The Supreme Court of India in Securities and Exchange Board of India v. Terrascope Ventures Limited (2026 INSC 245)

Introduction

In Securities and Exchange Board of India v. Terrascope Ventures Limited (“Terrascope Judgement”), the Supreme Court of India (“Supreme Court”) held that the objects of a preferential issue (i.e. issue of new shares or convertible securities by a listed issuer toany select person orgroup of personson a privateplacement basis), as disclosed under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”), are market-facing regulatory commitments whose breach can amount to “fraud” under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”).

Three aspects of the Terrascope Judgement are particularly important. Firstly, building on Securities and Exchange Board of India v. Kishore R. Ajmera, Securities and Exchange Board of India v. Kanaiyalal Baldevbhai Patel and Securities and Exchange Board of India v. Rakhi Trading (P) Ltd., the Supreme Court resorted to an expansive conception of “fraud” under the PFUTP Regulations and treats the immediate and systematic diversion of issue proceeds as evidence that the issuer never intended to honor the disclosed objects, attracting liability for fraud under the PFUTP Regulations. Secondly, it draws a sharp line between the “objects of the issue” and the company’s constitutional objects, holding that post-facto amendments to the memorandum of association (“MoA”) of the company cannot retrospectively cure prior regulatory breaches. Thirdly, it rejects shareholder ratification on the primary ground that a breach of Securities and Exchange Board of India’s (“SEBI”) public-law regulatory framework is a statutory illegality incapable of being cured by shareholder vote, regardless of whether the conduct was intra vires the company’s constitutional documents.

This note emphasizes how the Terrascope Judgement reinforces a public-law paradigm for SEBI’s regulatory framework: obligations under the framework of PFUTP Regulations are owed to the market as a whole, and company law doctrines of ratification and implied powers cannot be invoked to dilute them.

Facts and Regulatory Trajectory

1. The preferential issue and immediate diversion

The case arises from a preferential issue by Moryo Industries Limited (now Terrascope Ventures Limited) (“Company”) in 2012. In September 2012, the Company proposed a preferential issue of up to 74,50,000 equity shares. The explanatory statement, issued under Section 173(2) of the Companies Act, 1956 and Regulation 73(1) of the ICDR Regulations, disclosed five objects namely: (i) capital expenditure including acquisition of companies/business; (ii) funding long-term working capital requirements; (iii) marketing; (iv) setting up of offices abroad; and (v) other approved corporate purposes. Following a shareholder approval, 42 allottees out of the 49 proposed allottees subscribed to the preferential issue, raising approximately INR 15.875 crores. The allotment was made between October 16, 2012 and November 8, 2012, with the last tranche of proceeds being credited on November 9, 2012.

However, from October 17, 2012 (i.e. one day after the first credit) proceeds were transferred as undocumented loans and advances to entities connected to a common promoter and deployed in share purchases of other companies. By November 9, 2012, the bulk of the proceeds had been redirected, none of it towards the disclosed objects of the preferential issue.

2. Post-diversion corporate strategy

Faced with this position, the Company pursued a two-stage corporate-law remediation strategy. Firstly, on March 12, 2014, nearly 18 months after the entire proceeds had already been deployed towards investment in shares and loans, the Company amended its MoA to include financing, investment and share-trading as objects of the Company. Secondly, on September 29, 2017, after the whole time member (“WTM”) had passed and confirmed a market-access restraint order, it procured a shareholder resolution purporting to “ratify and approve” the utilization of the proceeds of the preferential issue “in variation to the objects as set out in the notice” of the extraordinary general meeting held in 2012, expressly invoking Section 27 of the Companies Act, 2013 (“Companies Act”).

3. Regulatory proceedings

On December 4, 2014, the WTM, acting under Section 19 read with Sections 11(1), 11(4)(b) and 11B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), passed an ad-interim order restraining the Company, its promoters and directors (including the individual respondents) and certain related entities from accessing the securities market. The order described the preferential allotment as “a tool for implementation of the dubious plan, device and artifice of Moryo Group and allottees”. This interim order was confirmed on August 22, 2016.

In parallel, the adjudicating officer (“AO”) issued a show-cause notice dated April 27, 2018 under Section 15-I of the SEBI Act, alleging violations of Regulations 3(a) to (d) and 4(1), 4(2)(f), 4(2)(k) and 4(2)(r) of the PFUTP Regulations and Section 21 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) read with Clause 43 of the Listing Agreement. The AO ultimately held that the proceeds had not been utilized for the objects of the preferential issue and imposed monetary penalties on the Company and its managing director and chairman of the audit committee.

Separately, upon completion of the investigation in the scrip of Moryo Industries Limited, SEBI issued a show cause notice dated December 5, 2017, to the Company, among others, for violations of the PFUTP Regulations. By an order dated March 19, 2019, the WTM found the Company had violated the PFUTP Regulations but imposed no further penalty, given that the Company had already been restrained from accessing the securities market for over four years and three months pursuant to the ad-interim order dated December 4, 2014.

4. Securities Appellate Tribunal and Supreme Court

The Securities Appellate Tribunal (“SAT”) allowed the respondents’ appeal, placing decisive weight on the shareholder resolution of 2017 and holding that once shareholders had ratified the utilization of the proceeds, “the acts and deeds done by the Company becomes valid and authorized and therefore there was no variation of the utilization of the proceeds”, and that consequently there was no violation of Clause 43 of the Listing Agreement. SEBI appealed to the Supreme Court, which, by a judgment dated March 17, 2026 set aside the SAT order and restored the AO’s penalties in full.

Statutory Framework and Core Issues

1. PFUTP’s expanded conception of “fraud”

In Securities and Exchange Board of India v. Kanaiyalal Baldevbhai Patel, the Supreme Court highlighted that definition of fraud under the PFUTP Regulations is deliberately broader than the definition under the Indian Contract Act, 1872 and can capture conduct that may not amount to fraud at common law but nonetheless undermines market integrity. Fraud may be established even in the absence of traditional elements such as deceit, where the act or omission induces another to deal in securities. In the Terrascope Judgement, this doctrinal foundation enables the Supreme Court to treat misrepresentation regarding use of proceeds, and the failure to use funds in accordance with those representations, as constituting fraudulent conduct even in the absence of investor complaints or demonstrable individual loss. The focus, therefore, is on inducement and the misleading character of the disclosures, rather than on proof of actual loss to identified investors.

A point of direct practical significance: the defence presented by the amicus curiae included the argument that no complaints had been received from any of the allottees who subscribed to the preferential issue. The Supreme Court implicitly but firmly rejected this contention. By characterizing the framework under the PFUTP Regulations as protecting the rights of multiple stakeholders across the market, including secondary market participants who adjust their positions in reliance on disclosed objects, the Supreme Court confirms that SEBI enforcement under the PFUTP Regulations is not conditional on investor grievances or demonstrated individual loss. SEBI may act suo motu based on its own investigation. This principle flows from the market wide conception of fraud under Regulation 2(1)(c) of the PFUTP Regulations.

2. Regulation 73 of the ICDR Regulations and the “objects of the issue” — including the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”)

Regulation 73(1) of the ICDR Regulations requires issuers undertaking preferential issues to disclose the objects of the issue in the explanatory statement in the notice for the shareholders’ meeting. In the Terrascope Judgement, the explanatory statement to the notice for the extraordinary general meeting complied with Regulation 73(1), but the objects mentioned therein did not include financing activities or investments in third-party entities.

The Supreme Court treated these objects as regulatory commitments, rather than aspirational statements. It links them to the objectives of the SEBI Act, promoting orderly growth of the securities market and protecting investors, by emphasizing that disclosures of the use of proceeds support market transparency and price discovery. Existing shareholders may decide to hold or dispose of shares based on the Company’s deployment strategy; potential investors may enter or exit positions in reliance on such representations; and market prices may adjust to the anticipated impact of the capital raising. Deviations from the disclosed objects therefore affect not only the Company and the allottees of the preferential issue but also non-participating shareholders and secondary market investors, none of whom have been identified or have complained for SEBI’s jurisdiction to arise.

Although the events in the Terrascope Judgement pre-dated the LODR Regulations, the Supreme Court expressly refers to the LODR Regulations to demonstrate the continuity and reinforcement of the disclosure architecture. For listed entities today, the operative provision is Regulation 32 of the LODR Regulations, which imposes a structured quarterly-disclosure regime.

3. Company law provisions and the ratification defence

The defence relied on three company law arguments: (i) Section 27 of the Companies Act (variation of terms of a contract or objects stated in a prospectus), read by analogy with Section 62(1)(c) (preferential issues) of the Companies Act; (ii) Clause 3(A)(12) of the pre-amendment MoA, which permitted investment in shares; and (iii) the amendment to the MoA in 2014 inserting lending as an object. Combined with the general doctrine of ratification that acts within corporate capacity but beyond management authority may be validated by shareholder approval, the defence argued that the shareholder resolution in 2017 regularized the deployment.

Supreme Court's Analysis

1. Chronology, intent and the fraud inference

The Supreme Court’s fraud reasoning is anchored in chronology. The very next day after the first credit on October 16, 2012, funds were already being transferred out as loans. By November 9, 2012, the day the last tranche of the allotment proceeds were received, the diversion was substantially complete. The explanation that “market conditions” prevented adherence to the original plan was dismissed as vague, unsupported and internally implausible: a reliance on general newspaper articles about decline in gross domestic product was characterized as “too general” and “not convincing at all”. No specific market condition was identified that would have prevented capital expenditure, the establishment of offices abroad or funding of working capital, while simultaneously compelling immediate undocumented loans to connected entities.

Based on the combined reading of the definition of fraud under the PFUTP Regulations and the above analysis, this pattern supports a compelling inference that the Company did not intend to utilize the proceeds for the disclosed objects at the time of the preferential issue. Raising capital on the basis of specific representations about utilization, without any real intention to honor them, falls squarely within the category of “a promise made without any intention of performing it” and constitutes “a device, scheme or artifice to defraud” the market under Regulation 3(c) of the PFUTP Regulations. This aligns with the approach in SEBI v. Kishore R. Ajmera where the Supreme Court held that the proof of violation may be inferred by a logical process of reasoning from the totality of attending facts and circumstances, without direct evidence of deceit.

The sequential timing of the shareholder resolution in 2017 reinforces rather than undermines this inference. The fact that the resolution was procured only after regulatory action had crystallized, over two years after the WTM’s confirmed restraint order and shortly before the issuance of fresh show cause notice, makes it difficult to characterize it as a genuine retrospective commercial variation. It reads instead as a litigation strategy, a feature of the facts that the Supreme Court treats as further evidence of the absence of any genuine commercial intent underlying the diversion.

2. Objects of the issue versus corporate objects

The Supreme Court draws a doctrinal distinction that carries significant implications beyond this case: the distinction between the “objects of the Company” (as set out in the MoA) and the “objects of the issue” (as disclosed in the explanatory statement and other issue related documentation). For the purposes of the PFUTP Regulations and ICDR Regulations, the latter are determinative.

The defence argued that investment in shares was within the original MoA objects under Clause 3(A)(12) and that lending was covered by the amendment to the MoA in 2014. The Supreme Court rejected both these contentions. On the original MoA, it found that Clause III(B)(11) of the MoA (i.e. the ancillary/incidental objects clause) did not in fact cover the grant of loans and advances; it only permitted guarantees and security arrangements. More importantly, as a matter of principle, the Supreme Court held that the MoA objects are irrelevant to compliance with PFUTP Regulations. The mischief lies in the misrepresentation to the market, not in whether the Company had the corporate capacity to do the acts concerned. A company may have broad constitutional objects and yet commit fraud under PFUTP Regulations by raising capital for one stated purpose and deploying it for another.

On the post-facto MoA amendment, the holding is unequivocal: an amendment made in March 2014 to legalize acts undertaken in October-November 2012 cannot retrospectively alter the regulatory position as it stood at the time the original representations were made. This is consistent with the general principle that a subsequent change cannot cure a prior illegality.

3. Section 27 of the Companies Act and the limits of ratification: Three independent grounds

The Supreme Court identified three independent grounds on which the Section 27 of the Companies Act or Section 62(1)(c) of the Companies Act argument fails, and it is important to appreciate that each ground independently defeats the defence.

a. A textual inapplicability to private placements:

Section 27 of the Companies Act is confined to variation of objects stated in a prospectus, which by definition involves a public offering. A preferential issue under Section 42(8) of the Companies Act expressly prohibits public advertisement; it is a private placement to which Section 27 of the Companies Act has no application. Extending it by analogy, Section 62(1)(c) of the Companies Act would create a variation mechanism which the Parliament did not provide, stripped of the safeguards such as; public notice, exit rights, newspaper advertisement, that accompany prospectus based variations under Rule 7 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“PAS Rules”).

b. The unutilized-amount precondition under Rule 7(1)(e):

Even if Section 27 of the Companies Act is applied by analogy, Rule 7(1) of the PAS Rules restricts the variation mechanism to situations where an unutilized amount remains. Rule 7(1)(e) of the PAS Rules requires the notice to disclose such unutilized amount out of money that are raised through prospectus. Here, the entire proceeds had been deployed before the ratification was contemplated; the mechanism cannot operate retrospectively on funds that are already disbursed.

c. The express prohibition on equity share trading:

Section 27(1) of the Companies Act contains an absolute proviso prohibiting use of raised funds to buy, trade or deal in equity shares of any other listed company. Several of the investee entities of the Company were listed. Even on the analogy the defence sought to invoke, the specific conduct would have been independently impermissible.

Taken together, these three grounds demonstrate that there is no available statutory pathway, whether direct or analogous, for retrospectively validating a wholesale deployment of the proceeds of the preferential issue for purposes categorically different from those disclosed, after the entire funds have been committed and after the regulatory action has commenced.

4. The public-law ratification bar: Statutory illegality, not ultra vires

The Supreme Court’s primary ratio on ratification is broader, and more consequential, than a simple ultra vires analysis.

The primary ratio: Statutory public-law illegality cannot be cured by shareholder vote

The Supreme Court drawing on Shri Lachoo Mal v. Shri Radhey Shyam, holds that where a statutory obligation is imposed for the benefit of the public, not merely for the private protection of the immediate parties, it cannot be waived or condoned by those parties alone, irrespective of the majority they may command. Obligations under the PFUTP Regulations are explicitly framed as market wide, public benefit obligations. They protect not merely the shareholders who approved the ratification, but the broader universe of market participants, secondary market investors, potential subscribers, and any person whose investment decisions were influenced by the issuer’s disclosures. A shareholder resolution cannot absolve a company from the regulatory domain that may injure or has potential to injure the prospective or other existing investors.

This principle applies even where the acts are intra vires the company’s constitutional documents. The Supreme Court accepts, for the sake of argument, that investment in shares may have been within the Company’s MoA objects. The ratification is not rejected because the acts were beyond the Company’s capacity; it is rejected because the Company breached a public law statutory framework. This is a critical distinction, indicating that the principle extends to all violations under the PFUTP Regulations, regardless of whether the conduct was within or beyond the Company’s corporate powers. The ratio is not limited to ultra vires situations.

The secondary stream: Illegality cannot be ratified; and ultra vires acts cannot be ratified

The Supreme Court reinforced its reasoning by drawing upon two distinct but converging lines of authority. Firstly, it relies on service law and education law authority precedents namely, Government of Andhra Pradesh and others v. K. Brahmanandam and others and Pramod Kumar v. U.P. Secondary Education Services Commission, to reiterate the settled principle that acts which are illegal by reason of statute as opposed to those that are merely irregular, are inherently incapable of regularization.

Secondly, it separately invokes the company law principle articulated In re: Birkbeck Permanent Benefit Building Society, as adopted by the Supreme Court in Dr. A. Lakshmanaswami Mudaliar and others v. Life Insurance Corporation to emphasize that acts which are ultra vires the company's constitutional documents cannot be ratified, even by the unanimous consent of the shareholders.

These two streams are presented in addition to, and as reinforcement of, the primary public law ratio.

Conclusion

The implication of theTerrascope Judgement is clear and unambiguous. Firstly, it confirms that use of proceeds disclosures in the context of preferential issues are market facing regulatory commitments enforceable under the PFUTP Regulations, and that their immediate and systematic breach is indicative of fraudulent intent from the outset, regardless of whether the deployment was within the company’s constitutional capacity or whether an investor loss has been identified. Secondly, it establishes in clear terms that SEBI’s regulatory framework constitutes a public law regime whose obligations cannot be waived, ratified or condoned by corporate majorities, because those obligations are owed not to the shareholders but to the market as a whole.

This insight has been authored by Swapneil Akut, Abhishek Singh and Anushka Rungta from S&R Associates. They can be reached at [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.