​SME IPO Gone Wrong? Sebi Nails Veerkrupa Jewellers for Manipulating Investors

The primary market is abuzz with activity across the Small and Medium Enterprises (SME) and Mainboard segments. In the past few years, the primary market has increased in popularity for both firms looking to raise funds and investors on the lookout for new investment opportunities.

However, the Securities and Exchange Board of India (Sebi) has flagged several instances of IPO-bound companies misleading or deceiving investors either during the public issue process or after the listing of the stock. In one such instance, Sebi has found Veerkrupa Jewellers to have manipulated investors who invested in the company's IPO which opened in June 2022.

Sebi's Order Against Veerkrupa Jewellers

Sebi has cracked down on the promoter and managing director of Veerkrupa Jewellers and its lead merchant banker, First Overseas Capital Ltd (FOCL). In an adjudicating order issued on August 31, Sebi has imposed monetary penalties under Section 15HB of the Sebi Act.

Sebi has also levied penalties of Rs 5 lakh each on Veerkrupa Jewellers Managing Director Chirag Arvindbhai Shah and FOCL. Additionally, the regulator fined FOCL's Managing Director Satyen Bhupendra Dalal Rs 3 lakh, former Vice President Rushabh Pradeep Shroff Rs 2 lakh, and former executive Mala Soneji Rs 1 lakh.

Highlighting that circumventions of the procedure cannot be treated as administrative errors, the regulator spoke about the purpose of public issue regulations. "The safeguards prescribed under the ICDR Regulations and the Escrow Agreement are intended to ensure transparency, accountability and regulatory oversight in the handling of subscription monies and constitute an integral part of the public issue process," Sebi said.

Addressing the fiduciary failures of the company's management in routing public funds, the regulator emphasised the direct responsibility borne by the promoter. "Instead of implementing proper safeguards, he authorised and initiated the irregular fund transfer of IPO proceeds, which was in deviation to the prescribed regulatory mechanism governing the routing of subscription monies," Sebi said.

Rejecting attempts by the lead merchant banker to shift blame onto the banker to the issue, the regulator clarified where the core regulatory duty lies. "The primary responsibility for ensuring that the routing and transfer of the IPO proceeds strictly complied with the ICDR Regulations and the Escrow Agreement rested with FOCL as the lead merchant banker," Sebi said.

Sebi also pointed out past enforcement actions and repeated non-compliance among the entities involved and noted an aggravating pattern of misconduct.

"These repeated regulatory defaults by the Noticees demonstrate that the present violations are not isolated lapses but form part of a pattern of recurring violations of the applicable regulatory provisions," Sebi said.

What Sebi Found In Its Investigation Against Veerkrupa Jewellers

The market regulator's investigation revealed that Veerkrupa Jewellers raised Rs 8.10 crore in July 2022 through its SME IPO with the stated objective of funding working capital requirements.

However, instead of transferring the net IPO proceeds of Rs 7.95 crore into the company's own bank account as mandated by law, the amount was transferred directly from the public issue escrow account to four third-party gold vendors, Akshat Gold, Karuna Bullion, Navkar Gold, and Satva Gold.

Highlighting the breach committed by bypassing the company's bank account, the regulator noted the strict requirements under primary market norms. "Such direct routing represents a gross non-compliance with the procedural framework mandated under the ICDR Regulations, which strictly requires that the public issue proceeds be credited to the issuer's bank account prior to any utilization," Sebi said.

The investigation revealed that FOCL instructed Axis Bank to disburse nearly 100 per cent of the net IPO funds directly to vendors using Annexure A2, a form legally restricted to paying IPO intermediary fees and issue management expenses.

Underlining how the lead manager misused documentation to carry out the transfers, the regulator detailed the intermediary's role. "The material available on record establishes that FOCL approved and implemented the transfer of IPO proceeds directly from the public issue escrow account to the issuer company's third-party vendors under the garb of issue expenses and thereby bypassed the prescribed regulatory mechanism governing the release and routing of public issue proceeds," Sebi said.

Additionally, Chirag Arvindbhai Shah claimed before investigators that he had personally signed RTGS forms at the Axis Bank Ahmedabad branch to execute the vendor payments, a defense the bank and regulator rejected.

Dismissing the promoter's claims regarding the execution of the transfers, the regulator found the statements to be contradictory. "Therefore, the contention made by Noticee that he intended to refer to the request letters signed by him on the Company's letterhead and directing the release of funds to the vendors is an afterthought and is not acceptable," Sebi said.

Consequently, Sebi ruled that Chirag Arvindbhai Shah violated Listing Obligations and Disclosure Requirements (LODR) regulations for failing to act with due diligence, care, and governance oversight. FOCL was found to have violated the Issue of Capital and Disclosure Requirements, 2018 (ICDR) Regulations and the Merchant Bankers Regulations for failing to ensure proceeds were credited to the issuer before utilisation. Officials Mala Soneji and Rushabh Shroff were held liable under ICDR Regulations and Merchant Bankers Regulations, while Satyen Dalal was penalised for a failure of supervisory oversight.