Regulation 3 is the beating heart of India's takeover code. It answers one deceptively simple question: at what point does buying shares in a listed company stop being an ordinary market purchase and become a substantial acquisition that obliges you to make an open offer to every other shareholder? The answer comes in two numbers—25% and 5%—and a great deal of jurisprudence on how those numbers are counted. This chapter unpacks the initial-acquisition trigger in Regulation 3(1), the creeping-acquisition trigger in Regulation 3(2), the gross-acquisition rule, the 75% ceiling, and the case law that has shaped how SEBI and the Securities Appellate Tribunal apply them.
What Regulation 3 Does
Regulation 3 sits within Chapter II of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the "SAST Regulations" or "Takeover Code"), the chapter that prescribes when a mandatory open offer is triggered. It is best read alongside its companion, Regulation 4, which deals with the acquisition of control. Where Regulation 4 is qualitative—asking whether the acquirer has obtained control irrespective of any shareholding percentage—Regulation 3 is quantitative. It fixes bright-line shareholding thresholds and says: cross them, and you must extend an exit opportunity to the public shareholders by way of an open offer made under Regulation 13 onwards.
The rationale is the principle of equality of treatment. When a person amasses a substantial stake—enough to influence or dominate a listed company—the public shareholders who did not bargain for a new dominant shareholder are given the right to exit at the same price the acquirer is willing to pay. The Supreme Court has repeatedly framed the Takeover Code as investor-protection legislation, and Regulation 3 is the operative trigger that converts that policy into a hard obligation. For the historical backdrop on why these thresholds replaced the older 15% trigger, see our chapter on the evolution from the 1997 Regulations, and for the hub of this subject visit the SEBI Takeover Code notes hub.
The Initial Trigger: Regulation 3(1) and the 25% Threshold
Regulation 3(1) is the primary trigger. It provides that no acquirer shall acquire shares or voting rights in a target company which, taken together with shares or voting rights already held by the acquirer and by persons acting in concert (PAC) with him, would entitle them to exercise 25% or more of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares in accordance with the Regulations.
Three features deserve emphasis. First, the test is on voting rights entitlement, not merely on the headline shareholding—differential voting structures and the like are measured by reference to the voting power they confer. Second, the threshold is reckoned on an aggregate basis: the acquirer's own holding plus that of every person acting in concert is added together, so an acquirer cannot evade the trigger by parking shares with associates. The breadth of "persons acting in concert" is therefore central, a concept addressed in our chapter on definitions. Third, the trigger fires the moment the acquisition would entitle the acquirer to cross 25%—it is the agreement to acquire, or the acquisition itself, that obliges the public announcement, not some later event.
The 25% figure replaced the 15% trigger of the 1997 Regulations on the recommendation of the Achuthan Committee. The higher entry point was a deliberate policy choice: it permits a financial or strategic investor to build a meaningful, even board-influencing, stake of just under a quarter without being forced into the expense of an open offer, while still guaranteeing public shareholders an exit once genuine substantial control becomes a realistic prospect.
The Creeping-Acquisition Trigger: Regulation 3(2) and the 5% Limit
Regulation 3(2) governs the position after an acquirer (with PAC) already holds 25% or more but less than the maximum permissible non-public shareholding. Such an acquirer may continue to consolidate, but only within an annual ceiling. The sub-regulation provides that no such acquirer shall acquire, within any financial year, additional shares or voting rights entitling them to exercise more than 5% of the voting rights, unless they make a public announcement of an open offer.
This is the so-called "creeping acquisition" allowance. It recognises commercial reality: an entrenched promoter or major shareholder will often wish to top up their stake incrementally without being forced to launch a full open offer every year. The 5% per financial year head-room is the safety valve. Cross it—even by acquiring shares entitling the acquirer to more than 5% in aggregate over the year—and an open offer becomes mandatory. The detailed mechanics of computing the 5%, including the financial-year reset and the interaction with market purchases, are explored in our dedicated chapter on creeping acquisition.
It is important to grasp that Regulations 3(1) and 3(2) operate as a continuum. Regulation 3(1) catches the entry across 25%; Regulation 3(2) catches subsequent consolidation above 25%. An acquirer who is at 24% and buys 3% crosses 25% and is caught by 3(1); an acquirer already at 30% who buys a further 6% in the same financial year is caught by 3(2). The two limbs together leave very little room for stealth accumulation.
The Gross-Acquisition Rule
A recurring trap concerns how the 5% in Regulation 3(2) is measured. The Regulations make clear, through the explanation appended to Regulation 3, that the acquisition is reckoned on a gross basis. The shares acquired during the financial year are aggregated regardless of any intervening sale or dilution. In other words, an acquirer cannot buy 4%, sell 4%, and then buy a further 4% claiming a net position of only 4%—the gross acquisition is 8% and the trigger has fired.
There is, however, a refinement where the change in voting rights arises not from a purchase but from a corporate action of the company. Where the increase in an acquirer's percentage results from a buy-back of shares by the company, or from a fresh issue diluting others, the Regulations contain specific carve-outs and computation rules so that a passive increase is not always treated as an "acquisition". The general principle to memorise for examinations is nonetheless the gross rule: aggregate every acquisition in the financial year, ignore disposals, and test against the 5% ceiling. This anti-avoidance design mirrors the philosophy running through the entire Code, that substance prevails over the form of intermediate transactions.
The 75% Ceiling: Proviso to Regulation 3(2)
The proviso to Regulation 3(2) introduces an absolute outer limit. It provides that the acquirer cannot acquire or agree to acquire shares or voting rights exceeding such number as would take the aggregate shareholding pursuant to the open offer above the maximum permissible non-public shareholding—that is, 75% of the total shareholding or voting rights in the target company.
The proviso dovetails with the minimum public shareholding requirement under the Securities Contracts (Regulation) Rules, 1957, which mandate that at least 25% of a listed company be held by the public. The Takeover Code does not permit an open offer to be used as a device to extinguish the public float. Accordingly, even though Regulation 7 fixes the minimum offer size at 26% of the target's shares, an acquirer who would breach the 75% ceiling must either scale down the offer or follow the separate delisting route under the SEBI delisting framework. The proviso therefore performs a dual function: it caps consolidation and it protects the very public float that the open-offer mechanism is meant to serve.
Regulation 3(3): Change in Holding Within a Promoter Group
Regulation 3(3) addresses a subtle situation. The trigger under sub-regulations (1) and (2) is ordinarily tested on the combined holding of the acquirer and PAC. But what if the aggregate holding of a promoter group does not change while the holding of a particular acquirer within that group crosses a threshold? Regulation 3(3) provides that the acquisition of shares by any person, such that the individual shareholding of that person crosses the thresholds in 3(1) or 3(2), shall also attract the open-offer obligation—notwithstanding that there is no change in the aggregate shareholding of the persons acting in concert.
The provision prevents intra-group reshuffles from being used to escape the Code. If one member of a promoter group buys out another and individually crosses 25%, or breaches the annual 5% creeping limit, the obligation arises even though the group's total stake is unchanged. SEBI has clarified through informal guidance that ordinary inter-se transfers between qualifying promoters may attract exemption under Regulation 10, but where no exemption applies, Regulation 3(3) ensures the individual crossing is independently caught.
Why "Persons Acting in Concert" Is the Pivot
Because Regulation 3 aggregates the holdings of the acquirer with those of persons acting in concert, the identity of the PAC group determines whether a threshold has been crossed. The leading authority is Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati (2010) 7 SCC 449, decided by the Supreme Court on 8 July 2010. The Court held that the expression "persons acting in concert" connotes the presence of two or more persons who share a common objective or purpose of acquiring shares of, or control over, a particular target company, and who cooperate towards that end pursuant to an agreement or understanding, formal or informal.
Crucially, the Court held that the concert must relate to the same target company. On the facts, when Daiichi Sankyo acquired Ranbaxy, the question was whether Daiichi and Ranbaxy could be treated as acting in concert in relation to Zenotech Laboratories, a company Ranbaxy controlled. The Court found that Daiichi did not share a common objective with Ranbaxy to acquire substantial shares in Zenotech at the relevant time, and therefore the two were not persons acting in concert with respect to that target. The decision establishes that mere ex post facto association, or a parent-subsidiary relationship in the abstract, is not enough; there must be a shared objective directed at the specific target. This narrowing of the PAC concept directly affects whether a Regulation 3 threshold is breached, since aggregation only sweeps in true concert parties. The mechanics of how PAC and "deemed PAC" are defined are treated more fully in our definitions chapter.
Triggering by Indirect Acquisition
Regulation 3 thresholds can be crossed not only by buying shares of the target directly, but also indirectly—by acquiring a holding company or entity that in turn controls the listed target. Regulation 5 of the 2011 Regulations expressly equates an indirect acquisition of shares, voting rights or control with a direct acquisition for the purpose of the open-offer obligation. Thus an acquirer who, through an upstream transaction, comes to control 25% or more of the target's voting rights triggers an open offer just as if he had bought the shares on the floor of the exchange.
The foundational decision on indirect triggers, decided under the 1997 Regulations but still illustrative of the principle, is Swedish Match AB v. SEBI (2004) 11 SCC 641. There, Swedish Match acquired controlling interests in two intermediate companies (Haravon and Seed) which together held a majority stake in Wimco Ltd., the Indian listed company. SEBI required, and the Supreme Court upheld, a public offer for the shares of Wimco because the upstream acquisition indirectly transferred control of more than the then-applicable threshold of Wimco's shares. The case confirms the substance-over-form approach: the open-offer obligation attaches to the economic reality of acquiring control, however many corporate layers are interposed. The detailed treatment of computation and timing for indirect deals appears in our chapter on indirect acquisition.
Regulation 3 and the Control Trigger in Regulation 4
Regulation 3 and Regulation 4 are independent triggers, and either can fire on its own. Regulation 4 provides that irrespective of any acquisition of shares or voting rights, no acquirer shall acquire control over the target company unless he makes an open offer. This means an acquirer can be obliged to make an open offer even while holding fewer than 25% of the voting rights, if he obtains control—for instance, through the right to appoint a majority of directors or through a shareholders' agreement conferring decisive management rights.
The interplay matters because a single transaction may attract both triggers, or only one. A share purchase taking the acquirer to 26% attracts Regulation 3(1); a management arrangement conferring control without crossing 25% attracts only Regulation 4. SEBI has, in cases such as the Subhkam Ventures matter before the Securities Appellate Tribunal, grappled with what constitutes "control"—in particular whether negative or protective veto rights amount to control—but for Regulation 3 purposes the inquiry remains the cleaner, arithmetic question of voting-rights percentage. A student must be able to state which trigger applies on a given set of facts and why.
Consequences of the Trigger: Offer Size and Pricing
Once Regulation 3 is triggered, the acquirer must make a public announcement and proceed to an open offer governed by Regulations 7 and 8. Regulation 7(1) fixes the minimum offer size at 26% of the total shares of the target company as on the tenth working day from the closure of the tendering period. The 26% figure is calibrated so that, when added to a 25%-plus acquirer's holding, it can carry the acquirer towards majority control while still respecting the 75% ceiling.
Regulation 8 prescribes the offer price, which must be the highest of a series of benchmarks—the negotiated price under the agreement, the volume-weighted average price paid by the acquirer in the preceding 52 weeks, the highest price paid in the preceding 26 weeks, and the volume-weighted average market price over the 60 trading days before the public announcement, among others. The pricing for indirect acquisitions was a major battleground in Daiichi Sankyo, where the Securities Appellate Tribunal and the Supreme Court examined the relevant date for determining the offer price. For voluntary offers made without any mandatory trigger, see our chapter on the voluntary open offer.
Worked Examples of the Trigger
Consider an acquirer A holding 20% of Target Co, with no PAC. A agrees to buy a further 8%. The post-acquisition entitlement is 28%, which crosses 25%; Regulation 3(1) is triggered and A must announce an open offer for at least 26% before completing the acquisition.
Now suppose A already holds 30% (acquired earlier with a compliant open offer). In financial year 2026–27, A buys 3% in April and a further 3% in October. The gross acquisition for the year is 6%, exceeding the 5% creeping limit, so Regulation 3(2) is triggered—notwithstanding that A might argue the second tranche "alone" was only 3%. The gross-acquisition rule defeats that argument.
Finally, suppose a promoter family collectively holds 60%, of which member X holds 10%. X buys out cousin Y's 20%, taking X individually to 30% while the family's aggregate stays at 60%. Regulation 3(3) is attracted because X individually crosses 25%, even though the PAC aggregate is unchanged—unless an inter-se transfer exemption under Regulation 10 applies. These three patterns—entry, creep and intra-group crossing—capture the everyday application of Regulation 3 and are the most heavily examined fact situations.
A fourth variation tests the interaction with fresh issuances. Suppose A holds 24% and the company makes a preferential allotment to A of new shares taking A to 27%. The increase results from an acquisition by A of newly issued shares, so the 25% threshold in Regulation 3(1) is crossed and an open offer is required unless a Regulation 10 exemption (for example, an allotment pursuant to a court-sanctioned scheme) applies. Contrast this with a passive increase: if A's percentage rises merely because the company buys back and extinguishes other shareholders' shares, A has not "acquired" anything, and the Regulations provide a specific framework treating such passive increases differently. The examiner's trick is usually to disguise an active acquisition as a passive one, or vice versa; the safe approach is to ask whether the acquirer did something—bought shares, subscribed to an issue, or entered an agreement—that increased the entitlement.
When the Trigger Does Not Apply: Exemptions
Crossing a Regulation 3 threshold does not invariably compel an open offer. Regulation 10 lists automatic exemptions, and Regulation 11 empowers SEBI to grant case-specific exemptions. Common automatic exemptions include inter-se transfers among qualifying persons (immediate relatives, persons named as promoters, and certain group companies) subject to pricing and disclosure conditions; acquisitions pursuant to a scheme of arrangement sanctioned by a court or tribunal; acquisitions in the ordinary course of business by underwriters, stockbrokers and merchant bankers; and increases in voting rights arising from a buy-back, subject to conditions.
SEBI's case-specific exemption power under Regulation 11 has been exercised in numerous orders, often where a strict open offer would defeat the broader public interest—such as acquisitions by lenders enforcing security, or under government-approved restructuring. The Securities Appellate Tribunal and SEBI's own orders form a substantial body of practice on the boundaries of these exemptions. For the foundational threshold concept against which all these exemptions operate, revisit our chapter on the substantial acquisition 25% threshold.
The architecture is deliberate. Regulation 3 fixes a hard, mechanical trigger so that acquirers and the market have certainty about when the open-offer obligation arises; Regulations 10 and 11 then supply the flexibility to disapply that obligation where an open offer would serve no protective purpose or would frustrate a legitimate transaction. A transfer of shares between an existing promoter and his immediate relative does not bring in a new dominant shareholder against whom the public needs protection, so Regulation 10 exempts it on conditions. By contrast, where a genuinely new acquirer takes control, no exemption is available and the offer must follow. Examiners frequently combine a threshold-crossing on the facts with a plausible exemption, expecting the candidate both to identify the trigger under Regulation 3 and then to test whether any Regulation 10 or 11 exemption squarely applies, including its pricing and disclosure conditions.
Consequences of Failing to Make a Triggered Offer
Failure to make a mandatory open offer after a Regulation 3 trigger exposes the acquirer to serious consequences. SEBI may direct the acquirer to make a delayed open offer together with interest for the period of delay, may impose monetary penalties under the SEBI Act, 1992, and may issue directions divesting the acquirer of shares acquired in violation. The Securities Appellate Tribunal has consistently upheld SEBI's power to compel a belated open offer rather than merely penalise, on the footing that the public shareholders' right of exit is the primary remedy the Code seeks to vindicate.
The Supreme Court's affirmation of SEBI's directions in Swedish Match AB v. SEBI illustrates the point: the relief was the public offer itself, at a price protective of the public shareholders, rather than a mere fine. Acquirers therefore cannot treat the open-offer obligation as a cost to be weighed against a penalty—the regulator retains the power to enforce the offer in specie, with interest, however delayed.
Exam Takeaways
For judiciary and CLAT-PG purposes, master the two numbers and the rules around them. Regulation 3(1): 25% or more of voting rights, on an aggregate (acquirer plus PAC) basis, triggers a mandatory open offer. Regulation 3(2): once at or above 25%, acquiring more than 5% of voting rights in a financial year triggers an offer, computed on a gross basis. The proviso to 3(2) caps consolidation at the 75% maximum permissible non-public shareholding. Regulation 3(3) catches an individual crossing within an unchanged PAC aggregate.
Anchor your answers in the case law: Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati (2010) 7 SCC 449 on the common-objective requirement for persons acting in concert, and Swedish Match AB v. SEBI (2004) 11 SCC 641 on indirect triggers and the substance-over-form approach. Remember that the offer once triggered must be for a minimum of 26% under Regulation 7(1), priced under Regulation 8, and that Regulations 10 and 11 supply the exemptions. Knowing how Regulation 3 interlocks with the creeping acquisition and indirect acquisition provisions will let you answer almost any threshold problem the examiner can pose.
Frequently asked questions
What is the trigger threshold for a mandatory open offer under Regulation 3(1)?
An acquirer (together with persons acting in concert) who acquires shares or voting rights entitling them to exercise 25% or more of the voting rights in a target company must make a public announcement of an open offer. The 25% figure replaced the old 15% trigger of the 1997 Regulations on the Achuthan Committee's recommendation.
How does the creeping-acquisition trigger in Regulation 3(2) work?
Once an acquirer (with PAC) already holds 25% or more, they may acquire only up to 5% additional voting rights in any financial year without an open offer. Acquiring more than 5% in a financial year triggers a mandatory open offer. The 5% is computed on a gross basis, so disposals during the year are ignored.
What is the gross-acquisition rule?
Under the explanation to Regulation 3, acquisitions during a financial year are aggregated regardless of any intervening sale or dilution. An acquirer cannot buy 4%, sell 4%, and buy a further 4% and claim a net 4%—the gross acquisition is 8% and the creeping limit is breached.
Why is the case of Daiichi Sankyo v. Jayaram Chigurupati important for Regulation 3?
In Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati (2010) 7 SCC 449 the Supreme Court held that "persons acting in concert" requires a common objective of acquiring shares or control of a particular target company. Because Regulation 3 aggregates the holdings of the acquirer and PAC, the scope of "concert" decides whether a threshold is crossed.
Can an open offer be triggered without buying any shares of the target?
Yes. Regulation 4 triggers an open offer on the acquisition of control irrespective of shareholding, and Regulation 5 treats indirect acquisitions—acquiring an upstream entity that controls the target—as equivalent to direct acquisitions. In Swedish Match AB v. SEBI (2004) 11 SCC 641 the Supreme Court upheld an open offer for Wimco arising from an upstream acquisition.
What is the minimum open offer size once Regulation 3 is triggered?
Regulation 7(1) fixes the minimum open offer size at 26% of the total shares of the target company, subject to the proviso to Regulation 3(2) that the acquirer's aggregate holding must not exceed the 75% maximum permissible non-public shareholding. The price is determined under Regulation 8 as the highest of the prescribed benchmarks.