Sebi cancels Trafiksol IPO listing after probe finds shell entity links; refund to investors ordered

The Securities and Exchange Board of India (Sebi) has cancelled the listing of Trafiksol ITS Technologies' Initial Public Offering (IPO) on BSE SME following an investigation into alleged financial irregularities and misstatements in its prospectus.

However, the issue came under scrutiny after the Small Investors’ Welfare Association (SIREN) filed a complaint alleging irregularities, including the questionable financials of a third-party vendor cited in the IPO prospectus. Based on the complaint, Sebi and BSE deferred the listing and initiated an investigation.

The probe, conducted under an interim order issued on October 11, 2024, revealed concerns over alleged intent to divert funds through misleading objects in the issue, misstatements in financial disclosures provided in the prospectus, and concealment of material facts, particularly regarding the third-party vendor.

The vendor in question, listed as the supplier of a ₹17.7 crore software solution critical to Trafiksol's smart city projects, was found to lack the technical expertise and operational capacity to deliver on the claims made in the prospectus. Investigations revealed the vendor’s financial records were fabricated, and its office was non-operational during inspections.

Trafiksol claimed that it merely obtained a quote from the TPV, and it was selected after adhering to the rigorous procedures outlined in its procurement policy, and that the TPV was just an intermediate entity which would sub-contract the software development.

Sebi, however, noted that Trafiksol's management, including its Managing Director, failed to exercise due diligence. Despite disclosing quotations from the vendor in compliance with regulations, Sebi stressed that relying on a shell entity undermines the sanctity of disclosures.

"The question of whether the quotation from the TPV was part of a scheme to divert IPO proceeds will remain moot due to the events triggered by the Complaint and subsequent regulatory intervention. This, however, does not take away the fact that the Company relied on a sham entity and participated in a cover-up when the credentials of the TPV were being examined," the order stated.

As part of its order, the market regulator directed Trafiksol to refund investors within one week, including the interest earned on the IPO proceeds, and mandated BSE to oversee the process.

“Trafiksol is directed to refund the money paid by the investors, who have been allotted shares in the Initial Public Offering,” Sebi said in its order. “"BSE in coordination with the Bankers to the issue shall oversee the refund process which shall be completed within one week from the date of this Order.”

All shares allotted during the IPO will be transferred to a separate demat account and subsequently cancelled.

“The interest earned on the issue proceeds pursuant to the directions in the Interim Order shall be proportionately refunded to the investors,” the regulator added.