Fund Diversion Case: SEBI bars Varanium Cloud, MD from securities market for 7 years

The Securities and Exchange Board of India (SEBI) on Tuesday, August 25, said that it has banned Varanium Cloud Limited (VCL) and its Managing Director Harshawardhan Hanmant Sabale from the securities market for seven years.The step has been taken by the market regulator after finding that the company fabricated data centre operations, manipulated financial statements and diverted investor funds to benefit promoter entities.SEBI has directed Sabale to disgorge unlawful gains of Rs 128.77 crore, along with 12 per cent interest, and ordered VCL to recover Rs 62.51 crore that was diverted from funds raised from investors.What is the case?SEBI’s case against Varanium Cloud Ltd (VCL) is linked to the company’s September 2022 IPO and a later rights issue.The company had raised Rs 40.39 crore through its IPO and said the money would be used to set up containerised Edge Data Centres and Digital Learning Centres.A year later, VCL raised another Rs 48.45 crore through a rights issue. According to SEBI, nearly 89.83 per cent of this amount was routed to entities connected with the promoters. The regulator said Rs 32.73 crore from the rights issue proceeds was transferred directly to the personal bank account of Sabale.SEBI also questioned claims made by the company about its data centre operations. VCL had said that it had commissioned Edge Data Centres in Goa and Sawantwadi.However, inspections carried out by SEBI and the National Stock Exchange allegedly found no data centre facility at the registered address in Sawantwadi.The regulator also raised concerns over the claimed Goa facility. According to SEBI, the site used only six units of electricity in one month, which did not appear consistent with the kind of power consumption expected from a technology-heavy data centre operation.SEBI further said the main vendor linked to these projects did not have the fixed assets needed to carry out such work.The regulator also found signs of possible financial manipulation through transactions that it described as fictitious sales and purchases.VCL had reported sales worth Rs 594.32 crore to a single company, Amtelfone Incorporated, over two financial years. SEBI said these transactions appeared only as accounting entries and were not backed by actual receipts through banking channels.Revenues from US-based subsidiaryThe company also reported substantial revenue from its US-based subsidiary, Varanium Cloud INC, despite the subsidiary having only $1,000 in capital and no employees. According to SEBI, the subsidiary was shown as generating Rs 392.11 crore in revenue in a single quarter.The regulator said these financial statements were accompanied by misleading corporate announcements that helped create an inflated perception of VCL's business and prospects. One such announcement in February 2023 concerned the proposed acquisition of Fastway Transmissions Private Ltd for Rs 2,683 crore.SEBI noted that the proposed acquisition value was nearly 20 times VCL's net worth. The regulator said the company's reported revenue subsequently surged by 984 per cent, while the company's share price also rose sharply, creating an opportunity for promoter entities to sell their holdings at elevated valuations.According to SEBI, promoter entities made unlawful gains of more than Rs 128.77 crore by offloading shares at inflated prices, causing losses to unsuspecting investors.The regulator has also taken action against other individuals and entities allegedly involved in the scheme. Sabale has been fined Rs 20.4 crore, while VCL has been penalised Rs 1.3 crore.Raj Jagtani, proprietor of BM Traders, which SEBI identified as a front entity that received more than Rs 138 crore from VCL and Sabale, has been fined Rs 10.1 crore and barred from the securities market for four years.VCL's executive directors Vinayak Vasant Jadhav and Fahim Iunus Shaikh, along with Chief Financial Officer Mukundan Raghavan, have each been fined Rs 6 lakh and barred from the securities market for one year.