[Kushagra Jaiswal is a third-year B.A., LL.B. (Hons.) student at NALSAR University of Law, Hyderabad]
On March 17, 2026, a division bench of the Supreme Court comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan delivered a landmark ruling in SEBI v. Terrascope Ventures Ltd., addressing the limits of shareholder ratification in cases involving violations of securities law. The case arose when Moryo Industries Ltd. (later renamed Terrascope Ventures Ltd.) raised funds through a preferential allotment after representing to shareholders that the proceeds would be utilised for specific corporate purposes such as capital expenditure, acquisitions, and working capital requirements. However, shortly after the funds were received, the company diverted a substantial portion of the proceeds towards investments in shares and loans to connected entities, contrary to the disclosed objects of the issue.
The bone of contention was whether such diversion of funds could subsequently be cured through shareholder ratification. Overturning the decision of the Securities Appellate Tribunal, the Supreme Court held that violations of securities regulations possess a public-law character and therefore cannot be retrospectively corrected by shareholder approval.
This post seeks to, first, examine the reasoning adopted by the Supreme Court in treating violations of securities regulations as matters of public law incapable of shareholder ratification. Second, it attempts to critically analyse the doctrinal ambiguities left unresolved by the judgment, particularly the distinction between “public” and “private” illegality, by drawing upon comparative corporate jurisprudence relating to fiduciary dishonesty, public policy, and the limits of shareholder approval. Lastly, it highlights the absence of a clearly articulated business judgment rule in Indian corporate jurisprudence and argues for the need to develop such a doctrine to distinguish bona fide commercial decisions from dishonest corporate conduct.
From Corporate Wrong to Public Law Violation
The line of reasoning adopted by the Supreme Court was that violations of securities regulations are not merely internal corporate irregularities but possess a distinct public-law character because they directly affect market integrity, investor confidence, and the fairness of the securities market (¶58).
The Court observed that disclosures made in explanatory statements prior to preferential allotments are not confined to informing shareholders alone; rather, they influence the conduct of investors and market participants generally. Consequently, diversion of funds contrary to the disclosed objects was held to amount to a misleading and fraudulent practice under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (the “PFUTP Regulations”).
To strengthen this stance, the Court relied upon SEBI v. Kishore R. Ajmera, SEBI v. Kanaiyalal Baldevbhai Patel, and SEBI v. Rakhi Trading Pvt Ltd, all of which emphasised that the SEBI Act, 1992 and the PFUTP Regulations must receive a broad and purposive interpretation aimed at protecting investors and preventing manipulative conduct in the securities market.
In particular, the Court relied heavily on Kanaiyalal Baldevbhai Patel to reiterate that “fraud” under the PFUTP Regulations extends beyond traditional common law deceit and includes conduct capable of inducing investors through misleading disclosures, even absent direct fraudulent intent.
The Limits of Shareholder Approval
The Court held that this meant that shareholder approval could not retrospectively ratify acts that were illegal or contrary to statutory obligations. The Court distinguished between procedural defects that could be remedied by ratification and substantive illegalities that are void regardless of shareholder consent.
For this proposition, the Court cited Government of Andhra Pradesh v. K. Brahmanandam (in ¶60), wherein the Supreme Court had held that an illegality cannot be regularised or ratified and only curable irregularities are capable of being validated subsequently. Further, it cited Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India(in ¶62), which categorically held that acts that are ultra vires or beyond legal authority are void ab initio and incapable of ratification even by unanimous shareholder approval.
Public Rights versus Private Rights
Another important dimension of the judgment was the Court’s distinction between private corporate rights and obligations grounded in public policy. The Court articulated that while shareholders may waive or ratify matters affecting their private interests, they cannot condone conduct that violates statutory norms enacted to protect the public and the securities market as a whole.
In the present case, the Court held that “by a private resolution, a liability which is crystalized cannot be wiped off by contending that the shareholders have condoned the action” and that where “rights of multiple stakeholders are involved and regulations proscribe a particular course of action, any breach must necessarily face its consequences” (¶59).
Moreover, the case of Lachoo Mal v. Radhey Shyam held that a person may waive a right “made solely for the benefit and protection of the individual in his private capacity” so long as such waiver does not infringe “any public right or public policy” (¶6).
However, where a statute is intended to operate “as a matter of public policy,” its requirements cannot be waived through private agreement or consent. Applying these principles, the Court concluded that violations of securities disclosure norms affect investors and market participants generally and therefore fall outside the permissible domain of shareholder ratification.
Analysis
It has been argued that the principal basis on which shareholder ratification was denied in Terrascope was the Court’s finding that the conduct of the company and its directors amounted to “illegality” which is a recognised exception to shareholder ratification. However, this leaves unresolved the question of what precisely constitutes such illegality. Although the Court avoided directly addressing this issue, it implicitly treated violations of securities regulations as matters affecting public interest, thereby placing them within the domain of public law. This interpretation both widens and narrows the principle. On the one hand, it expands the category of non-ratifiable conduct by treating breaches of SEBI regulations as inherently public in character. On the other hand, it arguably leaves open the possibility that illegalities which are purely private and do not implicate public interest may still remain capable of shareholder ratification.
The above equivocality may perhaps be resolved by looking at comparative corporate jurisprudence. In Madoff Securities International Ltd v. Raven, a UK court observed that a dishonest transaction, even when not amounting to criminality, may nevertheless be denied legal validity on grounds of public policy despite subsequent shareholder ratification, particularly where the transaction does not genuinely further the interests of the company. This approach shifts the inquiry away from the rigid distinction between “public” and “private” illegality and instead focuses upon dishonesty, bad faith, and deviation from legitimate corporate objectives.
Applied to the present case, the diversion of preferential issue proceeds contrary to the disclosed objects arguably neither furthered the company’s interests nor served public interest, as it undermined investor confidence and the integrity of securities disclosure norms. Consequently, the stronger justification for denying shareholder ratification may lie not merely in the public-law character of SEBI regulations, but in the fundamentally dishonest nature of the transaction itself, which ultimately leads to the invalidity of shareholder ratification.
Similarly, in Gantler v. Stephens, it was recognised under Delaware law that the existence of dishonesty, in whatever form manifested, strips the transaction of the protection ordinarily afforded by the business judgment presumption.Further, as elucidated in Ella M. Kelly & Wyndham, Inc. v. Bell, the business judgment rule ordinarily protects directors from liability for decisions taken in good faith and in the best interests of the company. The reasoning underlying the rule is to allow directors to manage corporate affairs without excessive judicial interference. However, once dishonesty is objectively established, judicial intervention becomes justified because the directors can no longer be presumed to be pursuing legitimate corporate objectives and instead appear to have acted for personal or collateral gain.
Therefore, comparative jurisprudence posits that the stronger doctrinal basis for denying shareholder ratification may lie in fiduciary dishonesty and abuse of corporate power rather than exclusively in the public-law character of the underlying violation. Further, it also means the lack of a well-established business judgment rule in Indian corporate law and the necessity for India to formulate such a doctrine (see here and here) to differentiate genuine commercial decisions that deserve deference by the judiciary and fraudulent dealings that require judicial scrutiny.
Conclusion
The Supreme Court’s decision in Terrascope is an important step in defining the limits of shareholder ratification in Indian corporate law. However, the judgment leaves unresolved the precise scope of non-ratifiable illegality by primarily grounding its reasoning in the public-law character of securities violations. Comparative jurisprudence suggests that fiduciary dishonesty and abuse of corporate power may provide a stronger doctrinal basis for denying ratification. The decision therefore also highlights the need for India to develop a clearer business judgment rule capable of distinguishing bona fide commercial decisions from dishonest corporate conduct.
– Kushagra Jaiswal
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