Diversion of preferential issue funds amounts to fraud: Supreme Court holds post-facto shareholder ratification cannot cure illegality under SEBI law
Case Name: Securities and Exchange Board of India v. Terrascope Ventures Limited & Ors.
Citation: 2026 INSC 245
Date of Judgment/Order: 17 March 2026
Bench: Justice K.V. Viswanathan,Justice J.B. Pardiwala
Held: The Supreme Court held that diversion of funds raised through preferential allotment for purposes other than those disclosed in the explanatory statement constitutes fraud under the SEBI (PFUTP) Regulations, 2003, and violates disclosure norms under securities law. It was further held that such illegality cannot be cured by post-facto shareholder ratification, as the breach affects public interest and multiple stakeholders in the securities market. The Court clarified that regulatory violations under SEBI law are not private rights capable of waiver or ratification, and any act contrary to statutory disclosure obligations remains void and actionable.
Summary: The case arose from a preferential allotment of shares by the respondent company, which had disclosed specific objects such as capital expenditure, working capital, and business expansion. However, immediately upon receipt, the funds were diverted towards investments in shares and granting loans to various entities, contrary to the stated objects. SEBI initiated proceedings alleging violations of the PFUTP Regulations and the Securities Contracts (Regulation) Act. The Adjudicating Officer imposed monetary penalties, finding that the company had misled investors and engaged in fraudulent conduct. The Securities Appellate Tribunal set aside the penalties, accepting the defence that shareholders had subsequently ratified the diversion of funds.
The Supreme Court examined the statutory framework governing preferential allotments, including SEBI regulations, disclosure requirements, and the concept of fraud in securities law. It emphasized that disclosure of objects is fundamental to investor decision-making and market integrity. The Court found that the diversion of funds occurred immediately after receipt, demonstrating a lack of intention to utilize funds for stated purposes from inception. It rejected the argument that shareholder ratification could validate such conduct, holding that regulatory violations affecting public interest cannot be ratified. The Court further clarified that fraud under PFUTP has a broad meaning and includes conduct that induces investors through misleading disclosures, even without traditional elements of deceit.
Decision: The Supreme Court allowed the appeals, set aside the order of the Securities Appellate Tribunal, restored the penalties imposed by the Adjudicating Officer against the respondent company and its directors for violations of PFUTP Regulations and the SCRA, and upheld the regulatory action taken by SEBI, with all pending applications disposed of accordingly.