Sebi bars Varanium Cloud, promoter for 7 years, orders ₹128.8 crore disgorgement

Mumbai: The Securities and Exchange Board of India (Sebi) on Tuesday barred Varanium Cloud Ltd (VCL) and its promoter Harshawardhan Sabale from the securities market for seven years and ordered Sabale to disgorge ₹128.77 crore in alleged unlawful gains.

The regulator has also directed VCL to return ₹62.51 crore that it found had been diverted from the proceeds of the company’s initial public offering (IPO) and rights issue, along with 12% interest. Sebi said the money was transferred to related parties and other entities, including ₹32.73 crore to Sabale.

Misrepresentation

Sebi’s final order issued on Tuesday found that VCL had misrepresented its financial statements and disclosures, including through fictitious sales and purchases. It said the company’s reported sales and purchases were inflated and that several transactions were supported mainly by journal entries rather than adequate underlying evidence.

The regulator also took issue with VCL’s public announcements about its business plans. For instance, the company proposed a ₹2,683 crore acquisition of Fastway Transmissions Pvt. Ltd. A portion of the total purchase price was to be funded through a ₹1,250 crore preferential issue. However, the regulator found that the deal did not go through and was a ploy to mislead investors into providing fresh capital through a preferential issue.

The order said VCL’s share price rose sharply after its listing, from ₹131 on 27 September 2022 to ₹1,526.15 on 13 January 2023, before falling to ₹17.75 by 31 May 2024. Sebi said that Sabale and the promoter group entity, Varanium Networks Pvt. Ltd, sold shares during this period and made unlawful gains.

Sebi calculated the promoter group’s total gains at ₹128.77 crore. Of this, it attributed ₹111.52 crore to Sabale and ₹17.25 crore to Varanium Networks. The regulator noted that Sabale held a 99.99% stake in Varanium Networks and controlled the entity.

Apart from disgorgement, Sabale has been restrained from associating with any listed company or a Sebi-registered intermediary as a director or key managerial person for seven years.

Co-offenders

The regulator also alleged that Raj Jagtani, proprietor of BM Traders, had aided VCL and Sabale in siphoning off funds raised through the IPO and the rights issue. BM Traders received ₹15.46 crore, 38.31% of the IPO proceeds, and ₹4.2 crore from the rights issue, apart from ₹119.17 crore from Sabale’s personal account.

The regulator noted that the firm, which was registered as a wholesale fruits and vegetables business, failed to provide invoices, project reports or other documents to explain the receipt of the funds. Of the ₹19.66 crore it received from the IPO and rights issue proceeds, BM Traders transferred ₹15.6 crore to several other entities. Sebi concluded that Jagtani aided and abetted the diversion of funds and also failed to comply with its summons.

A total of 47.03% of the IPO proceeds were sent to several entities, which Varanium Cloud had no business relations with, the order said.

Athos Capital Advisors and its director Jinesh Mehta were found to have aided VCL and its directors in a scheme involving misrepresentations in the company’s IPO prospectus. Sebi also examined a ₹2.97 crore transaction involving Athos that VCL recorded as a purchase. However, the regulator found that VCL’s own ledger showed the amount as professional fees, while bank records showed payments of about ₹2.84 crore, leading Sebi to conclude that the purchase transaction was fictitious.

Sebi imposed a ₹1.3 crore penalty on VCL and ₹20.4 crore on Sabale. Other penalties included ₹10.1 crore on Jagtani, proprietor of BM Traders, and ₹50 lakh each on Athos Capital Advisors and its director Mehta. A penalty of ₹10 lakh has also been imposed on the merchant banker for the IPO, First Overseas Capital Ltd.