Trafiksol IPO: SEBI puts SME IPO listing on hold

In an usual move, the markets regulator on Friday ordered theBombay Stock Exchange to not proceed with the listing shares of the company Trafiksol ITS Technologies Ltd till Sebi completes its investigation into the case. BSE had already postponed the listing of Trafiksol shares on September 17 after it was informed about the investor complaints with Sebi.

The ex-parte interim order of Sebi authored by Whole Time Member Ashwani Bhatia said “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. Therefore, action taken in such cases needs to be done with utmost care.”

Securities lawyer Chirag M Shah said it was 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, including to pass such orders. But usually action is taken after the company files about the proceeds of IPO, post facto analysis. But in this case, it has happened before”.

This action by Sebi reinforces the regulator’s intent to tighten it’s oversight on the SMEs selling shares to the public.

As recently as 29 August, Sebi had raised concerns about questionable practices in the SME market and warned investors about unrealistic projections by some SMEs. On 12 September, Bloomberg reported that Sebi is considering tighter oversight on SMEs selling shares to the public.

“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.

Founded in 2018, TrafikSol specializes in intelligent transportation systems (ITS) and automation solutions, offering services like software development, consulting, and delivery. The company reported an 80% revenue growth and a 153% increase in profit after tax in FY24 compared to the previous year.

On May 31, it filed a Draft Red Herring Prospectus (DRHP) with BSE for an Initial Public Offer (IPO) of equity shares intended for the Small and Medium Enterprises (SME) Platform of BSE. A fresh issue of ₹64.10 lakh shares was proposed, with the IPO offered to investors between September 10 and 12 at a price band of ₹66 to ₹70 per share. The issue was oversubscribed 345.65 times, with the retail portion subscribed 317.66 times, 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’s closure, 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 Private Limited, to retain the proceeds in an escrow account. Investors subsequently demanded the cancellation of the IPO and refunds.

Meanwhile Sebi summoned the merchant banker to provide clarifications and found that the software was to be purchased from Oasis Corpcare, a third party vendor that reported NIL revenue last FY and had not filed financial statements in the past three FYs. BSE team also visited Oasis’s site on September 19, finding the office closed.

Trafiksol informed BSE that it would shelve the 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 stated.

The WTM 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 recognised that there could be a possibility of erosion of capital in the event the disclosures that have been made turns out to be misleading/faulty. A balance has to be struck between these competing interests,” the WTM held.

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