When Varanium Cloud made its debut on NSE’s SME platform in September 2022, it quickly became the talk of the town. Shares of the Mumbai-headquartered company, allotted at INR122 apiece, soared to INR 1,602.4 within just four months.
Social media buzzed with excitement and word of mouth helped propel its reputation as a remarkable investment while the IT services company kept on making new announcements to impress unsuspecting investors. However, the narrative took a turn in November 2023 after investors alleged irregularities in share trading and dividend payments.
Adding to the controversy, allegations of cheating in two separate cases surfaced against Varanium Cloud’s promoter Harshvardhan Sabale in February 2024, shifting the spotlight from the company’s rapid financial ascent to its current troubles.
ET Prime had previously reported about Varanium Cloud and Sabale's chequered past through a curious connection in fictitious Malta-based Streamcast group.
All the red flags raised by the investors had put Varanium under the scanner of the Securities and Exchange Board of India (Sebi), which subsequently initiated an investigation focusing on its utilisation of IPO proceeds, fairness of reported financial statements, and genuinity of its corporate announcements.
It revealed that Varanium engaged in dubious transactions to portray a misleadingly positive financial outlook to entice investors and misutilised the IPO proceeds.
But how did the whole narrative get busted in the first place?
Allegation #1: Misutilisation of IPO proceeds
As per its IPO prospectus, the company was supposed to utilise its INR40 crore-odd IPO proceeds to set up three containerised data centres (INR23.4 crore), three digital learning centres (INR8.4 crore), and for general corporate purposes (INR8.59 crore).
The company had stated that it had received a quotation from Avance Technologies to set up data centres and digital learning centres. As per the company’s disclosure dated November 17, 2023, it had utilised INR13.94 crore in setting up data centres, INR3.04 crore in setting up digital learning centres, and INR8.59 crore for general corporate purposes.
After this disclosure made by the company, NSE sought details of quotations received by the company, along with invoices, and other supporting documents like delivery challan, goods receipt note, the agreement, and asked Varanium to specify if the company had any relation with Avance.
However, Varanium could not provide any document and stated that all the documents were with the tax department as the company was undergoing CGST audit. It further stated that neither the company nor its directors, officers, or employees were in any way connected with Avance.
Sebi further investigated Varanium and its dealings with Avance, a BSE-listed company, and found out that the latter had reported revenue from operations of INR30.5 crore in FY23 worth, which is less than the payments made by Varanium during this period.
Further analysis of Avance’s FY23 financial statements revealed that out of its total assets of INR434.70 crore, it had zero fixed assets and thus its capability to construct the proposed data centers for Varanium appeared doubtful. Hence, the expense of INR16.98 crore mentioned by Varanium for creation of data centers out of the IPO proceeds looked suspicious.
The majority of Varanium’s assets were investments in various other companies including INR20.27 crore in Jump Networks (now Winpro Industries), a listed entity in which Sabale had served as the managing director between February 2020 and March 2021.
As per the Varanium’s FY23 annual report, it had set up three data centres, but site visits proved otherwise while the electricity bills of the said facilities indicated that the quantum of power consumed was too low to validate the company’s claims.
Allegation #2: Fund diversion
Bank statements including those of the IPO escrow account and Varanium’s main current account revealed that immediately after receiving the issue proceeds, the company made large remittances to an entity named BM Traders (46% of IPO proceeds) and also to several promoter group companies (16%).
Sebi found that BM Traders is a proprietary firm owned by an individual named Raj Kishanchand Jagtani. The registration certificate of BM Traders showed that it was involved in the wholesale business of fruits and vegetables. The reported income of BM Traders during FY24 was a mere INR6.4 lakh.
A visit to BM Traders revealed that it was a residential address and had no business activity. Sebi investigation stated that prima facie, it appears that significant amount from IPO proceeds was diverted to BM Traders, which is dubious and questionable.
Allegation #3: Misreporting of financial statements
Varanium’s standalone revenue from operations in FY23 was INR383.36 crore, a whopping 984.46% from a year-ago period. In its response to Sebi, the company said it had moved from B2C to B2B model. It added that the revenues from FY23 onwards are gross revenues billed by distributors who sell Varanium’s services in bulk.
Sebi further observed that Varanium’s recorded sales of INR326.22 crore (83.91% of total sales) during FY23 and INR268.10 crore (71.44% of total sales) in the H1FY24 came from an entity called Amtelfone, which according to the company’s response to the market regulator is a distributor of VoIP Services in the Middle East and North Africa. A public domain search by Sebi showed a website which contained just basic information but did not provide any details about the Amtelfone’s management or the individuals associated with it. Further, the said address was common with various companies mentioned in the Panama Papers as available in Offshore Leaks Database.
Varanium Cloud had also recorded sales worth INR21.07 with Cressanda Solutions, a BSE-listed company currently suspended due to procedural reasons. As per the annual report of Cressanda Solutions, its revenue jumped significantly from INR0.18 crore in FY22 to INR75.13 crore in FY23. Its entire revenue was accounted as trading sales against which INR71.77 crore was recorded as purchase of stock-in-trade. However, as per the annual report of Varanium Cloud, entire sales were on account of services provided.
The investigation highlighted the contradiction in the books of both the companies, raising doubts over the genuinity of transaction.
Allegation #4: Stake divestment by promoter
The Sebi investigation reveals that Sabale was prima-facie engaged in fraudulent practices by presenting inflated and misleading information about the company’s growth and prospects. Despite numerous positive corporate announcements boasting about the company’s success and expansion, Sabale reduced his shareholding significantly through on-market sales. He was holding a total 64.22% stake in the company as on March 31, 2023. The first lock-in period on promoter shareholding was over on October 12, 2023. As of December-end last year, he held only a 36.38% stake, which is under lock-in until October 12, 2025.
Sabale sold off the remaining stake owned by him directly or through Varanium Networks, realising a whopping INR143 crore.
The bottom line
The investigation concluded that Varanium has misutilised the IPO proceeds and has manipulated its financial statements by recording fictitious sales and purchases. The mis-stated financial statements presented a rosy picture about the financial health of the company, leading to an increase in investor interest.
Considering its findings, Sebi in May 2024 banned Varanium and Sabale from the capital markets.
(Graphic by Mohammad Arshad)
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