Implications of the SAT’s Ruling on Disclosure-Based Regulations

[By Yuvraj Sharma]

The author is a student of School of Law, Narsee Monjee Institute of Management and Studies, Hyderabad.



In a nine-page ruling, the Securities Appellate Tribunal (SAT) criticises SEBI’s approach to disclosure-based laws, which allows corporations that have committed wrongdoing to be exonerated if they gain post-facto approval from their shareholders. This ruling creates a problematic precedent by allowing businesses to seek approval for any conduct, regardless of its legality, and by tolerating wrongdoing by strong corporate clients. This precedent could be used by the legal profession to support unlawful behaviour. Investors, who will be affected by the decision, are mostly in the dark about it. In the Terrascope Ventures Limited (“Company”) case, which resulted in this choice, the business used the money for unlawful reasons that were later approved by shareholders. The Tribunal rejected SEBI’s decision and upheld the legality of a director’s violation of duty, contradicting SEBI’s contention that such post-facto validation for already committed acts is unlawful.

The article talks about the recent decision by India’s SAT to let businesses to “ratify” director misconduct after the fact, despite the fact that the Companies Act of 2013 does not have any such a provision. The article underlines the worries of legal and financial professionals who think that such a clause may be simply misused and might perhaps put the interests of minority shareholders in danger. Additionally, there are no safeguards in place to guarantee that post-facto ratification is not abused. Since the SAT decision has an impact on the fundamentals of disclosure-based regulation in India, experts are urging SEBI to file an appeal and start a board discussion on the matter.

Factual Matrix of the case Terrascope Venture vs. SEBI

Terrascope Ventures Limited (“Company”) sought and gained shareholder permission for a preferential offer of 63,50,000 shares in October 2012, with the intention to use the money for operational expenses, including capital purchases., marketing, working capital, and international expansion. However, the company made share purchases and loan and advance payments to 19 entities named in the SEBI order rather than using the funds for the approved purposes.

At their 2017 Annual General Meeting (AGM) in September, Terrascope Ventures Limited’s shareholders overwhelmingly approved a special resolution. The resolution approved spending the money on something that was not even close to what it was approved for during the preference issue. Five years after the funds were collected, they were finally ratified.

After receiving a show-cause notice from SEBI’s Adjudicating officer in 2018, Terrascope Ventures Limited was fined in April 2020. During this time, Terrascope argued before SEBI’s AO that in 2014, they had expanded their object clause to include financing, investment, and share trading via a special resolution. They contended that the modified object clause was followed by allocating some of the proceeds from the preferential offering.

What is the Principle of Disclosure & Disclosure base regulations?

The principle of disclosure is basically an accounting rule that requires companies to disclose any of the information which materially impacts their financial results or financial position. This principle usually promotes the financial market transparency, it lowers the risk of fraud and it also protects the investors and analysts from the overabundance of irrelevant information. It can also be applied in commercial law to make sure that parties to a business transaction reveal all relevant facts prior to the completion of the deal.

In 1992, India’s stock market became subject to disclosure-based regulation. The screening process for investors already includes sifting through annual reports, disclosures to stock exchanges, and offer paperwork, all of which are required by the listing agreement. All of these warnings are useless since that the SAT allows for ‘ratification’ by shareholders after the fact, long after the misappropriation of cash or questionable conduct has already taken place. The implications for initial public offerings (IPOs) are dire, as investors in high-profile technology businesses are already seeing significant losses.

The Court needs to Restates Its Point of Judgement

Ratification is defined and the rights of the parties and the consequences of ratification are spelt out in Section 196 of the Indian Contract Act of 1872. This approach only applies to contracts that can be voided, not those that are invalid or flawed from the beginning. Section 197 of the Act states that ratification may be communicated explicitly or implicitly by the conduct of the person for whom the Act is performed. However, if the ratification is made by someone with a materially flawed understanding of the relevant facts, it will be null and void as per Section 198 of the Act. In addition, per Section 198, a person’s consent to a transaction includes his knowledge of any illegal activity conducted on his behalf. The significance of communicating a contract’s confirmation may become clear in future dealings.

While ratification is permitted under the Indian Companies Act, it is unclear whether or not acts that breach the duty of care can be ratified under the law. However, the Bombay High Court has ruled that board members cannot rely on this doctrine to justify a breach if they are the only shareholders in the company. The Securities Appellate Tribunal (SAT) in Mumbai overlooked the principle’s lack of statutory and judicial support. The failure to codify the notion of ratification suggests that legislators intended to bar shareholders from relieving directors of culpability by ratifying their actions. Directors may try to rationalise illegal behaviour by relying on the ratification concept, which was lifted wholely from English law without being adapted to Indian conditions. Without proper adjustments, imports of this nature are doomed to fail.

The Act lacks statutory provisions that would allow for legal ratification, whereas other common law jurisdictions have established procedures for ratification. There could be serious consequences if foreign doctrines were imported into Indian law without the necessary legal systems or social structures.


 Regardless of the lack of such a provision in the Companies Act of 2013, the Securities Appellate Tribunal (SAT) of India has recently ruled that companies may “ratify” director misconduct after the fact. The judgement could legalise illegal action and endanger the interests of minority shareholders, as it goes against SEBI’s view that such post-facto certification of already committed activities is unconstitutional. This underlines the potential hazards for investors, especially in IPOs, and raises worries about the lack of protections to prevent post-facto ratification from being misused. Therefore, there is a requirement for appeal against the SAT order and also a need for discussion on this issue on the board level of all ministries those who are presented., because at the end of the day the ruling reverberations in the basic foundation of the doctrine of disclosure or we can say disclosure base regulation.


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