EoGM of company can not ratify diversion of fund raised by preferential issue – SC

Ratification by EoGM of the company can not give legality of the diversion of the fund raised by preferential issue.

In a recent judgment, Hon’ble Supreme Court has held that ratification by EoGM of the company can not give legality of the diversion of the fund raised by preferential issue.

ABCAUS Case Law Citation:
5070 (2026) (03) abcaus.in SC

In the instant case, SEBI had challenged the order passed by the Securities Appellate Tribunal (SAT) holding that since the shareholders have ratified the Acts and Deeds done by the company, the alleged diversion of funds become valid.

The funds raised by the respondent company by 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 Company even carried out the amendments to the objects clause of the Memorandum of Association to include financing, investment and share trading in the objects.

The allegation of the appellant SEBI was that instead of using the proceeds for approved objects, funds were diverted to purchase shares of other companies and grant loans/advances.  SEBI contended that this was an indication that from the very inception, there was no intention on the part of the respondent-company to use the proceeds of the preferential issue for the purpose for which it was made. 

The SEBI had passed ad interim orders restraining the company promoters, directors including the individual respondents herein, the preferential allottees and, certain group companies of the first respondent from buying, selling or dealing in the securities markets, either directly or indirectly, in any manner, till further directions.

The only defence raised by the respondent was that the company’s shareholders by way of an EGM ratified the alteration/variation in the utilization of proceeds of preferential allotment.

The Hon’ble Supreme Court observed 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.

The Hon’ble Supreme Court opined that conspectus of the reading of the SEBI Act, PFUTP Regulations, the SCRA Act, ICDR Regulation and the Listing Agreement all point in one direction to the fact that objects set out in the explanatory note for the issuance of securities including preferential allotment of shares are of utmost significance and have a large say in influencing and impacting the conduct of the stakeholders concerned with the securities market. It is not to be taken casually since the consequences to public interest could be grave.  

The Hon’ble Supreme Court observed that the entire amount raised was utilized for a different object than the one set out in the EoGM notice and ratification was sought after committing the illegality.

The Hon’ble Supreme Court stated that 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. Ratification of an illegality cannot be done.

Download Full Judgment Click Here >>

• Compensation to borrower upheld as bank did not verify construction progress before loan disbursals to builder
• No timeline mentioned in PMLA to forward arrest order & material in possession to Adjudicating Authority
• Release of seized assets if mandatory on completion of 120 days? Question referred to Larger Bench
• EPFO Extends date of filing of new ECR for the wage month September to 31/10/2026
• Earlier acceptance is relevant evidence in evaluating subsequent allegation of fictitious investment