Shareholder Ratification Cannot Wipe Out Liability For Violation Of SEBI Regulations: Supreme Court
The Supreme Court on Tuesday observed that violations of SEBI regulations cannot be nullified through shareholder ratification, observing that regulatory breaches affecting multiple stakeholders must face statutory consequences.
A bench of Justices J.B. Pardiwala and K.V. Viswanathan while setting aside the order dated June 2, 2022 passed by the Securities Appellate Tribunal, which had set aside penalties imposed by SEBI on Terrascope Ventures Ltd and its directors.
“SEBI's Regulations including the PFUTP is to protect the rights of the several stakeholders. By a private resolution, a liability which is crystallized 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 consequences. They are not in the realm of private rights which can be waived off as ratified.”, the court observed.
The court noted that the case arose out of violations relating to issuance of securities, including preferential allotment of shares, which attracted the SEBI Act and allied regulations and cannot be cured by later ratification.
"A conspectus of the reading of the SEBI Act, PFUTP Regulation, the SCRA Act, ICDR Regulation and the Listing Agreement all point in one direction to the fact that the objects set out in the explanatory note for the issuance of the 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 would be grave.”, it further added.
Background
Terrascope Ventures Ltd had raised funds through a preferential issue of 63,50,000 shares at Rs. 25 per share pursuant to a special resolution passed on October 1, 2012. The proceeds were stated to be used for purposes such as capital expenditure, acquisitions, working capital and expansion.
However the funds were later used for purchasing shares of other companies and granting loans and advances. In the Annual General Meeting held on September 29, 2017, shareholders passed a special resolution ratifying this deviation from the original objects.
SEBI then issued a show cause notice to Terrascope on April 27, 2018 alleging non-disclosure of variation in fund utilization under Clause 43 of the Listing Agreement. The Adjudicating Officer imposed penalties of Rs. 1 crore on the company and Rs. 25 lakh each on its directors.
On appeal, the Securities Appellate Tribunal on June 2, 2022, held that shareholder ratification validated the utilization retrospectively. It ruled that once ratified, there was no variation or violation and accordingly set aside the penalties imposed by SEBI.