Permissible Limits. What are they?

As has already been discussed the Code is enacted to ensure that the existing shareholders get an
exit opportunity. The Code enables this by mandating an open offer to be made in case an
acquisition is substantial, whether direct or indirect, or if there is a change in control. To examine
whether the acquisition is substantial or not, the code puts an acquisition test in place. This happens
in three scenarios. So if the acquirer either individually or with persons acting in concert with him,
acquires shares entitling him to an ownership that is 25% or more, then the open offer requirement
triggers.[6] This is the first type of requirement which usually happens in a case of direct acquisition.
The second type of requirement comes when the acquirer either individually or through PAC already
has 25% or more voting rights in the company but wants to acquire more then the Code mandates
that he will have to make an open offer if this acquisition is of 5% or more shares in one financial
year.[7] This is an example of creeping acquisition that the Code seeks to regulate. The third case
when open offer requirements come to the fore is when the acquirer either individually or with PAC
gains control[8] in the company without the acquisition of shares, for example by exercising power
to appoint directors in the Board.

That being said, it is important to mention that one can’t acquire more than 75% of shares in a public
company. This is referred to as the permissible non-public shareholding in a listed company. This is
derived based on the minimum public shareholding requirement under Rule 19A of the Securities
Contracts (Regulations) Rules 1957 (“SCRR”) which mandates all listed companies, excluding public
sector companies to have at least 25% of share capital of the company.

We have discussed the permissible limits and how they trigger the open offer requirements. Let’s
now examine what is the open offer requirement under the Code.