SEBI Cancels Trafiksol IPO, Orders Refund to Investors

The market regulator has halted the IPO of Trafiksol ITS Technologies, instructing the company to refund investors' money.

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In its order issued on Tuesday, the Securities and Exchange Board of India (SEBI) directed Trafiksol to approach the market only after the conclusion of ongoing regulatory proceedings and in accordance with any subsequent instructions.

Trafiksol had intended to use a portion of the IPO proceeds to purchase software from a third-party vendor. However, complaints revealed that this vendor had not filed its financial statements for over three years. In September, the Bombay Stock Exchange (BSE) had already asked the company to delay its listing due to unresolved queries.

As per SEBI’s December 3 order, Trafiksol must refund all IPO funds to investors who were allotted shares. BSE, in collaboration with the IPO’s bankers, will oversee the refund process, which must be completed within a week. Once refunds are issued, the depositories will transfer the allotted shares into a separate demat account under Trafiksol’s name, after which the company is required to cancel the shares.

Trafiksol’s draft red herring prospectus (DRHP) indicated plans to procure an Integrated Software Control Centre (ICCC) from a third-party vendor to serve as a hub for smart city operations. However, following complaints about the vendor’s credibility, SEBI instructed BSE to investigate, uncovering multiple red flags.

The latest SEBI order noted findings suggesting the vendor was a shell company. During a site inspection, the vendor’s office was locked, and its financial statements for FY22–FY24, submitted after regulatory scrutiny began, were deemed questionable. These statements were signed by an auditor on the same day they were submitted, raising further suspicion. Additionally, the vendor’s client list and director credentials were fabricated, and an ex-director admitted the company was sold for a nominal amount of ₹20,000, indicating a lack of expertise to deliver the ICCC project.

SEBI’s Whole-Time Member Ashwani Bhatia criticized Trafiksol for failing to provide a credible explanation for its association with the vendor. Bhatia remarked, “The company relied on a sham entity and engaged in a cover-up during the investigation into the vendor’s credentials.” Quoting the adage, “Oh, what a tangled web we weave, when first we practice to deceive,” Bhatia emphasized the deceptive practices uncovered. Other allegations, including falsified financial statements, remain under investigation.

In October 2024, the Bombay Stock Exchange (BSE) postponed the listing of Trafiksol ITS Technologies Ltd on its SME platform due to concerns raised by investors. This prompted the Securities and Exchange Board of India (SEBI) to investigate complaints, particularly regarding the company’s allocation of ₹17.7 crore from its IPO proceeds for software procurement.

The investigation uncovered serious irregularities that led SEBI to take an unprecedented step by staying the listing and eventually cancelling the IPO altogether.

The complaints centered around the third-party vendor (TPV) selected by Trafiksol, which was allegedly incapable of fulfilling the software contract. SEBI’s 16-page final order confirmed that Trafiksol had knowingly relied on fraudulent documentation submitted by this questionable vendor. Investigations revealed that the TPV was a shell company with no prior experience in software development.

Its financial statements for FY22 to FY24 were found to be fabricated, signed by an auditor on the same day they were submitted to BSE, just a day after the listing was put on hold. The vendor’s profiles and credentials, presented in the IPO documents, were fabricated, and its operations were found to lack credibility.

Trafiksol, in its defence, claimed that it had selected the vendor after adhering to its internal procurement policy and described the TPV as an intermediary that would subcontract the work. However, SEBI rejected these justifications, highlighting that Trafiksol had offered conflicting explanations and failed to provide a single credible reason for engaging the vendor.

SEBI noted that Trafiksol’s Managing Director, given his experience in the industry, must have been aware of the fabricated nature of the TPV’s profiles. This demonstrated an attempt to mislead investors and participate in a cover-up when the vendor’s credentials were scrutinized.

SEBI barred Trafiksol from proceeding with its IPO and ordered the company to refund the funds collected from investors. Depositories were instructed to transfer the shares allotted during the IPO into a separate demat account under Trafiksol’s name, after which the company was required to cancel these shares. SEBI also stated that Trafiksol could only approach the market again after the conclusion of ongoing regulatory proceedings.

Abhiraj Arora, a partner at Saraf and Partners, described SEBI’s action as a landmark decision, emphasizing its role in safeguarding investor interests. He noted that SEBI’s move sends a strong message about the importance of transparency in IPO disclosures and the need to uphold investor trust.

However, Arora also raised the question of whether SEBI’s response was proportionate, suggesting that instead of cancelling the entire IPO, SEBI could have required Trafiksol to set aside the ₹17.7 crore or appointed a monitoring agency to oversee the spending of the funds.

While SEBI’s decisive action addresses the immediate concerns, allegations of falsified financial statements by Trafiksol are still under adjudication. The case serves as a stark reminder of the importance of accountability in the market and the critical need for companies to uphold the highest standards of disclosure and transparency.