In today’s Finshots, we tell you how Varanium Cloud, a small digital services company disguised its business model and financials to make big bucks through its SME IPO.

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The Story

Companies raise capital through IPOs (Initial Public Offerings). They offer their shares to the public in exchange for money and list the company on the stock exchange. But not all companies can do this on regular stock exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).

You have to make sure your company meets stringent conditions set out by the market regulator SEBI (Securities and Exchange Board of India). You may have to have a company whose net worth breaches a certain limit. You may have to have a profitable track record*. You may have to do some other thing among a list of things India’s top stock exchanges expect you to do.

That’s exactly why going public is no easy feat and it's especially challenging for small companies or SMEs (Small and Medium Enterprises) who may want to expand, grow and thrive.

But things changed nearly a decade ago when both the NSE and BSE rolled out separate listing platforms for SMEs. They simplified the rules and made it easier for these humble businesses to tap the market.

These companies didn’t have to meet stringent thresholds. And their IPO documents didn’t even need SEBI’s approval. A go-ahead from the stock exchange would do the trick. And it worked. Nearly 950 companies have raised about ₹14,700 crores ever since.

What’s more impressive?

These SME IPOs have been all the rage of late.

In FY24 for instance, the number of companies tapping the SME IPO platform reached 205. That’s 64% higher than last year’s numbers. They even raised nearly 3 times the money than SMEs which went public in FY23. And the listing gains were crazy too ― over 300% in some cases.

That’s why you’ll see that the S&P BSE SME IPO index rose by more than 170% over the last year. This index tracks the performance of over 60 SME stocks listed on the BSE (Bombay Stock Exchange) by the way. And it’s no wonder that investors are buying into the hype.

But hold on… There’s a catch. These handsome profits come with a lot of risks too. The biggest one is something that SEBI flagged recently and one that is common knowledge to most SME IPO investors. IPOs here are usually manipulated.

It could be folks within the company i.e. the promoters who run the business and eventually rig the IPO or bogus investors buying these stocks to artificially inflate the price, only to dump them on unsuspecting retail investors later. Or even a new modus operandi ― having a business on paper with no real business model at all.

We’re talking about Varanium Cloud, an SME that went public in 2022 and got busted by the SEBI last weekend.

Look, Varanium Cloud is a small tech company that seemed to have its fingers in many pies. Whether it was offering content streaming services, facilitating online payments, digital education through edtech platforms or providing tech-related services to other startups and SMEs, Varanium Cloud did it all. At least that’s what its website said.

And over a year ago it successfully raised ₹33 crores by listing itself on the SME platform. But things began to unravel when investors began suspecting something was amiss. Soon enough, several media reports raised questions about the credibility of the company’s financial statements. And finally, even SEBI got in on the action by kicking off a proper investigation.

At first, SEBI set out to answer a simple question ― how did Varanium Cloud use the proceeds from the IPO?

You’d expect that the company would use the proceeds to expand its business. And that’s what Varanium Cloud said in its prospectus too. It set up a few data centres, built more digital learning centres and bought more assets to expand its operations.

Where was the proof?

Well, Varanium Cloud dodged this question by stating that the invoices were submitted to the GST department as part of a GST (Goods and Service Tax) audit but promised to furnish them later.

Now, SEBI didn’t want to sit idle in the meantime. So it looked at how much cash the company had generated after its IPO in FY23. And what did it find out?

Well, Varanium Cloud didn’t have any significant operations that brought in cash. So things like dividend payouts (profits shared with shareholders) and investments were supported using… well… the IPO funds.


That isn’t something you can do.

But SEBI went digging even further. And here’s what came out of it.

Varanium Cloud invested in shares of companies where its MD (Managing Director), Harshawardhan Sabale also served as director for a brief period before or during the year. Not just that. It fetched cost estimates from a company called Avance Technologies to set up more data centres. And that cost, which would add to Avance Technologies’ revenue, was in fact more than 100% of the revenue that Avance Technologies made in the entire financial year! That obviously didn’t seem right.

SEBI also found that a company that Varanium Cloud dealt with had its head office situated in Seychelles, a tax haven. And the data and education centres it boasted of? Well, they didn’t exist at all. And even when they did, there weren’t any real operations. They’d just have a bunch of employees sitting at the centre doing documentation work!

So why then did investors pour their hard-earned money into such a company’s IPO, you ask?

Well, it’s simple. Marketing!

Varanium Cloud made sure that it made frequent announcements that sugar-coated revenue expectations. And since investors don’t see what’s happening behind the scenes, it’s easy to fall for the bait.

In fact, these announcements were so effective that the number of shareholders went up from around 1,000 to more than 10,000 between September 2022 and December 2023, taking the stock price up with it. And Harshawardhan Sabale used the opportunity to sell his shares and make a whopping ₹122 crores! That doesn’t even include the money he raked in through network entities that owned a promoter’s stake in the company.

So yeah, that’s exactly why SEBI barred both the company and Sabale from the stock market.

But it’s keeping a watchful eye on these SME IPOs. It knows that companies are overtly using this listing method as a gateway to mine huge profits, while leaving gullible investors holding the bag. And it may soon come up with stricter regulations to tackle their shenanigans.

Could that backfire for genuine SMEs who want to expand their business? We hope not. But only time will tell. Until then…

*Companies that aren't profitable can also go public through an alternative route that have strict conditions too.

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