Mint Explainer | Why shareholder ratification won’t protect companies from Sebi action

Mint explains what the ruling means for companies and investors.In 2012, Moryo Industries raised about ₹15.87 crore from investors through preferential allotment to non-promoters. In its notice to shareholders, the company had stated that the funds would be used for capital expenditure, including the acquisition of companies, funding long-term working capital requirements, marketing, and setting up of offices abroad.

Sebi’s investigation, however, found that the company diverted the proceeds almost immediately after receiving them toward investments in shares of other companies and loans to various entities. Such uses were not disclosed in the original offer document.

The regulator said in its 2014 interim order that Moryo had admitted that it invested 66% of proceeds of preferential allotment in shares of listed as well as unlisted companies and rest of the money was given as loans and advances to certain entities.

This amounted to violations of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, it added.An adjudicating officer imposed penalties of ₹70 lakh and ₹30 lakh on the company and ₹25 lakh each on its directors. However, SAT later set aside these penalties, holding that a 2017 shareholder resolution ratifying the utilization of funds made the actions valid.The court disagreed with SAT and restored Sebi’s penalties, holding that diverting funds from stated objectives was a clear violation of securities laws.Moryo Industries was relying on the argument that it had sought shareholder approval for alterations in fund utilization after the act was carried out.