Substantial Acquisition — 25% Threshold

The 25% line is the spine of the SEBI Takeover Code. Regulation 3(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("SAST" or the "Takeover Code") tells an acquirer that the moment its holding — counted with persons acting in concert — would reach or cross 25% of the voting rights in a listed target, it cannot proceed until it offers to buy out the public shareholders too. The number looks arbitrary until you see its logic: 25% is the blocking-minority figure under the Companies Act for special resolutions, the point at which an investor stops being a passive holder and becomes a person who can shape (or stall) the company's destiny. This chapter unpacks who the threshold binds, how the count is done, what the trigger forces an acquirer to do, and how the Supreme Court and the Securities Appellate Tribunal (SAT) have policed it. For the wider scheme, start at the SEBI Takeover Code hub.

Why 25%? The Logic of the Threshold

Every takeover code in the world picks a number at which it forces an acquirer to share the wealth with public shareholders. India's first code — the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 — set that number at 15%. The 2011 Regulations, drafted on the recommendation of the Achuthan Committee (the Takeover Regulations Advisory Committee chaired by C. Achuthan), raised the initial trigger to 25%. The shift was deliberate. A 15% holder rarely controls a company; raising the bar to 25% lets private-equity and strategic investors take a meaningful but non-controlling stake without being dragged into a mandatory offer, while still catching anyone approaching real influence.

The figure is not pulled from the air. Under company law, a special resolution requires a three-fourths majority, so a 25%-plus holder commands a blocking minority — it can veto any special resolution. That is the precise point at which an outside acquirer stops being a portfolio investor and starts being able to obstruct or steer the company. The Code therefore treats 25% as the line beyond which the public must be offered an exit. For the historical arc from 1997 to 2011, see Introduction and Evolution from the 1997 Regulations.

The Text of Regulation 3(1)

Regulation 3(1) is the operative provision. In substance it reads: no acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.

Three features deserve emphasis. First, the obligation bites on the acquisition — the public announcement must precede the crossing, not follow it. Second, the count is of the acquirer plus persons acting in concert (PAC), never the acquirer alone; this is what prevents fragmentation of a single takeover among friendly fronts. Third, the trigger is framed in terms of voting rights, not merely equity shares, so differential-voting instruments and convertibles are pulled into the arithmetic. The companion trigger in Regulation 3(2) governs further acquisitions by those already above 25% — see Creeping Acquisition.

Who Is an "Acquirer" and What Is "Substantial"

The word "acquirer" is defined widely in Regulation 2(1)(a): any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in, or control over, a target company, whether by himself or together with PAC. The acquirer need not act with the intention of control; intention is irrelevant to the 25% trigger. What matters is the objective fact of crossing the line. The companion concepts — "target company", "shares", "voting rights" and "control" — are mapped in Definitions.

"Substantial acquisition" is not separately defined; it is the shorthand the Code uses for any acquisition that crosses one of the regulatory thresholds — 25% under Regulation 3(1), the creeping 5%-per-year limit under Regulation 3(2), or control under Regulation 4. Because the test is objective, an acquirer who stumbles across the line through inadvertence — for example by a buy-back that shrinks the capital base and inflates its percentage — can still attract scrutiny, though the Code carves out specific exemptions for passive increases caused by the target's own actions.

Persons Acting in Concert: Aggregating the Holding

The 25% line is meaningless unless one knows whose shares to add up. Regulation 2(1)(q) defines persons acting in concert as persons who, with a common objective or purpose of acquiring shares or voting rights in, or exercising control over, a target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate for acquisition of shares or voting rights or control. Certain relationships — a company and its holding, subsidiary and group companies, promoters and their relatives, mutual funds and their sponsors — are deemed to be acting in concert unless the contrary is established.

The leading authority is Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati, (2010) 7 SCC 449. The Supreme Court held that to be persons acting in concert two or more persons must share a common objective to acquire shares of the same target company, and there must be an agreement or understanding to that end; mere membership of the same corporate group, without a shared concert in relation to the particular target, does not make persons PAC. The Court stressed that concert is target-specific and time-specific — the relationship must exist at the time of the acquisition in question. The decision is the anchor for any PAC dispute under the 25% trigger and is examined further in Indirect Acquisition.

The practical bite of the PAC concept is that it forecloses the most obvious avenue of evasion: splitting a single acquisition among several nominally separate buyers, each kept below 25%, while the real economic interest is unified. By aggregating the holdings of all persons acting in concert, Regulation 3(1) collapses such structures into a single notional acquirer. The deeming provisions in Regulation 2(1)(q)(2) do much of the heavy lifting, but they are rebuttable; a group company that can genuinely show it had no common objective with the acquirer in relation to the particular target can step outside the aggregation. The burden of rebuttal, however, is real and the regulator scrutinises the surrounding facts — funding arrangements, shareholders' agreements, board nominations and the timing of purchases — to test whether the claimed independence is genuine or contrived.

What Counts Toward the 25% — Voting Rights, Convertibles, Depository Receipts

The threshold is expressed in voting rights, and the Code casts the net wide to stop acquirers escaping through instruments that are economically equity but legally something else. Shares carrying differential voting rights are counted by their actual voting entitlement, not by face value of capital. Convertible instruments and warrants are brought into the count for disclosure purposes, and on conversion they swell the denominator and numerator alike. Shares underlying depository receipts that carry voting rights, or where the holder is entitled to instruct on voting, are likewise included.

Equally important is the denominator. The percentage is calculated against the total voting rights of the target company as of the relevant date — which can shift if the target issues fresh shares or buys back stock. A holder static in absolute terms can be pushed above 25% by a buy-back that shrinks the base. The Code's exemptions and the principle that a passive increase not brought about by the acquirer's own acquisition does not, by itself, trigger Regulation 3(1) are the safety valve here; an acquirer who then makes any voluntary purchase, however small, must reckon with the consolidated position.

The Consequence of Crossing: A Mandatory Open Offer

Crossing 25% does not bar the acquisition. It conditions it. The acquirer must make a public announcement of an open offer to the remaining shareholders so that they can exit at the same or a comparable price. The mechanics — the minimum offer size, the offer price, the timeline — are governed by Regulations 7 and 8 and are treated in detail in Trigger for Open Offer. The headline figures: under Regulation 7(1) the mandatory open offer must be for at least 26% of the total shares of the target, and the public announcement must be made on the date of agreeing to acquire or deciding to acquire the shares that take the holding past the threshold.

The Supreme Court's seminal statement of why this matters is Swedish Match AB v. SEBI, (2004) 11 SCC 641. Interpreting the 1997 Regulations, the Court held that the public announcement of an open offer is one of the principal modes by which the takeover regime protects public shareholders, and that the acquirer cannot escape the obligation once it is attracted. The reasoning carries directly into the 2011 Code: the open offer is the price an acquirer pays for crossing the substantial-acquisition line, and the obligation, once triggered, is not a matter of the acquirer's convenience.

The timing rule is unforgiving. The public announcement is not something the acquirer does after it has crossed the line and counted the cost; it is the precondition to crossing at all. For a market purchase the announcement is to be made on the same day the trigger is breached, and for a negotiated or share-purchase agreement it is to be made on the date of entering into the agreement to acquire. A detailed letter of offer follows, escrow is created to secure the consideration, and the acquirer is bound to honour acceptances tendered by public shareholders up to the offer size. The open offer is thus a fully funded, irrevocable commitment, not an expression of intent — which is exactly why the Code insists the announcement precede rather than follow the acquisition.

First Crossing (3(1)) Versus Creeping (3(2))

Regulation 3 has two limbs and students must keep them apart. Regulation 3(1) is the initial threshold: it catches the acquirer who, holding less than 25%, acquires shares that take it to 25% or more. Regulation 3(2) is the creeping-acquisition limb: it catches an acquirer who already holds 25% or more but less than the maximum permissible non-public shareholding (effectively up to 75%) and who, in any financial year, acquires more than 5% of the voting rights. Crossing either limb triggers the same consequence — a mandatory open offer.

The interaction is neat. Once an acquirer crosses 25% under 3(1) and makes its open offer, future buying within the 25%–75% band is policed not by 3(1) again but by the annual 5% creeping cap under 3(2). The creeping limb is computed on gross acquisitions in the financial year, ignoring any intermittent fall in holding caused by disposal or by dilution from a fresh issue. The full treatment, including the gross-versus-net debate, is in Creeping Acquisition.

The 25% Threshold and the Separate Trigger of Control

The 25% threshold is a bright-line share/voting-rights test. It sits alongside, and is distinct from, the control trigger in Regulation 4, under which an acquisition of control over a target obliges an open offer irrespective of the number of shares acquired. An acquirer can therefore be caught even below 25% if it gains control, and conversely it can cross 25% without acquiring control and still be caught by 3(1).

What "control" means has been the most litigated question in this area. In Subhkam Ventures (I) Pvt. Ltd. v. SEBI (SAT, Appeal No. 8 of 2009, decided 15 January 2010), the Securities Appellate Tribunal held that ordinary investor-protective rights — affirmative or veto rights of the kind a financial investor takes to guard its money — are protective, not proactive, and do not by themselves amount to a change of control; control connotes the power to proactively direct the management and policy of a company, not merely the power to block. The Supreme Court later disposed of the appeal without affirming the SAT's reasoning as binding precedent, leaving the question fact-sensitive, and SAT revisited the theme in the NDTV litigation. For the doctrine, see Definitions and Trigger for Open Offer.

Crossing the Threshold Indirectly

An acquirer cannot defeat the 25% trigger by acquiring the target's parent rather than the target itself. Regulation 5 deems an indirect acquisition of shares, voting rights or control over a target — typically by acquiring an upstream holding company — to be a direct acquisition for the purposes of the open-offer obligations, where the parameters in Regulation 5 are met. The leading illustration is again Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati, (2010) 7 SCC 449: when Daiichi acquired Ranbaxy, it indirectly acquired Ranbaxy's substantial holding in Zenotech Laboratories, which the regulator treated as attracting the public-announcement obligation in respect of Zenotech.

The earlier Swedish Match AB v. SEBI, (2004) 11 SCC 641, is to the same effect under the 1997 Code: an acquisition of upstream majority holdings that carried with it an indirect stake in the listed Indian target (Wimco) attracted the public-announcement obligation, and the Supreme Court upheld SEBI's direction to make the offer. Indirect crossings are computed and timed differently from direct ones — the detail is in Indirect Acquisition.

Disclosure Long Before 25%: The 5% Tripwire

The Code does not wait until 25% to make an acquirer visible. Regulation 29(1) requires any acquirer who, together with PAC, acquires shares or voting rights aggregating to 5% or more of the target to disclose its aggregate holding to the company and the stock exchanges. Regulation 29(2) then requires a holder already at 5% or more to disclose every change of more than 2% of the total shareholding, in either direction. These filings, due within two working days, give the market an early-warning system that lets the regulator and other shareholders watch an acquirer's march toward the 25% line.

The disclosure obligations are independent of the open-offer obligation: an acquirer can comply with Regulation 29 yet still violate Regulation 3(1) if it crosses 25% without an open offer, and vice versa. SEBI treats non-disclosure as a separate, serious default, because the transparency it secures is what makes the 25% bright line enforceable in practice.

Alongside the event-based disclosures in Regulation 29 sit the annual continual-disclosure obligations in Regulation 30, under which promoters and holders above the prescribed level report their aggregate shareholding as at the end of each financial year. Together the two regimes give the market a continuous picture of how concentrated a target's ownership has become and how fast any acquirer is moving toward the 25% line. A holder who has armed itself with convertible instruments must remember that those instruments count for disclosure even before conversion, so the 5% and 2% tripwires can be crossed on a fully-diluted basis well before any voting right actually accrues. The disclosure architecture is, in short, the surveillance layer that sits beneath the substantive 25% trigger.

Voluntary Open Offers by Those Already Above 25%

An acquirer already holding 25% or more is not confined to creeping acquisition. Regulation 6 permits a voluntary open offer — a proactive offer to the public, subject to conditions including a minimum offer size of 10% of voting rights, an eligibility bar where the acquirer has bought shares in the preceding 52 weeks, and a cooling-off restriction on further market purchases for a period after the offer. The voluntary route lets a substantial holder consolidate its position transparently rather than through annual creeping, and is the preferred device where an acquirer wants to move decisively toward majority control.

The voluntary open offer is the mirror image of the mandatory one: same machinery, opposite motive. Where Regulation 3(1) forces an offer on an acquirer who has crossed the line, Regulation 6 lets an already-substantial holder choose to make one. The conditions, eligibility and consequences are set out in Voluntary Open Offer.

Exemptions from the 25% Trigger

Not every crossing of 25% forces an open offer. Regulation 10 lists automatic exemptions — among them inter-se transfers among qualifying promoters and group entities (subject to holding-period and pricing conditions), acquisitions pursuant to a scheme of arrangement sanctioned by a court or tribunal, acquisitions in the ordinary course of business by underwriters, stock-brokers, merchant bankers acting as stabilising agents, and scheduled commercial banks acting as escrow agents, and increases in voting rights caused solely by the target's buy-back. Regulation 11 empowers SEBI to grant case-specific exemptions on an application, on terms it thinks fit.

The exemptions are construed strictly: the acquirer claiming one bears the burden of showing it falls squarely within the condition, and the procedural requirements (filing reports, observing lock-ins) are not mere formalities. SEBI's exemption orders, and the discipline of conditions attached to them, are a recurring theme in regulatory practice and reward close reading alongside the bare text of Regulations 10 and 11.

Consequences of Crossing 25% Without an Offer

An acquirer who crosses 25% without making the mandatory open offer exposes itself to a battery of remedies under Regulation 32 and Section 11 of the SEBI Act, 1992. SEBI can direct the defaulting acquirer to make a delayed open offer with interest to compensate shareholders for the lost time-value of their exit, direct divestment of the excess shares, bar the acquirer from exercising voting rights or receiving dividends on the excess, and impose monetary penalty under Section 15H of the SEBI Act for failure to make a public announcement.

The Supreme Court in Swedish Match AB v. SEBI, (2004) 11 SCC 641, confirmed that the obligation, once triggered, cannot be wished away and that SEBI's directions to enforce the offer are within its remedial powers. The lesson for the exam and for practice is the same: the 25% line is not a soft guideline but a hard obligation, and the regulator's toolkit is designed to ensure that crossing it without an offer is never the cheaper option.

Exam Pointers and Common Traps

For judiciary and CLAT-PG candidates, the high-yield points are: (i) the trigger figure is 25% under Regulation 3(1), raised from 15% under the 1997 Code; (ii) the count is always acquirer plus PAC; (iii) the consequence is a mandatory open offer of at least 26% under Regulation 7(1); (iv) control under Regulation 4 is a separate trigger that operates regardless of the 25% number; and (v) disclosure under Regulation 29 starts at 5%, well below the offer trigger.

Common traps: confusing the 26% offer size with the 25% trigger; assuming intention to control is needed for 3(1) (it is not); forgetting that a buy-back-induced passive increase is treated differently from an active acquisition; and mixing up the gross-acquisition basis of creeping acquisition with the simple crossing test of 3(1). Keep the leading cases ready — Daiichi Sankyo, (2010) 7 SCC 449 for PAC and indirect acquisition; Swedish Match AB, (2004) 11 SCC 641 for the inviolability of the open-offer obligation; and Subhkam Ventures (SAT, 2010) for the meaning of control. For the surrounding scheme, work through Trigger for Open Offer and the hub.