In three separate orders, SEBI had imposed a total penalty of Rs 1.5 crore on Terrascope Ventures Limited, erswhile Moryo Industries Ltd (Rs 1 crore) and two directors (Rs 25 lakh each) for not utilising the preferential allotment proceeds as per the objects of issue.
Per SEBI, the company raised Rs 15 crore by issuing shares on preferential basis, and had not utilised the proceeds of the issue as mentioned in the notice of the Extra Ordinary General Meeting (EOGM). As per SEBI, the company had made investments in shares and given loans and advances, which were not disclosed as the objects of the preferential issue in the notice of the EOGM.
Subsequently, after five years, the company passed a special resolution at its AGM, ratifying and approved all acts, deeds and things done by the Company in entering into and giving effect to the utilization of proceeds pursuant to the preferential issue which was in variance to the original objects of the preferential issue stated in the notice of EGM.
SEBI still held that disclosure of objects of the issue as presented to shareholders or public in the notice of the EOGM of the members of the company was not true and have misled the investors. According to SEBI, variance of the utilization of the proceeds from the preferential issue or non-disclosure thereof cannot be legitimized by a subsequent ratification by passing a Special Resolution by the shareholders of the Company.
In appeals, SAT set aside SEBI Orders. In order to hold whether the aforesaid ratification by the shareholders was permissible, SAT delved into the interpretation of the term ‘ratification’ and viewed that “…ratification means making valid of an act already done. Thus, even though the Company utilized the proceeds of the preferential issue for a different purpose in variance with the objects specified in the notice of the EOGM dated October 1, 2012 such variance in the utilization of the proceeds stood ratified and became authorized and valid pursuant to the Special Resolution dated September 29, 2017….. therefore it was incorrect on the part of the AO to hold that passed illegal acts or deeds cannot be legitimized by a subsequent ratification by passing a resolution by the shareholders of the Company.”
SAT also held that since the utilization of proceeds were ratified, there was no variance in the utilization of the proceeds and thus Clause 43 of the Listing Agreement was not violated.
This is an important ruling raising various questions on the regulator as well as the regulated. Is there a limitation on ratification? Is it a route to bypass non-disclosure? Can SEBI ignore a ratified resolution validly passed? etc.
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