Subsequent shareholder ratification cannot validate fraudulent diversion of securities issue proceeds from disclosed objects.

In September 2012, Terrascope Ventures Ltd (the Company) issued a notice for an Extraordinary General Meeting (EoGM) to raise funds through preferential allotment, stating the objects as capital expenditure, acquisitions, and working capital

Between October and November 2012, the Company raised ₹15.87 crores but immediately diverted the funds to purchase shares of other companies and grant unsecured loans to entities connected to a common promoter

The Company amended its Memorandum of Association (MoA) post-facto in 2014 and passed a shareholder resolution in 2017 to ratify the diversion

While the SEBI Whole Time Member (WTM) restrained the respondents from the market for over four years, the Adjudicating Officer (AO) separately imposed monetary penalties totaling ₹1 crore on the Company and ₹25 lakhs each on its directors for violating PFUTP Regulations and the Securities Contracts (Regulation) Act (SCRA)

The Securities Appellate Tribunal (SAT) set aside the AO's penalties, holding that the 2017 shareholder ratification validated the Company’s acts

SEBI appealed to the Supreme Court.

1. Whether the SAT was justified in reversing the AO’s order on the ground that subsequent shareholder ratification legitimized the fraudulent diversion of funds

2. Whether an illegal act violating SEBI Regulations and impacting public interest can be cured by a private resolution of ratification

3. Whether the AO had the jurisdiction to impose penalties while parallel proceedings on the same facts were conducted by the WTM

The Court applied Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, which prohibit manipulative, deceptive, or fraudulent devices in connection with the issue of securities

It relied on the broad definition of "fraud" under Regulation 2(1)(c), as interpreted in SEBI v. Kanaiyalal Baldevbhai Patel, which includes acts committed even without deceit if they induce dealings in securities

The Court also applied Section 21 of the SCRA regarding compliance with listing conditions (specifically Clause 43 of the Listing Agreement)

the principle from Shri Lachoo Mal v. Shri Radhey Shyam that statutory provisions intended for public policy or public interest cannot be waived or ratified

The Court observed that the diversion of funds occurred almost immediately after receipt, indicating a pre-conceived intention to disregard the objects disclosed in the EoGM notice

Such conduct constitutes fraud under PFUTP Regulations because the disclosure of objects is a statutory mandate designed to protect the integrity of the market and inform investor decisions

The Court rejected the applicability of Section 27 of the Companies Act, noting it applies to prospectuses and not private placements; furthermore, even Section 27 prohibits using proceeds to trade in shares of other listed companies

Crucially, the Court held that while a company may ratify an irregular act, it cannot ratify an illegal act that violates public law or SEBI regulations, as these involve public interest and multiple stakeholders beyond just the current shareholders

Regarding the parallel proceedings, the Court clarified that the WTM’s powers under Section 11B (remedial) and the AO’s powers under Section 15HA (punitive) operated in separate fields at the material time; thus, the WTM’s decision not to impose further "restrained access" did not preclude the AO from imposing statutory monetary penalties

(i) the diversion of funds was a fraudulent practice under PFUTP Regulations as it involved misrepresentation of objects to stakeholders

(ii) shareholder ratification cannot cure a violation of SEBI Regulations or public policy

(iii) the AO and WTM exercised distinct statutory functions, making the AO's penalty valid despite the WTM’s prior adjudication