Securities And Exchange Board Of India vs. Terrascope Ventures Limited Etc. Etc.

REPORTABLE
2026 INSC 245
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 5209-5211 of 2022


Securities and Exchange
Board of India … Appellant(s)

Versus

Terrascope Ventures Limited Etc. … Respondent(s)



J U D G M E N T
K. V. Viswanathan, J.
1. The present appeals, under Section 15Z of the Securities
and Exchange Board of India Act, 1992 (for short the “SEBI
Act”), call in question the correctness of the order dated
02.06.2022 passed by the Securities Appellate Tribunal (for
short the “SAT”), Mumbai in Appeal Nos. 116 of 2021, 114 of
2021 and 115 of 2021. The SAT set aside the orders of the
Signature Not Verified
Digitally signed by
CHANDRESH
Date: 2026.03.17
13:50:41 IST
Reason:
Adjudicating Officer dated 29.04.2020. The Adjudicating
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Officer had imposed monetary penalties on the respondent-
company as well as on the respondent individuals who were
the Managing Director (Mr. Manoharlal Saraf) and Director-
(Mrs. Geeta Manoharlal Saraf) respectively, for violations of
the provisions of the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Relating to Securities Market) Regulations,
2003 (for short the “PFUTP Regulations”), and the Securities
Contracts (Regulation) Act, 1956.
2. Though the respondents were duly served, they did not
put in appearance. This Court, by order dated 22.08.2025,
appointed Mr. Mahfooz A. Nazki, learned counsel, as amicus
curiae to assist the Court.
BRIEF FACTS: -
3. On 03.09.2012, the respondent No.1-company, then
known as Moryo Industries Limited, issued notice for an
Extraordinary General Meeting (EoGM) and presented to its
shareholders and the public, the purpose and object of
allotment of equity shares on preferential basis to non-
promoters. The number of proposed allottees was 49 and the
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total number of equity shares to be allotted was up to
74,50,000. In the explanatory statement appended pursuant
to Section 173(2) of the Companies Act, 1956, dealing with the
objects of the issue, it was set out as under:-
“The object of the issue is to fulfill the additional fund
requirements for capital expenditure including
acquisition of companies/business, funding long-term
working capital requirements, marketing, setting up of
offices abroad and for other approved corporate
purposes.”


The disclosure was additionally as per Regulation 73(1) of the
SEBI (ICDR) Regulations, 2009.
4. On 01.10.2012, a Special Resolution was passed and
between 16.10.2012 and 08.11.2012 preferential allotment
was made to 42 entities and a total sum of Rs. 15,87,50,000/-
was raised.
5. The appellant-SEBI contends that from 17.10.2012 itself,
instead of using the proceeds for approved objects, funds
were diverted to purchase shares of other companies and
grant loans/advances. SEBI contends that this is an indication
that from the very inception, there was no intention on the part
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of the respondent-company to use the proceeds of the
preferential issue for the purpose for which it was made.
According to SEBI, these transactions happened between
17.10.2012 and 09.11.2012.
AD-INTERIM ORDER OF WTM: -
6. On 04.12.2014, the Whole Time Member (WTM) SEBI
passed ad interim orders restraining the company promoters,
directors including the individual respondents herein, the
preferential allottees and, certain group companies of the first
respondent from buying, selling or dealing in the securities
markets, either directly or indirectly, in any manner, till
further directions. We are only concerned with the
respondents herein. These orders were made by virtue of
powers conferred under Section 19 read with Section 11(1),
11(4)(b) and 11B of the SEBI Act. In the said order, after setting
out certain background facts and the movement of the share
price in the market of the first respondent-company and the
diversion of purpose, pursuant to the preferential allotment, it
was recorded in para 26 as under:-
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“In the facts and circumstances of this case, I am of the view
that preferential allotment was used as a tool for
implementation of the dubious plan, device and artifice of
Moryo Group and allottees. One could argue that in the
order to make LTCG, the preferential allottees in question
could have bought in secondary market and waited for a
year before selling the shares. In the instant case, probably
the preferential allotment route was preferred over
secondary market route because the share capital of
Moryo prior to preferential allotment was very small, i.e.,
1,900,190 shares (Face Value: ₹ 10), to accommodate the
required fictitious LTCG of ₹ 141 crore approximately. As
such the capital expansion through preferential allotment
and stock split provided much bigger source to the
persons involved in terms of volume and price
manipulation to facilitate the whole operation. ”

7. Dealing with the entities in which investments were made
and to which loans and advances were given pursuant to the
preferential allotment of shares, the relevant portion of the
WTM order is set out hereunder:-
“13. During preliminary inquiry Moryo submitted that it
had invested 66% of proceeds of preferential allotment in
shares of listed as well as unlisted companies and rest of
the money was given as loans and advances to certain
entities as given in the following table:-

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a) capital expenditure including acquisition of
company/business
b) funding long term working capital requirements
c) marketing
d) setting up of offices abroad and
e) for other approved corporate purposes.

15. The aforesaid utilisation of proceeds of preferential
allotment does not appear to be for any of the aforesaid
purposes as Moryo did not use them for either capital
expenditure or acquisition of company/business or
towards working capital or setting up office abroad or for
marketing. Further in the common business parlance
general corporate purposes provide the framework for
ongoing decisions and activities of the business. In this
case, as discussed above, Moryo did not have any business
operations during relevant period.

16. On examination it was observed that most of the
companies mentioned at Table V had a common promoter,
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i.e., Mr. Giriraj Kishore Agarwal (GKA). Companies
mentioned at Sr. no. 1 to 6 in the above Table in which
Moryo invested and entities mentioned at Sr. no. 1 to 6 to
whom loans and advances were given, are connected to
Mr. Giriraj Kishore Agarwal. It was submitted by Moryo
during the preliminary inquiry that all its aforesaid loans
and advances granted, were without any loan agreement.
Such informal financing arrangement without any
documentation clearly indicates that these entities were
known or connected to Moryo.”

8. It transpires from the record that even before the ad-
interim order of WTM but after having diverted the proceeds
of the preferential allotment to purchase shares and advance
loans, the respondent No.1-Company carried out the
amendments to the objects clause of the Memorandum of
Association on 12.03.2014. By this, they sought to include
financing, investment and share trading in the objects.
9. The WTM, by order of 22.08.2016, confirmed his ad-
interim order of 04.12.2014.
PURPORTED RATIFICATION RESOLUTION DATED
29.09.2017 :-
10. When the matter stood thus and pursuant to the interim
order, it transpires that on 29.09.2017, a resolution was passed
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by the first respondent-company purportedly ratifying the
diversion of funds. The resolution is in the following terms:-
“ RATIFICATION BY SHAREHOLDERS FOR
ALTERATION / VARIATION OF UTILIZATION OF
PROCEEDS OF PREFERENTIAL ALLOTMENT OF
63,50,000 EQUITY SHARES
“RESOLVED THAT pursuant to the provisions of Section 27
and other applicable provisions, if any, of The Companies
Act, 2013 and pursuant to the Companies (Prospectus and
Allotment of Securities) Rules, 2014 and all the applicable
laws and regulations for the time being in force, in respect
of Preferential Allotment of 63,50,000 Equity Shares of Face
Value of Rs.10/- each issued at a premium of Rs.15/- per
share allotted by the Board of Directors at their meeting
held on 09/11/2012, the ratification and approval of the
Shareholders be and is hereby accorded to all acts, deeds
and things done by the Company in entering into and
giving effect to the utilization of proceeds as received in the
said Preferential issue which is in variation to the objects as
stated out in the Notice of Extra Ordinary General meeting
held on 01/10/2012”.

11. On 29.05.2015, the respondent-Company wrote a letter
to the WTM denying any diversion of the proceeds of
preferential allotment to purposes other than stated in the
objects of the EoGM.
12. It further transpires from the record that on 05.12.2017,
that WTM issued a show cause for violations of the PFUTP
Regulations. The show cause notice called upon the
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respondents herein to show cause as to why suitable
directions under Section 11B, 11(4) and 11(1) of the SEBI Act
be not passed against them for violation of the aforementioned
violations. It further transpires that the WTM on 19.03.2019,
after rejecting the reply of the respondents dated 05.01.2019
held that there was violation of the PFUTP Regulations. The
WTM found the Company had utilized the proceeds for the
objects not disclosed in the notice of EGoM however, since by
the said date, the respondents herein had already undergone
restriction from accessing the security market for a period of
more than four years and three months, in view of the ad-
interim order of 04.12.2014, no further penalty was imposed.

SHOW CAUSE NOTICE BY ADJUDICATING OFFICER
(AO):-
13. On 27.04.2018, the Adjudicating Officer (AO) of the
appellant issued a show cause notice to the respondents
calling upon the noticees to show cause as to why an enquiry
should not be held for violations under Regulations 3(a), 3(b),
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3(c), 3(d), 4(1), 4(2)(f), 4(2)(k) and 4(2)(r) of the PFUTP
Regulations. It was specifically alleged that the proceeds of
the preferential allotment were immediately transferred to
various entities inasmuch as while the proceeds were credited
in the account of the Company during 16.10.2012 and
08.11.2012. The same were transferred to various entities
during October 16, 2012 to November, 09, 2012. The relevant
para in the show cause notice is extracted hereunder:-
“It was further observed that proceeds of preferential
allotment were immediately transferred to various entities
as mentioned in the table 2. As an instance while the
proceeds of preferential allotment started getting credited
on Oct 16, 2012, a part of the same was transferred to one
Mr. Raj Agarwal on the next day itself, i.e. on Oct 17, 2012.
While the proceeds of the preferential allotment were
credited in the said bank accounts of Moryo during Oct 16,
2012 to Nov 09, 2012. Thus, the proceeds of preferential
allotment were never retained in the company for executing
its objects as envisaged in the special resolution passed
under section 81(1A) of the Companies Act, 1956. Further,
it was also observed that prior to receipt of the proceeds of
the preferential allotment, the funds available in the
aforesaid bank accounts of the company would not have
been sufficient enough for transfers to various entities.”

14. To the show cause notice of 27.04.2018 issued by the
Adjudicating Officer though the same was delivered there was
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no response from the noticees initially. Letter of 04.04.2019
was issued informing of the personal hearing which was fixed
on 24.04.2019. Thereafter, a fresh notice was issued for
personal hearing on 24.07.2019. Both the notices were
returned as unclaimed. By way of affixture of notice on the last
known address on 15.07.2019, service was effected.
REPLY TO SHOW CAUSE NOTICE BY RESPONDENTS: -
15. By a letter of 22.07.2019, noticee No.1 submitted a reply
stating that under the MOA advancing money to companies
was permitted; that due to prevailing market conditions the
proceeds of the preferential issue could not be utilized as per
the objects of the issue. Therefore, considering the object to
be incidental or ancillary to the attainment of the main object
of the company a part of the proceeds were invested in shares
and lend to entities. They also submitted that in the year 2014
they altered the object clause to financial activities through a
special resolution. They averred that a part of the preferential
issue, proceeds which were invested in shares and lent to
other entities were received back and utilized as per the
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modified objects clause of the noticee company. They also
submitted the shareholders have ratified and approved the
aforesaid utilization of the proceeds of the preferential issue
by passing a Special Resolution in the AGM. They submitted
that the acts were bona fide and cannot be considered as
detrimental to the interest of the participants in the securities
market.
ORDER OF AO DATED 29.04.2020: -
16. On 29.04.2020, the Adjudicating Officer passed three
orders against respondent Nos.1 to 3 finding that they have
violated Regulations 3(a), 3(b), 3(c), 3(d), 4(1), 4(2)(f), 4(2)(k),
and 4(2)(r) of the PFUTP. It was also found that the respondent
No.1-company has violated Section 21 of the SCRA read with
Clause 43 of the Listing Agreement. The AO ordered that in
exercise of his powers under Section 15(I)(2) of the SEBI Act
read with Rule 5 of the Adjudication Rules and Section 23(I)(2)
of the SC (R) Act, 1956 read with Rule 5 of the Adjudication
Rules, a monetary penalty of Rs.70,00,000/- under Section
15HA of the SEBI Act, 1992 for violation of PFUTP Regulations
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and Rs. 30,00,000/- under Section 23E of the SC (R) Act for
violation of Section 21 of the said Act and Clause 43 of the
Listing Agreement be imposed. This penalty was on the
Company. Insofar as the individual Directors were
concerned, for violation of PFUTP Regulations, the penalty of
Rs.25,00,000/- each was imposed.
17. The Adjudicating Officer found that the Noticees had not
utilized the proceeds of the preferential issue as mentioned in
the notice of the EoGM. Moreover, the AO found that the
Noticees accepted the position that they have utilized the
proceeds for purchasing shares of other companies and
extending loans and advances to other companies and
entities. It was found that the proceeds were not utilized as
per the objects of the issue. The AO rejected the explanation
of the Noticees that the proceeds could not be utilized due to
prevailing market conditions by finding that the Noticees had
not elaborated as to what the market condition was and the
difficulties in meeting the objects of the issue and the
compelling reason to extend loans and advances.
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18. The AO distinguished between objects of the preferential
allotment as stated in the notice for EoGM and the objects of
the company as stated in the Memorandum of Association.
Hence, the AO rejected the argument that utilizing the
proceeds of the preferential issue purportedly for one of the
objects incidental/ancillary to the attainment of the main
object of the company was to be considered as utilizing the
proceeds towards meeting the objects of the issue, as devoid
of merit. A further finding was recorded that Clause III(B)(11)
of the MoA did not contain as its ancillary/incidental object,
the grant of loans and advances, and only permitted giving
guarantees or acting as security. The AO noticed the post-
facto amendment to the MoA on 12.03.2014 and held that
being a post-facto amendment it would not remedy the
illegality of a prior act.
19. Dealing with the Special Resolution dated 29.09.2017,
which according to the Noticees ratified and approved all
acts, deeds and things with regard to utilization of the
proceeds from the preferential issue, the AO rejected the said
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contention, holding that past alleged acts/deeds cannot be
legitimized by subsequent ratification.
20. Thereafter, the AO held that the Noticees had made
investments in shares and given loans and advances which
were not disclosed as objects of the preferential issue. The
AO held that the objects of the issue as presented to the
shareholders/public in the notice dated 03.09.2012 was
untrue and misleading.
21. By way of two separate orders passed on the same day,
the AO found R2 and R3 liable for the violations committed by
R1 since a company cannot act on its own. The AO held that
R1’s fraudulent acts could not have been committed except
with the knowledge of Respondents Geeta Manoharlal Saraf
and Manoharlal Saraf, who were directors of the company and
signatories to the financial statements declared by the
Company in its Annual Report for 2012-13 and 2013-14. It was
noted that Manoharlal Saraf was the MD, and his wife Geeta
Manoharlal Saraf was the Chairman of the Audit Committee of
the Company for the FY 2012-13 and 2013-14 and that she had
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attended all the meetings of the Audit Committee held during
FY 2012-13 and 2013-14.
APPEAL TO SAT: -
22. The respondents carried the matter in appeal to the SAT.
By a short order, the SAT, after noticing the ratification in the
resolution on 29.09.2017, allowed the appeal of the Noticees
by recording the following finding:-
“12. Once the utilization of the proceeds have been ratified
by the shareholders of the Company, the acts and deeds
done by the Company becomes valid and authorized and
therefore there was no variation of the utilization of the
proceeds. The show cause notice alleging variation in the
utilization of the proceeds is, thus, erroneous.
13. For the same reason, since the utilization of the
proceeds have been ratified, there was no variance in the
utilization of the proceeds and consequently there was no
violation of Clause 43 of the Listing Agreement.”

Aggrieved, the appellant is in appeal before us.
CONTENTIONS OF THE APPELLANT: -
23. Mr. Naveen Pahwa, learned Senior Advocate for the
appellant contends that the misutilization of funds is in
violation of the PFUTP Regulations, 2003 and Section 21 of
SCRA and Clause 43 of the Listing Agreement. Learned Senior
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Counsel submits that the objects stated in the notice of EoGM
pursuant to the resolution passed by the company on
01.10.2012, were the following:-
“a. Capital expenditure including acquisition of
companies/business;
b. Funding long term working capital requirements;
c. Marketing:

d. Setting up of offices abroad; and
e. For other approved corporate purposes.”

Whereas between 16.10.2012 and 08.11.2012 they were
diverted for different purposes namely for grant of loans and
investments in shares.
24. Learned Senior Counsel submits that the ratification of
29.09.2017 is of no avail as Section 27 of the Companies Act
has no application. According to the learned Senior Counsel,
Section 27 of the Companies Act applies only to variation in
terms of contract or objects in prospectus. According to the
learned Senior Counsel, there is no provision under the
Companies Act to ratify post facto diversion of funds raised
through issue of any securities. Learned Senior Counsel
submits that as per Section 42(3) of the Companies Act a
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Company making private placement shall issue private
placement offer and application in such form and manner as
may be prescribed. Learned Senior Counsel submits that as
per Rule 14(3) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014, the prescribed form is PAS-4. Under
this form, the object of preferential issue is required to be
disclosed to existing shareholders and a special resolution is
required to be passed for making such allotment. Further, as
per Regulation 73(1)(a) of the SEBI ICDR Regulations, the
object of preferential issue ought to be disclosed in the
explanatory statement to the notice for the general meeting
proposed for passing the Special Resolution. Learned Senior
Counsel submits that guardrails have been placed to ensure
that due process has been followed and the interest of the
investors are protected. According to the learned Senior
Counsel, neither SEBI ICDR Regulations nor the Companies
(Prospectus and Allotment of Securities) Rules 2014 provide
for varying the purpose or object of preferential allotment.
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25. Learned Senior Counsel submits that the timing of
diversion immediately after the receipt, establishes fraud and
violation of Regulations 3 and 4 of the PFUTP Regulations.
Learned Senior Counsel submits that illegal and void ab initio
acts cannot be ratified. Utilizing funds for purpose different
from the purpose stated in the invitation to subscribe is a
fraudulent activity under the PFUTP Regulations.
26. Learned Senior Counsel submits that both Section 11
proceedings by the WTM and the proceedings by the AO
under 15(I) are maintainable. According to learned Senior
Counsel, the proceedings under Section 11 by the WTM are
for the interest of investors and to maintain integrity of the
securities market, while under Section 15(I) the power is to
impose penalty for violation of SEBI regulations. Learned
Senior Counsel contended that the impugned order is wholly
untenable and prayed for setting aside the same and
restoration of the order of the Adjudicatory Authority.
Detailed written submissions also have been filed by the
appellants.
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CONTENTIONS OF THE AMICUS CURIAE: -
27. Mr. Mahfooz A. Nazki, the learned Amicus did not dispute
that the proceeds received as consideration for the
preferential issue have not been utilized for the purposes
stated in the notice. The contention of the learned Amicus is
that though Section 27 on its terms and applied only to a
prospectus, since Section 62(1)(c) of Companies Act which
deals with allotments such as private placement makes
compliance with provisions of Chapter III, the principles
analogous to Section 27 would be applicable to the present
situation when read with Section 62(1)(c). Learned Amicus
submits that there is no requirement of prior approval.
28. Learned Amicus contends that shareholders are entitled
to grant a retrospective approval or make a ratification.
Learned Amicus submits that it cannot be contended that the
company could not have authority to vary the objects under
any circumstances. Learned Amicus Curiae contends that a
company cannot be rendered helpless or paralyzed merely
because no specific mechanism for variation of objects of a
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preferential issue is provided in the statute. Learned Amicus
submits that so long as the variation does not contravene any
law or the company’s constitutional documents, the Company
must be treated as having the implied power to make such
variation and according to the learned Amicus such power is
being reasonable and incidental to achievement of its objects.
29. Learned Amicus contends that under Clause 3 (A)(12) of
the Memorandum of Association, investment in shares is set
out as one of the objects of the Company. Though the
Memorandum of Association did not provide for lending as
one of the purposes, according to learned Amicus there was
no clause prohibiting the same. Learned Amicus submits that
on 12.03.2014 the MOA came to be amended providing for
lending as one of the objects of the company. Learned Amicus
submits that there is no express provision forbidding a
company from ratifying any impugned action. Hence, learned
Amicus submits that on facts the ratification is valid, especially
since :-
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(A) The breach was in relation to the interest of the
shareholders
(B) No complaints were received from anyone including
the group of shareholders who have subscribed to the
preferential issue.
(C) that complaint was not per se ultra vires the
Memorandum of Association of the respondent.
(D) that in reply to Show Cause Notice, the noticees have
specifically stated that the information regarding
preferential issue was shared with the shareholders in
the Balance Sheet of the Company as well as on the
exchange and company website on regular basis.
30. Learned Amicus contends that merely mentioning the
wrong provision of Section 27 is not fatal for ratification.
Learned Amicus questioned the imposition of heavy penalties
contending that the AO has not considered the contention of
the noticees that all loans advanced have been received back
by the Company and that the investments made by the
respondents had yielded positive results.
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31. Learned Amicus Curiae contends that the proceedings
before the AO and the WTM were founded on the very same
set of facts and allegations. Once the WTM had adjudicated
the matter and returned findings it was impermissible for the
AO to simultaneously adjudicate on the same cause, as such
parallel exercise of jurisdiction leads to contradictory and
inconsistent findings undermining certainty and regulatory
discipline. So contending, learned Amicus submitted that the
impugned order did not call for any interference.
QUESTION FOR CONSIDERATION: -
32. In the above background, the question that arises for
consideration is: Whether the SAT was justified in reversing
the order of the Adjudicating Officer, and exonerating the
respondents for alleged violations of PFUTP Regulations and
the SCRA?
ANALYSIS AND REASONING : -
33. The original object for the preferential issue as disclosed
was that the funds raised would be utilized for (a) capital
expenditure including acquisition of companies/business, (b)
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funding long-term working capital requirements (c)
marketing (d) setting up of offices abroad and (e) for other
approved corporate purposes. These objects are statutorily
required to be disclosed under Regulation 73 of the SEBI
(ICDR) Regulations, 2009.
34. It is undisputed that the funds raised by the preferential
issue were utilized for investment in shares and giving loans
and advances which were admittedly not the objects set out in
the disclosure made prior to the raising of funds. The only
defence raised is that by a resolution of 29.09.2017, the
shareholders have ratified the alteration/variation in the
utilization of proceeds of preferential allotment. It is also
submitted that post the issue and the raising of funds, on
12.03.2014 the Memorandum of Association of the Company
was altered to include carrying on business as a finance
company and advance money to any person, firm or body
corporate. The argument of ratification is what has found
favour with the SAT.

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RELEVANT STATUTORY PROVISIONS :-
35. The SEBI Act, 1992 has amongst its objects promotion of
orderly and healthy growth of securities market and for
investors’ protection. The Board itself has been established to
protect the interests of the investors in securities and to
promote the development of and to regulate, the securities
market and for matters connected therewith or incidental
thereto. To achieve this object several regulations have been
issued by SEBI and we are in the present case concerned with
one of them namely the PFUTP Regulations. The relevant
provisions of PFUTP Regulations with which we are concerned
are as follows.
“2(1)(c). “fraud” includes any act, expression,
omission or concealment committed whether in a
deceitful manner or not by a person or by any other
person with his connivance or by his agent while
dealing in securities in order to induce another person
or his agent to deal in securities, whether or not there
is any wrongful gain or avoidance of any loss, and
shall also include —
xxx xxx
(3) an active concealment of a fact by a person having
knowledge or belief of the fact;
(4) a promise made without any intention of
performing it ;
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3. Prohibition of certain dealings in securities
No person shall directly or indirectly—
(a) buy, sell or otherwise deal in securities in a
fraudulent manner;
(b) use or employ, in connection with issue, purchase
or sale of any security listed or proposed to be
listed in a recognized stock exchange, any
manipulative or deceptive device or contrivance in
contravention of the provisions of the Act or the
rules or the regulations made there under;
(c) employ any device, scheme or artifice to
defraud in connection with dealing in or issue of
securities which are listed or proposed to be
listed on a recognized stock exchange ;
(d) engage in any act, practice, course of business
which operates or would operate as fraud or deceit
upon any person in connection with any dealing in
or issue of securities which are listed or proposed
to be listed on a recognized stock exchange in
contravention of the provisions of the Act or the
rules and the regulations made there under.
4. Prohibition of manipulation, fraudulent and unfair
trade practices
(2) Dealing in securities shall be deemed to be a
manipulative fraudulent or an unfair trade practice if it
involves any of the following:—
xxx xxx
(f) knowingly publishing or causing to publish or
reporting or causing to report by a person
dealing in securities any information relating to
securities, including financial results, financial
statements, mergers and acquisitions,
regulatory approvals, which is not true or which
he does not believe to be true prior to or in the
course of dealing in securities;
xxx xxx
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(k) disseminating information or advice through
any media, whether physical or digital, which
the disseminator knows to be false or
misleading in a reckless or careless manner
and which is designed to, or likely to influence
the decision of investors dealing in securities;
xxx xxx

(r) knowingly planting false or misleading news which
may induce sale or purchase of securities.”
(Emphasis Supplied)

OBJECTS OF THE SEBI ACT AND REGULATIONS : -
36. It is now very well settled that the SEBI Act and the
Regulations are intended to pre-empt manipulative trading
and check all kinds of impermissible conduct resorted by
parties, so that the innocent investor is not misled. The
primary purpose of such statutory provisions is to provide an
environment conducive to increased participation and
investment in the securities market, which is vital to the
growth and development of the economy.

37. Further, the object is to prevent exploitation of the public
through misrepresentation and to ensure that adequate and
true information before the investor is placed. This Court has
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also held that while interpreting these regulations which are
intended to protect the investor the Court must weigh against
an interpretation which will protect unjust claims over just,
fraud over legality and expediency over principle. Further,
this Court has emphasized that any practice which does not
conform to the fair and transparent principles of trades in the
stock market would be captured under the rubric of unfair
trade practices in the securities market. This Court has held
that protection of investors should necessarily include
prevention of misuse of the market. (See SEBI v. Kishore R.
2
1
Ajmera, , SEBI v. Kanaiyalal Baldevbhai Patel , and SEBI v.
3
Rakhi Trading (P) Ltd.

APPLICATION OF LAW TO THE FACTS :-
38. Applying these principles to the facts, we find that the
proceeds for preferential allotment, as alleged in the Show
Cause Notice were immediately transferred to various entities

1
(2016) 6 SCC 368
2
(2017) 15 SCC 1
3
(2018) 13 SCC 753
Page 28 of 58


by way of loans inasmuch as while the proceeds started
getting credited in the account of the company from
16.10.2012 till 08.11.2012, the transfers occurred from
October 16, 2012 to November 9, 2012. Further, the
Adjudicating Officer found that though the noticees sought to
justify their stand by contending that proceeds could not be
utilized due to prevailing market conditions, the noticees have
not elaborated as to what the market conditions were and as
to what the difficulties were in meeting the objects of the issue
and the compelling reasons to extend loans and advances.
The Adjudicating Officer also correctly distinguished
between the objects of the preferential allotment as stated in
the notice for EoGM and the objects as stated in the
Memorandum of Association. Hence, what is crucial is what
was stated as objects in the notice of EoGM.

39. For the purpose of PFUTP and the SCRA, breach of
Regulation 3 and 4 would be attracted if any person sells or
otherwise deals in the security in a fraudulent manner. It
Page 29 of 58


would further be attracted if any person uses or employs in
connection with issue of any security, any manipulative or
deceptive device in contravention of provisions of the Act;
knowingly publishes or causes to publish any information
which is not true or which he does not believe to be true prior
to or in the course of dealing with securities; disseminates
information which he knows to be false or misleading and
which is designed to influence the decision of the investor
dealing in securities and knowingly plants false or misleading
news which may induce sale or purchase of securities.

EXPANDED MEANING OF THE CONCEPT OF FRAUD :-
40. It may also be noticed that fraud has been defined to
mean any act expression or concealment committed whether
in a deceitful manner or not in order to induce any person to
deal in securities and whether or not there is any wrongful
gain or avoidance of wrongful loss. Fraud would also include
an active concealment of a fact by a person having knowledge
Page 30 of 58


or belief of the fact and making of a promise without any

intention of performing it.

41. Under the PFUTP Regulations, fraud is broadly defined
and is not confined to the meaning as normally understood. As
would be clear from the definition, there could be fraud under
the PFUTP Regulations even without deceit. This view is
reinforced by the judgment of this Court in Kanaiyalal
Baldevbhai Patel (supra) .
“28. There is no dispute as to the fact that fraud is
jurisprudentially very difficult to define or clothe it with
particular ingredients. A generalised meaning may be
difficult to be attributed, as human ingenuity would invent
ways to bypass such behaviour. It is to be noted that fraud
is extensively used in various regulatory framework
which mandates me to take notice of the conceptual and
definitional problem it brings along. Fraud is among the
most serious, costly, stigmatising and punitive forms of
liability imposed in modern corporations and financial
markets. Usually, the antifraud provisions of the
security laws are not coextensive with common law
doctrines of fraud as common law fraud doctrines are
too restrictive to deal with the complexities involved
in the security market, which is also portrayed by the
changes brought in through the 2003 Regulations to
the 1995 Regulations.

29. On a comparative analysis of the definition of
“fraud” as existing in the 1995 Regulations and the
subsequent amendments in the 2003 Regulations, it
can be seen that the original definition of “fraud”
under the FUTP Regulations, 1995 adopts the
Page 31 of 58


definition of “fraud” from the Contract Act, 1872
whereas the subsequent definition in the 2003
Regulations is a variation of the same and does not
adopt the strict definition of “fraud” as present under
the Contract Act. It includes many situations which
may not be a “fraud” under the Contract Act or the
1995 Regulations, but nevertheless amounts to a
“fraud” under the 2003 Regulations.

54. The definition of “fraud”, which is an inclusive
definition and, therefore, has to be understood to be
broad and expansive, contemplates even an action or
omission, as may be committed, even without any
deceit if such act or omission has the effect of inducing
another person to deal in securities. Certainly, the
definition expands beyond what can be normally
understood to be a “fraudulent act” or a conduct
amounting to “fraud”. The emphasis is on the act of
inducement and the scrutiny must, therefore, be on
the meaning that must be attributed to the word
“induce”

42. Further, in Kanaiyalal Baldevbhai Patel (supra) this
Court clearly laid down a touch stone namely that a Court must
weigh against any interpretation which would protect unjust
claims over just, fraud over legality and expediency over
principle and once this Rule is established, individual cases
should not pose any problem.

43. Applying this principle, we have no semblance of doubt
in our mind that the diversion of the funds raised for an object
Page 32 of 58


not set out in the notice of EoGM was clearly in breach of
Regulation 3 as well as Regulations 4(2)(f), 4(2)(k) and 4(2)(r)
of the PFUTP Regulations. Further, the very purpose of notice
of EoGM and the notice informing the objects of preferential
issue is also traceable to Regulation 73 of the ICDR
Regulations, 2009 which mandate that the objects for the
preferential issue have to be set out.

44. The reason is not far to seek. When a company offers
private placement or goes public, the legal regime mandates
fair disclosure and transparency. The investors and all other
stakeholders concerned with the securities market
irrespective of whether they ultimately subscribe to the
shares or not, adjust their affairs based on the disclosure
made.

45. For example, based on the objects set out an investor
holding the shares of a company may decide to retain the
shares and not trade at that moment. It may also happen that
an investor who carefully observes the market may on reading
Page 33 of 58


the objects and finding them to be genuine may decide to
purchase shares of the company which are otherwise traded
in the market. Yet another investor keenly observing the
market may feel that the object set out for a particular
preferential issue may be ultimately detrimental to the
company and decide to off load his shares in the market. All
this is set out only to show that disclosure of the objects as
mandated in Regulation 73 of the ICDR Regulations and as
mandated by the fairness and transparency required of
companies by the various regulations of SEBI have salutary
purposes, which ought not to be casually compromised with.

46. The importance of the objects stated in the explanatory
statement is also highlighted in Clause 43 of the Listing
Agreement of the stock exchange which mandates the
furnishing on quarterly basis indicating variations between
projected utilization of funds and/or projected profitability
statement made in the letter of offer or objects stated in the
Page 34 of 58


explanatory statement and the actual utilization of funds and
or actual profitability. Clause 43 is extracted hereinbelow.
“Equity Listing Agreement - BSE
43. a) The Company agrees that it will furnish on a
quarterly basis a statement to the Exchange indicating the
variations between projected utilisation of funds and/or
projected profitability statement made by it in its
prospectus or letter of offer or object/s stated in the
explanatory statement to the notice for the general
meeting for considering preferential issue of securities,
and the actual utilisation of funds and/or actual
profitability.
b) The statement referred to in clause (1) shall be given
for each of the years for which projections are provided in
the prospectus/letter of offer/object/s stated in the
explanatory statement to the notice for considering
preferential issue of securities and shall be published in
newspapers simultaneously with the unaudited/audited
financial results as required under clause 41.
c) If there are material variations between the projections
and the actual utilisation/profitability, the company shall
furnish an explanation therefore in the advertisement and
shall also provide the same in the Directors' Report.
d) The statement referred to in clause (a) shall also be
given for warrants issued along with public or rights issue
of specified securities.”

47. Section 21 of the Securities Contracts (Regulation) Act,
1956 and 23E of SCRA read as under.
“21. Conditions for listing. -
Where securities are listed on the application of any
person in any recognised stock exchange, such person
shall comply with the conditions of the listing agreement
with that stock exchange.
Page 35 of 58



23E. Penalty for failure to comply with listing
conditions or delisting conditions or grounds. -
If a company or any person managing collective
investment scheme or mutual fund, fails to comply with the
listing conditions or delisting conditions or grounds or
commits a breach thereof, it or he shall be liable to a
penalty not exceeding twenty-five crore rupees.”

48. Further, the importance of the objects and the need for
compliance is further highlighted by the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015.
Though the LODR Regulations are of 2015, it has only been set
out here to highlight how Regulation 32(1) and 32(5) create a
reporting obligation of deviations in the use of the proceeds
from the stated objects. This does not mean that this is a
sanction for deviation but this mandates the reporting of
deviation, to enable stock exchange to be posted of the said
facts. Regulation 32 and 35 are extracted hereinbelow: -
“32. Statement of deviation(s) or variation(s).
(1) The listed entity shall submit to the stock exchange
the following statement(s) on a quarterly basis for
public issue, rights issue, preferential issue etc. ,-
(a)indicating deviations, if any, in the use of
proceeds from the objects stated in the offer
document or explanatory statement to the notice
for the general meeting, as applicable;
Page 36 of 58


(b)indicating category wise variation (capital
expenditure, sales and marketing, working
capital etc.) between projected utilisation of
funds made by it in its offer document or
explanatory statement to the notice for the
general meeting, as applicable and the actual
utilisation of funds.
(2)The statement(s) specified in sub-regulation (1), shall
be continued to be given till such time the issue
proceeds have been fully utilised or the purpose for
which these proceeds were raised has been achieved.
(3)The statement(s) specified in sub-regulation (1),
shall be placed before the audit committee for
review and after such review, shall be submitted to the
stock exchange(s).
(4)The listed entity shall furnish an explanation for the
variation specified in sub-regulation (1), in the
directors’ report in the annual report.
(5)The listed entity shall prepare an annual statement of
funds utilized for purposes other than those stated in
the offer document/prospectus/notice, certified by the
statutory auditors of the listed entity, and place it
before the audit committee till such time the full money
raised through the issue has been fully utilized.
(6)Where the listed entity has appointed a monitoring
agency to monitor utilisation of proceeds of a public
issue or rights issue or preferential issue or qualified
institutions placement, the listed entity shall submit to
the stock exchange(s) any comments or report
received from the monitoring agency within forty-
five days from the end of each quarter.
(7)Where the listed entity has appointed a monitoring
agency to monitor the utilisation of proceeds of a
public issue or rights issue or preferential issue or
qualified institutions placement, the monitoring
report of such agency shall be placed before the
audit committee on a quarterly basis, promptly upon
its receipt.
Page 37 of 58


Explanation,— For the purpose of sub-regulations(6)
and (7), “monitoring agency” shall mean the
monitoring agency as specified in the Securities and
Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018.
(7A) Where an entity has raised funds through
preferential allotment or qualified institutions
placement, the listed entity shall disclose every year,
the utilization of such funds during that year in its
Annual Report until such funds are fully utilized.
(8)For the purpose of this regulation, any reference to
“quarterly/quarter” in case of listed entity which have
listed their specified securities on SME Exchange shall
respectively be read as “half yearly/half year.
Annual Information Memorandum.
35.
The listed entity shall submit to the stock
exchange(s) an Annual Information Memorandum in
the manner specified by the Board from time to time.”

49. A conspectus of the reading of the SEBI Act, PFUTP
Regulations, the SCRA Act, ICDR Regulation and the Listing
Agreement all point in one direction to the fact that objects set
out in the explanatory note for the issuance of securities
including preferential allotment of shares are of utmost
significance and have a large say in influencing and impacting
the conduct of the stakeholders concerned with the securities
market. It is not to be taken casually since the consequences
to public interest could be grave.
Page 38 of 58



INTENTION TO DISREGARD OBJECTS FROM INCEPTION : -
50. There is another significant aspect in the present case.
The EoGM was on 03.09.2012 for the stated objects therein
and the funds started coming in from 16.10.2012. From the
very next day, the funds were diverted towards advances to
companies and for investment in shares. The ratification came
after the WTM had passed an ex-parte order on 04.12.2014
only on 29.09.2017, at a point when the entire funds already
stood diverted. The explanation tendered that the market
conditions prevailing prevented them from utilizing was
rightly not accepted. It is very clear from the facts that the
respondents had from the very inception had no intention to
use the funds for the stated objects and their only object was
to somehow raise the funds and divert it for the purpose they
ultimately did.
51. In Kishore R. Ajmera (supra), this Court held that proof
of violation of Regulations may have to be inferred by a logical
process of reasoning from the totality of attending facts and
Page 39 of 58


circumstances. In this case, though there is admission that
there is diversion of purpose, the claim that it was due to
market conditions is false, is established from the speed with
which the amounts were diverted. The reliance on newspaper
articles about GDP rate hitting a new low is to say the least not
convincing at all and is too general.

COULD ILLEGALITY BE RATIFIED ? :-
52. It is in this background that we need to test the summary
finding of the SAT that since the shareholders have ratified the
Acts and Deeds done by the company, they become valid and
authorized and as such there was no variation in the utilization
of the proceeds.

53. Mr. Mahfooz A. Nazki, the learned Amicus placed
reliance on Section 27 of the Companies Act read with Section
62 (1)(c) of the said Act. Learned Amicus contends that though
Section 27 may not apply proprio vigore, by virtue of Section
62(1)(c) the principles analogous to Section 27 may be
applied. Section 27 reads as under : -
Page 40 of 58


“27. Variation in terms of contract or objects in
prospectus.— (1) A company shall not, at any time, vary
the terms of a contract referred to in the prospectus or
objects for which the prospectus was issued, except
subject to the approval of, or except subject to an
authority given by the company in general meeting by
way of special resolution:
Provided that the details, as may be prescribed, of
the notice in respect of such resolution to shareholders,
shall also be published in the newspapers (one in English
and one in vernacular language) in the city where the
registered office of the company is situated indicating
clearly the justification for such variation:
Provided further that such company shall not use
any amount raised by it through prospectus for buying,
trading or otherwise dealing in equity shares of any other
listed company.
(2) The dissenting shareholders being those shareholders
who have not agreed to the proposal to vary the terms of
contracts or objects referred to in the prospectus, shall be
given an exit offer by promoters or controlling
shareholders at such exit price, and in such manner and
conditions as may be specified by the Securities and
Exchange Board by making regulations in this behalf.


54. A careful perusal of Section 27 indicates that it applies to
variation of objects in a prospectus. Section 2(70) of the
Companies Act, 2013 defines “prospectus” as under: -
“2(70) “prospectus” means any document described or
issued as a prospectus and includes a red herring
prospectus referred to in section 32 or shelf prospectus
referred to in section 31 or any notice, circular,
advertisement or other document inviting offers from the
Page 41 of 58


public for the subscription or purchase of any securities
of a body corporate;”


55. On its very terms, Section 27 has no application. The
present issue of equity shares by way of preferential allotment
to designated individuals is through private placement and
under Section 42(8) no company offering securities on private
placement shall release any public advertisement or utilize
any media, marketing, disbursement channels or agents to
inform public at large about such an offer. The reliance on
Section 62(1)(c) is also misplaced. The reliance placed by the
learned Amicus is the amendment made in 2018. Section
62(1)(c) in the unamended and amended form (with effect
from 09.02.2018) respectively, read as under: -
“62. Further issue of share capital.— (1) Where at any
time, a company having a share capital proposes to
increase its subscribed capital by the issue of further
shares, such shares shall be offered—
(c) to any persons if it is authorized by a special resolution,
whether or not those persons include the persons
referred to in clause (a) or clause (b), either for cash or for
a consideration other than cash, if the price of such shares
is determined by the valuation report of a registered
valuer subject to such conditions as may be prescribed.


Page 42 of 58


AMENDED FORM
62. Further issue of share capital.— (1) Where at any
time, a company having a share capital proposes to
increase its subscribed capital by the issue of further
shares, such shares shall be offered—
(c) to any persons, if it is authorised by a special
resolution, whether or not those persons include the
persons referred to in clause (a) or clause (b), either
for cash or for a consideration other than cash, if the
price of such shares is determined by the valuation
report 2 [of a registered valuer, subject to the
compliance with the applicable provisions of Chapter
III and any other conditions as may be prescribed.”

56. Even if one is to take the amended form of Section
62(1)(c) all that Section talks of is the applicable provisions of
Chapter III which would mean the conditions stipulated in
Section 42. Reverting back to Section 27, which deals with
varying the terms of the prospectus, it will be seen that even
there it is subjected to several conditions; firstly, it is subject
to the Companies (Prospectus and Allotment of Securities)
Rules, 2014. Rule 7 of the said rules read as under: -
“ 7. Variation in terms of contracts referred to in the
prospectus or objects for which prospectus was
issued.—
(1) where the company has raised money from public
through prospectus and has any unutilized amount out of
the money so raised, it shall not vary the terms of contracts
referred to in the prospectus or objects for which the
prospectus was issued except by passing a special
Page 43 of 58


resolution through postal ballot and the notice of the
proposed special resolution shall contain the following
particulars, namely:—
(a) the original purpose or object of the Issue;
(b) the total money raised;
(c) the money utilised for the objects of the company
stated in the prospectus;
(d) the extent of achievement of proposed objects(that
is fifty percent, sixty percent, etc);
(e) the unutilised amount out of the money so raised
through prospectus,
(f) the particulars of the proposed variation in the
terms of contracts referred to in the prospectus or
objects for which prospectus was issued;
(g) the reason and justification for seeking variation;
(h) the proposed time limit within which the proposed
varied objects would be achieved;
(i) the clause-wise details as specified in sub-rule (3)
of rule 3 as was required with respect to the
originally proposed objects of the issue;
(j) the risk factors pertaining to the new objects; and
(k) the other relevant information which is necessary
for the members to take an informed decision on
the proposed resolution.

(2) The advertisement of the notice for getting the
resolution passed for varying the terms of any contract
referred to in the prospectus or altering the objects for
which the prospectus was issued, shall be in Form PAS-
1 and such advertisement shall be published
simultaneously with dispatch of Postal Ballot Notices to
Shareholders.

(3) The notice shall also be placed on the website of the
company, if any.”

Secondly, Rule 7(e) requires stipulation of the unutilized
amount; and thirdly, even under Section 27 the amount ought
Page 44 of 58


not be used for buying, trading or otherwise dealing in equity
shares of other listed company.

57. In the present case, the entire amount raised was utilized
for a different object than the one set out in the EoGM notice
and ratification was sought after committing the illegality. In
view of the above, the reliance on Section 27 read with Section
62(1)(c) is completely misplaced.

58. There is another important aspect. SEBI’s Regulations
including the PFUTP is to protect the rights of several
stakeholders and as such has public law dimensions. The
Regulations are framed keeping in mind the rights and
interests of multiple stakeholders involved in the securities
market.

59. By a private resolution, a liability which is crystalized
cannot be wiped off by contending that the shareholders have
condoned the action. When rights of multiple stakeholders are
involved and certain Regulations proscribe a particular
course of action any breach of the Regulation has to face its
Page 45 of 58


consequences. They are not in the realm of private rights
which can be waived off as ratified. Dealing with the
difference between private rights and public rights and as to
how matter involving rights of the public cannot be waived,
4
this Court in Shri Lachoo Mal v. Shri Radhey Shyam , held as
under: -
“ 6. The general principle is that every one has a right to
waive and to agree to waive the advantage of a law or rule
made solely for the benefit and protection of the
individual in his private capacity which may be dispensed
with without infringing any public right or public policy.
Thus the maxim which sanctions the non-observance of
the statutory provision is cuilibet licet renuntiare juri pro
se introducto. (See Maxwell on Interpretation of Statutes,
Eleventh Edn., pp. 375 and 376). If there is any express
prohibition against contracting out of a statute in it then no
question can arise of any one entering into a contract
which is so prohibited but where there is no such
prohibition it will have to be seen whether an Act is
intended to have a more extensive operation as a matter
of public policy. In Halsbury's Laws of England, Vol. 8,
Third Edn., it is stated in para 248 at p. 143:
“As a general rule, any person can enter into a binding
contract to waive the benefits conferred upon him by
an Act of Parliament, or, as it is said, can contract
himself out of the Act, unless it can be shown that such
an agreement is in the circumstances of the particular
case contrary to public policy. Statutory conditions
may, however, be imposed in such terms that they
cannot be waived by agreement, and, in certain
circumstances, the legislature has expressly provided
that any such agreement shall be void.”

4
(1971) 1 SCC 619
Page 46 of 58



60. What was said in the context of waiver will equally apply
for ratifications since ratification of an illegality cannot be
done. In Government of Andhra Pradesh and Others vs. K.
5
Brahmanandam and Others, in the context of service
jurisprudence, this Court held as under:-
“16.
Appointments made in violation of the mandatory
provisions of a statute would be illegal and, thus, void.
Illegality cannot be ratified . Illegality cannot be
regularised, only an irregularity can be.”
[Emphasis supplied]


61. In Pramod Kumar vs. U.P. Secondary Education
6
Services Commission and Others, this Court observed as
under :-
“18. If the essential educational qualification for
recruitment to a post is not satisfied, ordinarily the same
cannot be condoned. Such an act cannot be ratified. An
appointment which is contrary to the statute/statutory rules
would be void in law. An illegality cannot be
regularised,
particularly, when the statute in no
unmistakable term says so. Only an irregularity can be.
[See Secy., State of Karnataka v. Umadevi (3) [(2006) 4 SCC
1], National Fertilizers Ltd. v. Somvir Singh [(2006) 5 SCC
493] and Post Master General, Kolkata v. Tutu Das
(Dutta) [(2007) 5 SCC 317]”
[Emphasis supplied]



5
(2008) 5 SCC 241
6
(2008) 7 SCC 153
Page 47 of 58


62. Following the judgment in re: Birkbeck Permanent
7
Benefit Building Society , this Court in Dr. A.
Lakshmanaswami Mudaliar and Others vs. Life Insurance
8
Corporation of India and Another, observed that where a
company does an act which is ultra vires, no legal relationship
or effect ensues therefrom. Such an act is absolutely void and
cannot be ratified even if all the shareholders agree.

63. Though said in the context of resolution of the
shareholders being ultra vires the Memorandum of
Association of the Trust in the said case, what is important is
the holding that if something is “ultra vires” it cannot be
ratified.

64. The meaning of ultra vires, according to Advanced Law
rd
Lexicon P. Ramanatha Aiyar 3 Edition 2005 “ ultra vires
(beyond their power) said of a company or corporation etc.
when exceeding the authority imparted to it by law ”.

7
(1912) 2 Ch. D. 183
8
1962 SCC OnLine SC 9
Page 48 of 58


65. In the present case, what is argued by the learned amicus
is that notwithstanding the diversion of the funds raised
through the preferential allotment, the purpose for which they
were diverted, namely, advancement of loans and investment
in shares is relatable to the Memorandum of Association as it
originally stood and, in any event, was covered by the
amendment to the Memorandum of Association made on
12.03.2014. We are not able to countenance the submission
What is crucial for our purpose is that the object set out in the
explanatory note appended to the notice of EoGM prior to the
issuance of preferential shares. The funds were not utilized
for those disclosed objects. To make the matters worse for the
respondents here the diversions were made soon after the
amounts were raised between 16.10.2012 and 08.11.2012. The
diversion was contrary to the object set out to the explanatory
note and was before any amendment was carried out to the
Memorandum of Association and the purported resolution of
ratification dated 29.09.2017. More importantly, the diversion
was contrary to the PFUTP Regulations of SEBI, the SEBI Act
Page 49 of 58


and the disclosure norms under Section 173(2) of the
Companies Act read with Regulation 73(1) of the SEBI ICDR
Regulations, 2009. Being a plainly illegal act impacting a vast
array of stakeholders other than the shareholders of the
company, the question of ratification cannot arise at all.

66. The matter cannot be viewed from the prism of the
shareholders alone. When matter involves public interest it
cannot be deemed as private waivable right. What applied to
waiver will also apply to ratification. No condonation or
ratification on aspects opposed to public policy can be made,
as it will seriously jeopardize public interest.

VALIDITY OF SEPARATE PROCEEDINGS BY WTM AND
ADJUDICATING OFFICER :-
67.
That brings us to the final question that learned Amicus
Curiae raised. Learned Amicus Curiae contend that the
adjudicating order which culminated in the order of
29.04.2020, was found on the very same facts and allegations
on which the WTM had on 19.03.2019 adjudicated after
Page 50 of 58


passing the ex-parte order on 04.12.2014. According to the
learned Amicus Curiae, the AO was estopped from initiating
proceedings on the same set of facts which the WTM had
adjudicated. Reliance is placed on Securities and Exchange
9
Board of India Vs. Ram Kishori Gupta & Anr. , judgment of
10
SAT in Nirmal N. Kotecha v. SEBI .

68. Considering the timelines involved in this case, we find
that this submission is also misplaced. The EoGM resolution is
dated 01.10.2012 and the funds were raised between
16.10.2012 and 08.11.2012. The funds were utilized for the
purpose other than the one set out in the explanatory
memorandum between 16.10.2012 and 09.11.2012.

69. Thereafter on 04.12.2014, the Whole Time Member
exercising powers under Section 11(4) and 11(B) of the SEBI
Act as it then stood, passed an ex-parte order against
respondents, restraining them from buying, selling, and

9
Civil Appeal no. 7941 of 2019
10
2021 SCC OnLine SAT 1613
Page 51 of 58


dealing with securities market either directly or indirectly in
any manner till further directions. This was done to protect the
interest of the investors.

70. Section 11(1), 11(4)(b) and 11(B) of the SEBI Act, at that
point of 04.12.2014, stood as under :-
“ 11. Functions of Board .- (1) Subject to the provisions
of this Act, it shall be the duty of the Board to protect
the interests of investors in securities and to promote
the development of, and to regulate the securities
market, by such measures as it thinks fit.
11 (4) Without prejudice to the provisions contained in
sub-sections (1), (2), (2A) and (3) and section 11B, the
Board may, by an order, for reasons to be recorded in
writing, in the interests of investors or securities
market, take any of the following measures, either
pending investigation or inquiry or on completion of
such investigation or inquiry, namely:—
(b) restrain persons from accessing the securities
market and prohibit any person associated with
securities market to buy, sell or deal in securities;

11B . Power to issue directions.- (1) Save as otherwise
provided in section 11, if after making or causing to be
made an enquiry, the Board is satisfied that it is
necessary,—

(i) in the interest of investors, or orderly
development of securities market; or
(ii) to prevent the affairs of any intermediary or
other persons referred to in section 12 being
Page 52 of 58


conducted in a manner detrimental to the interest
of investors or securities market; or
(iii) to secure the proper management of any such
intermediary or person, it may issue such
directions,—
(a) to any person or class of persons
referred to in section 12, or associated with
the securities market; or
(b) to any company in respect of matters
specified in section 11A, as may be
appropriate in the interests of investors in
securities and the securities market.

Explanation.—For the removal of doubts, it
is hereby declared that the power to issue
directions under this section shall include and
always be deemed to have been included the
power to direct any person, who made profit or
averted loss by indulging in any transaction or
activity in contravention of the provisions of this
Act or regulations made thereunder, to disgorge
an amount equivalent to the wrongful gain made
or loss averted by such contravention.”

71. The ex-parte order was confirmed on 22.08.2016.
Thereafter, the appellant conducted a detailed investigation
and a Show Cause Notice was issued to the respondents on
05.12.2017 calling upon them for alleged violation under
PFUTP Regulations and to show cause why suitable direction
under Section 11(B), 11(4) and 11(1) cannot be passed. An
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order was made after adjudication on 19 March 2019 and
insofar as the present respondents were concerned, since by
then these respondents had already undergone a prohibition
from accessing the securities market directly or indirectly for
a period of more than four years, the said period was held as
sufficient.

72. Under Section 11(B), 11(4) and 11(1) of the SEBI Act, as it
then stood, the WTM could only impose punishment of
restraining access from the securities market and
disgorgement of any profit made or loss averted. In the
present case, for a transaction of this nature, only restraining
from accessing markets could have been imposed by the
WTM at that point and that was duly imposed.

73. The power to impose penalty under Section 15HA was to
be exercised by the Adjudicating Officer under 15(I)(1). Post
the interim order by the WTM and based on the investigation
for the purpose of imposition of penalty the Adjudicating
Officer issued a Show Cause Notice on 27.04.2018 and it is out
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of this Show Cause Notice that the present proceedings arise.
Section 15HA was amended in 2014 to read as under: -
“Penalty for fraudulent and unfair trade practices.
15HA. If any person indulges in fraudulent and unfair
trade practices relating to securities, he shall be liable to
a penalty which shall not be less than five lakh rupees but
which may extend to twenty-five crore rupees or three
times the amount of profits made out of such practices,
whichever is higher.


74. It is only in 2018 under the Finance Act of 2018 with effect
from 08.03.2019 power was vested in the Whole Time Member
to levy penalty under Section 15HA under Section 11B.
However, since in the present case inquiry having begun on
27.04.2018 by the AO, the WTM steered clear of the penalty
inquiry since the AO was looking into matter. Today, post the
amendment the WTM could impose the penalty. However, we
are dealing with situation before the amendment in the
Finance Act 2018 and particularly a case where AO had
exercised jurisdiction.

75. It will be very unfortunate if the only punishment a person
who has committed fraud under PFUTP Regulation is an order
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restraining access from market and disgorgement of profit or
the loss averted. There would be no deterrence. When the
matter was clear during the inquiry that there was a clear case
for penalty, the AO stepped in and exercised jurisdiction and
passed an order for penalty. We find nothing wrong in the
course of action adopted in the impugned order. It is only that
two authorities vested with different powers operating in
separate fields have exercised jurisdiction during the period
in question.

76. The judgment in Nirmal N. Kotecha (supra) has no
application. There the adjudicating officer had exonerated
the party and thereafter the WTM stepped in. That is not the
scenario again. Nirmal N. Kotecha (supra) is pending in
appeal before this Court and we are not to be taken to have
commented one way or the other on the issues involved in the
said appeal.

77. Ram Kishori Gupta (supra) is also distinguishable.
There this Court categorically held that when an earlier order
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dated 31.07.2014 of the WTM on the same cause of action and
on the very same show cause notices remained intact and
attained finality, the later order of 29.08.2018 could not have
been passed supplementing the earlier order with additional
directions. It was held that the power to order disgorgement
was very much within the ambit and scope of SEBI even on
31.07.2014 but the WTM chose not to resort to it. It was in that
context that this Court held that the order of 31.07.2014 having
attained finality and given full effect, passing of a fresh order
once again on the very same cause of action trampled upon
and reversed the finality that had already attached to the
earlier order. That is not the situation in the present case.

78. We also do not find the penalty imposed to be
disproportionate.

79. For the above reasons, the impugned order passed by
the SAT in Appeal Nos. 116 of 2021, 114 of 2021 and 115 of 2021
cannot be sustained. Accordingly, we set aside the same. The
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Appeals are allowed. The order of the Adjudicating Officer
dated 29.04.2020 is restored.

80. We place on record our appreciation for Mr. Mahfooz A.
Nazki, the learned Amicus, who very ably presented the case
on behalf of the respondents.

……….........................J.
[ J.B. PARDIWALA ]



……….........................J.
[ K. V. VISWANATHAN ]
New Delhi;
th
17 March, 2026
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