Crossing 25%: Trigger, Price and the 24.99% Trap
The Arvind group holds 24.10% of Arvind Textiles Ltd, which has 10 crore shares: 15.00% with the flagship promoter company and 9.10% with three family PACs. On 12 June the flagship buys 1.90% in a single block deal at ₹420 per share, taking the group to 26.00%. The 60-trading-day VWAP on 11 June was ₹395 and the 26-week VWAP was ₹368; in November of the previous year the flagship had bought 0.80% at ₹445. The board of Arvind Textiles, alarmed by the block deal, meets on 25 June and approves a preferential allotment of 60 lakh shares to a friendly strategic investor and, separately, a tender-offer buyback of 5% of capital, both to be completed within 60 days. The flagship also wants to buy a further 1% in the market on 20 June, before the open offer opens, at up to ₹460.
1. Has a mandatory open offer been triggered, for what size, and what does the 5% annual creep permit?
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The trigger. Holdings are aggregated with persons acting in concert, and 24.10% + 1.90% = 26.00%. An acquisition that takes an acquirer and PACs to 25% or more of the voting rights requires a public announcement. The trigger has been crossed.
The creep does not help. The 5% per financial year allowance is a permission to consolidate after the 25% threshold has been crossed by an acquirer who has made an open offer; it does not validate the acquisition that breaches the threshold, and it operates only up to 75%.
Offer size. The offer must be for at least 26% of the total voting rights, i.e. 2.6 crore shares of the 10 crore share capital - not merely for the 1.9% that was acquired. The obligation is to give the public an exit, not to reverse the specific purchase.
Timeline. The public announcement had to be made on 12 June itself, the date of the block deal; the detailed public statement follows within five working days, and the offer must be financed and completed within the Code's timetable.
2. What is the minimum open offer price, and how does the proposed purchase of 1% at up to ₹460 on 20 June affect it?
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Four parameters. The offer price is the highest of: (i) the negotiated or block price, ₹420; (ii) the 60-trading-day VWAP, ₹395; (iii) the 26-week VWAP, ₹368; and (iv) the highest price paid by the acquirer and its PACs for any acquisition in the 24 months preceding the public announcement, ₹445.
Answer: ₹445. The November purchase fixes the floor. The rationale is protective, not arithmetical: public shareholders must not be bought out at less than the best price the acquirer has recently been willing to pay.
The 20 June purchase. Any acquisition above ₹445 would oblige the acquirer to revise the offer to that higher price, so a purchase at ₹460 would push the offer to ₹460. Open-market purchases after the public announcement are otherwise not permitted outside the offer framework, and a purchase made during the offer period at a higher price must be reflected in the price offered to every shareholder. The acquirer cannot keep the ₹460 purchase for itself and offer ₹445 to the public.
3. The flagship suggests buying only 0.90% so that the group sits at exactly 25.00%. Will that avoid an open offer? Do the target board's resolutions of 25 June change the acquirer's obligation?
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Exactly 25.00% is not safe. The trigger applies to an acquirer who, together with PACs, would hold "25% or more". A holding of exactly 25.00% therefore still triggers a mandatory offer; only a purchase that keeps the group below 25% - 24.99% or less - avoids it. The group's real choice is a full offer or no further purchase at all.
The target's resolutions do not assist. A preferential allotment and a buyback approved by the board during the offer period are precisely the defensive steps the Code scrutinises, because they alter the capital structure and the acquirer's post-offer stake. Such capital actions during an offer period require shareholder approval by special resolution and, depending on the facts, SEBI's concurrence; a board resolution alone is insufficient.
Offer size is fixed. The 26% obligation is computed by reference to the total voting rights of the target at the time of the public announcement. Subsequent dilution by the target does not reduce the number of shares the acquirer must offer to buy.