Shareholder Ratification Cannot Validate Illegal Fund Diversion

Case Details: Securities and Exchange Board of India vs. Terrascope Ventures Ltd., etc. [2026] 184 taxmann.com 332 (SC)

Judiciary and Counsel Details

K.V. Viswanathan & J.B. Pardiwala, JJ.
Navin Pahwa, Sr. Adv., Dhaval Mehrotra & Ms Aditi Desai, Advs. for the Appellant.
Mahfooz Ahsan Nazki, Aor, Mahfooz A. Nazki, Amicus Curiae, Vivek Rajan D.B., Ms Nazarat Fatima & Hemant Gupta, Advs. for the Respondent.

Facts of the Case

In the instant case the respondent company issued a notice for an Extra Ordinary General Meeting (EoGM) disclosing, under Section 173(2) of the Companies Act, 1956 read with Regulation 73(1) of the SEBI (ICDR) Regulations, 2009, that the proceeds of a proposed preferential allotment would be used for capital expenditure including acquisitions, long-term working capital, marketing, setting up of offices abroad and other approved corporate purposes.

A special resolution was passed, and preferential allotment was made to 42 entities, raising about Rs. 15.88 crores.

The SEBI alleged that, immediately upon receipt, the company diverted proceeds to purchase shares of other companies and to grant loans/advances, contrary to disclosed objects. The SEBI issued a show cause notice for alleged Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) violations and, by a final order, recorded that the company had utilised proceeds for objects not disclosed in the EoGM notice.

The SEBI imposed penalties on the company of Rs. 70 lakhs under Section 15HA of the SEBI Act, Rs. 30 lakhs under Section 23E of the Securities Contracts (Regulation) Act, 1956 (SCRA), and Rs. 25 lakhs each on the Managing Director and the Director for PFUTP violations.

On an appeal, the Securities Appellate Tribunal (SAT) set aside SEBI’s orders, holding that once utilisation of proceeds was ratified by shareholders on 29.09.2017, acts became valid/authorised, there was no variation in utilisation, and consequently, there was no violation of Clause 43 of the Listing Agreement.

It was noted that since the entire amount raised was utilised for an object other than one set out in the EoGM notice, and ratification was sought after committing illegality, reliance on Section 27 read with Section 62(1)(c) of the Companies Act, 2013 was completely misplaced.

Supreme Court Held

The Supreme Court held that the subsequent shareholder ratification dated 29.09.2017 and the MoA amendment dated 12.03.2014 could not validate such variation, as it was a plainly illegal act impacting a vast array of stakeholders other than shareholders of the company.

Therefore, the impugned order passed by the SAT could not be sustained and was to be set aside. Thus, the penalty imposed was not disproportionate.

List of Cases Reviewed

Order of Securities Appellate Tribunal, Mumbai in Appeal Nos. 116 of 2021, 114 of 2021 and 115 of 2021, Dated 02.06.2022 (para 79) set aside

List of Cases Referred to

SEBI v. Rakhi Trading (P.) Ltd. [2018] 90 taxmann.com 147/146 SCL 163 (SC) (para 37)
SEBI v. Kanaiyalal Baldevbhai Patel [2017] 85 taxmann.com 267/144 SCL 5 (SC) (para 37)
SEBI v. Kishore R. Ajmera [2016] 66 taxmann.com 288/134 SCL 481 (SC) (para 37)
Shri Lachoo Mal v. Shri Radhey Shyam (1971) 1 SCC 619 (para 59)
Government of Andhra Pradesh v. K. Brahmanandam 2008 taxmann.com 10758 (SC) (para 60)
Pramod Kumar v. U.P. Secondary Education Services Commission (2008) 7 SCC 153 (para 61)
Birkbeck Permanent Benefit Building Society, In re (1912) 2 Ch. D. 183 (para 62)
Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India 1962 SCC OnLine SC 9 (para 62)
SEBI v. Ram Kishori Gupta [2025] 173 taxmann.com 299/188 SCL 714 (SC) (para 67)
Nirmal N. Kotecha v. SEBI [2021] 129 taxmann.com 221/167 SCL 831 (SAT – Mumbai) (para 67).