The instant a public announcement is made, the board of directors of the target company ceases to be a free agent. Regulation 26 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 freezes the company in its tracks: business must continue in the ordinary course, value-shifting decisions need a special resolution by postal ballot, the independent directors must speak to shareholders, and the board must extend a level playing field to every acquirer. This chapter unpacks each limb of Regulation 26, traces its lineage to Regulation 23 of the 1997 Code, and shows through Nirma Industries, Akshya Infrastructure and Pramod Jain how courts have policed both acquirer and board against frustrating an offer once made.
Why the Code Restrains the Target Board
An open offer is the mechanism by which the Takeover Code guarantees an exit at a fair price to the public shareholders of a target company. But the offer plays out over weeks, and during that window the incumbent board, often aligned with outgoing promoters, controls the company's assets, its capital structure and its information flows. Left unchecked, a hostile or self-interested board could gut the very company the acquirer has bid for, deploy the company's resources to defeat the bid, or starve shareholders of the information they need to tender. Regulation 26 exists to neutralise this asymmetry. It does not forbid the board from running the company; it forbids the board from changing the character of the bargain on which acquirer and shareholders are proceeding.
The comparative backdrop sharpens the point. In jurisdictions such as the United States, boards enjoy considerable latitude to mount defensive measures, subject to fiduciary review; the Delaware case law on poison pills and the enhanced-scrutiny standards is a body of judge-made doctrine. The United Kingdom and India, by contrast, adopt a non-frustration philosophy rooted in shareholder primacy: the board may not take action capable of frustrating a bona fide offer except with the sanction of the shareholders themselves. Regulation 26 is India's statutory expression of that philosophy. The board is recast, for the duration of the offer, from a strategic decision-maker into a steward whose discretion over value-shifting acts is suspended and handed to the general body of shareholders.
The provision must be read alongside the related framework of the Code. The trigger for an open offer brings the offer period into being; Regulation 26 then governs how the target's board must conduct itself throughout that period; and Regulation 27 places parallel obligations on the acquirer. For the historical arc of these duties, see the evolution from the 1997 Regulations and the consolidated SEBI Takeover Code hub.
When the Obligations Bite: The Offer Period
Regulation 26 is anchored to the "offer period", a defined term under Regulation 2(1)(p). The offer period runs from the date of the agreement to acquire shares or voting rights, or the date of the public announcement, whichever triggers the obligation, and continues until the completion of payment of consideration to the shareholders who have accepted the open offer, or until the offer is withdrawn under Regulation 23. The board's fetters under Regulation 26 attach for the whole of this period. Because the duties are tied to the offer period and not merely to the formal letter of offer, the restraints operate from a very early stage, capturing the vulnerable window between announcement and settlement.
It is worth contrasting this with the moment the acquirer's own conduct obligations crystallise. The acquirer's duty to keep the escrow funded and to not sell shares during the offer period sits in Regulation 25 and Regulation 22. The board's duties under Regulation 26 are independent of, and run in parallel with, those acquirer-side duties. A reader should keep the two columns distinct: Regulation 26 is the target board's code of conduct; Regulation 25 and 27 are the acquirer's.
Regulation 26(1): Conduct of Business in the Ordinary Course
The foundational obligation is in Regulation 26(1): upon a public announcement of an open offer being made, the board of directors of the target company must ensure that during the offer period the business of the target company is conducted in the ordinary course consistent with past practice. The phrase carries two limbs. "Ordinary course" looks to the nature of the transaction; "consistent with past practice" looks to the company's own historical pattern. A transaction may be ordinary for the industry yet abnormal for the particular company, and Regulation 26(1) catches both.
The rationale is preservation. The acquirer has priced its bid against the company as it stood at announcement. If the board were free to reshape operations, divest divisions or take on unusual liabilities mid-offer, the shareholders deciding whether to tender and the acquirer committed to buying would both be deciding against a moving target. Regulation 26(1) freezes the operational baseline so that the open offer remains a meaningful exit at a meaningful price. It is a standard of conduct, enforceable through SEBI's directions power under Section 11 and 11B of the SEBI Act, 1992.
Regulation 26(2): The Postal-Ballot Lock on Value-Shifting Acts
Regulation 26(2) is the heart of the chapter. During the offer period, unless the approval of the shareholders of the target company by way of a special resolution by postal ballot is obtained, the board of directors of the target company or any of its subsidiaries must not undertake a specified list of value-shifting acts. The prohibited acts include: alienating any material assets whether by way of sale, lease, encumbrance or otherwise, or entering into any agreement to do so, outside the ordinary course of business; effecting any material borrowings outside the ordinary course of business; issuing or allotting any authorised but unissued securities carrying voting rights (subject to carve-outs for allotments pursuant to conversions, or in discharge of prior public or rights issue obligations); implementing a buy-back of shares or effecting any other change to the capital structure; entering into, amending or terminating any material contracts outside the ordinary course of business; and accelerating any contingent vesting of a right to which an employee or director would otherwise not be entitled.
The architecture is deliberate. The board is not absolutely barred from these acts; it is barred from doing them on its own authority. By routing such decisions through a special resolution by postal ballot, the Code returns the decision to the very shareholders whose exit the offer protects. The supermajority threshold and the postal-ballot mode ensure that dispersed public shareholders, not a board controlled by the outgoing promoter, decide whether a defensive or value-shifting step is in the company's interest. This is the Indian Code's answer to the "poison pill" debate: rather than a board-veto or a board-defence model, India adopts a shareholder-primacy model in which frustrating action is permissible only with shareholder sanction.
Regulation 26(3): Extending the Discipline to Subsidiaries
A board minded to circumvent Regulation 26(2) might route a value-shifting act through a subsidiary, where the target's shareholders have no direct vote. Regulation 26(3) closes this gap. In any general meeting of a subsidiary of the target company in respect of the matters referred to in Regulation 26(2), the target company and its subsidiaries must vote in a manner consistent with the special resolution passed by the shareholders of the target company. In effect, the parent's shareholder mandate flows down the corporate chain. The subsidiary cannot become a back door for asset stripping or capital restructuring that the parent's shareholders have not sanctioned.
This anti-avoidance design echoes the broader philosophy of the Code, which repeatedly looks through corporate form to economic substance, as it does in the rules on indirect acquisition. The drafters anticipated that sophisticated boards would test the perimeter of the restraint, and Regulation 26(3) extends that perimeter to the consolidated enterprise.
Regulation 26(4): No Record Date During the Tendering Period
Regulation 26(4) addresses timing mischief around corporate actions. It restrains the board from fixing any record date for a corporate action on or after the third working day prior to the commencement of the tendering period and until the expiry of the tendering period. The tendering period is the window during which shareholders submit their shares in acceptance of the offer. A record date set in this sensitive window could distort which shareholders are entitled to a dividend, bonus or other benefit, complicating the tender mechanics and potentially being used to influence whether shareholders tender or hold. By keeping record dates clear of the tendering window, the Code protects the integrity and simplicity of the acceptance process.
Regulation 26(5): Furnishing the Shareholder List to the Acquirer
Regulation 26(5) imposes a positive duty of cooperation. Upon receipt of a request from the acquirer, the board of the target company must furnish to the acquirer, within two working days, a list of shareholders as contained in the register of members of the target company, and a list of persons whose applications for registration of transfer of shares are pending with the company. The acquirer needs this information to dispatch the letter of offer and to administer the offer to every eligible shareholder. A board that withheld or delayed the register could effectively sabotage the offer's reach. The two-working-day deadline makes the duty time-bound and enforceable, and converts what might otherwise be a chokepoint into a ministerial obligation.
Regulation 26(6): The Committee of Independent Directors
Regulation 26(6) introduces the central governance safeguard for shareholders weighing an offer. The board of directors of the target company must constitute a committee of independent directors to provide reasoned recommendations on the open offer to the shareholders of the target company, and the target company must publish such recommendations. The committee is expressly empowered to seek external professional advice at the expense of the target company. The provision recognises that public shareholders are typically unable to evaluate the fairness and adequacy of an offer on their own and need a credible, conflict-free assessment from directors who are not aligned with either the acquirer or the outgoing promoter.
Two points deserve emphasis. First, the requirement is for a committee of independent directors, deliberately excluding executive and promoter-nominee directors whose loyalties may be divided. Second, the recommendation must be "reasoned": a bare "accept" or "reject" is insufficient; the committee must disclose the basis of its view, including the voting pattern within the committee where members differ. SEBI has prescribed a standard format (Format under the Master Circular) for these recommendations precisely to ensure substance over ritual.
Regulation 26(7): Publishing the Recommendations on Time
Regulation 26(7) governs the timing and mode of publication. The committee's written reasoned recommendations on the open offer must be published at least two working days before the commencement of the tendering period, in the same newspapers in which the detailed public statement was published, and simultaneously sent to SEBI, the stock exchanges and the manager to the offer. The two-working-day cushion is calibrated so that shareholders receive the independent assessment in time to make an informed tendering decision but not so early that material developments are missed. Tying the publication to the same newspapers as the detailed public statement ensures the recommendation reaches the same audience that received the offer.
Read together, Regulation 26(6) and 26(7) embody the disclosure-and-fairness spine of the Code: the acquirer states its price and intent through the public announcement and detailed public statement, and the target's independent directors respond on the record, giving shareholders both sides of the ledger before they decide.
Regulation 26(8) and (9): Facilitating Verification and Levelling the Field
Regulation 26(8) requires the board to facilitate the acquirer in verification of securities tendered in acceptance of the offer. This is the mirror image of Regulation 26(5): just as the board must hand over the register at the start, it must assist in checking the validity and ownership of tendered shares as acceptances come in, so that genuine shareholders are paid and the settlement is clean.
Regulation 26(9) embeds the principle of equal treatment among competing acquirers. The board of directors of the target company must ensure that the information and co-operation provided to any acquirer that has made a competing offer is also provided to every other acquirer who has made a competing offer. This level-playing-field rule prevents an incumbent board from secretly favouring a friendly white-knight bidder over a hostile one by leaking diligence or denying access. It dovetails with the competing-offer machinery of Regulation 20 and reflects the Code's insistence that the board remain neutral as between rival bidders, leaving the choice of bid to shareholders rather than to a partisan board.
Regulation 26(10): Registering the Transfer of Shares
The final obligation completes the transaction. Upon fulfilment by the acquirer of the conditions of the open offer, the board of directors of the target company must, without any delay, register the transfer of shares acquired by the acquirer, whether under the underlying agreement or through open-market purchases or pursuant to the open offer, in physical form. With shares now overwhelmingly held in dematerialised form, this provision principally retains relevance for residual physical holdings, but its principle is general: once the acquirer has performed, the board must give effect to the acquisition and may not use the mechanics of registration as a last-ditch tool of resistance. The board's role at the close is ministerial, not gatekeeping.
The provision also forecloses a once-common defensive tactic. Under earlier regimes, target boards occasionally refused or delayed transfer registration to keep an unwelcome acquirer off the register and out of voting control. Regulation 26(10) removes any such discretion in the takeover context: the obligation is to register the transfer without any delay, and it bites across all routes by which the acquirer has come to hold the shares, whether the negotiated agreement, on-market purchases, or the open offer itself. The board cannot draw artificial distinctions between these tranches to withhold registration of some while registering others. The cumulative effect of Regulation 26(5), 26(8) and 26(10) is that the board must assist at the start, during, and at the close of the offer, leaving no procedural lever by which an obstructive board could defeat a completed acquisition.
Interaction with Regulation 24: The Board Composition Standstill
Regulation 26 must be read with Regulation 24, which governs the composition of the board during the offer period and is functionally part of the same protective scheme. Under Regulation 24(1), during the offer period no person representing the acquirer or any person acting in concert with it may be appointed as a director of the target company, whether as an additional director or to fill a casual vacancy. The standstill prevents the acquirer from seizing boardroom control before the public shareholders have had their exit. The bar relaxes only after fifteen working days from the detailed public statement, and only if the acquirer deposits in cash in the escrow account one hundred per cent of the consideration payable under the open offer, thereby demonstrating its commitment and protecting shareholders against an acquirer who takes control but defaults on payment.
Regulation 24(3) goes further during competing offers: regardless of the amount in escrow, there can be no induction of any new director representing any acquirer onto the board while competing offers are pending. Together, Regulation 24's composition standstill and Regulation 26's conduct restraints ensure that neither the acquirer prematurely nor the incumbent board defensively can distort the contest for control while shareholders are still deciding.
The Sanctity of the Offer: Nirma and Akshya Infrastructure
The post-announcement obligations of the board would mean little if the acquirer could simply walk away when the offer became inconvenient. The Supreme Court has policed this from the acquirer's side with notable strictness. In Nirma Industries Ltd. v. SEBI, (2013) 8 SCC 20, an acquirer that had triggered an open offer by invoking a share pledge sought to withdraw after discovering large-scale fraud and embezzlement at the target. The Court refused, holding that the power to permit withdrawal under Regulation 27(1)(d) of the 1997 Code is narrow and confined to circumstances of genuine impossibility in the nature of those listed in clauses (b) and (c), and that an acquirer is responsible for its own pre-offer due diligence. The discovery of fraud, however serious, did not render performance impossible and so did not justify withdrawal.
The principle was reinforced in SEBI v. Akshya Infrastructure Pvt. Ltd., (2014) 11 SCC 112. There the acquirer, a promoter-group entity, sought to withdraw a voluntary open offer that had allegedly become uneconomical owing to delay. The Supreme Court held that public offer is the rule and withdrawal the exception, that economic unviability is not a ground for withdrawal, and that permitting withdrawal on such grounds would compromise the integrity of the securities market and the scheme of the Takeover Code. The two decisions together establish the doctrine of the sanctity of the open offer: once announced, an offer binds the acquirer and may be abandoned only on the narrow statutory grounds, strictly construed.
Policing the Board's Defensive Conduct: Pramod Jain v. SEBI
The complementary point, that the target's board cannot frustrate an offer by value-shifting acts, is illustrated by Pramod Jain v. SEBI, (2016) decided by the Supreme Court on 7 November 2016 (the Golden Tobacco matter). The acquirers, having made a voluntary public announcement to acquire 25% of Golden Tobacco Ltd., later sought to withdraw the offer. SEBI and the Securities Appellate Tribunal rejected the withdrawal, and the Supreme Court affirmed, again applying the strict-construction approach of Nirma and Akshya to Regulation 27. The factual matrix is instructive for Regulation 26 students: during the offer period the target's board had resolved to enter into a large joint-development arrangement for company property, precisely the kind of material transaction outside the ordinary course that Regulation 26(2) of the 2011 Code (Regulation 23(1) of the 1997 Code) channels through shareholder approval. The episode shows the two restraints working in tandem, the board's conduct duties under Regulation 26 and the acquirer's non-withdrawal duty under Regulation 27, to keep both sides faithful to the offer once it is on the table.
For aspirants, the doctrinal takeaway is symmetry: the Code disciplines the acquirer (it must honour the offer) and the board (it must not change the company's character mid-offer) so that the public shareholder's protected exit survives the manoeuvring of both. Compare these duties with the thresholds that bring an offer about in the first place, namely the 25% substantial-acquisition threshold and the creeping-acquisition limits.
Consequences of Breach and Examination Focus
A breach of Regulation 26 attracts SEBI's wide remedial and penal armoury. Under Sections 11, 11B and 11(4) of the SEBI Act, 1992, SEBI may direct the target board to undo or refrain from a prohibited act, restrain the company from giving effect to a value-shifting transaction, or pass such directions as are necessary to protect investors and the integrity of the market. Monetary penalties under Section 15HB for contravention of the regulations, and adjudication proceedings, are also available. Because Regulation 26 protects the offer process rather than any single shareholder, SEBI's enforcement tends to be preventive and remedial, aimed at preserving the offer, rather than merely compensatory.
For examinations, command the limb-by-limb structure of Regulation 26: the ordinary-course rule (26(1)); the postal-ballot lock on value-shifting acts and its enumerated list (26(2)); the subsidiary pass-through (26(3)); the record-date and tendering-period bar (26(4)); the two-working-day shareholder-list duty (26(5)); the committee of independent directors and the reasoned, two-working-day-prior publication of its recommendation (26(6) and 26(7)); facilitation of verification and equal treatment of competing acquirers (26(8) and 26(9)); and the duty to register the transfer once conditions are met (26(10)). Pair these with Regulation 24's composition standstill and the Nirma, Akshya and Pramod Jain line on the sanctity of the offer, and you can answer any problem on what a target board may or may not do once the bell has rung.
Frequently asked questions
What is the core obligation of the target company's board under Regulation 26(1)?
Once a public announcement of an open offer is made, Regulation 26(1) requires the board to ensure that during the offer period the business of the target company is conducted in the ordinary course consistent with past practice. The aim is to preserve the company's character so that the offer remains a meaningful exit at the price on which acquirer and shareholders are proceeding.
Can the target board sell assets or raise capital during the offer period?
Not on its own authority. Under Regulation 26(2), value-shifting acts such as alienating material assets, material borrowings outside the ordinary course, issuing voting securities, buy-backs, capital restructuring, and entering into or terminating material contracts require a special resolution by postal ballot of the target's shareholders. The decision is returned to the shareholders whose exit the offer protects.
What is the role of the committee of independent directors under Regulation 26(6) and (7)?
The board must constitute a committee of independent directors to provide written, reasoned recommendations on the open offer to shareholders. The committee may take external professional advice at the company's cost, and its recommendation, including any divergent voting pattern, must be published at least two working days before the tendering period in the same newspapers as the detailed public statement, giving shareholders a conflict-free fairness assessment before they tender.
Can an acquirer withdraw an open offer if it becomes uneconomical?
No. In SEBI v. Akshya Infrastructure Pvt. Ltd., (2014) 11 SCC 112, the Supreme Court held that economic unviability is not a ground for withdrawal; public offer is the rule and withdrawal the exception, permissible only on the narrow grounds in Regulation 27, strictly construed. Allowing withdrawal for unprofitability would compromise market integrity and the scheme of the Code.
Does the discovery of fraud at the target permit withdrawal of the offer?
Generally no. In Nirma Industries Ltd. v. SEBI, (2013) 8 SCC 20, the Supreme Court refused withdrawal even after the acquirer discovered large-scale fraud at the target, holding that the withdrawal power under Regulation 27(1)(d) is confined to circumstances of genuine impossibility and that an acquirer bears responsibility for its own pre-offer due diligence.
How does Regulation 24 complement the board's obligations under Regulation 26?
Regulation 24 imposes a board-composition standstill: during the offer period no acquirer nominee may join the board, relaxing only after fifteen working days from the detailed public statement and only if the acquirer deposits 100% of the offer consideration in escrow; and during competing offers no new acquirer-nominee director may be inducted at all. Together with Regulation 26's conduct restraints, this prevents both premature acquirer control and defensive board manoeuvring.