The Supreme Court of India held shareholder ratification cannot validate securities law breaches, reinstating Securities and Exchange Board of India penalties on Terrascope Ventures Limited and its directors for violating PFUTP Regulations involving fund misappropriation.
NEW DELHI: The Supreme Court ruled that shareholder ratification cannot legitimize breaches of securities laws, asserting that a company cannot avoid liability for misappropriating funds simply because its shareholders later approved the actions.
This decision was delivered by Justices JB Pardiwala and KV Viswanathan, who reinstated the penalties imposed by the Securities and Exchange Board of India (SEBI) on Terrascope Ventures Limited and its directors for violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations (PFUTP Regulations).
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The ruling stemmed from an appeal by SEBI against a prior decision by the Securities Appellate Tribunal (SAT), which had provided relief to the company. The Court rejected SAT’s argument that a subsequent special resolution passed by shareholders ratifying the use of funds could remediate the initial wrongdoing.
It established that while ratification might be relevant in private corporate matters, it cannot be used to sidestep statutory obligations or regulatory breaches.
It said,
“By a private resolution, a liability which is crystallised cannot be wiped off.”
This distinction highlights the Court’s view that securities regulations are meant to safeguard a broader group of stakeholders.
Terrascope Ventures Limited, previously known as Moryo Industries Limited, raised funds in 2012 through a preferential allotment of shares, informing shareholders that the proceeds would support specific purposes such as capital expenditure, working capital, marketing, and overseas expansion. Contrary to these declarations, the company diverted the funds to buy shares of other firms and extend loans actions not disclosed in the notice for the Extraordinary General Meeting (EOGM).
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SEBI initiated investigations and concluded that the company had strayed from its declared objectives and failed to provide necessary disclosures, deeming these actions fraudulent, and thus imposed penalties on the company and its directors. However, SAT set aside SEBI’s decision, reasoning that a special resolution passed by shareholders in 2017 validated the fund’s use and rectified any issues.
The Supreme Court firmly dismissed this rationale, declaring that a resolution from shareholders cannot eliminate liabilities arising from statutory infractions. The Court argued that permitting such ratifications would allow companies to circumvent regulatory protections through internal approvals, ultimately undermining the statutory framework.
Moreover, it highlighted that SEBI regulations exist to protect not just shareholders, but a broader spectrum of stakeholders, including current and potential investors, as well as the market as a whole. Therefore, compliance obligations must not be weakened by mere shareholder consent.
Expanding on this point, the Court clarified that the doctrine of ratification, which is well-established in private law, has limited relevance when it comes to public law and regulatory obligations. Drawing a parallel with the principle of waiver, the Court noted that while rights based on public policy cannot be waived, illegal actions that contradict statutory provisions cannot be ratified.
It noted,
“There cannot be a ratification of illegality.”
The Bench warned that allowing such regulatory violations to be ratified could significantly endanger public interest, as securities regulations aim to foster transparency, fairness, and investor trust in the market. The Court emphasized that securities law violations should not be regarded solely through the lens of shareholder approval.
In terms of the specifics, the Court found that diverting funds from the stated objectives constituted a clear infringement of Regulations 3 and 4 of the PFUTP Regulations.
It reiterated that disclosures regarding the purposes of a preferential issue are crucial for investors’ decision-making.
It stated,
“The investors and all other stakeholders adjust their affairs based on the disclosures made.”
Consequently, the Court annulled the SAT order and restored the penalties that SEBI’s adjudicating officer had imposed on Terrascope.
Case Title: SEBI Vs. Terrascope Ventures Ltd
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