Summary of this article
Sebi barred Varanium Cloud from the securities market entirely.
Promoters must disgorge Rs 128.77 crore in unlawful gains.
The company completely fabricated sales and diverted IPO funds.
India's primary market has been increasingly garnering more and more investor interest in the past few years. This had led to an initial public offering boom across the mainboard and SME board.
Companies big and small alike are raising capital from the primary market to expand and investors are getting opportunities to invest in the growth journey of upcoming businesses. However, amid this rush for capital mobilisation, Securities and Exchange Board of India (Sebi) has initiated proceedings against a company called Varanium Cloud for the misutilisation of IPO proceeds.
What Sebi Said In Its Order Against Varanium Cloud
In a final order issued on August 25, Sebi found that Varanium Cloud and its Managing Director, Harshawardhan Hanmant Sabale, along with Executive Directors Vinayak Vasant Jadhav and Fahim Iunus Shaikh, and former Chief Financial Officer Mukundan Raghavan, defrauded shareholders through a systematic scheme.
Sebi has made several allegations including the mis-utilisation of IPO proceeds, misrepresentation of financial statements through fictitious sales and purchases, submission of false statements of deviation, non-disclosure of material litigations, and releasing deceptive corporate announcements regarding acquisitions and overseas operations.
The market regulator has directed the disgorgement of Rs 128.77 crore in gains from promoter group entities.
"Varanium through its Promoter, Mr. Harshawardhan Hanmant Sabale, spun an intricate web of apparently dubious transactions and tried to paint a picture that did not represent the fundamentals of the Company," Sebi said.
Sebi barred Varanium Cloud and Sabale from the securities market for a period of seven years. Furthermore, Sabale was prohibited from associating with any listed company or registered intermediary as a director or key managerial personnel. The other key managerial personnel, including Jadhav, Shaikh, and Raghavan, were handed market bans and restricted from holding board or managerial positions in listed entities.
The crackdown also extended to the aiders and abettors of the fraud. Raj Jagtani, the proprietor of BM Traders, was restrained from the securities market for facilitating the siphoning of issue proceeds and failing to comply with regulatory summons. Similarly, Athos Capital Advisors and its director Jinesh Mehta faced market debarment for acting as unregistered merchant bankers and aiding the fraudulent scheme.
The regulator also penalised First Overseas Capital, the lead merchant banker for the IPO, for gross negligence and failure to exercise independent due diligence. Affirming the non-negotiable statutory duty of merchant bankers to safeguard public market integrity, the regulator cited settled jurisprudence.
"Due diligence on part of Merchant Banker does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out," Sebi said.
Varanium Cloud Modus Operandi and Sebi Findings
Sebi found through its investigation that the company had raised Rs 40.39 crore through an SME IPO in September 2022 and another Rs 48.45 crore through a rights issue in September 2023.
However, the company failed to deploy the proceeds toward its stated objectives of building Edge Data Centres and Digital Learning Centres. Sebi undertook a bank trail analysis which uncovered that Rs 18.98 crore from net IPO proceeds and Rs 43.53 crore from rights issue proceeds were diverted to promoter group entities and intermediaries.
Additionally, Rs 15.46 crore was transferred to BM Traders, a proprietorship managed by Raj Jagtani, while Rs 32.73 crore moved directly into Sabale's personal bank account.
"Varanium through its Promoter, Mr. Harshawardhan Hanmant Sabale, spun an intricate web of apparently dubious transactions and tried to paint a picture that did not represent the fundamentals of the Company," Sebi said.
Sebi mentioned in its order that exchange site visits also confirmed that the company’s proposed data centres in Panjim and Sawantwadi were non-operational or completely absent.
"Nothing was actually happening on ground and no economic activity was evident in any manner," Sebi said.
Additionally, over 95 per cent of the company’s reported revenues in recent financial periods were fictitious book entries created with entities like Amtelfone Incorporated without corresponding cash receipts.
Sebi also found that lead merchant banker First Overseas Capital and intermediary Athos Capital Advisors failed to exercise proper due diligence before issuing the prospectus.
Sebi’s order reinforces investor confidence for primary market investors, showing that the market watchdog remains vigilant against fraudulent listings and the misdirection of public funds.
