2026 INSC 245 Page 1 of 58

REPORTABLE

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

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:-

Table : V

Investments

Shares Values

1. Banas Finance Ltd. 2,80,34,913

2. Confidence Trading Co. Ltd. 26,37,751

3. Esaar (India) Ltd 72,39,206

4. Out of City Travel Solutions Ltd. 1,71,83,697

5. Shreenath Commercial and Finance Ltd. 4,77,66,900

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6. Kayaguru Capital Market Pvt. Ltd 2,00,000

7. Daga Strips Pvt. Ltd 2,75,000

Total 10,33,37,467

Loans & Advances

1. Rupak Developers Pvt. Ltd 25,34,000

2. Sanjay V Parmar 25,00,000

3. Fragrant Multitrading Pvt. Ltd 26,85,000

4. Rockon Capital Market Pvt. Ltd 2,56,62,000

5. Kayaguru Capital Market Pvt. Ltd 1,18,00,000

6. Insight Multitrading Pvt. Ltd 27,50,000

7. Yashasvi Developers Pvt. Ltd 25,00,000

Total 5,04,31,000

14. From the copy of the special resolution passed under

Section 81(1A) of the Companies Act, 1956 as available on

BSE website it is noted that Moryo had disclosed to its

shareholders and public that the purpose of aforesaid fund

raising through preferential allotment was to meet

requirements for –

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 A DJUDICATING 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 RESPONDENT S: -

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 CURIA E: -

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

Page 28 of 58

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.

Ajmera,

1, SEBI v. Kanaiyalal Baldevbhai Patel

2

, and SEBI v.

Rakhi Trading (P) Ltd.

3

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 29 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 30 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 31 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 32 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 33 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

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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 35 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 36 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 37 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 38 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 39 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 40 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 41 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 42 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 43 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 44 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 45 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 46 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,

this Court in Shri Lachoo Mal v. Shri Radhey Shyam

4, 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 47 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.

Brahmanandam and Others,

5 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

Services Commission and Others,

6 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 48 of 58

62. Following the judgment in re: Birkbeck Permanent

Benefit Building Society,

7

this Court in Dr. A.

Lakshmanaswami Mudaliar and Others vs. Life Insurance

Corporation of India and Another,

8 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

Lexicon P. Ramanatha Aiyar 3

rd

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 49 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 50 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 51 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

Board of India Vs. Ram Kishori Gupta & Anr.

9, judgment of

SAT in Nirmal N. Kotecha v. SEBI

10

.

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 52 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

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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 2 2.08.2016.

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;

17

th

March, 2026