Sebi bans Varyaa Creations from securities mkt over IPO proceeds diversion

Markets regulator Sebi has restrained SME company Varyaa Creations Ltd (VCL) from accessing the securities market for alleged diversion of funds raised through its initial public offering (IPO).

Additionally, the regulator has barred Inventure Merchant Banking Services Pvt Ltd from taking up any new assignment relating to merchant banking activities in the securities market till further directions.

Also, the shareholdings of seven promoter group entities have been frozen until further directions, according to an interim order passed by Sebi on Wednesday.

Varyaa Creations, which is primarily engaged in wholesale trading of precious metals, and manufacture and sale of jewellery, came out with its Rs 20.10-crore IPO and got listed on the SME platform of the BSE on April 30, 2024.

The Securities and Exchange Board of India (Sebi) carried out a routine inspection of the activities of the Inventure and noticed certain irregularities in the IPO process of VCL and initiated an inquiry into the matter.

During the inquiry, Sebi noted that more than 70 per cent of the issue proceeds (Rs 14 crore) were transferred to three entities -- Kaveri Corporation, Maruti Corporation, and Overseas Metal and Alloys Pvt Ltd -- on April 30, 2024, the day of the listing on the instructions of the lead manager Inventure.

The stated purpose of the transfers was to cover issue management fees, underwriting and selling commissions, registrar fees, and other IPO-related expenses.

Sebi said these transfers, purportedly made to cover issue-related expenses, were disproportionate to the issue-related expenses disclosed in the IPO's prospectus.

The regulator sought explanation from VCL and Inventure regarding transfers, however, VCL failed to give a satisfactory response, citing the unavailability of its accounts team and statutory auditor.

The lead manager stated that transactions were in line with objects of the issue stated in the prospectus -- purchase of inventory and general corporate purposes.

After further investigation, Sebi, prima facie, found certain discrepancies in the use of the funds.

"...it, prima facie, appears that Rs 9 crore from the IPO proceeds was credited to the bank account of Kaveri Corporation and withdrawn in cash on April 30, 2024 -- the very day the company was listed," Sebi said.

Accordingly, Sebi has restrained Varyaa Creations "from accessing the securities market, either directly or indirectly, in any manner whatsoever until further orders. Besides, Noticee 2 (Inventure Merchant Banking Services) shall not take up any new assignment relating to merchant banking activities in the securities market till further directions from Sebi".

Besides, the regulator directed the appointment of a monitoring agency for any pending assignments of Inventure.

On freezing the holding of seven entities, Sebi noted that a lock-in period applicable to a portion of the promoters' shareholding expired on May 14, and there is a risk of the promoters offloading the shares held by them in VCL, while the inquiry into the end-use of IPO proceeds is ongoing.

Over the past year, Sebi intervened in many cases, especially in the SME segment, where IPO proceeds were misutilised or siphoned off.