New Delhi: The Supreme Court on Tuesday said shareholder approval neither shields a company from securities law violations nor removes the liability on fund diversion to unapproved activities despite a nod from investors after the alleged legal breach.
The top court saside an order from the Securities Appellate Tribunal (SAT), which had given Terrascope Ventures (formerly Moryo Industries) and its directors a clean chit on fund diversion.
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Instead, a bench comprising Justices JB Pardiwala and KV Viswanathan upheld the penalties imposed by the Securities and Exchange Board of India (Sebi).
“Any diversion of funds without proper disclosure to the investors, amounts to fraudulent activity under the Sebi (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations),” the court said. “Utilizing funds for purposes different from the purpose stated in the invitation to subscribe is a fraudulent activity under PFUTP Regulations and its liability cannot be wiped out by subsequent shareholder ratification.”
It said that while ratification may operate in the realm of private corporate acts, it cannot be invoked to defeat statutory obligations or regulatory breaches. “There cannot be a ratification of illegality,” the top court said.
By a private resolution, a liability which is crystalized cannot be wiped off by contending that the shareholders have condoned the action, the judges said, while emphasising that securities regulations are designed to protect a wider class of stakeholders.
Allowing such ratification would effectively permit companies to bypass regulatory safeguards through internal approvals, thereby undermining the statutory scheme, it said, adding that SEBI regulations are framed to protect not just shareholders, but multiple stakeholders including existing investors, potential investors and the market at large.
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“No condonation or ratification on aspects opposed to public policy can be made, as it will seriously jeopardize public interest” since securities regulations are designed to ensure transparency, fairness and investor confidence in the market, the judgment stated.
Terrascope had raised approximately ₹15.87 crore in 2012 through a preferential allotment of shares, after informing shareholders that the proceeds would be used for specific purposes like capital expenditure, working capital, marketing and overseas expansion.
