2022 (6) TMI 1492 - AT - SEBI

Non utilization of the proceeds of the preferential issue in accordance with the Special Resolution passed under Section 81(1A) of the Companies Act - proposed utilization of the proceeds of the preferential issue as informed to the shareholders in EOGM ignored - proceeds were utilized by the Company for purchasing shares of other companies and extending loans and advances to other companies and entities - HELD THAT - Admittedly in the Special Resolution of the Company dated October 1 2012 the proceeds were required to be utilized for various purposes as stated in the said Notice to the EOGM. Subsequently the proceeds which were utilized for other purposes was ratified by the shareholders of the Company by a Special Resolution on September 29 2017. The shareholders ratified and approved all acts deed and things done by the Company in entering into and giving effect to the utilization of the proceeds as received in the said preferential issue which was in variation to the objects as stated in the notice of EOGM held on October 1 2012. Once this Special Resolution dated September 29 2017 is passed utilization made by the Company towards purchase of shares and giving loans and advances to other companies and entities becomes the object of utilization of the Company. Ratifies / ratification means making valid of an act already done. Thus even though the Company utilized the proceeds of the preferential issue for a different purpose in variance with the objects specified in the notice of the EOGM dated October 1 2012 such variance in the utilization of the proceeds stood ratified and became authorized and valid pursuant to the Special Resolution dated September 29 2017. The ratification done by Special Resolution on September 29 2017 approved the acts and deeds of the Company which was improperly done or performed in the first instance and therefore it was incorrect on the part of the AO to hold that passed illegal acts or deeds cannot be legitimized by a subsequent ratification by passing a resolution by the shareholders of the Company. This finding of the AO of the impugned cannot be sustained. Once the utilization of the proceeds have been ratified by the shareholders of the Company the acts and deeds done by the Company becomes valid and authorized and therefore there was no variation of the utilization of the proceeds. The show cause notice alleging variation in the utilization of the proceeds is thus erroneous. For the same reason since the utilization of the proceeds have been ratified there was no variance in the utilization of the proceeds and consequently there was no violation of Clause 43 of the Listing Agreement. The impugned orders passed by the AO cannot be sustained and are quashed.

Summary

Issues:
Violation of SEBI Act and SCRA, Utilization of proceeds from preferential issue, Ratification of acts by shareholders, Violation of Listing Agreement, Legitimacy of subsequent ratification, Variance in utilization of funds, Compliance with Clause 43 of Listing Agreement.

Analysis:
The judgment pertains to three separate orders passed by the Adjudicating Officer (AO) of SEBI against a company and its directors for violating SEBI Act and SCRA by misutilizing proceeds from a preferential issue. The AO imposed penalties under relevant regulations for fraudulent practices in the securities market. The AO found that the company used the funds for purposes not disclosed to shareholders, leading to misleading investors. The AO also noted a failure to disclose variations in fund utilization as required by the Listing Agreement.

The shareholders later ratified the company's actions through a Special Resolution, approving the deviation from the original purpose of the funds. The Tribunal analyzed the concept of ratification, citing legal precedents to explain that ratification validates prior acts. Consequently, the Tribunal held that the subsequent ratification by shareholders made the company's actions valid and authorized, overriding the initial deviation from the stated purpose of the funds.

The Tribunal emphasized that once ratified, the company's actions were legitimate, and there was no longer a variance in fund utilization. Therefore, the alleged violations of the Listing Agreement were deemed erroneous. The Tribunal distinguished cited cases, asserting their inapplicability to the present matter. Ultimately, the Tribunal quashed the AO's orders, allowing the appeals with no costs imposed.

In conclusion, the judgment highlights the significance of shareholder ratification in validating past actions, underscoring the legal principle that ratification makes prior acts valid. The decision emphasizes the importance of legal compliance and the implications of subsequent ratification on the legitimacy of corporate actions, providing clarity on the interpretation of regulations governing securities market practices.