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Informist, Tuesday, Mar. 17, 2026

 

NEW DELHI – The Supreme Court Tuesday held that shareholder's ratification cannot cure diversion of funds by a company. Utilising funds for purposes different from the purpose stated in the invitation to subscribe is a fraudulent activity under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and its liability cannot be wiped out by subsequent shareholder ratification, said the court.

 

By a private resolution, a liability which is crystalised cannot be wiped off by contending that the shareholders have condoned the action, said the court. When rights of multiple stakeholders are involved and certain regulations forbid a particular course of action, any breach of the same requires facing consequences, said the court. "No condonation or ratification on aspects opposed to public policy can be made, as it will seriously jeopardize public interest," said the court.

 

The top court upheld the Securities and Exchange Board of India's penalties against Terrascope Ventures Ltd. and its directors for violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations. The top court rejected the Securities Appellate Tribunal's order that held a subsequent special resolution passed by shareholders validating the utilisation of funds would cure the initial deviation.

 

The case has its genesis from Terrascope Ventures raising funds in 2012 through a preferential allotment of shares, after informing shareholders that the proceeds would be used for specific purposes such as capital expenditure, working capital, marketing and overseas expansion. However, Terrascope Ventures utilised the funds to purchase shares of other companies and to extend loans and advances, with these purposes not being disclosed in the notice of the company's extraordinary general meeting.

 

In 2017, the shareholders of Terrascope Ventures passed a special resolution ratifying the utilisation of funds by the company. The SEBI imposed penalties upon the company and its directors and held that past deeds could not be legitimised by subsequent ratification.  End

 

Reported by Surya Tripathi

Edited by Deepshikha Bhardwaj

 

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