The Supreme Court of India has held that the post-facto ratification by shareholders cannot validate the illegal diversion of funds raised through a preferential issue for purposes other than those disclosed in the offer documents. Reversing an order of the Securities Appellate Tribunal (SAT), a bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan restored the penalties imposed by the SEBI Adjudicating Officer (AO) on Terrascope Ventures Limited and its directors.
Summary of Legal Issue and Outcome
The core legal question was whether a company, having raised funds through a preferential allotment by stating specific objects in its Extraordinary General Meeting (EoGM) notice, could later divert those funds to unrelated activities and legitimize the act through a subsequent shareholders’ resolution.
The Court concluded that such diversion constitutes “fraud” under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations). It ruled that acts which are void ab initio or impact public interest cannot be ratified. Consequently, the Court set aside the SAT’s order dated June 2, 2022, and restored the AO’s order imposing a total penalty of ₹1.5 crore on the company and its directors.
Background of the Case
In September 2012, Terrascope Ventures Limited (then Moryo Industries Limited) issued a notice for an EoGM to allot 74,50,000 equity shares on a preferential basis. The stated objects of the issue included capital expenditure, acquisition of companies, funding long-term working capital, and setting up offices abroad.
However, SEBI’s investigation revealed that between October 16, 2012, and November 8, 2012—immediately upon receipt—the proceeds were diverted to purchase shares of other companies and grant undocumented loans and advances to entities connected to a common promoter.
On April 29, 2020, the SEBI Adjudicating Officer imposed a penalty of ₹70 lakh under the SEBI Act for PFUTP violations and ₹30 lakh under the Securities Contracts (Regulation) Act (SCRA) for violating listing conditions. Additionally, penalties of ₹25 lakh each were imposed on the Managing Director, Mr. Manoharlal Saraf, and Director, Mrs. Geeta Manoharlal Saraf. The SAT later set these aside, reasoning that a shareholders’ resolution passed on September 29, 2017, had ratified the variation in fund utilization.
Arguments of the Parties
Appellant (SEBI): Senior Advocate Naveen Pahwa argued that the diversion happened immediately after funds were raised, indicating a fraudulent intent from the inception. He contended that Section 27 of the Companies Act, which allows variation of objects in a prospectus, does not apply to private placements or post-facto diversions. He further argued that illegal and void acts cannot be ratified.
Amicus Curiae: Mr. Mahfooz A. Nazki, appointed as amicus curiae, argued that while Section 27 might not apply directly, the principles analogous to it should allow shareholders to grant retrospective approval. He submitted that the company had an implied power to vary objects as long as it did not contravene the law and that all advanced loans had eventually been recovered.
Court’s Analysis and Observations
The Court rejected the amicus curiae’s reliance on Section 27 of the Companies Act, noting that it specifically applies to “prospectuses” and not to private placements. Even if analogous principles were applied, the law prohibits using such funds for trading in equity shares of other listed companies—an activity the respondent had engaged in.
On the concept of “fraud,” the Court noted that under the PFUTP Regulations, the definition is “broad and expansive” and does not require the strict proof of deceit needed under the Contract Act.
“Fraud would also include an active concealment of a fact by a person having knowledge or belief of the fact and making of a promise without any intention of performing it.”
The Court emphasized that disclosure of objects has a “salutary purpose” as investors adjust their affairs based on such information.
“The investors and all other stakeholders… adjust their affairs based on the disclosure made. All this is set out only to show that disclosure of the objects… have salutary purposes, which ought not to be casually compromised with.”
Regarding ratification, the Court held:
“Appointments made in violation of the mandatory provisions of a statute would be illegal and, thus, void. Illegality cannot be ratified. Illegality cannot be regularised, only an irregularity can be.”
The Court further observed that the speed of diversion (the very next day after funds arrived) proved that the respondents had no intention to use the funds for the stated objects from the very beginning.
Decision
The Supreme Court held that the SAT’s summary finding—that ratification made the acts valid—was untenable. It ruled that when a matter involves public law dimensions and the protection of multiple stakeholders, a private resolution cannot wipe off a crystallized liability.
The Court allowed the appeals, set aside the SAT order, and restored the Adjudicating Officer’s order dated April 29, 2020.
Case Details
- Case Title: Securities and Exchange Board of India v. Terrascope Ventures Limited Etc.
- Case Number: Civil Appeal Nos. 5209-5211 of 2022
- Bench: Justice J.B. Pardiwala and Justice K.V. Viswanathan
- Date of Judgment: March 17, 2026
- Statutes Cited: SEBI Act, 1992; SEBI (PFUTP) Regulations, 2003; Companies Act, 2013; Securities Contracts (Regulation) Act, 1956.
- Cases Discussed: SEBI v. Kishore R. Ajmera; SEBI v. Kanaiyalal Baldevbhai Patel; SEBI v. Rakhi Trading (P) Ltd.; Dr. A. Lakshmanaswami Mudaliar v. LIC.
