The Supreme Court has held that diversion of funds raised through a preferential share issue for purposes not disclosed to investors amounts to a fraudulent practice under securities laws and cannot be validated through a later shareholder ratification.

In SEBI v. Terrascope Ventures Limited, the Court set aside an order of the Securities Appellate Tribunal (SAT) and restored the penalties imposed by the Securities and Exchange Board of India (SEBI) on the company and its directors for violating securities market regulations. The judgment was delivered by a bench led by Justice K. V. Viswanathan. 

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The dispute arose from a preferential allotment of shares made in 2012 by Terrascope Ventures Ltd., then known as Moryo Industries Ltd.

The company informed shareholders through an Extraordinary General Meeting notice that the funds raised would be used for: capital expenditure and acquisitions, long-term working capital, marketing initiatives, setting up overseas offices, and other approved corporate purposes. 

Between October and November 2012, the company raised approximately ₹15.87 crore through preferential allotment to multiple entities. However, SEBI later found that the company almost immediately diverted the funds to: investments in shares of other companies, and loans and advances to related entities. 

According to SEBI, these transactions occurred within days of receiving the funds, indicating that the company had no intention of using the proceeds for the stated purposes.

After investigation, SEBI initiated proceedings for violations of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations) and the Securities Contracts (Regulation) Act, 1956 (SCRA).

The SEBI Adjudicating Officer imposed: ₹70 lakh penalty on the company for PFUTP violations, ₹30 lakh penalty for breach of listing conditions under SCRA, and ₹25 lakh each on the company’s Managing Director Manoharlal Saraf and Director Geeta Saraf. 

The officer concluded that the company had misled investors by raising funds for specific purposes but using them for entirely different activities.

The company challenged the penalties before SAT.

SAT accepted the company’s argument that shareholders had passed a resolution in 2017 ratifying the diversion of funds, and therefore the utilization of proceeds had effectively been approved by shareholders.

On this basis, SAT held that there was no unlawful variation in the use of funds and set aside SEBI’s penalties.

The Supreme Court strongly disagreed with SAT’s reasoning and restored SEBI’s action.

1. Diversion of Funds Constituted Fraudulent Practice

The Court held that diverting funds raised for specific disclosed objects violates the PFUTP Regulations because it misleads investors and distorts market transparency.

It emphasized that under securities laws, fraud includes acts or omissions that induce investors to trade in securities even without traditional deceit. 

2. Disclosure of Objects is Crucial for Investor Decisions

The Court noted that disclosure of the purpose of fundraising is a critical factor influencing investor behaviour.

Investors may decide to buy or sell shares based on the proposed use of funds, or retain holdings expecting the stated projects to benefit the company.

Therefore, misleading disclosures undermine the integrity of the securities market. 

3. Immediate Diversion Showed Lack of Intent

The Court observed that funds were diverted almost immediately after being received, demonstrating that the company never intended to utilize them for the declared purposes. 

4. Illegal Acts Cannot Be Ratified Later

Rejecting the SAT’s reliance on shareholder approval, the Court ruled that illegal acts cannot be validated through post-facto ratification.

It held that:

• securities regulations protect multiple stakeholders, not just shareholders, and
• violations affecting market integrity involve public law considerations.

Hence, shareholders cannot waive or ratify conduct that violates regulatory provisions.

Case Details

Case Title: SEBI Versus Terrascope Ventures Limited Etc. 

Citation: JURISHOUR-416-SC-2026

Case No.: Civil Appeal Nos. 5209-5211 Of 2022

Date: 17/03/2026

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