The Securities Exchange Board of India ("SEBI") passed a final order on 3 December 2024 directing Trafiksol ITS Technologies Limited ("Trafiksol") to refund the money paid by the investors, who were allotted shares in the Initial Public Offer ("IPO") of Trafiksol. This order of SEBI came in pursuance of SEBI's earlier interim ex-parte order passed on 11 October 2024 whereby the regulator had directed the Bombay Stock Exchange ("BSE") to stop the listing of Trafiksol and had further directed BSE to keep maintain the proceeds of the issue in an interest-bearing escrow account till the investigations were over
Facts of the matter:
Trafiksol had filed a Draft Red Herring Prospectus ("DRHP") for its proposed IPO to be listed on the Small and Medium Enterprises ("SME") with the BSE and in furtherance of the same, a price band was set and the IPO was made open for subscription. The IPO was oversubscribed by 345.66 times and Rs.44.87 Crores was raised through the IPO. Accordingly, the shares of Trafiksol were credited to the demat accounts of the eligible applicants and the listing of shares was scheduled on the next day of allotment.
However, just before the listing of the shares, a complaint was received by SEBI and BSE from the Small Investors Welfare Association ("SIREN/ Complainant") in respect of the IPO, alleging that the objects of the IPO inter alia included a purchase of a software valued at Rs.17.70 Crores from a Third-Party Vendor ("TPV") who has questionable financials.
SEBI's Findings
SEBI investigated the TPV mentioned in Trafiksol's DHRP with great depth and identified multiple lacunae and deformity in its operation. Based on an investigation of the financial statements, shareholding pattern, and site inspection of the TPV, SEBI has held that the TPV is a shell entity. SEBI also found that Trafiksol had a connection with the TPV directors.
Trafiksol's had contended that it had only disclosed it's quotation with the TPV as mandated under Clause 7(b) of Schedule VI of the SEBI (Issue of Capital and Disclosure Requirement) Regulation, 2018 ("ICDR Regulations"), which states that "in case the objects of an issue involves purchase of any equipment or technology the order for which has not been placed, then the company has to disclose the details of the quotation relied upon for the estimates, in the prospectus." However, SEBI rejected this contention and held that this cannot be an excuse placed for obtaining quotations from a company which has no credentials and there is no justification for engaging with such a dubious entity in the first place.
Trafiksol also requested that instead of directing for a refund, the investors should be allowed to withdraw the bids made in the subscription period as was provided by SEBI in the IPO of C2C Advanced Systems Limited ("C2C"). However, SEBI held that the present matter cannot be compared with C2C, and thus upheld the refund of money to the investors which the Book Running Lead Manager was directed to oversee within one week. Further, the depositories were directed to transfer the shares of the company allotted post IPO to a separate demat account opened in the name of the company.
MHCO Comment:
The said order is an ideal example of SEBI upholding its role as the chief regulator of the capital markets for promoting transparency and integrity, however it is to be noted that the order begins with the preface that this is an "unusual and unprecedented situation". The order very broadly outlines the inherent stand that the utilization of proceeds must be pragmatic and within the contours of market regulations to steer the voyage of IPO. Thus, the order is an attempt by SEBI to regulate this segment with an intent to uphold and protect the interest of the investors.
This article was released on 6 December 2024.
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