Preferential Allotment, Creeping Acquisition and the SAST Open Offer at Meridian Textiles
Meridian Textiles Ltd has 80 crore equity shares of ₹10 each. The promoter group holds 47.8%. The board approves a preferential allotment of 9.5 crore equity shares to the promoter group at ₹120 per share, raising ₹114 crore. The 26-week VWAP is ₹128 and the 2-week VWAP is ₹124. After the allotment, the promoter group would hold 53.3%. In the same financial year, the promoter group has already bought 1.8% of the voting rights in the open market. The company’s legal adviser says no open offer is needed because “a preferential allotment is not a market purchase” and because the promoter is not acquiring control. The CFO wants to know whether scaling the allotment down to 7.5 crore shares would avoid an open offer, and whether the ₹120 price is defensible. The board wants to complete the funding before the quarter-end.
1. Calculate the post-issue promoter holding and decide whether the SAST open offer obligation is triggered.
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The post-issue promoter holding is (38.24 crore + 9.5 crore) / (80 crore + 9.5 crore) = 47.74 / 89.5 = 53.34%. The increase is 53.34% − 47.8% = 5.54 percentage points.
Under the SEBI (SAST) Regulations, 2011, an acquirer crossing 25% or acquiring 5% or more of the voting rights in a financial year must make a public announcement of an open offer, unless an exemption applies. The 5% test is not avoided by the fact that the shares are issued preferentially rather than bought on the exchange; the regulations look at the acquisition of voting rights. Nor does the “no change in control” argument help, because the obligation can be triggered by the 5% acquisition itself even without a change in control.
The 1.8% already acquired in the same financial year must be aggregated. The promoter group has therefore acquired 5.54% + 1.8% = 7.34% in the financial year. An open offer is triggered. The offer must be for at least 26% of the target’s voting capital, subject to the detailed SAST conditions, and the public announcement must be made within the prescribed time. The board should not complete the allotment on the assumption that no offer is needed.
2. Would scaling the allotment to 7.5 crore shares avoid the open offer? State the conditions and the pricing constraint.
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Scaling to 7.5 crore shares gives a post-issue holding of (38.24 + 7.5) / (80 + 7.5) = 45.74 / 87.5 = 52.27%. That is a 4.47 percentage-point increase. On its own, 4.47% is below 5%. But the 1.8% open-market purchase must be added, giving 6.27% for the financial year. The open offer is still triggered. Even 7.5 crore shares is too large.
To stay within the creeping-acquisition limit, the aggregate increase for the financial year must remain below 5%. After the 1.8% already acquired, the preferential allotment can add less than 3.2 percentage points. On these numbers, the maximum preferential allotment is roughly 5.2 crore shares, not 7.5 crore. The company must also ensure there is no change in control and that the acquisition falls within the creeping-acquisition exemption; the exemption is not a general permission to acquire 5% each year without regard to the aggregate.
Pricing is a separate problem. The preferential issue floor price is the higher of the 26-week VWAP and the 2-week VWAP, i.e. ₹128, not ₹120. An issue at ₹120 is below the floor and would not comply with the ICDR pricing rules unless a specific exception applies. The board should reprice at or above ₹128, obtain the required shareholder approval, and apply the prescribed lock-in to the promoter allotment.
3. What approvals and sequencing should the board follow if it decides to proceed with the open offer?
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The board should sequence the transactions carefully. First, it must determine whether the preferential allotment and the open offer are conditional on each other or whether the offer is triggered before the allotment. The public announcement of the open offer must be made within the prescribed time after the triggering acquisition; the board cannot wait for the quarter-end funding. Second, the preferential allotment requires shareholder approval by special resolution, with the promoter group abstaining, and the pricing must be at or above the floor price. Third, the open offer requires an escrow arrangement, a draft letter of offer, independent director recommendations, and the other SAST disclosure and procedural steps.
The board should also disclose the promoter’s 1.8% open-market purchase and the resulting aggregation to the stock exchanges. If the company wants to avoid the open offer, it should reduce the allotment to the safe level before any further acquisition, not after. Because the transactions are within a short window and the funding is urgent, the board should obtain a written SAST compliance opinion and a timetable from the merchant banker before approving the allotment.