The Creeping Acquisition That Crossed 25%
Sunrise Cements Ltd (SCL) has 12.4 crore equity shares of Rs 10 each. The promoter group holds 21.42% - Sunrise Holdings 15.10% and Mr A. Rao 6.32%. On 3 June 2024, Mr K. Menon, a director of Sunrise Holdings and Mr Rao's brother-in-law, buys 39.7 lakh shares (3.20%) from a private equity fund at Rs 415. On 1 July 2024, Sunrise Holdings signs a share purchase agreement with the same fund for 60.8 lakh shares (4.90%) at Rs 462 and separately agrees to pay the fund Rs 95 crore for brand and non-compete covenants. SCL's 60-trading-day VWAP preceding the announcement is Rs 388; the highest price paid by the promoter group in the preceding 52 weeks is Rs 402. The group now holds 29.52% and plans to buy another 1% in the open market before March 2025. The CFO tells the board the purchases are within the creeping acquisition limit and that no public announcement is needed because the group is still below 30%. The board has not been told of the Rs 95 crore payment.
1. Is an open offer triggered, and on what date? Analyse who is a person acting in concert and why the creeping acquisition route is unavailable.
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The CFO's reasoning is wrong on two counts.
PAC status. Mr Menon is a director of the promoter holding company and the brother of Mr Rao's spouse, which brings him within the deemed persons acting in concert definition in Regulation 2(1)(q) of the SAST Regulations. His 3.20% purchase must therefore be aggregated with the promoter group. Group holding after 3 June 2024: 21.42% + 3.20% = 24.62% - below the trigger, so no offer on that date, but the purchase is not neutral: it fixes Rs 415 as a reference price.
The trigger. The 4.90% acquisition on 1 July 2024 takes the group to 29.52%, crossing 25%. Regulation 3(1) is breached the moment an acquisition entitles the acquirer together with PACs to exercise 25% or more, however small the incremental purchase. The obligation attaches on the date of the share purchase agreement, and the public announcement must be made on that date, followed by the detailed public statement within five working days and the draft letter of offer to SEBI within ten working days.
Why creeping acquisition fails. Regulation 5 is available only to an acquirer who already holds 25% or more and permits no more than 5% in a financial year. It cannot be used to reach 25% in the first place. The 'below 30%' belief has no basis in the Regulations; 30% was the old threshold and has not been the test since 2011.
2. Compute the minimum offer price and the offer size. Should the Rs 95 crore brand and non-compete payment be added to the offer price?
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Floor price under Regulation 8(2) is the highest of:
- the highest negotiated price: Rs 462;
- the 60-trading-day VWAP: Rs 388;
- the highest price paid by the acquirer or any PAC in the preceding 52 weeks: Rs 415 (Mr Menon, 3 June 2024), which also exceeds the Rs 402 earlier purchase.
Floor = Rs 462 per share.
The Rs 95 crore payment. Spread over the 60.8 lakh shares acquired it is Rs 156.25 per share - larger than the apparent premium itself. A private equity fund does not own or operate a brand, and a covenant that the fund will not compete in Indian cement is of doubtful independent value. Under the equal-opportunity principle, any consideration paid to a seller that is in substance part of the price for the shares must flow to all shareholders through the offer. The defensible position is either to include the payment in the offer price (Rs 618.25) or to obtain an independent valuation of the covenant and disclose it, with the reasoning, in the detailed public statement. Simply keeping it outside the offer is exactly the structure SEBI has repeatedly treated as a disguised control premium.
Offer size. Regulation 4 requires an offer for 26% of the voting rights, i.e. 3.224 crore shares, on a fully diluted basis if convertible securities exist. The group at 29.52% plus 26% reaches 55.52%, within the 25% minimum public shareholding.
3. What are the consequences of a delayed or omitted public announcement, and what should the board do about the planned 1% open market purchase?
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Delay. A failure to make the public announcement on the date of the agreement breaches Regulations 3 and 6. SEBI's usual directions are: make the offer anyway, pay interest on the offer price to shareholders for the delay (commonly 10% per annum), and face penalty under section 15H of the SEBI Act, which extends to Rs 25 crore or three times the profit made, whichever is higher. Directors who caused the omission can be proceeded against under section 15HB. The board cannot cure the breach by deciding that no offer was needed.
The 1% purchase. It must not be made during the offer period. An acquirer may not acquire shares outside the offer once the announcement is made, and an off-market purchase in that window converts the offer into a covert price-support mechanism. After the offer closes, the group may acquire within the 5% annual limit under Regulation 3(2), measured from the start of the financial year and counting the June and July purchases.
Board action. Record the agreement, the PAC relationships and the Rs 95 crore payment in the board minutes; treat the payment as consideration for the shares unless independently justified; ensure the detailed public statement discloses the full PAC shareholding and the basis of the price; and disclose the pre-announcement price movement to the audit committee. The company secretary should minute dissent if the board proceeds on the CFO's advice.