News
SC: Fraudulent Diversion of Issue Proceeds Cannot Be Ratified
On 17th March 2026, the Supreme Court in its judgment in SEBI v. Terrascope Ventures Ltd. held that the diversion of funds raised through preferential allotment for purposes other than those disclosed to investors constitutes fraudulent conduct under securities law, particularly under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations), and cannot be cured by subsequent shareholder ratification.
The case arose from a 2012 preferential allotment through which Terrascope Ventures Ltd. (then Moryo Industries Ltd.,) raised approximately ₹15.87 crore. In the notice convening the Extraordinary General Meeting, the company stated that the funds would be used for capital expenditure, acquisitions, working capital, and expansion-related purposes.
However, SEBI found that immediately almost immediately after receiving the funds, including from the next day onwards, the company diverted the funds, channelling the money into investments in shares of other entities and granting loans and advances, uses that were inconsistent with the purposes disclosed to shareholders. Consequently, SEBI’s Adjudicating Officer imposed monetary penalties on the company and its directors.
While the Whole Time Member (WTM) had earlier restrained the entities from accessing the securities market, the Securities Appellate Tribunal (SAT) set aside the penalties, relying on a 2017 shareholder resolution that purported to ratify the altered utilization of funds.
Setting aside the SAT’s order, the Supreme Court emphasised that disclosures made to investors are not mere formalities but form the foundation of trust in the securities market. It observed that when a company raises funds, investors and other stakeholders rely on such disclosures to make informed decisions, and any deviation undermines transparency and market integrity.
Noting from a broader regulatory framework, the Court stated that disclosure obligations under Regulation 73 of the ICDR Regulations serve a substantive purpose and cannot be treated casually or diluted through subsequent actions. It held that the conduct of the company demonstrated a lack of intent from inception to utilize the funds for the stated purposes, particularly given the immediate diversion of funds.
Rejecting the argument of post facto ratification, the Court held that violations of securities law have a public law character, impacting investors and the integrity of the market beyond just shareholders, and therefore cannot be legitimized through shareholder approval. Thus, the appeal was allowed, the SAT’s order was set aside, and the order of the Adjudicating Officer was restored.
