SEBI cancels Trafiksol SME IPO over shell entity dealings, orders refunds, postponing market debut amid rising SME IPO concerns.

SEBI canceled the highly anticipated SME IPO of Trafiksol ITS Technologies citing alleged financial irregularities and shell company dealings. It is one of the most critical regulatory interventions aimed at protecting investor interests in the market which has been experiencing a sharp rise in SME IPOs.

Trafiksol SME IPO Oversubscription and Controversy

The Trafiksol SME IPO was subscribed 345.65 times within the subscription period between September 10 and 12, 2024, raising ₹44.87 crore at ₹70 per share. However, hardly a fortnight later after the IPO closed and the allotment of shares was done, a complaint from the Small Investors’ Welfare Association questioned the intent of the company and its financial dealings.

At the center of the controversy is a proposed software purchase worth ₹17.70 crore from a third-party vendor (TPV), later identified as a potential shell entity. Investigations revealed questionable financials and fabricated credentials associated with the vendor, raising alarms over the IPO’s legitimacy.

SEBI’s Investigation and Key Findings

Following the complaint, the IPO investigation by SEBI uncovered several alarming facts:

• The TPV’s office was found locked during inspections.
• Its financial statements for the period of FY22 to FY24 are accused of being falsified. Audit signatures were obtained on dubious conditions.
• Ex-director of the TPV testified that the company was sold for a paltry sum of ₹20,000 which throws serious doubts about its operational and technical capabilities.
• SEBI concluded that Trafiksol probably attempted to cover up fraud when it scrutinized the company. It said the vendor did not have the knowledge or experience to implement the project and suspected a possibly cheated IPO process.

Refund Ordered and Market Debut Postponed

The above facts have brought SEBI to issue an order directing Trafiksol to return the amount collected from investors which amounts to ₹44.87 crore. In doing so, SEBI protects the investor’s interests since the money has been held for about three months. Trafiksol’s ITS market debut has been indefinitely postponed while SEBI declared that only after the present investigation is over and necessary directions are complied with shall the company re-enter the market.

SEBI Wholetime Director Ashwani Bhatia said that immediate action was required to ensure transparency and protect small investors.

Impact on Trafiksol ITS Technologies

Founded in 2018, Noida-based Trafiksol ITS Technologies provides solutions for intelligent transportation systems through software development and consultancy. The company’s revenues for FY2024 stood at ₹65.81 crore with a net profit of ₹12.01 crore. However, the controversy surrounding its IPO has cast a shadow on corporate governance and due diligence.

Impact on SME IPOs

The Trafiksol SME IPO fiasco occurs amid a booming market for SME public issues, with some oversubscriptions reaching over 2,000 times. Such a trend has attracted smaller entities to capitalize on investor enthusiasm, often at the cost of regulatory compliance.

The SEBI response has come in the form of stringent norms to help curb fraudulent practices and have full transparency. The cancellation of Trafiksol’s IPO will serve as a wake-up call to all entities to be strict.

Conclusion:

The Trafiksol ITS Technologies IPO points out the difficulties of integrity in the rapidly growing SME market. SEBI’s proactive steps, therefore, emphasize accountability and transparency for the sustenance of investor confidence. Trafiksol’s case highlights the critical role of regulators in balancing growth with ethical practices.

For investors, the incident is a reminder to approach SME IPOs cautiously, prioritizing due diligence over speculative gains.