I. Introduction
In this Finsec Case Digest, we analyse the Supreme Court’s judgment dated March 17, 2026, delivered by the Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan, in the matter of Securities and Exchange Board of India (“SEBI”) v. Terrascope Ventures Limited Etc. (“Terrascope” or “Company”). In its judgement, the Supreme Court set aside the Securities Appellate Tribunal’s (“SAT”)order exonerating Terrascope and its directors, and restored the AdjudicatingOfficer’s (“AO”) order imposing monetary penalties for violations of theSEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating toSecurities Market) Regulations, 2003 (“PFUTP Regulations”) and theSecurities Contracts (Regulation) Act, 1956 (“SCRA”). The judgment principally addresses whether the illegal diversion of preferential allotmentproceeds can be immunised by post-facto shareholder ratification, and whether the Whole Time Member (“WTM”) and AO can exercise concurrent jurisdiction.
II. Facts of the Order
On September 3, 2012, the Company, then known as Moryo Industries Limited, issued a notice convening an Extraordinary GeneralMeeting (“EGM”) to allot up to 74,50,000 equity shares on a preferential basis to 49 non-promoter entities. The EGM notice disclosed that the objects of the issue were capital expenditure, acquisition of businesses, funding long-term working capital, marketing, setting up offices abroad, and other corporate purposes – objects mandatorily required to be disclosed underRegulation 73(1) of the SEBI (Issue of Capital and Disclosure Requirements)Regulations, 2009 (“ICDR Regulations”). Between October 16 and November8, 2012, shares were allotted to 42 entities, raising Rs. 15,87,50,000/-.
On October 17, 2012, the very next day afterreceipt of funds, the Company commenced diverting the proceeds for entirelydifferent purposes. It was alleged that approximately Rs. 10.33 crores (roughly66% of the proceeds) were utilised to purchase shares of other companies, andapproximately Rs. 5.04 crores were disbursed as informal, unsecured loans andadvances. A subsequent SEBI investigation revealed that most recipient entitieswere connected to a common promoter, Mr. Giriraj Kishore Agarwal.
On December 4, 2014, the WTM passed an ad-interim order under Sections 11(1), 11(4)(b), and 11B of the SEBI Act restraining the Company and its directors from accessing the securities market.This order was confirmed on August 22, 2016. Prior to the confirmation, theCompany had amended its Memorandum of Association (“MOA”) on March 12,2014, to include financing and investment activities. Subsequently, onSeptember 29, 2017, well after the entire proceeds had been diverted, the shareholders passed a Special Resolution purportedly ratifying the variation in utilisation of the proceeds.
On April 29, 2020, the AO imposed a total monetary penalty of Rs. 1,00,00,000/- on the Company (Rs. 70,00,000/- underSection 15HA of the SEBI Act for violation of the PFUTP Regulations and Rs.30,00,000/- under Section 23E of the SCRA), and Rs. 25,00,000/- each on the two individual directors. On appeal, the SAT reversed the AO’s orders on the singular ground that the shareholders’ ratification had rendered the Company’s acts valid. SEBI appealed to the Supreme Court.
III. Arguments Advanced by Parties
A. SEBI’s Arguments (Appellant)
a. Allegation of Misutilization of Funds and Violation of PFUTP Regulations
SEBI, represented by Senior Advocate Mr. NaveenPahwa, argued that the immediate misutilisation of the preferential allotmentproceeds constituted a clear violation of securities laws. By diverting fundsfor unstated purposes, granting unsecured loans and investing in shares, ratherthan utilising them for the disclosed objects, the Company violated Regulations3 and 4 of the PFUTP Regulations, Section 21 of the SCRA, and Clause 43 of theListing Agreement. SEBI emphasised that objects of a preferential issue aremandatorily disclosed under Regulation 73(1) of the ICDR Regulations, and allstakeholders adjust their affairs on the basis of such disclosures.
b. Invalidity ofRetrospective Ratification and Absence of Statutory Mechanism
SEBI contended that Section 27 of the CompaniesAct, 2013, which permits variation in the objects of a prospectus, applies exclusively to public offers and has no application to preferential allotments.Furthermore, neither the ICDR Regulations nor the Companies (Prospectus andAllotment of Securities) Rules, 2014 provide any statutory mechanism for altering the stated objects of a preferential allotment post-facto. SEBI therefore maintained that the diversion was void ab initio, a plainly illegal act incapable of being regularised by subsequent shareholder approval.
c. Evidence of FraudulentIntent from Inception
SEBI drew attention to the timing of the diversion as conclusive evidence of fraudulent intent from inception. The funds were raised between October 16 and November 8, 2012, yet diversion commenced onOctober 17, 2012, the very next day. This immediate, wholesale diversion demonstrated that the Company never intended to use the proceeds for the stated objects.
d. Justification forParallel Proceedings by SEBI
SEBI defended the maintainability of dual proceedings, contending that the WTM’s proceedings under Section 11 were preventive measures imposing a market ban, while the AO’s proceedings underSection 15-I were specifically designed to impose monetary penalties. Since theWTM lacked the power to impose monetary penalties at the material time (this power was vested in the WTM only by the Finance Act, 2018, with effect from March8, 2019), the two proceedings operated in wholly distinct statutory fields.
B. Respondents’ Arguments (Amicus Curiae)
a. Implied Power to Varyand Shareholder Ratification
Mr. Mahfooz A. Nazki, appointed amicus curiae(“Amicus”), conceded that the funds were not used for their stated purposes but argued for an “implied power to vary,” contending that a company cannot be paralysed merely because no specific statutory mechanism exists for varying the objects of a preferential issue. Drawing an analogy to Section 27read with Section 62(1)(c) of the Companies Act, the Amicus argued that shareholders retain the ultimate power to grant retrospective approval for variation in fund utilisation.
b. Alignment with MOA andSubsequent Regularization
The Amicus contended that the Company’s actions were broadly aligned with its MOA, noting that Clause 3(A)(12) already listed investment in shares as a core object. The MOA amendment of March 12,2014 had formally authorised lending activities. He further argued that no complaints had been received from preferential allottees, the Company had maintained full transparency in its disclosures, and all loans had been recovered with beneficial returns.
c. Challenge to ParallelProceedings and Procedural Fairness
The Amicus challenged the parallelproceedings, arguing that the WTM and AO were running concurrent proceedings onidentical facts. Relying on SEBI v. Ram Kishori Gupta & Anr. (CivilAppeal No. 7941 of 2019) and Nirmal N. Kotecha v. SEBI (2021 SCC OnLineSAT 1613), he contended that once the WTM had adjudicated the matter, it was impermissible for the AO to simultaneously impose separate monetary penalties.
IV. SupremeCourt’s Findings
a. Timingof Fund Diversion as Evidence of Fraudulent Intent
The Supreme Court held that the timing of the diversion was conclusive evidence of fraudulent intent. The diversion commenced the very next day after receipt of funds, establishing that the Company never intended to use the proceeds for their stated objects. Relying on the expansive definition of “fraud” under the PFUTP Regulations , encompassing “a promise made without any intention of performing it”, and its earlier judgments in SEBIv. Kishore R. Ajmera ((2016) 6 SCC 368), SEBI v. Kanaiyalal BaldevbhaiPatel ((2017) 15 SCC 1), and SEBI v. Rakhi Trading (P) Ltd. ((2018)13 SCC 753), the Court held that making false disclosures to induce investors while secretly intending to deploy funds differently constitutes market fraud.The “prevailing market conditions” defence was dismissed as entirely unsubstantiated.
b. Rejection of Post-Facto Ratification and Doctrine of Illegality
The Court dismantled the SAT’s reasoning that theshareholders’ ratification made the diversion legally valid. It was observedthat Section 27 of the Companies Act applied only to a “prospectus” as definedunder Section 2(70) and a preferential allotment notice was not a prospectus.Neither the ICDR Regulations nor the PAS Rules provided any mechanism forpost-facto variation of the objects of a preferential issue. Relying on ShriLachoo Mal v. Shri Radhey Shyam ((1971) 1 SCC 619) and Government ofAndhra Pradesh v. K. Brahmanandam ((2008) 5 SCC 241), the Court reiteratedthat: “Illegality cannot be ratified. Illegality cannot be regularised, onlyan irregularity can be.” It was noted that the PFUTP Regulations operatedas a public law regime protecting a vast array of stakeholders, not merelysubscribing shareholders, and liability crystallised thereunder could not beextinguished by a private shareholder resolution.
The Court underscored that strict disclosurenorms were the non-negotiable bedrock of the securities market. Investors andall stakeholders adjust their affairs on the basis of the declared objects ofan issue; any dilution of these norms could have consequences extending farbeyond the subscribing shareholders.
c. Validationof Parallel Proceedings and Final Ruling in Favour of SEBI
The Court rejected the argument that the AO andWTM proceedings were impermissibly parallel. It traced the statutory architecture as it existed at the material time: the WTM could impose market bans under Sections 11(1), 11(4)(b), and 11B, while the power to impose monetary penalties under Section 15HA was exclusively vested in the AO underSection 15-I(1). The Finance Act, 2018, subsequently consolidated penalty jurisdiction in the WTM with effect from March 8, 2019, by which time the AO had already initiated inquiry. The two authorities thus operated in distinct statutory fields. The Supreme Court set aside the SAT’s order and restored theAO’s order in its entirety: Rs. 1,00,00,000/- on the Company (Rs. 70,00,000/-under Section 15HA and Rs. 30,00,000/- under Section 23E of the SCRA) and Rs.25,00,000/- each on the two individual directors.
V. Impact and Broader Implications
The judgment draws a clear and emphatic distinction between procedural irregularities, which may be capable of ratification, and acts that are inherently illegal under securities law, which are void ab initio and incapable of being cured ex post-facto. It unequivocally affirms that no shareholder resolution, irrespective of the degree of consensus, can legitimise conduct that is fundamentally contrary to the statutory and regulatory framework governing the securities market.
The ruling reinforces thecentrality of disclosure-based regulation as the bedrock of market integrity,underscoring that investors and market participants are entitled to rely onstated objects of an issue when making investment decisions. Any deviation fromsuch disclosures, particularly where accompanied by evidence of premeditateddiversion, strikes at the core of market fairness and transparency.
The judgment alsomaterially strengthens SEBI’s enforcement architecture by affirming that theWTM and AO may exercise concurrent jurisdiction over the same set of facts,provided they operate within their respective statutory mandates. In doing so,it clarifies that preventive measures, such as market access restrictions, andpunitive actions, such as monetary penalties, are not mutually exclusive butconstitute complementary enforcement tools that may be deployed in parallel toaddress market misconduct.
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