SECURITIES AND EXCHANGE BOARD OF INDIA v. TERRASCOPE VENTURES LIMITED ETC. ETC.
Illegality and Fraud in Diversion of Preferential Allotment Proceeds Cannot Be Validated by Subsequent Shareholder Ratification under SEBI Regulations.
Court: Supreme Court of India
Citation: 2026 INSC 245
Decision Date: 17-03-2026
List of Laws
Securities and Exchange Board of India Act, 1992; SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003; SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009; Securities Contracts (Regulation) Act, 1956; Companies Act, 2013 (Section 27, Section 42); Doctrine of Ultra Vires and Ratification
- Facts: The respondent-company, Terrascope Ventures Limited (formerly Moryo Industries Limited), raised approximately Rs. 15.87 crores through a preferential allotment of shares in 2012. The stated objects in the Extraordinary General Meeting (EoGM) notice included capital expenditure, acquisitions, and working capital. However, immediately upon receipt, the company diverted these funds to provide loans to entities connected to its promoters and to invest in the shares of other companies—activities not disclosed as primary objects. In 2014, the company amended its Memorandum of Association (MoA) to include financing activities and, in 2017, passed a shareholder resolution purportedly ratifying the diversion of funds. SEBI's Adjudicating Officer (AO) imposed monetary penalties on the company and its directors for violating PFUTP Regulations and listing conditions.
- Procedural Posture: The Securities Appellate Tribunal (SAT) set aside the AO's penalty orders, holding that subsequent shareholder ratification validated the diversion of funds. SEBI appealed this reversal to the Supreme Court of India under Section 15Z of the SEBI Act, 1992.
- Issue: Whether the subsequent ratification by shareholders of a company can legalize the diversion of funds raised for specific objects, thereby exonerating the company from charges of fraud and misrepresentation under SEBI regulations?
- Holding: No. The Supreme Court held that the SAT was not justified in reversing the AO's order. Subsequent ratification cannot legitimize a prior illegal act that involves public interest and statutory violations.
- Reasoning: The Court reasoned that SEBI regulations, particularly the PFUTP Regulations, have a "public law dimension" aimed at protecting the integrity of the securities market and the interests of all stakeholders, not just current shareholders. Disclosure of the "objects of the issue" is a mandatory statutory requirement under ICDR Regulations and the Listing Agreement; misrepresenting these objects induces investors to deal in securities under false pretenses, which constitutes "fraud" in the expansive sense used in securities law. The Court emphasized that an "illegality cannot be ratified", whereas only a mere "irregularity" might be. Since the diversion was contrary to public policy and statutory disclosure norms, a private resolution by shareholders could not wipe out the crystallized liability or the fraudulent nature of the inception. Furthermore, the Court clarified that the Whole Time Member (WTM) and the Adjudicating Officer (AO) operate in separate fields with different powers, and the WTM's decision not to impose further administrative restraint did not bar the AO from imposing monetary penalties for the same underlying facts.
🔒 For Members Only