The case relates to the transfer of ₹7.95 crore, or almost the entire net IPO (initial public offer) proceeds of VJL, directly from the public issue escrow account to four gold vendors, rather than first transferring the funds to the company’s bank account.
SEBI imposes a penalty of ₹5 lakh each on Mr Shah and FOCL, ₹1 lakh on Ms Soneji, ₹2 lakh on Mr Shroff and ₹3 lakh on Mr Dalal.
The matter concerns VJL’s SME IPO, through which the company raised ₹8.10 crore in July 2022. According to the disclosures in the prospectus, the IPO proceeds were to be used for meeting the company’s working capital requirements. SEBI’s investigation found that ₹7.95 crore of the proceeds was subsequently paid to four entities, Akshat Gold Pvt Ltd, Karuna Bullion Pvt Ltd, Navkar Gold and Satva Gold, for the purchase of gold. The investigation also found that these vendors were active GST-registered entities engaged in the gold and precious metals business.
The central issue before SEBI, however, was not whether VJL ultimately purchased gold with the IPO money. It was how the money was released from the escrow account.
Instead of first releasing the subscription money to VJL’s own bank account, FOCL, which was the lead merchant banker to the issue, instructed the banker to the issue to transfer the money directly to VJL’s vendors. SEBI found that this bypassed the prescribed mechanism under the ICDR (Issue of Capital and Disclosure Requirements, 2018) Regulations which required the lead manager to ensure that the subscription monies were released to the issuer in accordance with law.
FOCL and its officials argued that the payments were made pursuant to written instructions from VJL and that the funds were used for precisely the purpose disclosed in the IPO documents. They also contended that routing the money through VJL’s bank account before paying the vendors would have produced the same commercial result. FOCL further claimed that direct payments to vendors were an accepted practice in SME IPOs and that there had been no siphoning of funds or loss to investors.
SEBI rejected this defence, making it clear that the issuer’s instructions could not override the independent regulatory obligations of a merchant banker. SEBI adjudicating officer (AO) Jai Sebastian said that even if the ultimate utilisation of the money was legitimate, the mandatory procedure governing the release and routing of IPO proceeds could not be disregarded. The regulator also rejected the contention that direct payments to vendors were an established SME IPO practice, noting that no credible evidence had been produced to support the claim.
A further issue was the use of Annexure A2 for the fund transfers. According to SEBI, A2 was meant for payments relating to IPO intermediary expenses and was not the appropriate mechanism for transferring the issue proceeds to VJL’s vendors. Ms Soneji, a board-authorised signatory of FOCL, had signed the fund transfer instructions using this form.
Ms Soneji argued that she had acted on the instructions of senior management and had also sought confirmation from Axis Bank regarding the appropriate form. SEBI, however, said that she was not merely an administrative employee. As a board-approved authorised signatory entrusted with operating the escrow account, she was required to exercise independent professional judgment and ensure that the instructions complied with the escrow agreement and regulatory framework. An alleged oral assurance from a bank official, without documentary evidence, could not absolve her of that responsibility.
SEBI also found that the decision to make direct payments from the escrow account was consciously discussed and approved by FOCL’s senior management. Mr Shroff, who was vice-president and functional head of the IPO team, admitted that the proposal had been discussed internally. Mr Dalal, FOCL’s MD and head of the firm, was also found to have approved the direct transfer of the proceeds to the vendors. Ms Soneji subsequently issued the instructions to the banker.
The regulator, therefore, held that the responsibility could not be shifted to Axis Bank merely because the Bank processed the instructions. SEBI noted that the escrow arrangement placed the primary responsibility for directing compliant release of the public issue proceeds on the lead merchant banker. The Bank’s processing of the instructions did not absolve FOCL or its officials of their own regulatory obligations.
In the case of Mr Shah, SEBI found a separate governance lapse. During the investigation, he had claimed that he personally signed RTGS forms and submitted them to Axis Bank’s Ahmedabad branch to authorise the payments. However, the Bank’s evidence showed that the transactions were processed by its centralised IPO operations team in Mumbai and that the relevant instruction forms had been signed by Ms Soneji. Mr Shah also failed to produce supporting documents for his claim. SEBI consequently held that he failed to discharge the fiduciary and governance responsibilities expected from the MD and CFO of a listed company.
At the same time, SEBI dropped some of the charges against FOCL. The regulator found that certain provisions cited in the SCN relating to association with unregistered merchant bankers, insider trading, reporting of securities transactions and inspection had no connection with the facts of the case. SEBI also dropped the allegation that FOCL had failed to maintain records of communications after accepting documentary evidence of VJL’s instructions.
While determining the penalty, SEBI noted that no quantifiable unfair gain to the noticees or loss to investors arising from the specific violations was available on record. However, the regulator took into account the previous regulatory defaults involving several of the noticees. The order records earlier penalties and directions against Mr Shah, FOCL, Mr Shroff and Mr Dalal and treated the repeated nature of these defaults as an aggravating factor.
SEBI emphasised that compliance with the safeguards governing public issue proceeds cannot depend on whether investors ultimately suffered a financial loss. The prescribed mechanism is intended to ensure transparency, accountability and regulatory oversight over subscription money. Once a breach of that mandatory framework is established, the absence of investor loss or wrongful gain does not, by itself, provide a defence.
Accordingly, SEBI imposed the ₹16 lakh aggregate penalty on the five noticees.
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