2025 (3) TMI 1071 - AT - SEBI

Company's IPO cancelled for misstatements about software procurement from unverified vendor lacking proper credentials

Trafiksol ITS Technologies Ltd. Versus Securities & Exchange Board of India, BSE Ltd.

Trafiksol ITS Technologies Ltd. Versus Securities & Exchange Board of India, BSE Ltd. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core issues considered in this judgment are:Whether the directions in the impugned order exceeded the scope of the show cause notice issued to the appellant.Whether the impugned order was based on allegations not included in the show cause notice.Whether there was a material misstatement in the prospectus regarding the procurement of software from a vendor with questionable credentials.Whether the appellant's actions constituted a violation of the SEBI regulations.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Scope of the Show Cause NoticeThe appellant argued that the directions in the impugned order exceeded the scope of the show cause notice, which proposed providing investors with an option to withdraw their subscription. The appellant relied on precedents such as the Gorkha Security Services case to argue that the principles of natural justice were violated as the notice did not explicitly mention the cancellation of the IPO.The respondent countered that the show cause notice included language allowing for 'suitable directions' under the relevant sections of the SEBI Act, which could encompass the directions given in the impugned order. The Tribunal agreed with the respondent, noting that the language of the notice was broad enough to cover the directions issued.Issue 2: Allegations Outside the Show Cause NoticeThe appellant contended that the impugned order was based on allegations not included in the show cause notice. The appellant highlighted that the notice limited the proceedings to 'material misstatement in the prospectus,' while the order addressed other aspects such as intent to divert funds and concealment of material facts.The Tribunal found that the core finding of 'material misstatement in the prospectus' was consistent with the show cause notice. The Tribunal noted that the appellant failed to rebut the allegations of misstatement effectively and that the impugned order was justified based on the inquiry conducted.Issue 3: Material Misstatement in the ProspectusThe appellant argued that there was no misstatement in the prospectus regarding the procurement of software, as the quotation from OCPL was disclosed as a budgetary estimate and not a definitive agreement. The appellant also pointed to an alternative quotation from another vendor in a similar price range.The Tribunal found that the appellant failed to conduct due diligence in verifying the credentials of OCPL, a company with no background in software development. The Tribunal noted that the quotation from OCPL was obtained through questionable means, involving a commission for providing a quote. The Tribunal concluded that the disclosure in the prospectus was misleading and constituted a material misstatement.Issue 4: Violation of SEBI RegulationsThe Tribunal considered whether the appellant's actions violated SEBI regulations, particularly regarding the adequacy and correctness of disclosures in the prospectus. The Tribunal emphasized the importance of safeguarding public shareholders' interests and found that the appellant failed to meet the disclosure requirements under the SEBI regulations.3. SIGNIFICANT HOLDINGSThe Tribunal upheld the impugned order, finding no merit in the appellant's arguments. The Tribunal emphasized the following principles:The language of a show cause notice can encompass a range of suitable directions, including those not explicitly mentioned, if it provides adequate notice to the appellant.Material misstatements in a prospectus can justify corrective actions by regulatory bodies to protect investor interests.Companies must ensure the adequacy and correctness of disclosures in public offerings, particularly when dealing with entities of questionable credentials.The Tribunal dismissed the appeal and upheld the order directing the refund of subscription amounts and cancellation of shares allotted in the IPO. No costs were awarded.