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The Securities and Exchange Board of India (Sebi) has intervened in the matter relating to alleged irregularities by Trafiksol ITS Technologies, which launched a Rs 45 crore initial public offering (IPO) on the small and medium enterprise platform last month (SME) of BSE.
In an ex parte order, the market regulator said it would conduct a detailed review of the information provided by the company in its draft information memorandum.
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The BSE suspended the listing of Trafiksol, a software provider for traffic systems, due to complaints about the use of the issue’s proceeds and unjustified disclosures.
Sebi’s investigation is expected to be completed within a month.
Trafiksol’s IPO was oversubscribed by 345 times.
In its offer document, the company had revealed that it would use Rs 17.7 crore for a software contract with a third-party vendor.
Sebi’s initial investigation found that the third-party vendor had not filed financial statements with the Ministry of Corporate Affairs for over three years and had no revenue in the last year for which the financial statements had been filed. Additionally, the seller’s financial statements for the previous three years were signed on the same day, just days before listing. The seller’s head office was also closed and its Goods and Services Tax (GST) return did not match the disclosed business activities.
“It cannot be ruled out at this stage that the attempt to award the software contract to a supplier, which appears at first glance to be a shell entity without any prior experience in developing a software platform of the disclosed nature by the company in its Draft Red Herring Prospectus (DRHP), was an attempt to deliberately mislead investors and divert proceeds from the IPO,” noted Sebi whole-time member Ashwani Bhatia , in the order.
Affirming the need for action, Sebi’s order notes that allowing listing of such IPOs could shake investor confidence in the listed SME ecosystem. The regulator also highlighted the failings of the investment banker.
While investors have demanded repayment of their investments, Sebi has asked BSE to ensure that the IPO proceeds are placed in an interest-bearing escrow account until further notice. The company will not have access to these funds.
SME listing documents are not examined by the market regulator; instead, exchanges grant approval. The SME segment has gained ground with exorbitant listing gains, now capped by the stock exchanges.
In view of the increasing cases of irregularities, Sebi is considering strict measures to combat any misuse of the SME platform. A consultation document on this subject is expected, according to sources.
First publication: October 11, 2024 | 5:40 p.m. STI