TaxTMI 
TaxTMI 
2026 (3) TMI 1086
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....ere the Managing Director (Mr. Manoharlal Saraf) and Director-(Mrs. Geeta Manoharlal Saraf) respectively, for violations of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (for short the "PFUTP Regulations"), and the Securities Contracts (Regulation) Act, 1956. 2. Though the respondents were duly served, they did not put in appearance. This Court, by order dated 22.08.2025, appointed Mr. Mahfooz A. Nazki, learned counsel, as amicus curiae to assist the Court. BRIEF FACTS:- 3. On 03.09.2012, the respondent No. 1-company, then known as Moryo Industries Limited, issued notice for an Extraordinary General Meeting (EoGM) and presented to its shareholders and the public, the purpose and object of allotment of equity shares on preferential basis to non-promoters. The number of proposed allottees was 49 and the total number of equity shares to be allotted was up to 74,50,000. In the explanatory statement appended pursuant to Section 173(2) of the Companies Act, 1956, dealing with the objects of the issue, it was set out as under:- "The object of the issue is to fulfill the additional fund re....
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....mall, i.e., 1,900,190 shares (Face Value: Rs.10), to accommodate the required fictitious LTCG of Rs.141 crore approximately. As such the capital expansion through preferential allotment and stock split provided much bigger source to the persons involved in terms of volume and price manipulation to facilitate the whole operation." 7. Dealing with the entities in which investments were made and to which loans and advances were given pursuant to the preferential allotment of shares, the relevant portion of the WTM order is set out hereunder:- "13. During preliminary inquiry Moryo submitted that it had 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 as given in the following table:- Table : V Investments Shares Values 1. Banas Finance Ltd. 2,80,34,913 2. Confidence Trading Co. Ltd. 26,37,751 3. Esaar (India) Ltd 72,39,206 4. Out of City Travel Solutions Ltd. 1,71,83,697 5. Shreenath Commercial and Finance Ltd. 4,77,66,900 6. Kayaguru Capital Market Pvt. Ltd 2,00,00....
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....shares and advance loans, the respondent No. 1-Company carried out the amendments to the objects clause of the Memorandum of Association on 12.03.2014. By this, they sought to include financing, investment and share trading in the objects. 9. The WTM, by order of 22.08.2016, confirmed his ad-interim order of 04.12.2014. PURPORTED RATIFICATION RESOLUTION DATED 29.09.2017:- 10. When the matter stood thus and pursuant to the interim order, it transpires that on 29.09.2017, a resolution was passed by the first respondent-company purportedly ratifying the diversion of funds. The resolution is in the following terms:- "RATIFICATION BY SHAREHOLDERS FOR ALTERATION / VARIATION OF UTILIZATION OF PROCEEDS OF PREFERENTIAL ALLOTMENT OF 63,50,000 EQUITY SHARES "RESOLVED THAT pursuant to the provisions of Section 27 and other applicable provisions, if any, of The Companies Act, 2013 and pursuant to the Companies (Prospectus and Allotment of Securities) Rules, 2014 and all the applicable laws and regulations for the time being in force, in respect of Preferential Allotment of 63,50,000 Equity Shares of Face Value of Rs. 10/- each issued at a premium of Rs. 15/- per share....
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....mentioned in the table 2. As an instance while the proceeds of preferential allotment started getting credited on Oct 16, 2012, a part of the same was transferred to one Mr. Raj Agarwal on the next day itself, i.e. on Oct 17, 2012. While the proceeds of the preferential allotment were credited in the said bank accounts of Moryo during Oct 16, 2012 to Nov 09, 2012. Thus, the proceeds of preferential allotment were never retained in the company for executing its objects as envisaged in the special resolution passed under section 81(1A) of the Companies Act, 1956. Further, it was also observed that prior to receipt of the proceeds of the preferential allotment, the funds available in the aforesaid bank accounts of the company would not have been sufficient enough for transfers to various entities." 14. To the show cause notice of 27.04.2018 issued by the Adjudicating Officer though the same was delivered there was no response from the noticees initially. Letter of 04.04.2019 was issued informing of the personal hearing which was fixed on 24.04.2019. Thereafter, a fresh notice was issued for personal hearing on 24.07.2019. Both the notices were returned as unclaimed. By way of affix....
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.... in the notice of the EoGM. Moreover, the AO found that the Noticees accepted the position that they have utilized the proceeds for purchasing shares of other companies and extending loans and advances to other companies and entities. It was found that the proceeds were not utilized as per the objects of the issue. The AO rejected the explanation of the Noticees that the proceeds could not be utilized due to prevailing market conditions by finding that the Noticees had not elaborated as to what the market condition was and the difficulties in meeting the objects of the issue and the compelling reason to extend loans and advances. 18. The AO distinguished between objects of the preferential allotment as stated in the notice for EoGM and the objects of the company as stated in the Memorandum of Association. Hence, the AO rejected the argument that utilizing the proceeds of the preferential issue purportedly for one of the objects incidental/ancillary to the attainment of the main object of the company was to be considered as utilizing the proceeds towards meeting the objects of the issue, as devoid of merit. A further finding was recorded that Clause III(B)(11) of the MoA did not ....
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....ization of the proceeds and consequently there was no violation of Clause 43 of the Listing Agreement." Aggrieved, the appellant is in appeal before us. CONTENTIONS OF THE APPELLANT:- 23. Mr. Naveen Pahwa, learned Senior Advocate for the appellant contends that the misutilization of funds is in violation of the PFUTP Regulations, 2003 and Section 21 of SCRA and Clause 43 of the Listing Agreement. Learned Senior Counsel submits that the objects stated in the notice of EoGM pursuant to the resolution passed by the company on 01.10.2012, were the following:- "a. Capital expenditure including acquisition of companies/business; b. Funding long term working capital requirements; c. Marketing: d. Setting up of offices abroad; and e. For other approved corporate purposes." Whereas between 16.10.2012 and 08.11.2012 they were diverted for different purposes namely for grant of loans and investments in shares. 24. Learned Senior Counsel submits that the ratification of 29.09.2017 is of no avail as Section 27 of the Companies Act has no application. According to the learned Senior Counsel, Section 27 of the Companies Act applies only ....
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....ve been filed by the appellants. CONTENTIONS OF THE AMICUS CURIAE:- 27. Mr. Mahfooz A. Nazki, the learned Amicus did not dispute that the proceeds received as consideration for the preferential issue have not been utilized for the purposes stated in the notice. The contention of the learned Amicus is that though Section 27 on its terms and applied only to a prospectus, since Section 62(1)(c) of Companies Act which deals with allotments such as private placement makes compliance with provisions of Chapter III, the principles analogous to Section 27 would be applicable to the present situation when read with Section 62(1)(c). Learned Amicus submits that there is no requirement of prior approval. 28. Learned Amicus contends that shareholders are entitled to grant a retrospective approval or make a ratification. Learned Amicus submits that it cannot be contended that the company could not have authority to vary the objects under any circumstances. Learned Amicus Curiae contends that a company cannot be rendered helpless or paralyzed merely because no specific mechanism for variation of objects of a preferential issue is provided in the statute. Learned Amicus submits that so l....
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....pugned order did not call for any interference. QUESTION FOR CONSIDERATION:- 32. In the above background, the question that arises for consideration is: Whether the SAT was justified in reversing the order of the Adjudicating Officer, and exonerating the respondents for alleged violations of PFUTP Regulations and the SCRA? ANALYSIS AND REASONING:- 33. The original object for the preferential issue as disclosed was that the funds raised would be utilized for- (a) capital expenditure including acquisition of companies/business, (b) funding long-term working capital requirements (c) marketing (d) setting up of offices abroad and (e) for other approved corporate purposes. These objects are statutorily required to be disclosed under Regulation 73 of the SEBI (ICDR) Regulations, 2009. 34. It is undisputed that the funds raised by the preferential issue were utilized for investment in shares and giving loans and advances which were admittedly not the objects set out in the disclosure made prior to the raising of funds. The only defence raised is that by a resolution of 29.09.2017, the shareholders have ratified the alteration/var....
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....n in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulation, fraudulent and unfair trade practices (2) Dealing in securities shall be deemed to be a manipulative fraudulent or an unfair trade practice if it involves any of the following:- xxx xxx (f) knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities; xxx xxx (k) disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities; xxx xxx (r) knowingly planting fals....
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....preferential allotment as stated in the notice for EoGM and the objects as stated in the Memorandum of Association. Hence, what is crucial is what was stated as objects in the notice of EoGM. 39. For the purpose of PFUTP and the SCRA, breach of Regulation 3 and 4 would be attracted if any person sells or otherwise deals in the security in a fraudulent manner. It would further be attracted if any person uses or employs in connection with issue of any security, any manipulative or deceptive device in contravention of provisions of the Act; knowingly publishes or causes to publish any information which is not true or which he does not believe to be true prior to or in the course of dealing with securities; disseminates information which he knows to be false or misleading and which is designed to influence the decision of the investor dealing in securities and knowingly plants false or misleading news which may induce sale or purchase of securities. EXPANDED MEANING OF THE CONCEPT OF FRAUD:- 40. It may also be noticed that fraud has been defined to mean any act expression or concealment committed whether in a deceitful manner or not in order to induce any person to deal in sec....
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....of inducing another person to deal in securities. Certainly, the definition expands beyond what can be normally understood to be a "fraudulent act" or a conduct amounting to "fraud". The emphasis is on the act of inducement and the scrutiny must, therefore, be on the meaning that must be attributed to the word "induce" 42. Further, in Kanaiyalal Baldevbhai Patel (supra) this Court clearly laid down a touch stone namely that a Court must weigh against any interpretation which would protect unjust claims over just, fraud over legality and expediency over principle and once this Rule is established, individual cases should not pose any problem. 43. Applying this principle, we have no semblance of doubt in our mind that the diversion of the funds raised for an object not set out in the notice of EoGM was clearly in breach of Regulation 3 as well as Regulations 4(2)(f), 4(2)(k) and 4(2)(r) of the PFUTP Regulations. Further, the very purpose of notice of EoGM and the notice informing the objects of preferential issue is also traceable to Regulation 73 of the ICDR Regulations, 2009 which mandate that the objects for the preferential issue have to be set out. 44. The reason is not....
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....notice for considering preferential issue of securities and shall be published in newspapers simultaneously with the unaudited/audited financial results as required under clause 41. c) If there are material variations between the projections and the actual utilisation/profitability, the company shall furnish an explanation therefore in the advertisement and shall also provide the same in the Directors' Report. d) The statement referred to in clause (a) shall also be given for warrants issued along with public or rights issue of specified securities." 47. Section 21 of the Securities Contracts (Regulation) Act, 1956 and 23E of SCRA read as under. "21. Conditions for listing.- Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange. 23E. Penalty for failure to comply with listing conditions or delisting conditions or grounds.- If a company or any person managing collective investment scheme or mutual fund, fails to comply with the listing conditions or delisting conditions or grounds or commi....
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....onitor utilisation of proceeds of a public issue or rights issue or preferential issue or qualified institutions placement, the listed entity shall submit to the stock exchange(s) any comments or report received from the monitoring agency within forty-five days from the end of each quarter. (7) Where the listed entity has appointed a monitoring agency to monitor the utilisation of proceeds of a public issue or rights issue or preferential issue or qualified institutions placement, the monitoring report of such agency shall be placed before the audit committee on a quarterly basis, promptly upon its receipt. Explanation,- For the purpose of sub-regulations(6) and (7), "monitoring agency" shall mean the monitoring agency as specified in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. (7A) Where an entity has raised funds through preferential allotment or qualified institutions placement, the listed entity shall disclose every year, the utilization of such funds during that year in its Annual Report until such funds are fully utilized. (8) For the purpose of this regulation, any reference ....
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.... shareholders have ratified the Acts and Deeds done by the company, they become valid and authorized and as such there was no variation in the utilization of the proceeds. 53. Mr. Mahfooz A. Nazki, the learned Amicus placed reliance on Section 27 of the Companies Act read with Section 62(1)(c) of the said Act. Learned Amicus contends that though Section 27 may not apply proprio vigore, by virtue of Section 62(1)(c) the principles analogous to Section 27 may be applied. Section 27 reads as under :- "27. Variation in terms of contract or objects in prospectus.-(1) A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution: Provided that the details, as may be prescribed, of the notice in respect of such resolution to shareholders, shall also be published in the newspapers (one in English and one in vernacular language) in the city where the registered office of the company is situated indicating clearly the justification for such variation: ....
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....ny time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered- (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report 2 [of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed." 56. Even if one is to take the amended form of Section 62(1)(c) all that Section talks of is the applicable provisions of Chapter III which would mean the conditions stipulated in Section 42. Reverting back to Section 27, which deals with varying the terms of the prospectus, it will be seen that even there it is subjected to several conditions; firstly, it is subject to the Companies (Prospectus and Allotment of Securities) Rules, 2014. Rule 7 of the said rules read as under:- "7. Variation in terms of contracts referred to in the prospectus or objects for which prospectus was issued.- (1) w....
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....her important aspect. SEBI's Regulations including the PFUTP is to protect the rights of several stakeholders and as such has public law dimensions. The Regulations are framed keeping in mind the rights and interests of multiple stakeholders involved in the securities market. 59. By a private resolution, a liability which is crystalized cannot be wiped off by contending that the shareholders have condoned the action. When rights of multiple stakeholders are involved and certain Regulations proscribe a particular course of action any breach of the Regulation has to face its consequences. They are not in the realm of private rights which can be waived off as ratified. Dealing with the difference between private rights and public rights and as to how matter involving rights of the public cannot be waived, this Court in Shri Lachoo Mal v. Shri Radhey Shyam (1971) 1 SCC 619, held as under:- "6. The general principle is that every one has a right to waive and to agree to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity which may be dispensed with without infringing any public right or public policy. Thus the m....
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.... [Emphasis supplied] 62. Following the judgment in re: Birkbeck Permanent Benefit Building Society (1912) 2 Ch. D. 183, this Court in Dr. A. Lakshmanaswami Mudaliar and Others vs. Life Insurance Corporation of India and Another 1962 SCC OnLine SC 9, observed that where a company does an act which is ultra vires, no legal relationship or effect ensues therefrom. Such an act is absolutely void and cannot be ratified even if all the shareholders agree. 63. Though said in the context of resolution of the shareholders being ultra vires the Memorandum of Association of the Trust in the said case, what is important is the holding that if something is "ultra vires" it cannot be ratified. 64. The meaning of ultra vires, according to Advanced Law Lexicon P. Ramanatha Aiyar 3rd Edition 2005 "ultra vires (beyond their power) said of a company or corporation etc. when exceeding the authority imparted to it by law". 65. In the present case, what is argued by the learned amicus is that notwithstanding the diversion of the funds raised through the preferential allotment, the purpose for which they were diverted, namely, advancement of loans and investment in shares is relatable to th....
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....aised between 16.10.2012 and 08.11.2012. The funds were utilized for the purpose other than the one set out in the explanatory memorandum between 16.10.2012 and 09.11.2012. 69. Thereafter on 04.12.2014, the Whole Time Member exercising powers under Section 11(4) and 11(B) of the SEBI Act as it then stood, passed an ex-parte order against respondents, restraining them from buying, selling, and dealing with securities market either directly or indirectly in any manner till further directions. This was done to protect the interest of the investors. 70. Section 11(1), 11(4)(b) and 11(B) of the SEBI Act, at that point of 04.12.2014, stood as under :- "11. Functions of Board.- (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. 11 (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following meas....
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....ss from the securities market and disgorgement of any profit made or loss averted. In the present case, for a transaction of this nature, only restraining from accessing markets could have been imposed by the WTM at that point and that was duly imposed. 73. The power to impose penalty under Section 15HA was to be exercised by the Adjudicating Officer under 15(I)(1). Post the interim order by the WTM and based on the investigation for the purpose of imposition of penalty the Adjudicating Officer issued a Show Cause Notice on 27.04.2018 and it is out of this Show Cause Notice that the present proceedings arise. Section 15HA was amended in 2014 to read as under:- "Penalty for fraudulent and unfair trade practices. 15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. 74. It is only in 2018 under the Finance Act of 2018 with effect from 08.03.2019 power was vested in the Whole Time Member to levy penalty under Sec....