SEBI Halts Trafiksol IPO: Orders Refund to Investors Amidst Fraud Allegations
Trafiksol ITS Technologies, a Noida-based company specializing in intelligent transportation systems and automation solutions for traffic and toll management projects, had filed a Draft Red Herring Prospectus (DRHP) with BSE for an IPO on the SME Platform. The IPO involved fresh issuance of 64.10 lakh equity shares with a price band between Rs 66 and Rs 70 per share. The IPO was open for subscription between September 10, 2024, and September 12, 2024, and was oversubscribed nearly 345.7 times, raising Rs 44.9 crore.
Concerns and Investigation
Prior to the scheduled listing on September 17, 2024, the Securities and Exchange Board of India (SEBI) received a complaint alleging that the objects of the issue included the purchase of software from a third-party vendor with questionable credentials. The complaint, filed by the Small Investors' Welfare Association - SIREN, raised concerns about the vendor's financials and failure to file annual financial statements with the Ministry of Corporate Affairs (MCA). The listing was deferred, and SEBI initiated an investigation.
Findings and Order
The investigation revealed that the third-party vendor was a shell entity with fabricated profiles and forged financial statements. SEBI found that Trafiksol had engaged in a cover-up when the vendor's credentials were questioned. Based on these findings, SEBI cancelled the IPO and directed Trafiksol to refund the Rs 44.9 crore paid by investors within one week, along with the interest earned on the issue's proceeds. The BSE, in coordination with bankers, will oversee the refund process.
SEBI's whole-time member Ashwani Bhatia emphasized the need to protect investors whose funds had been locked in for almost three months. He stressed the urgency of the refund and the importance of addressing the issue promptly, separate from the adjudication of other investigation findings.
“The finding that the company was involved in the cover-up is based on the fact that it can be reasonably presumed that the Managing Director of the company, given his long association with this sector, at the very least, was aware that the profile of the TPV directors, which was submitted to BSE, was fabricated. Therefore, the company's defence - that it merely forwarded documents provided by the TPV to BSE without verifying their authenticity - must be rejected," the order said.
Trafiksol's Defense and SEBI's Rebuttal
Trafiksol claimed they merely obtained a quote from the TPV and followed their procurement policy in selecting the vendor. They argued that the TPV was an intermediary that would subcontract the software development. However, SEBI rejected this defence, highlighting Trafiksol's reliance on a sham entity and participation in a cover-up. SEBI concluded that Trafiksol's managing director, given his industry experience, was likely aware of the fabricated profile of the TPV's directors submitted to BSE.
Implications and Future Course of Action
This is a landmark case as it marks the first instance of SEBI cancelling an IPO and ordering a refund. Abhiraj Arora, a partner at Saraf and Partners, believes SEBI's actions send a strong message about the sanctity of IPO objectives and prospectus disclosures. He suggests that alternative measures could have been considered, such as setting aside the disputed ₹ 17 crore or appointing a monitoring agency to oversee the IPO proceeds. However, SEBI's decision underscores its commitment to protecting investors and ensuring transparency in the capital markets.
While the allegations of falsifying financial statements are yet to be adjudicated, Trafiksol is prohibited from proceeding with the IPO. SEBI stated that Trafiksol could re-approach the market after the conclusion of the ongoing proceedings initiated by them. Additionally, Trafiksol was directed to take necessary steps to cancel shares transferred to bidders' demat accounts.