Trafiksol IPO: SEBI cancels listing after probe; SME ordered to refund investor’s money within one week | Stock Market News

Trafiksol IPO: Capital markets regular Securities and Exchange Board of India (SEBI) on Tuesday, December 3, ordered Trafiksol ITS Technologies Ltd to refund investor’s money worth ₹45 crore within one week after halting the share listing of the SME IPO. The market watchdog also directed the Bombay Stock Exchange (BSE) in its order to oversee the refund process, which will be completed within one week of the date of this order.

“I cannot also lose sight of the fact that the funds of investors allotted shares in the IPO have remained locked in for close to three months. The issue cannot be put on hold till the other findings of the investigation are adjudicated. The most prudent course of action is to direct the Company to refund the money raised through the IPO”, said SEBI Whole Time Member Ashwani Bhatia.

The order came after SEBI’s investigation revealed material misstatements in the company’s prospectus and suspected collusion with a ‘shell entity’. SEBI’s latest action is rare, underscoring regulatory concerns about the initial public offerings (IPOs) of India’s small and medium enterprises (SMEs). 

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SEBI order against Trafiksol ITS Tech SME IPO

In October 2024, BSE postponed listing Trafiksol ITS Technologies Ltd on its SME platform after investor concerns. SEBI then asked the leading stock exchange to investigate the complaints. In an unusual and unprecedented move, SEBI, through the interim order, stayed the listing of the company’s shares in abeyance after receiving a complaint one day before listing, particularly about using funds for software procurement.

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It was alleged that the third-party vendor (TPV) Trafiksol chose could not fulfil the contract. In its 16-page final order, SEBI said that Trafiksol knowingly relied on fraudulent documentation submitted by a ‘questionable TPV’ to justify the ₹17.7 crore earmarked for software procurement in its prospectus.

The regulator’s investigation showed that the TPV in question is a ‘shell entity’ and that its financial statements for FY22 to FY24 were obtained under questionable circumstances. The financials were found to have been signed by the auditor on the same day they were submitted to BSE by the merchant banker, which was a day after BSE put the listing of the shares on hold.

The TPV was found to have dubious financials, no prior track record in software development, and had been included in the IPO documents based on fabricated profiles and forged financial statements. SEBI also found that Trafiksol offered multiple and conflicting explanations for its engagement with the TPV. However, it conspicuously failed to provide a single credible justification for engaging such an entity in the first place.

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Meanwhile, Trafiksol reportedly told SEBI that it merely obtained a quote from the TPV and was selected after adhering to the rigorous procedures outlined in its procurement policy. Trafiksol IT Tech said the TPV was ‘just an intermediate entity that would subcontract the software development’.

“This, however, does not take away the fact that Trafiskol relied on a sham entity and participated in a cover-up when the credentials of the TPV were being examined”, said SEBI in its order. “The company was involved in the cover-up based on the fact that it can be reasonably presumed that the Managing Director of the company (Trafiksol), given his long association with this sector, at the very least, was aware that the profile of the TPV’s directors, which was submitted to BSE, was fabricated,” said SEBI.

“Therefore, Trafiksol’s defence that it merely forwarded documents provided by the TPV to BSE without verifying their authenticity must be rejected,” added SEBI in its order. SEBI clarified in its order that the allegations against Trafiksol of falsifying the financial statement had yet to be adjudicated.

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However, it is not permitted to proceed with the IPO. SEBI stated that Trafiksol could approach the market afresh after the ongoing proceedings initiated by SEBI are concluded. It also directed Trafiksol to take appropriate steps to cancel the shares transferred to the demat accounts of bidders by the depositories.

According to Abhiraj Arora, a Partner at Saraf and Partners, this was the first time SEBI had issued a direction to cancel an IPO’s proceeds and direct the company to refund the money. “By cancelling the IPO, SEBI wants to send a strong message that objects of IPO and disclosure in the prospectus are sacrosanct and it needs to be taken seriously and investors cannot be taken for a ride,” he said.

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Arora also wondered if SEBI could have asked the company to keep this ₹17 crore aside and let the company utilise the rest of the money. “It is debatable; or Sebi could have appointed a monitoring agency to monitor the spending of IPO proceeds rather than canceling the issue itself. The directions could have been more proportionate from company side” he added.

Trafiksol SME IPO Details

Trafiksol ITS Technologies’ ₹45-crore IPO was oversubscribed by over 345 times, attracting bids worth more than ₹10,000 crore. The public issue, priced between ₹66 and ₹70 per share, was open for subscription from September 10 to 12, 2024. Shares were initially planned to be listed on the BSE SME platform on September 17, 2024.

The company raised the funds and planned to use them for software purchases, borrowing repayment, working capital, and general corporate purposes. After the closure of the issue and allotment of shares, SEBI and BSE received certain complaints regarding discrepancies in Trafiksol’s IPO, particularly about the use of funds for software procurement. 

Trafiksol ITS Technologies is a Noida-based firm that provides intelligent transportation systems and automation solutions for traffic and toll management projects. The company focuses on analyzing user needs to deliver tailored software solutions and ongoing maintenance.