Securities and Exchange Board of Indiav.Terrascope Ventures Limited & Ors

Synopsis

This landmark judgment, delivered by the Supreme Court of India on March 17, 2026, arises from an appeal filed by the Securities and Exchange Board of India (SEBI) against an order of the Securities Appellate Tribunal (SAT). The SAT had exonerated the respondent-company and its directors from penalties imposed by SEBI's Adjudicating Officer for violations of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and the Securities Contracts (Regulation) Act, 1956 (SCRA). The core issue centered on a preferential allotment of shares by the respondent-company in 2012. The funds raised (Rs. 15.87 crores) were immediately diverted to purchase shares of other companies and grant loans/advances, which were not the objects disclosed in the notice for the Extraordinary General Meeting (EoGM). The company later sought to "ratify" this diversion through a shareholders' resolution in 2017. The Supreme Court reversed the SAT's decision, holding that the diversion of funds for undisclosed purposes constitutes a fraudulent and unfair trade practice under the PFUTP Regulations, that such illegality cannot be ratified by a subsequent shareholders' resolution, and that separate proceedings by the Whole Time Member (WTM) for restraining orders and the Adjudicating Officer for imposing penalties are valid and distinct.

1. Basic Information of the Judgment

Case Title: Securities and Exchange Board of India v. Terrascope Ventures Limited & Ors.

Citation: 2026 INSC 245

Court: Supreme Court of India

Jurisdiction: Civil Appellate Jurisdiction

Case Numbers: Civil Appeal Nos. 5209-5211 of 2022

Coram: Justice K.V. Viswanathan

Nature of Bench: Single Judge Bench

Date of Judgment: March 17, 2026

2. Legal Framework and Relevant Provisions

• Primary Statutes and Regulations:
  Securities and Exchange Board of India Act, 1992 (SEBI Act):
  Section 11: Functions of the Board to protect investors and regulate the securities market.
  Section 11(4)(b): Power to restrain persons from accessing the securities market.
  Section 11B: Power to issue directions, including for disgorgement.
  Section 15HA: Penalty for fraudulent and unfair trade practices (minimum Rs. 5 lakhs, up to Rs. 25 crores or three times the profits, whichever is higher).
  Section 15-I: Adjudication of penalties.
  Section 15Z: Appeals to the Supreme Court from SAT orders.
  SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations):
  Regulation 2(1)(c): An expansive, inclusive definition of "fraud," covering any act, expression, omission, or concealment committed to induce another person to deal in securities, whether or not there is wrongful gain. It includes active concealment of a fact and a promise made without any intention of performing it.
  Regulation 3: Prohibition of certain dealings in securities, including dealing in a fraudulent manner, employing manipulative devices, or engaging in any act that operates as fraud.
  Regulation 4(2): Deems certain acts as manipulative, fraudulent, or unfair trade practices, including:
  (f) knowingly publishing false or untrue information relating to securities.
  (k) disseminating false or misleading information likely to influence investor decisions.
  (r) knowingly planting false or misleading news which may induce sale or purchase of securities.
  Securities Contracts (Regulation) Act, 1956 (SCRA):
  Section 21: Conditions for listing – a company must comply with the listing agreement.
  Section 23E: Penalty for failure to comply with listing conditions (up to Rs. 25 crores).
  Companies Act, 1956 (applicable at the time of the EoGM):
  Section 173(2): Requirement of an explanatory statement for meetings.
  Companies Act, 2013:
  Section 27: Variation in terms of contract or objects in a prospectus – requires a special resolution and compliance with rules. Held inapplicable to preferential allotments.
  Section 42: Private placement.
  Section 62(1)(c): Further issue of share capital.
  SEBI (ICDR) Regulations, 2009:
  Regulation 73(1): Mandates disclosure of objects of a preferential issue in the explanatory statement to the notice for the general meeting.
  Listing Agreement (Clause 43) / SEBI (LODR) Regulations, 2015:
  Clause 43 (of the erstwhile listing agreement) and Regulation 32 of LODR mandate quarterly reporting of deviations in the use of proceeds from the stated objects.

• Key Precedents Relied Upon:
  SEBI v. Kishore R. Ajmera (2016) 6 SCC 368: Proof of violation of regulations may be inferred from the totality of attending facts and circumstances.
  SEBI v. Kanaiyalal Baldevbhai Patel (2017) 15 SCC 1: The Court must weigh against an interpretation that protects unjust claims over just, fraud over legality, and expediency over principle.
  SEBI v. Rakhi Trading (P) Ltd. (2018) 13 SCC 719: Any practice not conforming to fair and transparent principles of trade is an unfair trade practice.
  Government of A.P. v. K. Brahmanandam (2008) 5 SCC 241: Illegality cannot be ratified or regularized; only an irregularity can be.
  Pramod Kumar v. U.P. Secondary Education Services Commission (2008) 7 SCC 153: An appointment contrary to statute is void and cannot be regularized. Illegality cannot be ratified.
  Dr. A. Lakshmanaswami Mudaliar v. LIC (1963) 1 SCR 567 (as cited): An act that is ultra vires (beyond the power of the company) is absolutely void and cannot be ratified even by all shareholders.
  SEBI v. Ram Kishori Gupta (2023) SCC OnLine SC 1439: Distinguished on facts. Held that a later order cannot be passed on the same cause of action if an earlier order on the same had attained finality.

3. Relevant Facts of the Case

• On September 3, 2012, the respondent-company (then Moryo Industries Ltd.) issued a notice for an Extraordinary General Meeting (EoGM) to seek approval for a preferential allotment of up to 74,50,000 equity shares to 49 non-promoters. The explanatory statement set out the objects of the issue: (a) capital expenditure including acquisition of companies/business; (b) funding long-term working capital; (c) marketing; (d) setting up offices abroad; and (e) other approved corporate purposes.

• A special resolution was passed on October 1, 2012. Between October 16 and November 8, 2012, the company raised Rs. 15,87,50,000/- from the preferential allotment.

• Immediately thereafter, between October 16 and November 9, 2012, the funds were diverted for purposes not disclosed in the EoGM notice: a significant portion was invested in shares of other companies (over Rs. 10 crores) and given as loans/advances to various entities (over Rs. 5 crores).

• On December 4, 2014, the Whole Time Member (WTM) of SEBI passed an ex-parte ad-interim order, restraining the company, its directors, and others from dealing in the securities market.

• On March 12, 2014, the company amended its Memorandum of Association to include financing, investment, and share trading as objects. This was after the funds had already been diverted.

• On March 19, 2019, the WTM confirmed his ad-interim order, but since the respondents had already been under restriction for over four years, no further penalty was imposed under those proceedings.

• Meanwhile, on April 27, 2018, the Adjudicating Officer (AO) issued a show cause notice to the respondents for violations of PFUTP Regulations and SCRA.

• On September 29, 2017, the company passed a purported "ratification" resolution, seeking to ratify the diversion of funds.

• On April 29, 2020, the AO passed three orders, imposing monetary penalties: Rs. 70 lakhs on the company under Section 15HA for PFUTP violations and Rs. 30 lakhs under Section 23E of SCRA; and Rs. 25 lakhs each on the two directors for PFUTP violations.

• The SAT, by a short order dated June 2, 2022, allowed the appeals, holding that the ratification by shareholders made the acts valid and authorized, and therefore there was no violation.

• SEBI appealed to the Supreme Court.

4. Issues Before the Supreme Court

• Whether the diversion of funds raised through a preferential allotment for purposes not disclosed in the explanatory statement to the EoGM notice constitutes a violation of the PFUTP Regulations and the SCRA?

• Whether such a violation, once committed, can be cured or ratified by a subsequent resolution of the shareholders?

• Whether the Adjudicating Officer's proceedings for imposition of a monetary penalty could validly run parallel to the Whole Time Member's proceedings for issuing restraining orders, or were they barred?

5. Ratio Decidendi of the Court

The Supreme Court allowed SEBI's appeal, set aside the SAT's order, and restored the orders of the Adjudicating Officer. The key findings are as follows:

• Diversion of Funds for Undisclosed Purposes is a Fraudulent Act: The Court held that utilizing the proceeds of a preferential issue for purposes not disclosed in the explanatory statement to the EoGM notice is a clear violation of Regulations 3 and 4 of the PFUTP Regulations. The disclosure of objects is not a mere formality; it is a statutory requirement under Regulation 73 of the ICDR Regulations and is fundamental to investor protection. Investors and other stakeholders make decisions based on these disclosures. Diverting funds immediately after receipt (the next day) demonstrates that there was no intention from the very inception to use the funds for the stated objects. This falls within the expansive definition of "fraud" under Regulation 2(1)(c), which includes a promise made without any intention of performing it.

• Illegality Cannot Be Ratified: The Court firmly rejected the argument that a subsequent shareholders' resolution (in 2017) could ratify the illegal diversion of funds. Relying on Brahmanandam and Pramod Kumar, the Court held that an illegality cannot be ratified; only an irregularity can be. The act was void ab initio (from the beginning) and contrary to statutory regulations designed to protect public interest. A private resolution cannot wipe out a liability crystallized under public law.

• The Act was Ultra Vires the Disclosure, Not Just the Company's Objects: The Court distinguished between the company's objects clause in its Memorandum of Association and the objects stated in the explanatory notice for the preferential issue. What matters for PFUTP purposes is the latter. The funds were raised based on a specific representation to investors. Using them for other purposes, even if later included in the MoA, was a breach of that representation and a fraud on the investors and the market. An act contrary to the regulations is "ultra vires" in the sense of being beyond the power conferred by law, and following Lakshmanaswami Mudaliar, such an ultra vires act cannot be ratified.

• Separate Proceedings by WTM and AO are Valid and Distinct: The Court clarified that the powers of the WTM (under Sections 11, 11B) and the Adjudicating Officer (under Section 15-I) are distinct and operate in separate fields. The WTM's power is to issue directions to protect the market and investors (e.g., restraining orders, disgorgement). The AO's power is to impose monetary penalties for proven violations. Both can be exercised based on the same set of facts. In this case, the WTM's proceedings resulted in a restraining order, which was sufficient at that time. The AO's separate proceedings for a penalty were valid and necessary to ensure deterrence. The judgment in Ram Kishori Gupta was distinguished, as it dealt with a situation where a later order sought to supplement an earlier final order on the same relief.

• Importance of Disclosure in Securities Market: The Court emphasized the critical importance of accurate and complete disclosure in the securities market. The entire edifice of investor protection rests on the principle that companies must disclose material facts truthfully. Any deviation from disclosed objects, especially immediate and significant diversion, strikes at the heart of market integrity.

6. Legal Framework Clarified / Established

This judgment makes several significant contributions to securities law jurisprudence:

• PFUTP Violation by Misuse of Issue Proceeds: It firmly establishes that the misuse of funds raised through a preferential issue for purposes not disclosed in the offer document is a fraudulent and unfair trade practice under the PFUTP Regulations. The timing of the diversion can be evidence of initial intent to defraud.

• Shareholder Ratification Cannot Cure SEBI Violations: The judgment creates a clear and important principle: a violation of a public law regulation (like PFUTP) that affects the market and multiple stakeholders cannot be cured by a private act of shareholders, such as a ratification resolution. The rights of investors and the integrity of the market are not waivable by the company's shareholders.

• Distinction Between WTM and AO Powers Reaffirmed: The judgment provides a clear roadmap for SEBI's enforcement machinery. It confirms that protective/directive powers (WTM) and punitive/penalty powers (AO) are distinct and can be pursued concurrently. An order from one does not bar proceedings from the other, as long as they are for different statutory purposes.

• Expansive Interpretation of "Fraud": The judgment reinforces the wide amplitude of the definition of "fraud" under Regulation 2(1)(c). It confirms that it includes acts done without any intention of performing a promise, even without a traditional deceitful element, if the effect is to induce dealing in securities.

• Doctrine of "Ultra Vires" Applied to Regulatory Violations: The Court expansively applied the doctrine of ultra vires, holding that an act contrary to a statutory regulation is void and cannot be ratified, much like an act contrary to a company's memorandum.

7. Court's Examination and Analysis

The Supreme Court's analysis was exhaustive and methodical:

• Review of Statutory Scheme: The Court began by laying out the objects of the SEBI Act and PFUTP Regulations, emphasizing investor protection and market integrity. It quoted extensively from precedents to establish the high standards expected.

• Factual Analysis of Diversion: The Court noted the undisputed fact that funds were received between October 16 and November 8, 2012, and diverted to loans and investments between October 16 and November 9, 2012. This immediate diversion was key to inferring a lack of bona fide intent from the outset.

• Rejection of "Market Conditions" Defense: The AO had rejected the respondents' vague explanation of adverse market conditions as unsubstantiated. The Supreme Court endorsed this finding, noting that the respondents failed to elaborate on what specific difficulties prevented them from pursuing the stated objects.

• Analysis of the "Ratification" Argument: This was the core of the judgment. The Court dissected the argument:
  It held Section 27 of the Companies Act inapplicable as it deals with prospectuses, not private placements.
  It distinguished between a company's objects clause and the objects of a specific issue. The latter is the relevant disclosure for investor protection.
  It applied the principle that an illegality cannot be ratified, citing service law precedents (Brahmanandam, Pramod Kumar).
  It invoked the doctrine of ultra vires from Lakshmanaswami Mudaliar, arguing that an act contrary to law is void and cannot be validated even by unanimous shareholder consent.

• Analysis of the WTM/AO Proceedings: The Court traced the statutory scheme and the amendments over time. It concluded that the WTM's power (to restrain) and the AO's power (to penalize) were separate. The WTM's 2019 order did not preclude the AO from proceeding on the penalty aspect. The Ram Kishori Gupta case was distinguished because there the same authority had passed a subsequent order on the same cause of action after an earlier order had become final, which was not the case here.

• Proportionality of Penalty: The Court briefly noted that the penalties imposed were not disproportionate.

8. Critical Analysis and Final Outcome

• Outcome: The Supreme Court allowed SEBI's appeal. The impugned order of the SAT was set aside. The orders of the Adjudicating Officer dated April 29, 2020, imposing monetary penalties on the respondent-company (Rs. 1 crore total) and its two directors (Rs. 25 lakhs each) were restored.

• Critical Perspectives:
  Strengths: The judgment is a powerful and comprehensive reaffirmation of SEBI's regulatory authority and the paramount importance of investor protection. It closes a potential loophole where companies might think they can misuse investor funds and then get a "clean chit" from their own shareholders. The clear distinction between shareholder rights and public market obligations is crucial. The judgment provides immense clarity on the interplay between different provisions of the SEBI Act and the validity of parallel proceedings.
  Deterrence Against Corporate Misconduct: By upholding the substantial penalties and rejecting the ratification argument, the judgment sends a strong deterrent message to corporates that misusing funds raised from investors will have serious consequences. It prevents companies from treating investor money as freely available for any purpose, subject only to later shareholder approval.
  Clarity on SEBI's Enforcement Powers: The judgment provides a clear and practical guide for SEBI's enforcement actions. It confirms that protective orders (like restraints) and punitive orders (like penalties) can run in parallel, maximizing the regulator's ability to both stop ongoing harm and punish past misconduct.
  Potential Criticism: One could argue that the Court was overly harsh in completely dismissing the relevance of the subsequent shareholder ratification. A shareholder-centric view might suggest that if the ultimate owners of the company (the shareholders) are not aggrieved, the matter should end there. However, the Court's reasoning that SEBI's regulations protect a much wider class of stakeholders (potential investors, the market's integrity, public confidence) is constitutionally sound and aligns with the purpose of the SEBI Act. The market is not just about the company's existing shareholders.
  Guidance for Companies: The judgment provides clear guidance to companies raising funds from the market. The objects stated in the offer document are sacrosanct. Any deviation, even if for purposes that are otherwise permissible under the company's MoA, can lead to serious penalties. If a genuine change in circumstances requires a change in the use of funds, the proper route is to go back to investors with a clear proposal for variation before diverting the funds, not to seek ratification after the fact.

• Core Final Directive: Misusing funds raised from a preferential issue for purposes not disclosed in the explanatory statement to the notice of meeting is a fraudulent act under the PFUTP Regulations. Such an act, being a violation of public law intended to protect the securities market and all its stakeholders, cannot be ratified or cured by a subsequent resolution of the shareholders. An illegality cannot be ratified. The powers of the Whole Time Member to issue protective directions and the Adjudicating Officer to impose monetary penalties are distinct and can be exercised concurrently based on the same set of facts. Companies must strictly adhere to the objects disclosed at the time of raising funds, and any material deviation must be preceded by proper disclosure and approval, not followed by post facto ratification.

(MCQs)

1. Under Regulation 2(1)(c) of the SEBI (PFUTP) Regulations, 2003, "fraud" includes:?
A) Only acts done with a deceitful intention resulting in wrongful gain.
B) Any act, expression, omission, or concealment committed to induce another person to deal in securities, whether or not there is wrongful gain.
C) Only misstatements in the prospectus.
D) Acts that violate only the Companies Act, not the SEBI Act.

2. In SEBI v. Terrascope Ventures, the Supreme Court held that the illegal diversion of funds for undisclosed purposes:?
A) Can be cured by a subsequent shareholder ratification resolution.
B) Is a matter between the company and its shareholders, and SEBI has no role.
C) Cannot be ratified, as an illegality cannot be cured by a private act of shareholders, especially when public law regulations are violated.
D) Is permissible if the company later amends its Memorandum of Association to include those purposes.

3. The Supreme Court held that proceedings by the Whole Time Member (WTM) and the Adjudicating Officer (AO) on the same facts are valid because:?
A) They are conducted by different individuals.
B) The WTM can only impose penalties, and the AO can only issue restraining orders.
C) They operate in separate fields—the WTM for protective directions and the AO for monetary penalties.
D) The AO's orders require prior approval from the WTM.

4. Which of the following was NOT a basis for the Supreme Court's decision to set aside the SAT's order?
A) The immediate diversion of funds demonstrated a lack of intention to use them for the stated objects.
B) The respondents had not elaborated on the "market conditions" that prevented them from using the funds for the stated objects.
C) The shareholders' ratification was obtained before the funds were raised.
D) An illegality cannot be ratified.