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The Supreme Court of India, by way of its judgement dated 17.03.2026 in the matter of Securities and Exchange Board of India v. Terrascope Ventures Limited Etc.1, held that allegation of diversion of funds arising from a preferential allotment cannot be cured by subsequent ratification or approval by shareholders.
The court observed that Securities and Exchange Board of India Act, 1992, read with regulations framed thereunder, is designed to pre-empt manipulative trading and address all forms of impermissible conduct adopted by market participants. Its objective is to ensure that innocent investors are not misled and to foster an environment conducive to greater participation and investment in the securities market, an outcome that is vital for the growth and development of the economy. Hence, any practice that fails to conform to the principles of fairness and transparency governing stock market trading would fall within the ambit of unfair trade practices in the securities market. The court further held that the objects underlying the issuance of securities, including preferential allotment of shares, are of paramount significance as they materially influence the conduct of the stakeholders in the securities market, which cannot be cured by subsequent ratification/ approval by shareholders.
The court also took a note of the conduct of the parties and observed that, since the amounts received were disbursed immediately and in a manner contrary to the objective of the preferential allotment, this further supports the inference that the funds were diverted illegally.
Footnote
1. Important MCA Update for Directors on New DIR-3 KYC Web form.
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