Trafiksol IPO: Sebi puts SME listing on hold in rare crackdown

The markets regulator on Friday ordered BSE Ltd to not list shares of Trafiksol ITS Technologies Ltd till it completes its probe into its disclosures, a rare move that again underscores concerns about initial public offerings (IPOs) of small- and medium-sized firms.

BSE had already postponed the listing of Trafiksol shares on 17 September after it was informed about investor complaints filed with Sebi.

“If such IPOs are allowed to list, even in the wake of serious concerns (which Sebi found in its preliminary examination of the company), it can shake the confidence of the investors in the listed SME ecosystem,” said the ex-parte interim order of Sebi authored by whole-time member Ashwani Bhatia. “Therefore, action taken in such cases needs to be done with utmost care.”

Securities lawyer Chirag M Shah called it an usual and unprecedented order. “The onus lies with the BSE team which approved the SME IPO. Though Sebi has taken proactive steps to avoid a sure-shot disaster, the BSE team will have a lot to answer. The merchant banker also needs to be checked. Sebi has wide powers under Section 11 of the Sebi Act, including to pass such orders,” Shah said. “Usually in cases of IPOs, there is a post facto analysis after the company files its report on the utilisation of IPO proceeds. But in this case, it has happened proactively basis a complaint.”

Sebi's action reinforces the regulator's intent to tighten oversight on the SMEs selling shares to the public. On 29 August, the regulator had raised concerns about questionable practices in the SME market and warned investors about unrealistic projections by some of these firms. On 12 September, Bloomberg reported that Sebi is considering tighter oversight on such IPOs.

“The SME space has been under a glare for a while now, but it seems things have been sliding and the norms need tightening and heads need to roll,” Shah said.

A software vendor with no revenue

Founded in 2018, Trafiksol offers services like software development, consulting, and delivery. The company reported an 80% revenue growth and a 153% increase in profit after tax in FY24 over the previous year.

On May 31, it filed a draft red herring prospectus (DRHP) with BSE for an IPO on the exchange’s Small and Medium Enterprises (SME) platform. It proposed a fresh issue of 64.10 lakh shares, and offered shares to investors between September 10 and 12 at a price band of ₹66 to ₹70 apiece. The issue was oversubscribed 345.65 times, with the retail portion generating demand of 317.66 times the shares on offer, raising ₹44.87 crore at the upper end of the price band.

The DRHP disclosed that IPO proceeds would be used for software procurement (specifically an integrated software control centre), repayment of borrowings, working capital needs, and general corporate purposes.

After the issue closed, Sebi and BSE received complaints alleging discrepancies in the proposed use of proceeds, particularly regarding a third-party vendor's capability to execute the contract. On Sebi's advice, BSE examined the issue and deferred the listing. It also directed the company and its merchant banker, Ekadrisht Capital Pvt Ltd, to retain the proceeds in an escrow account. Investors subsequently demanded the cancellation of the IPO and sought refunds.

Meanwhile, Sebi summoned the merchant banker seeking clarifications and found that the software was to be purchased from Oasis Corpcare, a third-party vendor that reported zero revenue in the last financial year and had not filed financial statements in the past three fiscals. A BSE team also visited Oasis's site on 19 September, only to find the office closed.

Trafiksol informed BSE that it would shelve software procurement and seek fresh vendor proposals, requiring shareholder consent for any contract. However, due to the company's past conduct, Sebi remained unconvinced.

“The attempt to award the software contract to a vendor, who prima facie appears to be a shell entity without any prior experience in developing a software platform, was an attempt to deliberately mislead investors and divert the IPO proceeds. To safeguard investor interest, the issues raised in the order require a detailed investigation,” the regulator said.

Sebi also took note of the fact that investments made by the individuals and entities who have been allotted shares in the IPO are in limbo. “Listing of these shares will provide immediate liquidity to such investors. On the other hand, it has to be recognized that there could be a possibility of erosion of capital in the event the disclosures that have been made turn out to be misleading/faulty. A balance has to be struck between these competing interests,” the whole-time member held.

Sebi will investigate the disclosures made by Trafiksol within 30 days, which may also involve the examination of the merchant banker. Till then, BSE will not list the shares and will ensure the IPO proceeds remain in the interest-bearing escrow account with no access to Trafiksol.

Shah said if the software vendor turns out to be a shell company, it would speak volumes about the brazen conduct of the promoters and the merchant banker.

Ketan Mukhija, senior partner at Burgeon Law, said Sebi's order aims to mitigate risks for investors before Trafiksol can move forward with its IPO activities. While Sebi has not issued similar orders before shares are listed, Mukhija noted that the regulator did take action in the past, specifically between 2005 and 2006, during the IPOs of Yes Bank and IDFC, when thousands of fake demat accounts were used to fraudulently secure shares for retail investors.