[Umakanth Varottil is a Professor of Corporate Law at the National University of Singapore]
The legal structure of a company carries inherent checks and balances. This is because certain corporate actors, usually the board of directors, make decisions that have an impact on company (which is a separate legal personality) and its other constituencies such as the shareholders. The duties imposed on directors either under common law or statute are one such corporate law mechanism that operates to impose a check on directors who are therefore required to act in the interests of the company and, thereby, other relevant constituencies.
This raises the question whether, if the directors make a decision that is beyond their capacity, powers, or purpose, the shareholders can ratify (by way of a shareholder resolution) such action that has the effect of cleansing the board decision-making on a retrospective basis. In other words, if the directors’ actions are restricted to ensure the protection of shareholder interests, can those very beneficiaries condone directorial violations? The answer is not unequivocal: it is a yes, but subject to several exceptions. For example, shareholders cannot ratify an act of the directors that prejudices the creditors when the company is in the zone of insolvency: shareholders by then lose their decision-making in the company as they no longer have a “skin in the game”. Similarly, shareholders are powerless to condone directors’ actions that amount to an unlawful act or illegality. It is the last proposition that squarely fell to be tested before the Supreme Court in Securities and Exchange Board of India v. Terrascope Ventures Limited 2026 INSC 245 (17 March 2026), wherein the Court categorically ruled that shareholder ratification of corporate wrongdoing that amounts to an illegality is a non-starter.
Background to the Case
Unlike typical shareholder ratification cases under common law that involve breaches of directors’ duties, Terrascope Ventures related to a violation of securities regulation that falls within the regulatory domain of the Securities and Exchange Board of India (“SEBI”). In a nutshell, a company then known as Moryo Industries Limited undertook a preferential allotment in 2012 by which it issued shares to 49 investors. SEBI’s primary contention was that, instead of using the proceeds of the issue for its stated purposes, the funds the diverted towards the purchase of shares of, and extending loans and advances to, other companies. That way, the proceeds were utilised for arguably unproductive purposes rather than business expansion. SEBI initiated proceedings against the company and two directors under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 2003 (the “PFUTP Regulations”) and a SEBI whole time member passed certain sanctions against the alleged wrongdoers (being the respondents in the case before the Supreme Court). Subsequently, an adjudicating officer of SEBI issued an order against the respondents imposing a monetary penalty on them.
Materially for our purposes, after the initial SEBI order, the shareholders of Moryo Industries on 29 September 2017 passed a resolution ratifying the acts of the company in utilising the proceeds of the preferential allotment of shares, even though that was inconsistent with the objects of the share issuance as set out in the explanatory statement sent to the shareholders while seeking their approval for the preferential allotment. The respondents successfully relied on this purported shareholder ratification of the altered utilisation of proceeds before the Securities Appellate Tribunal (“SAT”), which allowed their appeal. It is against this SAT order that SEBI appealed before the Supreme Court.
The Courts’ Analysis and Implications
Factually, there is no dispute that the company utilised the funds in a manner that was at variance with the objects of the issue stated in the explanatory statement to the shareholders. Similarly, the fact that such utilisation of funds was contrary to the object stated in the memorandum of association of the company is evident from the fact that the shareholders subsequently amended the objects clause to include the business of financing or advancing moneys to other persons. The case therefore hung in balance on the clear legal question of whether the subsequent shareholder ratification was sufficient to cleanse the misutilisation of funds.
Securities Regulation and Illegality
The Supreme Court in Terrascope Ventures undertook a detailed analysis of the scope and import of the PFUTP Regulations in the context of a misutilisation of funds. It underscored the need for fair disclosure and transparency in corporate fundraising, which was found to have fallen short in the case. Conceptually, the Court engaged in a jurisprudential expansion of securities regulation as one falling within the domain of public law. Although securities regulation is aimed at investor protection, comprising an identifiable body of shareholders (or prospective investors who may be interested in subscribing to securities being issued by a company), the Court found that the “conspectus” of various legislation and SEBI regulations forming part of securities law in India indicate that the objects of a share issuance is of “utmost significance” that impacts various stakeholders in the securities markets and “the consequences of public interest could be grave”. Along these lines, the Court noted:
“58. … 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 prescribe 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. …”
By categorically finding that the implication of a misutilisation of funds extends beyond shareholders and affect a multiplicity of stakeholders, the Court concluded that the question of shareholders ratifying the actions of the company and its directors does not arise at all. It reiterated the public elements of securities regulation:
“66. The matter cannot be viewed from the prism of the shareholders alone. When [the] matter involves public interest it cannot be deemed as private waivable right. What applied to waiver will also apply to ratification. No condonation or ratification on aspects opposed to public policy can be made, as it will seriously jeopardize public interest.”
Unavailability of Statutory Ratification
Interestingly, the concept of shareholder ratification of variation in utilisation of proceeds arising from a shareholder issuance is not alien to statutory company law in India. For instance, section 27(1) of the Companies Act, 2013 (which was already in force when the shareholders of Moryo Industries passed the ratification resolution) stipulates that a company may vary the objects for which a prospectus has been issued so long as such authority has been conferred by the shareholders in general meeting by way of a special resolution. Interestingly, the respondents relied on this provision to claim a cleansing of misutilisation of funds through shareholder ratification. However, the Court, engaging in a textual analysis, denied the operation of section 27(1) to the present case because that statutory provision applies only to a “prospectus” that is used in a public offering of shares and not to documents such as the one involved in the present case that related to a preferential allotment of shares to identified investors by way of a private placement. The implication, therefore, is that shareholder ratification of a change in the utilisation of proceeds of a share issuance is available only for a public offering of shares and not to a preferential allotment (or private placement) thereof.
Impermissibility of Ratification in Ultra Vires Transactions
The Court also applied the well-known common law principle that ultra vires transactions, whereby the acts carried out by the company are beyond its capacity as enumerated in the objects clause in the memorandum of association, are void ab initio and incapable of ratification by shareholders. In the present case, the utilisation of proceeds was beyond the objects of Moryo Industries as stated in its memorandum of association at the relevant time (although they were amended subsequently).
Conclusion
It is not often that Indian courts encounter principles of shareholder ratification as a defence against wrong corporate or directorial actions. In that light, the Supreme Court’s ruling in Terrascope Ventures offers some guidance in a sparsely traversed area of corporate law. Three points are worth noting.
First, the primary prong on which shareholder ratification was disallowed relates to the fact that the actions of the company and its two directors amounted to illegality, which constitutes an exception to shareholder ratification. While this is trite law, there often remains the open question what precisely constitutes illegality. Although the Court in this case sidestepped the specific aspect of legal taxonomy, it did so by implicitly laying down that the justification for denying shareholders the power of ratification is because a violation of securities regulation amounts to adversely affecting public interest and thereby expanding the corporate violation into the domain of public law. This makes the legal principle both wide and narrow. On the one hand, the import of the Supreme Court’s ruling is that violation of securities law, namely regulations issued by SEBI, constitute one of public character thereby drawing the corporate wrongdoing outside the purview of shareholder ratification. On the other hand, it also leaves open the possibility for wrongdoers to argue (whether successfully or not remains to be seen) that any illegality that is private in nature, and one that does not invoke public interest, should surely be within the powers of the shareholders to ratify.
Second, when it comes to statutory ratification under section 27 of the Companies Act, 2013, the literal interpretation rendered by the Court makes it rather dichotomous: a public offering of shares is capable of ratification, but a private placement is not. At the same time, a textual analysis may also land us in a conceptual quagmire: if a public offering that is made to a large and indeterminate body of investors is capable of ratification, there is less reason to deny the same privilege to a small and identifiable body of investors.
Third, the common law principle of ultra vires that makes transactions that lack corporate capacity (by virtue of exceeding the objects clause in the memorandum of association) void ab initio, and therefore incapable of shareholder ratification, is alive and well, as recognised by the Supreme Court.
– Umakanth Varottil