The Regulatory Halt on Trafiksol ITS Technologies Ltd’s IPO Listing
In a significant move reflecting heightened scrutiny, the Securities and Exchange Board of India (Sebi) has ordered the Bombay Stock Exchange (BSE) to halt the listing of shares for Trafiksol ITS Technologies Ltd until its investigation into the company is fully complete. Previously, on September 17, the BSE had already delayed the listing after receiving complaints from investors, which prompted Sebi’s intervention.
The ex-parte interim order issued by Sebi, under the direction of Whole Time Member Ashwani Bhatia, emphasized the gravity of the situation, stating, “If such IPOs are allowed to list amidst serious concerns identified in our preliminary examination, it could undermine investor confidence in the listed SME ecosystem. Therefore, measures taken in such cases must involve the utmost diligence.”
Chirag M Shah, a noted securities lawyer, characterized the order as “unusual and unprecedented.” He pointed out that the responsibility primarily falls on the BSE team that approved the SME IPO. Sebi has exercised its extensive powers under Section 11 to take preemptive action, which is a departure from typical procedures where interventions come only post-facto after filing for the proceeds of an IPO. Shah remarked, “This proactive measure from Sebi indicates a much-needed tightening of their regulatory approach.”
This decision demonstrates Sebi’s commitment to enhancing its oversight of SMEs attempting to raise capital through public offerings, especially given the increasing complexity and concerns surrounding this sector.
Just weeks prior, on August 29, Sebi had expressed alarms over dubious practices in the SME market, cautioning investors about the unrealistic financial projections made by some enterprises. Further, on September 12, it was reported that Sebi is contemplating more stringent regulations for SMEs looking to enter the public market.
Shah further stated, “The SME market has been under scrutiny for some time, but there is a growing sentiment that existing norms are insufficient, and consequential accountability is necessary.”
Trafiksol, founded in 2018, specializes in intelligent transportation systems (ITS) and automation solutions. The firm reported an impressive 80% revenue growth and a remarkable 153% increase in profit after tax for the fiscal year 2024 compared to the previous year, showcasing its rapid expansion and market potential.
On May 31, Trafiksol submitted a Draft Red Herring Prospectus (DRHP) to the BSE for an Initial Public Offer (IPO) targeted at the Small and Medium Enterprises (SME) Platform. The IPO proposed a fresh issuance of ₹64.10 lakh shares, offered to investors between September 10 and 12, with a price range set between ₹66 and ₹70 per share. The issue saw overwhelming interest, being oversubscribed 345.65 times, including a staggering 317.66 times for retail investors, ultimately raising ₹44.87 crore at the upper end of the price band.
The DRHP detailed plans for using IPO proceeds, highlighting allocations for software procurement, notably an Integrated Software Control Centre, repayment of borrowings, working capital needs, and general corporate purposes.
However, after the closure of the issue, both Sebi and BSE received complaints raising concerns over discrepancies in the proposed use of funds, particularly pointing to the third-party vendor’s inadequate ability to fulfill the contract. Following Sebi’s guidance, BSE initiated an investigation and postponed the listing while requiring the company and its merchant banker, Ekadrisht Capital Private Limited, to deposit the proceeds in an escrow account. This led to demands from investors for the cancellation of the IPO and refunds.
In the subsequent investigations, Sebi summoned the merchant banker for clarifications and discovered that the software was intended to be sourced from Oasis Corpcare, a third-party vendor that reported zero revenue for the last fiscal year and had not submitted any financial statements over the past three years. A site visit by the BSE team on September 19 revealed that Oasis’s office was closed.
Trafiksol later informed the BSE that it would forgo the software procurement and seek new vendor proposals, necessitating shareholder approval for any contracts. Despite this, Sebi remained skeptical about the company’s intentions, asserting that the move to award a contract to a seemingly defunct entity indicated an attempt to mislead investors and misappropriate IPO funds. The regulatory body stressed the need for a thorough investigation to protect investor interests.
In its proceedings, the Whole Time Member (WTM) of Sebi acknowledged that the investments made by individuals and entities allotted shares in the IPO were now in a precarious state. The potential for immediate liquidity through listing has to be weighed against the risk of capital erosion should the company’s previous disclosures be found misleading.
Consequently, Sebi has committed to completing its investigation into Trafiksol within a 30-day timeframe, which may include evaluating the role of the merchant banker. During this period, listing of the shares will be on hold, and BSE will ensure that the IPO proceeds remain secured in an interest-bearing escrow account, inaccessible to Trafiksol.
