Siphoning SME IPO Proceeds: Varanium Cloud, Promoter Harshawardhan Sabale Barred from Markets
Moneylife Digital Team 13 May 2024
Holding Varanium Cloud Ltd, a small and medium enterprise (SME) listed on the SME platform of the National Stock Exchange (NSE) and the company promoter Harshawardhan Hanmant Sabale responsible for siphoning funds raised through the company's initial public offering (IPO) and rights issues, market regulator Securities and Exchange Board of India (SEBI) barred them from markets till further orders. Mr Sabale is also barred from holding key managerial positions in any listed company. 
In an order last week, Ashwani Bhatia, whole-time member (WTM) of SEBI says, "It has prima facie emerged that the money raised through the IPO and subsequent rights issue was not used for the intended purpose mentioned in the offer documents. Instead, the promoter shifted part of IPO funds to an entity, BM Traders, and the end use of such funds is not known. What has emerged clearly from the examination done by SEBI and (NSE) is the fact that Varanium through its promoter, Mr Sabale, spun an intricate web of apparently dubious transactions and tried to paint a picture that did not represent the fundamentals of the Company." 
"The Company made public announcements meant to give an impression to unsuspecting investors that Varanium was a top-notch IT service provider that was entering greenfield areas. In its effort to present such a picture, Varanium and its promoter entered into transactions that appeared only on paper. Nothing was actually happening on ground and no economic activity was evident in any manner. No employment was generated as claimed by the Company," the order says.
According to SEBI, all financial statements of Varanium are shrouded in questionable transactions. "The balance sheet does not give a true picture of the affairs of the Company. Most of the sales and purchase transactions were mere ledger or book entries. The bank account statements of Varanium did not show up adequate credit and debit entries to support the claimed sales or purchases. The Company was unable to provide supporting documents backing the sales and purchase transactions."
It says, "In the entire sequence of events and the narrative built by the promoter through public announcements, a positive sentiment was created which induced a large number of retail investors into purchasing the stock. This presented an opportunity to the promoter entities to exit the Company and reduce their stake significantly at the cost of gullible investors. The huge gains made by the promoter clearly shows the intent and purpose behind such public announcements. Clearly, these actions benefitted the promoter only."
"If this state of affairs is allowed to continue at Varanium, the investors’ interest is likely to suffer. I thus find it a fit case to issue interim directions against the Company and its promoter," the SEBI WTM says.
According to SEBI investigation, apart from raising Rs36.60 crore through the IPO, the company also made a pre-IPO placement of 7,00,000 shares to various shareholders at Rs99 per share for a total of Rs6.93 crore.
Varanium, responding to a query from NSE, claimed that it has obtained quotations from Avance Technologies Ltd for work orders worth Rs31.80 crore. From an examination of the financial statements of Avance, it was observed that Avance is a BSE-listed company offering a wide range of IT services. 
SEBI noted, "The value of quotation obtained by Varanium from Avance (i.e., Rs31.80 crore) alone surpassed 100% of the revenue of Rs30.53 crore reported by Avance in FY22-23. Analysis of Avance’s financial statements for FY22-23 showed that out of its total assets of Rs434.70 crore, it had no fixed assets and approximately 96% of its assets fell under investment in various private companies, trade advances and investment in Jump Networks Ltd."
Avance invested Rs20.27 lakh in Jump Networks. On examination, SEBI found Jump, now known as Winpro Industries Ltd, was also a listed entity in which Harshawardhan Sabale (MD of Varanium), served as the MD from 13 February 2020 to 12 March 2021. 
Additionally, as per media reports, Jump (currently Winpro) signed an annual digital services agreement with ‘Amtelfone Incorporated’ for a minimum guaranteed revenue of Rs100 crore to provide wholesale voice-over internet protocol (VoIP) services. It was also noted that ‘Amtelfone Incorporated’ was a significant sales partner of Varanium in FY22-23 and the first half of FY23-24.
"As Avance had no fixed assets, its capability to construct the proposed data centres for Varanium appeared doubtful. Accordingly, booking of expenses and payment of Rs16.98 crore by Varanium in FY22-23 for creation of data centres to Avance out of IPO proceeds looked suspect," SEBI says.
An analysis of bank statements of promoter group companies received from ICICI Bank revealed that, between August 2022 and April 2024, Varanium transferred Rs35.81 crore to BM Traders and Rs14.63 crore to promoter group companies. Further, Varanium Lifestyle Pvt Ltd transferred Rs12.73 crore to BM Traders during the same period. Further, Varanium Networks Pvt Ltd transferred Rs67 lakh to BM Traders in March 2024.
Information obtained from Punjab National Bank (PNB) shows that BM Traders is a proprietary business of Raj Kishanchand Jagtani. The UDYAM Registration certificate of BM Traders, provided by PNB, showed that BM Traders was involved in the wholesale business of fruits and vegetables. 
The reported income of BM Traders during the AY23-24 was a mere Rs6,47,200. BM Traders, in its letter dated 29 April 2024 to PNB, had stated that it dealt with agricultural products and did not have any employee in the business. During a site visit to the business address of BM Traders by PNB officials, it was found that it was a residential address and had no business activity.
From the above observations, SEBI says prima facie it appears that a significant sum of monies from IPO proceeds was diverted to BM Traders, which had dubious and questionable financial transactions with the promoter and promoter group companies of Varanium.
It says, "The prima-facie observations and findings clearly indicate that Varanium has mis-utilised the IPO proceeds and has manipulated its financial statements by recording fictitious sales and purchases. The mis-stated financial statements had presented a rosy picture about the financial health of the Company, leading to increase in investors’ interest in the stock. The same is evident from the increase in number of public shareholders from around 1000 in September 2022 to more than 10,000 in December 2023. The share price of Varanium also witnessed significant increase during the same period. The promoter, taking advantage of such price rise, off-loaded shares and made huge gains. A significant portion of gains appears to have been diverted to BM Traders about which little is known."
The SEBI WTM then restrained Varanium and its promoter Mr Sabale from markets utill further orders.
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