The capital market regulator SEBI is passing through rough weather. From Adani SEC saga to Trafiksol IPO cancellation, U-Turn in the case of NSE collocal server scam to acquittal of Chitra Ramakrishnan and others put a question mark at its investigative competence. Most of the forensic reports of SEBI have been criticized for being inconclusive and superficial. In this write up, we would try to discuss SME IPO menace in the context of Trafiksol IPO.
The IPO circus and its jokers: Initial Public Offer (IPO) is a mechanism to mobilize resources through stock market. SEBI regulates the entire process of IPO. The prospective company submits its IPO application with SEBI. The application is popularly known as Draft Red Herring Prospectus (DRHP). It contains the financials of the company, its intentions to raise fund from Stock Market and details of the utilization of such fund. The claims made by the Company in DRHP undergoes detail scanning. If the claims are found to be genuine, application is approved, and the Company is given green signal for listing at the bourses. The company hires a merchant banker for entire process and the primary market division of SEBI takes care of the regulatory clearances.
What went wrong with Trafiksol: The company Trafiksol ITS Technologies Ltd. (Trafiksol) applied for IPO and its DRHP was cleared by SEBI. Money was mobilized from investors and share was scheduled for listing at Bombay Stock Exchange (BSE). The issue was subscribed more than 300 times. Shares were allotted and credited into investors account. Then came the listing day of 17th September 2024. One day prior to the listing of Trafiksol IPO, an organization called Small Investors’ Welfare Association – SIREN came into fore. It made a complaint to SEBI and BSE that Trafiksol’s plan to buy Integrated Command and Control Software worth Rs 17.71 Crore (out of total 45 Crore IPO proceeds) from Third Party Vendor (TPV) was suspicious. It said that TPV had questionable financials and failed to file its annual financial statements with the Ministry of Corporate Affairs. SIREN raised red flag regarding utilization of IPO proceeds. The IPO was put on hold following SIREN complaint. On investigation, SIREN has proved right. SEBI failed to detect anything fishy in DRHP (as far as utilization of IPO proceeds are concerned), but SIREN unearthed it.
How could SEBI miss it? In an IPO size of Rs 45 Crore, almost 40 percent of the IPO proceeds were to be utilized for buying a software. Anybody will be interested in knowing about such an expensive software. If software is difficult to understand, at least the company supplying such software is bound to catch attention. Nothing such happened. As it happened, an invoice from the software supplier company TPV put an end to all curiosities of the SEBI sleuths. Even the publicly available documents at MCA (Ministry of Corporate Affairs) portal were not accessed. To cut it short, the invoice was ingenuine, the software supplier company was a shell company, and the exercise of software procurement was intended to carve out IPO proceeds. In simple terms, it was a billing racket to withdraw money from the company. The software supplier company was to get a commission for raising invoice, receiving billed amount, converting money into cash and hand it over to Trafiksol. So simple. But so complex for SEBI.
Complexities of SME IPO: SME IPOs are difficult to regulate. Although it has enriched all the participants – the merchant Bankers, the SME s, the investors and the Exchanges but none can deny the risk associated with such IPOs. Merchant bankers develop understanding with the company and window dress grey areas with their expertise, balance sheet is decorated, order book is fabricated, utilization of IPO proceeds is tailored to look reliable, price band is fantasized, subscription is managed (…the issue is subscribed so many times), IPO listing price is managed…. The show is managed minutely, and the manager is none other than the Merchant Banker. Is he alone in managing the show? I leave it for you to decide. Here is a hint … almost 30 percent of the IPO size is taken away by the merchant banker.
