Securities tribunal quashes penalties for preferential issue proceeds misuse citing shareholder ratification and delayed notice

Securities Appellate Tribunal, Mumbai set aside penalties imposed on appellants for alleged mis-utilization of preferential issue proceeds. The tribunal found inordinate delay in issuing show cause notice (preferential issue in August 2013, notice in January 2023) and noted that shareholders had ratified the deviation through special resolution in September 2017, prior to the notice. The tribunal held that shareholder ratification validated the company's actions, negating any violation of Listing Agreement Clause 43/SEBI-LODR Regulation 32. Appeals were allowed and impugned order quashed.

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Issues:
1. Delay in issuance of adjudication proceedings
2. Alleged violation of regulations and listing agreement
3. Ratification of deviation in object of issue by shareholders

Issue 1: Delay in issuance of adjudication proceedings
The Tribunal noted an inordinate delay in the issuance of the show cause notice, highlighting that the preferential allotment was made in August 2013, but the notice was issued in January 2023. Emphasizing the principle of reasonable time for exercising powers, the Tribunal referred to various precedents, including the case of Ashlesh Gunvantbhai Shah vs. SEBI, to establish that the authority must act within a reasonable period. The Tribunal concluded that the delay in this case was unreasonable, leading to the decision that no penalty could be imposed due to the delayed adjudication proceedings.

Issue 2: Alleged violation of regulations and listing agreement
The show cause notice alleged a deviation from the object of the issue, citing violations of Clause 43 of the Listing Agreement, LODR Regulations, and PFUTP Regulations. The Adjudicating Officer imposed penalties on the company and a director based on evidence of deviation from the issue's object. However, the Tribunal found that the shareholders had ratified the deviation in an extraordinary general meeting, validating the act retrospectively. Referring to the case of Terrascope Ventures Limited vs. SEBI, the Tribunal explained the concept of ratification and concluded that the ratification by the shareholders authorized the variance in utilization of proceeds, thereby quashing the penalties imposed.

Issue 3: Ratification of deviation in object of issue by shareholders
The Tribunal emphasized that the ratification by the shareholders validated the act of utilizing proceeds for a different purpose, despite the initial deviation from the specified objects. Noting the absence of defalcation charges, the Tribunal held that no penalty could be imposed for the alleged deviation. Ultimately, the impugned order concerning the appellants was deemed unsustainable and quashed, with the appeals allowed and no costs awarded. The order was directed to be digitally signed by the Private Secretary, and certified copies were made available from the Registry upon payment of usual charges.

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