SEBI stops listing of Trafiksol, asks company to refund investors and to cancel shares issued

In September, BSE had asked the company to defer the listing since certain queries still needed answering.

The market regulator has stopped the IPO of Trafiksol ITS Technologies and asked the company to refund the money to investors.

In an order issued on Tuesday, the Securities and Exchange Board of India (SEBI) said that the company should approach market afresh after the ongoing proceedings initiated by SEBI are concluded and subject to any directions issued.

Trafiksol had said that the IPO proceeds would be used partly to purchase software from third-party vendor. But according to the complaints, this third-party vendor had not filed its financial statements for more than three years. In September, BSE had asked the company to defer the listing since certain queries still needed answering.

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The SEBI order, dated December 3, said that Trafiksol is directed to refund the money paid by the investors, who have been allotted shares in the IPO.

BSE in coordination with the bankers to the issue has been asked to oversee the refund process which is to be completed within one week from the date of the order. Once the money is credited to the bank account of the applicants, the depositories have been directed to transfer the shares of the company which have been allotted pursuant to the IPO, to a separate demat account opened in the name of the company. The company has been directed to cancel the shares which have been so transferred to the account mentioned above by the depositories.

Trafiksol, in its DRHP, said that it was planning to buy from a third-party vendor "an Integrated Software Control Centre (ICCC) to function as the core operational hub for smart cities". But after receiving complaints about the viability of this vendor, SEBI asked BSE to investigate the matter and BSE had reported various concerns.

In the latest order, SEBI said that, based on the findings from an inspection, the third-party vendor (TPV) seems like a shell company.

In the order, SEBI's Whole-time Member Ashwani Bhatia wrote, " it is reasonable to conclude that the TPV in question is a ‘shell entity’. The TPV's office was found locked during a site inspection, and its financial statements for FY22 to FY24, submitted in response to allegations, were obtained under questionable circumstances as it was signed by the auditor on same day it was submitted to BSE by the MB. And this was one day after BSE in consultation with SEBI put on hold the listing of the shares of the company and initiated an examination. Further, the client list and credentials of its directors, presented in its profile, were fabricated... the ex-director’s sworn statement that the company was sold for a nominal sum of Rs. 20,000 reinforces the conclusion that the TPV lacked the technical expertise and operational capacity to execute a complex project such as ICCC software."

In the order, Bhatia said that the Trafiksol had offered multiple and conflicting explanations for its engagement with the TPV but the company "failed to provide is a single credible justification" for this.

Bhatia wrote, "The question of whether the quotation from the TPV was part of a scheme to divert IPO proceeds will remain moot due to the events triggered by the Complaint and subsequent regulatory intervention. This, however, does not take away the fact that the Company relied on a sham entity and participated in a cover-up when the credentials of the TPV were being examined. As the saying goes, “Oh, what a tangled web we weave, when first we practice to deceive,” and this case exemplifies it perfectly."

The order also said that certain other findings of the investigation, including the allegation that the company had falsified its financial statements, are yet to be adjudicated.