Quick Answer
India's takeover regulations have evolved significantly since the initial Takeover Regulations of 1994 (the "old code" under the Bhagwati Committee recommendations), through the 1997 amendments, and finally to the current SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, framed on the basis of the Achutan Committee.
India’s takeover regulations have evolved significantly since the initial Takeover Regulations of 1994 (the “old code” under the Bhagwati Committee recommendations), through the 1997 amendments, and finally to the current SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, framed on the basis of the Achutan Committee Report. The 2011 Regulations represent a comprehensive overhaul designed to bring clarity, efficiency, and fairness to the acquisition process for listed companies in India.
For valuation professionals, the Takeover Code is one of the most consequential regulatory frameworks encountered in practice. The determination of the open offer price — and particularly the role of independent valuation under Regulation 22 — involves complex interplay between market data, valuation methodologies, regulatory requirements, and judicial precedent from the Securities Appellate Tribunal (SAT) and the Supreme Court of India.
This article provides an in-depth analysis of valuation obligations under the SEBI Takeover Code, covering trigger thresholds, offer price determination, the independent valuer’s role, prescribed valuation methods, delisting interplay, exemptions, and key SAT precedents.
The Takeover Code establishes two primary triggers that obligate an acquirer to make an open offer to the public shareholders of a listed target company:
Under Regulation 3(1), any acquirer who, together with persons acting in concert (PAC), acquires shares or voting rights in a target company that would entitle them to exercise 25% or more of the voting rights in such target company is required to make an open offer to acquire at least 26% of the total shares of the target company.
Key aspects of the initial trigger include:
Under Regulation 4, an acquirer who, together with PACs, holds between 25% and 75% of the shares or voting rights in a target company, cannot acquire more than 5% of the total shares or voting rights in any financial year (April to March) without making an open offer.
This provision prevents existing large shareholders from gradually increasing their stake to the detriment of minority shareholders. The 5% limit is measured on a gross basis — both acquisitions and disposals within the financial year are counted.
Regulation 5 addresses situations where the acquisition of shares or control of one entity results in the indirect acquisition of shares or voting rights in, or control over, a listed company. The open offer obligation is triggered if the indirect acquisition would have triggered Regulation 3 or 4 had it been a direct acquisition.
For valuation professionals, indirect acquisitions present unique challenges. The offer price must reflect the value attributed to the listed subsidiary in the acquisition of the parent entity, often requiring a sum-of-the-parts valuation or a breakup analysis.
Once an open offer is triggered, the acquirer must:
The minimum offer size is 26% of the total shares of the target company, and the offer must be made at a price not lower than the minimum offer price determined under Regulation 8.
Regulation 8 prescribes the methodology for determining the minimum offer price. The offer price must be the highest of the following:
The highest price paid or agreed to be paid by the acquirer or PACs for any acquisition of shares of the target company under the agreement that triggered the open offer obligation. This includes consideration paid in any form — cash, shares, or other assets — and must be computed by the merchant banker at fair value.
The volume-weighted average price (VWAP) of shares of the target company on the stock exchange where the maximum volume of trading was recorded during the 60 trading days immediately preceding the date of the public announcement. For frequently traded shares, the VWAP serves as a market-based floor price.
The highest price paid or payable by the acquirer or PACs for any acquisition of shares of the target company, including through purchases on the stock exchange, during the 52 weeks immediately preceding the date of the public announcement.
Regulation 22 is the cornerstone provision for valuation professionals under the Takeover Code. It comes into play when the target company’s shares fail the “frequently traded” test prescribed by SEBI.
Under Regulation 2(1)(j), shares are considered “frequently traded” if, on the stock exchange where the maximum volume of trading is recorded, the annualised trading turnover during the immediately preceding 12 calendar months is at least 10% of the total number of shares of the target company. Conversely, shares that fail this test are classified as “infrequently traded.”
The rationale behind this distinction is sound: if shares are infrequently traded, the market price may not reflect the true underlying value of the company, and reliance on VWAP alone could prejudice minority shareholders. In such cases, an independent fair value determination becomes necessary.
Where the shares of the target company are infrequently traded, Regulation 22 requires the acquirer to determine the offer price per share based on the valuation carried out by an independent valuer. Specifically:
The independent valuer must not have any material relationship with the acquirer, the target company, or their respective promoters/directors that could compromise objectivity. This includes:
The independence requirement is strictly enforced, and any conflict of interest — actual or perceived — can lead to SEBI rejecting the valuation report and directing a fresh valuation.
While Regulation 22 refers to “internationally accepted pricing methodologies on arm’s length basis,” it does not prescribe a single method. In practice, the following valuation approaches are commonly employed:
The DCF method estimates the present value of expected future cash flows of the target company, discounted at an appropriate rate (typically the weighted average cost of capital). Key inputs include:
The DCF method is particularly suitable for operating companies with predictable cash flows and is widely accepted by SEBI and SAT.
The market approach derives value from the pricing of comparable listed companies (trading multiples) or from precedent M&A transactions involving similar companies. Common multiples include EV/EBITDA, P/E (price-to-earnings), P/BV (price-to-book value), and EV/Revenue.
The challenge in India is identifying truly comparable companies, particularly for niche businesses or companies operating in highly fragmented markets. The valuer must carefully select comparables and apply appropriate adjustments for differences in size, profitability, growth, and risk.
The NAV method values the company based on the fair value of its net assets (total assets minus total liabilities). This approach is commonly used for:
Under the NAV approach, the valuer must independently assess the fair value of each material asset and liability, including intangible assets that may not be fully reflected on the balance sheet.
In many Regulation 22 valuations, the independent valuer uses a weighted average of two or more methods. The weights assigned to each method depend on the nature of the target company’s business, the reliability of the inputs, and the purpose of the valuation. SEBI and SAT have generally accepted blended approaches, provided the rationale for the weighting is clearly articulated.
Where a competing offer is made under Regulation 20, the original acquirer may match or exceed the competing offer price. The independent valuation under Regulation 22, if applicable, must be considered by both the original and competing acquirers in determining their respective offer prices.
For indirect acquisitions under Regulation 5, the offer price must be computed as if the shares were directly acquired. Where the acquisition involves a holding company with multiple subsidiaries, the valuer must isolate the value attributable to the listed subsidiary. This often involves a sum-of-the-parts analysis of the holding company, allocating the acquisition price among its constituent businesses and assets.
If the trigger arises from a preferential allotment under Chapter V of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the offer price must reflect the preferential allotment price in addition to the Regulation 8 parameters.
The interplay between the Takeover Code and the SEBI (Delisting of Equity Shares) Regulations, 2021 is a critical area for valuation professionals. Several scenarios arise:
An acquirer who makes an open offer under the Takeover Code and subsequently wishes to delist the target company must comply with the delisting regulations separately. The delisting price is determined through the reverse book building process, which may yield a price higher than the open offer price. The floor price for the delisting offer is determined using the Regulation 8 parameters, but the discovered price through reverse book building may be significantly higher.
Under Regulation 5A of the Takeover Code (inserted by amendment), an acquirer may, at the time of making the public announcement for the open offer, also indicate an intention to delist. If the delisting succeeds, the open offer is deemed to have succeeded at the delisting price. If the delisting fails, the open offer reverts to the original open offer price.
For valuers, this creates a dual-price scenario where the Regulation 22 valuation (if applicable) informs the open offer floor price, while the reverse book building process determines the delisting price. The valuer’s assessment of fair value can influence whether shareholders tender in the open offer or hold out for a potentially higher delisting price.
The 2021 delisting regulations introduced a fixed-price delisting route for companies with small public shareholding (aggregate value not exceeding INR 25 crore, subject to conditions). In such cases, the fixed price must be determined by an independent valuer, creating an additional touchpoint for valuation services.
Regulation 10 provides certain exemptions from the open offer obligation. Key exemptions relevant to valuation include:
Even where an exemption applies, the company secretary of the target company must ensure that the conditions for the exemption are strictly met, and SEBI must be informed of the reliance on the exemption.
The Securities Appellate Tribunal (SAT) has delivered several landmark rulings on valuation-related disputes under the Takeover Code. These precedents provide important guidance for independent valuers:
SAT has consistently held that the choice of valuation methodology must be appropriate to the nature of the target company’s business. In cases involving asset-rich companies (such as real estate firms), SAT has favoured the NAV approach, while for operating businesses with established cash flows, the DCF method has been preferred. The key principle is that the methodology must capture the intrinsic value of the company, not merely its book value or market capitalisation.
In several rulings, SAT has scrutinised the assumptions underlying DCF valuations — particularly revenue growth rates, profit margins, discount rates, and terminal value assumptions. Valuations based on overly conservative assumptions that systematically undervalue the target company have been set aside, with SAT directing fresh valuations. Conversely, valuations based on aggressive projections without adequate supporting evidence have also been questioned.
SAT has addressed whether the open offer price should include a control premium. The prevailing view is that the Regulation 8 parameters and the Regulation 22 valuation are designed to determine a fair price for minority shares being tendered in the open offer. A control premium, if any, is reflected in the negotiated price paid by the acquirer for the stake acquisition that triggered the open offer. The independent valuer should, however, be mindful of whether the valuation is being conducted on a controlling or minority interest basis and apply appropriate discounts or premiums.
In cases where the target company’s shares were thinly traded, SAT has emphasised that market price alone cannot be the determinant of fair value. The very purpose of Regulation 22 is to address situations where market price is an unreliable indicator. However, SAT has also held that the market price cannot be entirely disregarded — it serves as one data point among several that the valuer must consider.
Some notable SAT decisions that have shaped valuation practice under the Takeover Code include disputes involving the valuation of companies in the infrastructure, pharmaceutical, and real estate sectors. In these cases, SAT examined whether the independent valuer appropriately considered the specific characteristics of the target company’s business, the quality of the underlying assets, and the growth prospects of the industry. While the specific details and outcomes of these cases are beyond the scope of this article, the overarching principle is clear: the independent valuer must exercise professional judgement, consider all relevant factors, and provide a transparent, well-reasoned valuation.
Based on our experience at Virtual Auditor, we recommend the following best practices for independent valuers undertaking Regulation 22 assignments:
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 have been amended several times since their initial notification. Key amendments relevant to valuation include:
SEBI also issues informal guidance and circulars that clarify the application of the Takeover Code. Valuers should refer to the latest SEBI circulars and FAQs, available on the SEBI website, to ensure compliance with current regulatory expectations.
Acquisitions triggering the Takeover Code may also require approval from the Competition Commission of India (CCI) under Section 5 of the Competition Act, 2002, if the applicable turnover or asset thresholds are met. The CCI review focuses on the competitive effects of the acquisition, which is distinct from the SEBI valuation exercise but may affect the transaction timeline and conditions.
The Companies Act, 2013 governs various aspects of share transfers, allotments, and corporate restructuring that interact with the Takeover Code. Sections 230-232 (schemes of arrangement) and Section 66 (reduction of share capital) have implications for the open offer obligation and the exemptions under Regulation 10.
Cross-border acquisitions triggering the Takeover Code must comply with FEMA and the regulations issued by the Reserve Bank of India (RBI), including sectoral caps, pricing guidelines, and reporting requirements. The FEMA pricing guidelines for share transfers (based on DCF valuation for unlisted companies and market price for listed companies) may interact with the Takeover Code pricing requirements.
The income tax implications of the open offer — including capital gains in the hands of tendering shareholders, withholding tax obligations of the acquirer, and the applicability of securities transaction tax (STT) — must be considered in the overall transaction planning. For cross-border acquirers, treaty benefits and transfer pricing implications add further complexity.
Several emerging issues are shaping the landscape of takeover valuation in India:
An independent valuation is required under Regulation 22 when the shares of the target company are “infrequently traded” — meaning the annualised trading turnover in the preceding 12 months is less than 10% of the total shares. In such cases, the market price is considered an unreliable indicator of fair value, and an independent valuer must determine the offer price using internationally accepted methodologies. The valuation-based price serves as an additional parameter alongside the Regulation 8 minimums (negotiated price, VWAP, and 52-week highest price).
Under Regulation 22, the independent valuer must be either (a) a SEBI-registered merchant banker other than the manager to the open offer, (b) a SEBI-registered independent valuer, or (c) a chartered accountant holding a certificate of practice for not less than 10 years. The valuer must be independent of the acquirer, the target company, and their respective promoters and directors. Any material relationship that could compromise objectivity disqualifies the valuer from the engagement.
SEBI accepts “internationally accepted pricing methodologies on arm’s length basis.” In practice, the most commonly used methods are the discounted cash flow (DCF) method (income approach), comparable companies and precedent transactions (market approach), and net asset value (asset approach). Independent valuers typically use a combination of two or more methods with appropriate weighting. The methodology selected must be suited to the nature of the target company’s business, and the rationale for the selection and weighting must be clearly documented in the valuation report.
Yes, the valuation and the resulting offer price can be challenged before the Securities Appellate Tribunal (SAT). Shareholders, the target company, or SEBI itself may challenge the valuation on grounds including inappropriate methodology selection, unfair or unreasonable assumptions, lack of independence of the valuer, or computational errors. SAT has the power to direct a fresh valuation by a different independent valuer if it finds the original valuation to be deficient. To minimise the risk of successful challenge, the independent valuer should ensure that the report is comprehensive, well-reasoned, and transparently documented.
Under Regulation 5A of the Takeover Code, an acquirer may simultaneously make an open offer and indicate an intention to delist the target company. If the delisting succeeds through the reverse book building process, the open offer is deemed to have succeeded at the delisting price (which may be higher than the open offer price). If the delisting fails (e.g., due to insufficient shareholder acceptance), the open offer reverts to the original offer price. This dual-track mechanism allows the acquirer to pursue delisting while ensuring that minority shareholders have the safety net of the open offer. The independent valuer’s Regulation 22 assessment informs the floor price for the open offer component of this process.
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Regulation 8 prescribes the methodology for determining the minimum offer price. The offer price must be the highest of the following:
Regulation 22 is the cornerstone provision for valuation professionals under the Takeover Code. It comes into play when the target company's shares fail the "frequently traded" test prescribed by SEBI.
While Regulation 22 refers to "internationally accepted pricing methodologies on arm's length basis," it does not prescribe a single method. In practice, the following valuation approaches are commonly employed: