The Supreme Court of India, on 17 March, ruled that companies cannot legitimize the diversion of funds raised from investors through a subsequent shareholder approval, tightening disclosure and accountability norms in the Indian capital markets.
The court set aside a decision by the Securities Appellate Tribunal (SAT) that had given relief to Moryo Industries Ltd, now called Terrascope Ventures Ltd, and its promoters and restored penalties imposed by the Securities and Exchange Board of India (Sebi). The ruling comes amid a surge in primary market fundraising in recent years.
Mint explains what the ruling means for companies and investors.
What was the case about?
In 2012, Moryo Industries raised about ₹15.87 crore from investors through preferential allotment to non-promoters. In its notice to shareholders, the company had stated that the funds would be used for capital expenditure, including the acquisition of companies, funding long-term working capital requirements, marketing, and setting up of offices abroad.
, however, found that the company diverted the proceeds almost immediately after receiving them toward investments in shares of other companies and loans to various entities. Such uses were not disclosed in the original offer document.
The regulator said in its 2014 interim order that Moryo had admitted that it 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. This amounted to violations of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, it added.
An adjudicating officer imposed penalties of ₹70 lakh and ₹30 lakh on the company and ₹25 lakh each on its directors. However, SAT later set aside these penalties, holding that a 2017 shareholder resolution ratifying the utilization of funds made the actions valid.
What did the Supreme Court say?
The court disagreed with SAT and restored Sebi’s penalties, holding that diverting funds from stated objectives was a clear violation of securities laws.
Moryo Industries was relying on the argument that it had sought shareholder approval for alterations in fund utilization after the act was carried out. It also amended the company’s memorandum of association to include carrying on business as a finance company and lending money to any person, firm or body corporate.
The court said disclosures made at the time of raising funds are central to investor decision-making and market integrity. It noted that the company had begun diverting funds almost immediately after receiving them, indicating that the stated objectives may never have been intended to be followed.
The apex court also rejected the argument that shareholder ratification could remove the illegality of the action. It held that violations of securities regulations, especially those affecting public interest, cannot be legitimised through retrospective approvals. Such acts, the court said, fall within the domain of public law and cannot be treated as private matters between a company and its shareholders.
How will this change things for listed companies?
The ruling makes companies more responsible for how they use money raised from investors, especially through routes like preferential allotments, private placements, and initial public offerings (). It also states that companies cannot fix mistakes later by getting shareholder approval after an illegal act has been carried out.
Companies must be careful from the start about what they tell investors while raising money, and it must be accurate, complete, and followed in practice.
This comes at a time when have seen strong activity, with companies raising large sums through IPOs and other routes. The judgment signals that any mismatch between stated and actual use of proceeds could attract regulatory action, regardless of later approvals.
The ruling, a first in several years, raises the bar for compliance and disclosures for companies.
“In the recent times, this is a unique order on variation of terms of preferential issue and not taking shareholders’ approval,” said Gaurav Pingle, a practising company secretary at Gaurav Pingle and Associates. “The observations of the Supreme Court in this case are quite significant. Shareholders’ approval cannot be taken for granted now.”
How will investors benefit from the order?
The ruling empowers investors, particularly retail shareholders, by reiterating that their approval is meaningful only when taken before key decisions, not after the fact.
By rejecting post-facto ratification as a defence, the court has reinforced that investors rely on disclosures to make informed decisions, whether to invest, hold, or exit a stock. Ensuring that companies stick to stated objectives reduces the risk of misallocation of capital and hidden risks.
The judgment also sends a broader signal that regulatory protections extend beyond just shareholders who participate in a specific issue to all market participants influenced by disclosures.
“The focus on disclosures and taking approval from shareholders will empower companies to go back to shareholders before they take any major decisions. This allows investors to take more informed decisions,” said Pingle.