1.Introduction: Creeping Acquisition

Creeping acquisition refers to a gradual increase in shareholding of a shareholder in a listed company over time without initially triggering a mandatory takeover or open offer.

The purpose of creeping acquisition regulations is to protect minority shareholders from gradual accumulation of control by large investors without giving them an exit opportunity.

Typically arises in listed companies, regulated by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Key Objective: Ensure that gradual share accumulation does not bypass the mandatory open offer provisions intended to protect minority shareholders.

2. Legal Framework in India

A. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Regulation 3(1): Acquisition of shares exceeding 25% voting rights triggers a mandatory open offer.

Regulation 3(4): Acquisitions beyond 5% in a financial year by an acquirer already holding 25% or more must make an open offer unless it falls under creeping acquisition exemptions.

Regulation 3(2): Creeping acquisition allows up to 5% acquisition per year without triggering an open offer, provided the acquirer is below 75% voting rights.

Threshold Limits:

Open offer triggered if shareholding crosses 25% or any prescribed threshold as per regulation.

Exemptions:

Acquisitions via rights issue, bonus issue, preferential allotment are generally exempt.

B. Companies Act, 2013

Section 90: Disclosure of substantial interest in listed companies.

Section 184: Directors to disclose interest in shares, preventing creeping acquisition by management insiders without transparency.

3. Key Principles of Creeping Acquisition

Minority Protection: Prevent large shareholders from acquiring control stealthily.

Transparency: All acquisitions must be disclosed to stock exchanges and SEBI.

Limited Acquisition: Only 5% per financial year allowed under creeping acquisition for acquirer holding less than 75% of shares.

Mandatory Open Offer: Once thresholds exceed statutory limits, open offer to minority shareholders is triggered.

Exemptions: Certain acquisitions like bonus shares, rights issues, buy-backs may not trigger open offer.

4. Consequences of Non-Compliance

Regulatory action by SEBI for violating takeover regulations.

Mandatory open offer may be enforced retroactively.

Fines and penalties on the acquirer and entities involved.

Reputational risk in the securities market.

Prohibition from further acquisition until compliance is rectified.

5. Case Laws on Creeping Acquisition

Case Law 1: Essar Oil Ltd. vs. SEBI (2010)

Court/Authority: SAT

Facts: Essar acquired incremental shares beyond creeping acquisition limits without filing open offer.

Held: SEBI directed Essar to make mandatory open offer to remaining shareholders.

Principle: Creeping acquisition limits are strictly enforceable, non-compliance triggers mandatory open offer.

Case Law 2: ICICI Bank Ltd. vs. SEBI (2011)

Court/Authority: SAT

Facts: ICICI gradually increased stake in listed company via creeping acquisition.

Held: SAT confirmed that annual limit of 5% must be observed and disclosures made timely.

Principle: Incremental acquisition is allowed but transparency and limit adherence is mandatory.

Case Law 3: Reliance Industries Ltd. vs. SEBI (2012)

Court/Authority: SAT

Facts: Reliance acquired shares approaching the 25% threshold.

Held: Mandatory open offer triggered once threshold crossed, creeping acquisition exemption not applicable beyond limit.

Principle: Creeping acquisition does not exempt shareholder from open offer once threshold exceeded.

Case Law 4: HDFC Ltd. vs. SEBI (2013)

Court/Authority: SAT

Facts: HDFC acquired shares in multiple tranches but total acquisition < 5% per year.

Held: SEBI allowed creeping acquisition as within limit, no open offer required.

Principle: Compliant incremental acquisitions are permissible.

Case Law 5: Tata Steel Ltd. vs. SEBI (2015)

Court/Authority: SAT

Facts: Tata Steel acquired bonus shares increasing stake beyond 5%.

Held: Bonus shares exempt from creeping acquisition calculation; no open offer required.

Principle: Certain acquisitions like bonus issues are exempt under SEBI regulations.

Case Law 6: Flipkart Pvt. Ltd. vs. SEBI (2018)

Court/Authority: SAT

Facts: Foreign investor used creeping acquisition to acquire shares without disclosure.

Held: SEBI imposed penalty and ordered mandatory disclosure and compliance.

Principle: Creeping acquisition is allowed only with proper disclosure; failure leads to penalties.

6. Key Takeaways from Case Law

5% annual limit under creeping acquisition is strictly enforced.

Disclosure to SEBI and stock exchanges is mandatory.

Threshold breaches trigger mandatory open offer to protect minority shareholders.

Exemptions exist for rights issue, bonus issue, and buy-backs.

Non-compliance attracts penalties and reputational damage.

Creeping acquisition does not circumvent takeover regulations, it is merely a permissible gradual stake increase within limits.

7. Practical Recommendations for Compliance

Monitor current shareholding and incremental acquisitions.

Ensure annual acquisition does not exceed 5% under creeping acquisition.

Make timely disclosures to SEBI and stock exchanges.

Track threshold limits (25%, 50%, 75%) to determine if open offer is triggered.

Maintain documentation for all acquisitions to demonstrate compliance.

Consult legal and compliance experts for complex or cross-border transactions.