SAST Creeping Acquisition Computation Under Regulation 3(2)
Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 governs the creeping-acquisition framework — the cumulative-acquisition mechanism that controls how an existing 25%-plus shareholder can increase its stake without triggering a fresh open offer. The computation is mechanical in form and contested in application.
The framework
The SEBI (SAST) Regulations, 2011 establish two principal triggers for the obligation to make a public announcement of an open offer.
Regulation 3(1) imposes the initial-acquisition trigger: any acquisition of shares or voting rights that, taken together with shares or voting rights already held, results in the acquirer holding 25% or more of the voting rights, requires a public announcement.
Regulation 3(2) imposes the creeping-acquisition trigger: an acquirer who already holds 25% or more (but less than the maximum permissible non-public shareholding) cannot acquire more than 5% of the voting rights in any financial year without making a public announcement.
The 5% computation is the working pressure point of Regulation 3(2). What counts as an "acquisition"? How are options, derivatives and rights issues treated? When does the financial year reset? Each question carries direct consequences for the obligation to make a public announcement.
The computation framework
The 5% computation under Regulation 3(2) operates on three principal axes.
First, aggregation across persons acting in concert. The acquirer's holding is computed together with the holdings of "persons acting in concert" (PAC) within the meaning of Regulation 2(1)(q). The PAC computation extends to relatives, group entities, financial advisers and other persons whose acquisitions are co-ordinated with the acquirer.
Second, aggregation across the financial year. The 5% is a cumulative figure for the financial year. Multiple smaller acquisitions adding up to 5% trigger the obligation; a single acquisition of less than 5% does not.
Third, reset at financial-year end. The computation resets at the start of each financial year — but the resulting baseline is the closing holding of the previous financial year, including any prior-year creeping acquisitions.
The "acquisition" question
Regulation 2(1)(b) defines "acquisition" expansively: it includes direct acquisitions, indirect acquisitions, acquisitions of voting rights, acquisitions of control, and acquisitions through agreements, options or other instruments. The breadth of the definition is the source of much of the practical complexity.
Three categories of transactions raise particular questions.
Rights issues: A rights-issue subscription by the existing 25%-plus shareholder is, technically, an acquisition. Regulation 10 provides specific exemptions for rights-issue subscriptions, but the exemption is conditional on the acquirer not exceeding the maximum-permissible non-public shareholding limit and on the acquirer not changing the price of the rights issue.
Buy-back-induced increases: A company's buy-back of its own shares can result in the existing shareholder's percentage holding increasing without any active acquisition by the shareholder. Regulation 10 again provides specific exemptions, conditional on the increase being attributable solely to the buy-back and the acquirer not voting in favour of the buy-back resolution.
Convertible instruments: The conversion of warrants, convertible debentures or other instruments held by the acquirer is treated as an acquisition for SAST purposes. The acquirer must compute the post-conversion holding against the pre-conversion holding, and assess the 5% threshold accordingly.
The PAC question
The "persons acting in concert" definition is the source of recurring SAST disputes. Regulation 2(1)(q) defines PAC as persons who, "with a common objective or purpose of acquisition of 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 that purpose.
The "agreement or understanding" requirement is the working test. SEBI has held that mere shareholding relationships between persons (parent-subsidiary, common shareholders) do not, without more, establish PAC status. The PAC determination requires evidence of a common objective and a co-operative arrangement.
However, Regulation 2(1)(q) deems certain categories of persons to be PACs absent evidence to the contrary. Companies and their subsidiaries, mutual funds and their sponsors, and similar relationship-based categories are presumed PACs, with the burden on the relevant persons to displace the presumption.
The 5% computation is mechanical at first glance and labyrinthine in application. The framework rewards careful day-to-day record-keeping over event-by-event computation.
The reporting obligations
Regulation 29 of the SAST imposes parallel reporting obligations. Regulation 29(1) requires disclosure of any acquisition of 5% or more of the voting rights — within two working days of the acquisition. Regulation 29(2) requires disclosure of every change in shareholding, by 2% or more, by an acquirer who already holds 5% or more.
The Regulation 29 disclosures run alongside the Regulation 3(2) computation but are independent of it. An acquirer can be in compliance with Regulation 3(2) (no public-announcement obligation) but in default of Regulation 29 (failure to make timely disclosure of a 2%-plus change).
The "voluntary offer" route
Where the existing 25%-plus shareholder wishes to increase its stake by more than 5% in a financial year, the SAST provides a voluntary-offer route under Regulation 6. The acquirer can voluntarily make a public announcement and acquire up to the maximum permissible non-public shareholding in a single transaction, subject to the open-offer process.
The voluntary-offer route is more cumbersome than the creeping route — it requires a letter of offer, a tendering window, and SEBI clearance — but provides certainty and removes the year-on-year computation pressure.
Working observations
Three observations from current M&A and listed-company practice. First: the 5% computation must be performed on a transaction-by-transaction basis, with running aggregation through the financial year. The acquirer's compliance team should maintain a contemporaneous record of every transaction (acquisition, conversion, rights subscription, indirect acquisition through PAC), with the cumulative figure tracked against the 5% ceiling.
Second: the PAC analysis is the source of most SAST surprises. Where the acquirer has multiple group entities, common shareholders, or co-ordinated investment partners, the PAC computation must be performed at the start of the financial year, with each subsequent transaction tested against the aggregated PAC holding.
Third: the Regulation 29 disclosure obligations are independent of the open-offer obligation. An acquirer concerned only with Regulation 3(2) compliance may inadvertently breach Regulation 29 — a separate violation that attracts independent SEBI consequences. The reporting protocol must cover both regulations.