Summary: The Securities Appellate Tribunal and Supreme Court recently had the occasion to examine what amounts to securities fraud. While in BDMCL, the SAT examined whether the essential ingredients of fraud were satisfied, in Terrascope, the Supreme Court ruled that false promises in fundraising documents amount to fraud and the same cannot be ratified subsequently by shareholders. Together, these rulings highlight the critical role of transparency and accountability in corporate disclosures.
Recently, in two separate cases, the Supreme Court and Securities Appellate Tribunal (“SAT”) considered whether certain transactions fell within the realm of securities fraud.
In Bombay Dyeing and Manufacturing Company Ltd. & Anr. v. SEBI[1] (“BDMCL”), SEBI passed an order holding that BDMCL had orchestrated a fraud by booking billions of rupees in fictitious profits through the sale of flats to a group company. The SAT, however, disagreed with SEBI and delivered a split decision, finding that the transactions were genuine, the financials had been publicly disclosed, and there was no evidence of investors being misled or induced to deal in securities based on false information.
In SEBI v. Terrascope Ventures Limited[2] (“Terrascope”), the listed company had raised funds through a preferential allotment, representing that the funds would be used for the objects specified in the offer documents. However, immediately after the fundraising, it utilised the entire amount towards loans and investments which had no connection to the stated objects. The SAT allowed the company’s appeal on the basis that a subsequent shareholder resolution had ratified the altered utilisation of funds. The Supreme Court disagreed, holding that such a shareholder resolution could not wipe clean the initial fraud, and accordingly restored the penalties as levied by SEBI.
This blog briefly analyses the facts of these cases and explores how courts and tribunals are examining cases of securities fraud.
The BDMCL Case
BDMCL, the flagship listed company of the Wadia Group engaged in real estate, polyester, and textile manufacturing, entered into eleven agreements with a group company – SCAL Services Limited (“SCAL”), between March 2012 and March 2014. Under these agreements, SCAL agreed to buy 325 flats in BDMCL’s projects for INR 3,033 crore, which accounted for 56 per cent of the company’s total real estate segment revenue and profits during that period.
Certain public shareholders complained to the stock exchanges and SEBI. Noting that the transactions with SCAL were not arm’s-length dealings but a structured scheme to present BDMCL as significantly more profitable than it was, thereby misleading investors, SEBI issued show cause notices to BDMCL, its directors, SCAL, and other related parties.
Findings of the Regulator and Tribunal
SEBI noted that SCAL had paid merely 7.46 per cent of the transaction value; it had a negative net worth and lacked financial capacity to enter into transactions of this scale. It also observed that BDMCL had reduced its stake in SCAL from 49 per cent to 19 per cent in March 2012 to avoid consolidating SCAL’s financials into its own and had later reversed this transaction in 2015. Looking at these events from the lens of an ordinary investor, SEBI concluded that these transactions were fraudulent.
The SAT, however, noted that the underlying transactions were genuine. The projects were real; the flats were constructed and eventually sold to end buyers; the price offered to SCAL was consistent with that offered to independent buyers; and a similar bulk-sale arrangement with SCAL had been used before without regulatory objection. SAT found that the violation of securities fraud could not be sustained because the transactions were genuine and the elements of securities fraud could not be established. There was also no evidence of any impact on the market prices of BDMCL’s shares due to the transaction with SCAL, no proof of unlawful profits being made since the promoters’ shareholding remained unchanged during the investigation period, and thus, the ultimate objective of price manipulation could not be established.
SAT noted that the facts about shared premises, common staff, and common directors between SCAL, BDMCL, and other Wadia group companies by itself were insufficient to doubt the veracity of the transactions, since sharing overheads within corporate groups is a common practice for commercial efficiency. On whether SCAL could be considered a related party of BDMCL once crossholdings were eliminated, the SAT held that lifting the “corporate veil” requires proof of both control and impropriety, neither of which SEBI had established. It also clarified that company law prevails over accounting standards, and since BDMCL held only 19 per cent of SCAL, which is below the 20 per cent legal threshold for a company to be classified as an “associate”, BDMCL had no legal obligation to consolidate SCAL’s financials with its own. Additionally, the SAT reprimanded SEBI for its nine-year delay in taking action in relation to the transactions that were disclosed in BDMCL’s audited financial statements.
Interestingly, the presiding officer of SAT, a judicial member, found the transactions to be fraudulent and dissented from the majority view of the two technical members. SEBI has since preferred an appeal against the SAT order before the Supreme Court, which is pending for consideration.[3] The appeal arrived at an interesting juncture, just a day before the Supreme Court’s judgment in Terrascope.
The Terrascope Case
In Terrascope, the company informed its shareholders in September 2012 that it was raising money through a preferential allotment to fund business expansion, working capital, marketing, and setting up overseas offices. However, from the very next day after receiving funds, the company began diverting the entire amount into buying shares in other companies and issuing loans, none of which was consistent with the information provided to shareholders. In March 2014, Terrrascope amended its Memorandum of Association to retrospectively include financing and share trading as permitted activities. In December 2014, SEBI passed an interim order restraining the company, its promoters, and directors from accessing the stock market, which was confirmed in August 2016. In September 2017, Terrrascope held a shareholder meeting purporting to retrospectively “ratify” the diversion. SEBI completed its investigation and found that Terrrascope and its directors had defrauded shareholders and levied monetary penalties on them. While deciding the appeal, the SAT held that the shareholder resolution validly ratified the diversion and consequently overturned penalties levied by SEBI.
Following SEBI’s appeal, the Supreme Court, on March 17, 2026, ruled that the diversion was plainly illegal from the start and had affected not only the company’s own shareholders but also a wide range of market participants, hence it could not be wiped clean by a shareholder resolution. The Court set aside the SAT’s decision and restored SEBI’s order, holding that under securities law, fraud is broadly defined and not confined to its ordinary meaning; there can be fraud even without deceit. It further held that investor harm need not be proved through specific transactions. Once representations are made in connection with a securities issuance, all market participants adjust their conduct based on those representations.
Key Takeaways
The contrast between the two cases is noteworthy. In BDMCL, where the allegation was that the company had embellished its financial statements to present a favourable picture to shareholders, the SAT examined the transactions on their merits, testing their genuineness, and assessing whether the essential ingredients of fraud were satisfied. By contrast, in Terrrascope, where funds were raised on the strength of representations that were never intended to be honoured, the transaction was treated as fraudulent from its very inception and considered a wrong that could not be cured or ratified by a subsequent shareholder resolution.
A review of the two decisions reveals an emerging principle. where transactions are genuine and undertaken with adequate public disclosure, they are unlikely to attract the charge of securities fraud. However, where disclosures are an eyewash to conceal the true nature of the underlying transactions, they are likely to fall foul and be declared fraudulent. Importantly, securities fraud cannot be condoned by shareholder approval alone, as regulator examines such conduct not merely from the perspective of the company’s shareholders, but also with due regard to the interests of all market participants and integrity of the securities market as a whole.
[1] 2026 SCC OnLine SAT 20
[2] 2026 SCC OnLine SC 403
[3] Diary Number 16115 of 2026