Can an open offer be allowed for less than six percent shareholders? Case against Sebi order reaches SAT

3A Capital Services has moved SAT against Sebi’s refusal to exclude non-selling promoters from its open offer in Sri Sarvaraya Sugars. Sebi has argued that once the 25 percent threshold is breached, an open offer to all eligible shareholders is mandatory.

In a unique case, 3A Capital Services - an investment company - has approached the Securities Appellate Tribunal (SAT) against the capital market regulator Sebi's orders after it was denied from excluding shareholders unwilling to sell their stake in the target company during an open offer.

3A Capital Services said that since 65 percent of shareholders were not willing to part with their shares, and it had already acquired more than 25 percent stake in Sri Sarvaraya Sugars, the target company, hence the open offer should be limited to just 5.85 percent of the remaining shareholders. However, Sebi did not agree and said regulations do not allow for such an exemption, and 3A Capital Services was required to make an open offer.

3A Capital Services’ counsel argued before the SAT that the company was required to make an open offer to remaining shareholders excluding those who acted in concert with the acquirer or the seller. Archana Prasad Kilaru, a promoter of Sri Sarvaraya Sugars, had sold her shares to 3A Capital while other promoter-shareholders - holding about 65 percent - were not desirous of selling their stake and had conveyed to Sebi through the merchant banker, and hence, 3A Capital contended that it was required to make an open offer only to the remaining 5.85 percent public shareholders.

Sebi disagreed with this view and submitted that the correspondence between the company, Sebi, and the merchant banker pertained to the stage when the acquirer held less than 25 percent stake. Once 3A Capital crossed the 25 percent threshold, it was duty-bound to make an open offer, and the promoter-shareholders holding 65 percent could not be excluded based on such correspondence. Sebi further argued that there was nothing on record to suggest that these promoter-shareholders would not accept the open offer.

Since they were not parties in the case, SAT permitted 3A Capital to implead the promoters or shareholders with 65 percent stake as parties to the proceedings.

“Sebi is correct in not providing any exception in this case. An open offer is simply an offer to the remaining public shareholders to sell their shares to the new acquirer. This offer has to be provided irrespective of whether shareholders tender their shares or not,” said Anil Choudhary, Partner, Finsec Law Advisers.

Choudhary further said, “Even if 65 percent shareholders don’t tender their shares, the acquirer will retain the shareholding acquired in the first 25 percent transaction. The acquirer can buy more shares from the market if there is enough supply. An open offer does not give the acquirer the right to take over control of the target company; it is merely an offer to existing shareholders to exit if someone else wants to acquire control or more than 25 percent shareholding of a listed company.”

Sebi’s FAQs on the stipulated size of an open offer state that an open offer - other than a voluntary open offer under Regulation 6 - must be made for a minimum 26 percent of the target company’s share capital. A voluntary open offer under Regulation 6 must be for at least 10 percent of the target company’s share capital.

On December 6, 2024, 3A Capital Services announced an open offer to acquire up to 1,78,323 equity shares, representing 5.85 percent of the paid-up capital of Sri Sarvaraya Sugars at Rs 4,100 per share. The move followed a share purchase agreement (SPA) signed on the same day with promoter Archana Prasad Kilaru to buy 1,60,170 shares (5.25 percent) at Rs 3,000 per share, triggering the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Prior to the transaction, 3A Capital held 23.85 percent in the company. The new acquisition pushed its holding beyond the 25 percent threshold, necessitating an open offer to public shareholders. The public announcement stated that 94.15 percent of the company’s equity - held by promoters and acquirers - was not eligible to participate, leaving only 5.85 percent of shares open for tender by public shareholders.