SEBI Bans Varanium Cloud, Promoter From Capital Market Over Misuse Of IPO Proceeds

The Securities and Exchange Board of India (SEBI) imposed an immediate ban on technology company Varanium Cloud, along with its promoter and managing director, Harshawardhan Hanmant Sabale, from participating in the capital market on May 10.

This decision came after investigations revealed alleged misconduct involving the misuse of initial public offering (IPO) proceeds.

Varanium is a technology company, providing services surrounding digital audio, video, and financial blockchain (for PayFac) based streaming services. It was listed on the National Stock Exchange’s SME Platform (NSE Emerge) on September 27, 2022.

As per SEBI’s findings, Varanium Cloud allegedly engaged in dubious transactions to present a misleadingly positive financial outlook, enticing investors with promising growth prospects. The order added that these actions enabled promoter entities to exit “at the cost of gullible investors.”

Varanium Cloud misused the IPO proceeds and manipulated its financial statements by recording fictitious sales and purchases. The misstated financial statements presented a rosy picture of the company’s financial health, leading to increased investor interest in the stock.

This misrepresentation reportedly attracted a surge in investor interest, evidenced by a tenfold increase in public shareholders from approximately 1,000 in September 2022 to over 10,000 by December 2023.

The company had raised money in its IPO only a year ago, in September 2022, stating that the funds would be used to create data centres. However, when the NSE team visited the purported data centre sites, no data centres were found.

Varanium Cloud claimed that its Edmission Centre (Distance Learning education centre) in Sawantwadi had been operational since February 2019. However, when the NSE team visited the site, they discovered that there was no distance learning centre at that location.

Varanium Cloud transferred most of the IPO money to an entity called BM Traders.

In addition to the ban on Varanium Cloud’s participation in the capital market, SEBI has restrained Harshawardhan Hanmant Sabale from assuming roles as a director or key managerial personnel in any listed company, its subsidiaries, or entities seeking public fundraising, pending further directives.

Meanwhile, stock exchanges are considering tighter norms, including the implementation of a minimum threshold for SME IPOs. This measure aims to ensure that only sizable and serious players utilise the capital market route, while non-serious players are deterred from using the platform.

Exchanges may consider implementing a minimum limit for SME IPOs, potentially ranging from INR 30-50 Cr, depending on each exchange’s individual policy and past data on listings and subscriptions.