securities Consideration — Regulation 9(2)
Regulation 9(2) sets the gateway that securities offered as consideration must clear. The conditions are cumulative and demanding, reflecting the principle that paper handed to an exiting shareholder must be as good as money. In substance, the securities (or the underlying listed shares, in the case of convertibles) must satisfy the following: they must be listed and frequently traded on a stock exchange on the date of the public announcement and have been listed for at least two years immediately preceding that date; the issuer must have redressed at least 95% of investor grievances; the issuer must have been in material compliance with its listing obligations for at least two years; and the cumulative impact of audit qualifications in the issuer's annual accounts for the immediately preceding three financial years must not exceed 5% of the net profit or loss after tax for those years.
Where any of these conditions is not satisfied — most directly, where the issuer has not been in material listing compliance — Regulation 9(2) mandates that the offer price be paid in cash only. The audit-qualification ceiling deserves particular note: a qualification exceeding the 5% threshold signals that the issuer's stated profits or losses may be materially misstated, which would distort the very value of the paper being offered. The Code does not ask the shareholder to bear that uncertainty; it converts the consideration to cash instead.
Why Investment-Grade and Frequent Trading? The Liquidity Rationale
The two recurring qualifiers across Regulation 9 — that secured debt be rated not below investment grade, and that equity be frequently traded — share a single rationale: the public shareholder forced out of the target must be able to convert the consideration into cash at a fair, observable price without undue delay. An investment-grade rating signals that the issuer is unlikely to default on the secured instrument, so the shareholder is not made an unwilling creditor of a fragile borrower. The frequent-trading requirement ensures that listed equity offered as consideration trades in sufficient volume that the recipient can sell at a market-determined price rather than at a steep illiquidity discount.
This is the same investor-protective philosophy the Supreme Court articulated, in the pricing context, in Daiichi Sankyo Co. Ltd. v. Jayaram Chigurupati, (2010) 7 SCC 449 — that the Takeover Code's machinery exists to guarantee the public shareholder a fair and effective exit, not a notional one. A mode-of-payment regime that allowed unrated debt or illiquid scrip would defeat that guarantee even while nominally honouring the offer price. The frequent-trading and investment-grade filters are therefore not technicalities; they are the operational core of the promise that paper consideration will be as good as cash.
Securities Requiring Statutory Approvals — Regulation 9(4)
Where the consideration involves the issue of fresh securities by the acquirer or a PAC, that issue will often require corporate and regulatory steps — board and shareholder approvals, in-principle listing approvals from the stock exchange, and compliance with the SEBI (ICDR) Regulations. Regulation 9(4) addresses this directly: the acquirer must ensure that all such statutory and regulatory approvals required for the issue and listing of the offered securities are obtained before the commencement of the tendering period. Tendering is the window during which target shareholders accept the offer and surrender their shares; it would be intolerable for shareholders to tender against a promise of securities that the acquirer might later be unable to issue or list.
Consistent with the Code's overall design, Regulation 9(4) again carries a cash fallback: if the requisite approvals are not in place, the offer price is to be paid in cash. The provision thus eliminates execution risk for the shareholder — either the paper is fully approved and ready before tendering opens, or the shareholder is paid in cash.
This timing rule has an important sequencing consequence for deal planning. Because listing and issuance approvals for fresh securities can take months — and because the open-offer timetable itself runs on tight statutory deadlines from public announcement to detailed public statement to letter of offer to tendering — an acquirer that wishes to pay in its own paper must begin the approval process at the very outset, often before the public announcement. Any slippage forces a conversion to cash, which can materially change the financing the acquirer must arrange. For this reason, securities consideration is most commonly seen in large strategic combinations where the acquirer's equity is already liquid and the issuance machinery is well-resourced, rather than in opportunistic acquisitions.
Differential Pricing Across Options — Regulation 9(3)
When an open offer gives shareholders a choice — cash, securities, or a combination — the acquirer may price each option differently. Regulation 9(3) expressly permits this, subject to two safeguards. First, each option must independently comply with the minimum offer-price requirements of Regulation 8; the acquirer cannot use a securities option to undercut the floor price that the regulated pricing formula guarantees. Our chapter on the substantial-acquisition threshold situates Regulation 8 within the broader pricing architecture. Second, the detailed public statement and the letter of offer must contain a clear justification for the differential pricing, so that shareholders can make an informed election rather than being steered by opaque arithmetic.
Differential pricing recognises a commercial reality: a shareholder who takes acquirer shares assumes market risk and a longer holding horizon, while a cash recipient takes a certain, immediate sum. The Code permits the acquirer to reflect that difference in price, but only transparently and only above the regulatory floor. This balances flexibility for the acquirer against the disclosure-and-floor protections that animate the entire offer-price regime.
Valuation and the Exchange Ratio — Regulations 9(5) and 9(6)
Paying in securities raises a valuation question: how many acquirer shares (or how much debt) equal the offer price per target share? Regulation 9(5) supplies the valuation rule for the offered securities, valuing them at the higher of the relevant volume-weighted average market prices over the prescribed reference periods, mirroring the logic of the Regulation 8 pricing formula so that the paper is not under-valued to the shareholder's detriment.
Regulation 9(6) then governs the exchange ratio — the conversion mechanic between the target's shares and the acquirer's securities. The exchange ratio must be determined and certified by an independent merchant banker (other than the manager to the open offer) or an independent chartered accountant of at least ten years' standing. The independence requirement is the safeguard: the very party structuring the deal cannot also bless the ratio that decides how much paper the public shareholder receives. By insisting on a disinterested professional with substantial experience, Regulation 9(6) injects an external check precisely where the acquirer's incentive to skew the ratio is greatest.
Securing the Promise — Escrow under Regulation 17
The mode of payment is meaningless unless the payment itself is assured. Regulation 17 requires the acquirer, not later than two working days before the detailed public statement, to create an escrow account as security for performance of its obligations. The escrow amount is graduated: 25% of the consideration up to ₹500 crore, plus 10% of the balance beyond ₹500 crore. The escrow may take the form of cash deposited with a scheduled commercial bank, a bank guarantee in favour of the manager to the offer, or a deposit of frequently traded and freely transferable equity shares with appropriate margin.
A vital cross-link to Regulation 9 appears here: where the escrow is provided by way of bank guarantee or securities rather than cash, the acquirer must additionally deposit at least 1% of the total consideration in cash with a scheduled commercial bank. This minimum cash buffer ensures liquidity to meet immediate obligations and underscores the Code's preference for cash as the ultimate backstop — the same preference that runs through Regulation 9's fallback provisions. The escrow is not released until well after the consideration has actually been paid to the tendering shareholders.
The Sanctity of the Offer — No Walking Away from the Payment
Because the mode and amount of payment crystallise into a binding obligation once the public announcement is made, the courts have been emphatic that an acquirer cannot simply abandon the offer when payment becomes inconvenient. In Nirma Industries Ltd. v. SEBI, (2013) 8 SCC 20, the Supreme Court refused to let an acquirer withdraw a 2005 open offer for Shree Rama Multi-Tech Ltd. on the plea that fraud by the target's promoters had made the deal a bad bargain. The Court read the withdrawal grounds in the erstwhile Regulation 27 of the 1997 Code strictly, holding that an offer may be withdrawn only where its performance has become virtually impossible — not merely uneconomic. An acquirer, the Court said, is responsible for its own investment diligence.
That principle was reaffirmed in SEBI v. Akshya Infrastructure (P) Ltd., (2014) 11 SCC 112, where the Court held that even regulatory delay — there, a prolonged pendency before SEBI — does not entitle an acquirer to withdraw a voluntary open offer that has become commercially unattractive, and in Pramod Jain v. SEBI (Supreme Court, 7 November 2016), affirming Pramod Jain v. SEBI, 2014 SCC OnLine SAT 128, where a hostile bidder for Golden Tobacco Ltd. was held to its announced offer notwithstanding changed circumstances. The takeaway for the mode-of-payment analysis is direct: the acquirer's promise to pay — in whatever permitted currency — is locked in by the announcement and policed by escrow and judicial scrutiny alike.
Although Nirma, Akshya and Pramod Jain all arose under Regulation 27 of the superseded 1997 Regulations, their reasoning carries directly into the 2011 Code, whose withdrawal provision (Regulation 23) is similarly narrow. The continuity matters for mode of payment because it means an acquirer cannot escape an inconvenient payment obligation — for instance, where its own shares offered as consideration have fallen in value, or where the cash cost has ballooned — by simply walking away. Having chosen its currency and announced its terms, the acquirer must perform, and the escrow under Regulation 17 stands ready to fund that performance if the acquirer falters.
Interplay with Offer Price and the 1997 Regime
Regulation 9 cannot be read in isolation from Regulation 8. The minimum offer price determined under Regulation 8 is the value that every mode of payment must deliver: cash must equal it, securities must be valued up to it, and each option in a differential-pricing structure must independently meet it. The mode of payment is thus the delivery mechanism for a value the Code fixes elsewhere. Readers tracing how that pricing floor evolved should consult our chapter on the evolution from the 1997 Regulations.
The 2011 Code's mode-of-payment framework is markedly more elaborate than the corresponding provisions of the 1997 Regulations. The earlier regime addressed payment in cash, shares and secured instruments but with thinner conditionality. The 2011 reform — following the Achuthan Committee's recommendations — tightened the eligibility filters for securities (the two-year listing, frequent-trading, grievance-redressal, listing-compliance and audit-qualification tests), formalised the independent-valuer requirement for exchange ratios, and entrenched the cash-option default. The trajectory is unmistakably towards stronger protection for the exiting public shareholder.
Practical Compliance Checklist for the Acquirer
For an acquirer structuring the consideration, Regulation 9 yields a working sequence. First, decide the currency: cash is cleanest; any securities component immediately invokes the Regulation 9(2) eligibility tests and the Regulation 9(4) approvals timeline. Second, check the 52-week cash-acquisition history — if cash purchases exceed 10% of voting rights, a cash option is mandatory and non-electing shareholders default to cash. Third, if securities are offered, confirm two-year listing, frequent trading, 95% grievance redressal, two-year listing compliance and the 5% audit-qualification ceiling; failing any, revert to cash.
Fourth, obtain every statutory and listing approval before the tendering period opens (Regulation 9(4)). Fifth, if options carry different prices, ensure each clears the Regulation 8 floor and justify the differential in the detailed public statement and letter of offer (Regulation 9(3)). Sixth, value the securities under Regulation 9(5) and have the exchange ratio certified by an independent merchant banker or a chartered accountant of at least ten years' standing (Regulation 9(6)). Finally, fund the escrow under Regulation 17 — including the 1% minimum cash component where escrow is by guarantee or securities. A full survey of the Code sits on our SEBI Takeover Code hub.
Frequently asked questions
What are the permitted modes of payment under Regulation 9 of the SEBI (SAST) Regulations, 2011?
Regulation 9(1) permits four modes, or a combination of them: cash; listed equity shares of the acquirer or a person acting in concert; listed secured debt instruments rated not below investment grade by a SEBI-registered credit rating agency; and convertible debt securities entitling the holder to acquire listed shares of the acquirer or a PAC. Unlisted securities are not permitted.
When must an open offer compulsorily include a cash option?
Under the first proviso to Regulation 9(1), where the shares acquired in cash by the acquirer and PACs during the 52 weeks before the public announcement exceed 10% of the target's voting rights, the offer must give shareholders a cash option. A shareholder who does not exercise any option is deemed to have opted for cash.
What conditions must securities meet to be offered as consideration?
Per Regulation 9(2), the securities (or underlying listed shares) must be frequently traded and listed for at least two years before the public announcement; the issuer must have redressed at least 95% of investor grievances and been in material listing compliance for two years; and audit qualifications over the preceding three years must not exceed 5% of net profit or loss after tax. Otherwise the price is paid in cash only.
Can the acquirer price the cash and securities options differently?
Yes. Regulation 9(3) allows differential pricing across options, provided each option independently satisfies the minimum offer-price requirements of Regulation 8 and the detailed public statement and letter of offer disclose a justification for the differential pricing.
Who determines the exchange ratio when payment is in securities?
Under Regulation 9(6), the exchange ratio must be certified by an independent merchant banker (other than the manager to the open offer) or an independent chartered accountant with at least ten years' experience. Regulation 9(5) requires the offered securities to be valued at the higher of the prescribed volume-weighted average prices.
Can an acquirer withdraw the offer if payment becomes too expensive?
No. In Nirma Industries Ltd. v. SEBI, (2013) 8 SCC 20, and SEBI v. Akshya Infrastructure (P) Ltd., (2014) 11 SCC 112, the Supreme Court held that an open offer can be withdrawn only where performance is virtually impossible, not merely uneconomic. The payment obligation, once announced, is binding and is secured by escrow under Regulation 17.