The Mystery Behind Varanium Cloud IPO! What Went Wrong?

Varanium Cloud IPO

Do you know what the majority of startups dream of? To get listed on stock exchanges! Similar is the story of the Varanium Cloud IPO. Everything was going well and good till SEBI slapped Varanium Cloud for portraying a false picture of good financial performance. 

What exactly went wrong here? You may ask. 

Varanium Cloud IPO

Go through this write-up to decode the mystery behind the Varanium Cloud IPO.

(A) Story So Far

Varanium Cloud, once a shining star in the stock market, faced a dramatic fall from grace. Let’s break down what happened to date.

Background of the Company- Varanium Cloud

Formerly known as Streamcast Cloud Pvt Ltd, Varanium Cloud claimed to offer cutting-edge digital, technology, and internet services in tier-two cities. The company positioned itself as a catalyst for positive change, aiming to boost education, economic growth, and employment in rural areas by promoting digital integration.

Initial Success & Meteoric Rise

Varanium Cloud made a grand entry into the stock market in September 2022. Investors were thrilled as the stock delivered exceptional returns, skyrocketing from its initial offer price of Rs.122 to a staggering Rs.1,602 in just four months. This phenomenal rise made it a favorite among investors.

Peak Performance

By October 2023, the stock reached its peak at Rs.239.5. At this point, everything seemed to be going great for Varanium Cloud, and investors were enjoying substantial gains.

Allegations of Financial Manipulation

Despite the initial success, concerns began to surface about Varanium Cloud’s financial practices. Allegations emerged that the company was manipulating its financials and misusing the proceeds from its IPO (Initial Public Offering). The company denied these allegations repeatedly, but doubts continued to grow.

The SEBI Investigation

A week ago, the Securities and Exchange Board of India (SEBI) stepped in after media reports and social media posts raised red flags about the company’s financial health and corporate announcements. SEBI’s investigation revealed some troubling findings.

(B) SEBI’s Finding on Varanium Cloud

SEBI's findings on Varanium Cloud IPO

When the Securities and Exchange Board of India (SEBI) began investigating Varanium Cloud, it set out with a simple question: how did the company use the money it raised from its Initial Public Offering (IPO)? Let’s dive into what SEBI discovered-

Promises Made

Varanium Cloud’s prospectus assured investors that the IPO funds would be used to grow the business. They claimed the money would go towards setting up new data centers, expanding digital learning centers, and purchasing assets to boost operations.

Proof of Use

But here’s the kicker- when asked for proof of these expenditures, Varanium Cloud dodged the question. They said the invoices were with the Goods and Services Tax (GST) department due to an audit, promising to provide them later. This didn’t satisfy SEBI.

Cash Flow Mystery

SEBI decided to look at the company’s cash flow for the fiscal year 2023 (FY23). Guess what they found? Varanium Cloud didn’t generate significant cash from its operations. This raised a huge red flag because it suggested that the company was using IPO funds for things like dividend payouts and investments, which isn’t allowed.

Misleading Investments

SEBI discovered that Varanium Cloud invested in shares of companies where its Managing Director (MD), Harshawardhan Sabale, had also been a director. This looked fishy because it implied potential conflicts of interest and misuse of funds.

Inflated Costs

SEBI found that Varanium Cloud obtained cost estimates from a company called Avance Technologies to set up new data centers. But hold on, the cost estimates were more than 100% of Avance Technologies’ total revenue for the entire year! This was clearly unrealistic and suggested manipulation.

Dubious Partners

Further, SEBI found that one of the companies Varanium Cloud dealt with had its head office in Seychelles, a known tax haven. This raised more suspicions about the legitimacy of their transactions.

The Reality Check and Non-Existent Operations

Perhaps the most shocking discovery was about the data and education centers Varanium Cloud boasted of. SEBI found that these centers either didn’t exist or, when they did, had no real operations. Employees were merely doing documentation work rather than engaging in any substantial business activities.

(C) The Aftermath: SEBI’s Actions

SEBI's Actions

As you have read above, many of the transactions reported by Varanium Cloud existed only on paper. In reality, nothing was happening on the ground as the company claimed. This deceptive practice misled investors into believing that the company was performing well.

Hence, SEBI took the following actions on the Varanium Cloud-

Immediate Ban

Given these findings, SEBI took swift action. They banned Varanium Cloud and its promoter, Harshawardhan Hanmant Sabale, from the capital markets immediately. Sabale was also barred from acting as a Director or Key Managerial Personnel of any listed company or any company intending to raise money from the public.

Stock Price Crash

Following SEBI’s actions, Varanium Cloud’s stock price plummeted. From its peak of Rs. 239.5 in October 2023, the stock crashed to Rs. 29.3 in the latest trade, marking an 87% decline. Investors saw their wealth nearly wiped out in a matter of months.

(D) How was the Varanium IPO successful despite fake financials?

As you know, Companies raise capital through IPOs (Initial Public Offerings) by offering their shares to the public in exchange for money. This process helps them list on stock exchanges and gain access to new funding. However, this isn’t a walk in the park for all companies. 

Regular stock exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) have stringent conditions set by SEBI (Securities and Exchange Board of India). Companies need to meet certain net worth limits, show a profitable track record, and fulfill other strict requirements to go public.

Nearly a decade ago, NSE and BSE introduced special listing platforms for SMEs (Small and Medium Enterprises), simplifying the rules. These platforms didn’t require the companies to meet the same high thresholds, and the IPO documents didn’t need SEBI’s direct approval. A nod from the stock exchange was sufficient.

As a consequence, the following events occurred-

The Surge in SME IPOs

This change made it much easier for SMEs to go public. Since then, nearly 950 companies have raised about Rs.14,700 crores through SME IPOs. The trend has been particularly hot lately. In FY24, 205 companies used the SME IPO platform, which is a 64% increase from the previous year. These IPOs raised nearly three times the money compared to FY23.

The Hype and the Risks

Greedy Investors

The excitement around SME IPOs has been visible enough! The S&P BSE SME IPO index, which tracks over 60 SME stocks on the BSE, rose by more than 170% over the last year. Investors have been drawn to the potential for high returns. But, there’s a catch. These impressive gains come with significant risks.

The Manipulation Problem

SME IPOs are often manipulated. Promoters might rig the IPO, or bogus investors could buy stocks to artificially inflate prices, only to dump them later on unsuspecting retail investors. Sometimes, companies exist only on paper with no real business model. 

Power of Marketing

You might wonder why so many investors decided to put their hard-earned money into Varanium Cloud’s IPO. Well, the answer is simple- superb marketing strategies!

Varanium Cloud made frequent, exciting positive announcements about its revenue expectations and business prospects. These glowing reports painted a very rosy picture of the company’s future, enticing investors.

Because investors don’t have access to the behind-the-scenes i.e. background details, it’s easy for them to be swayed by these optimistic updates. They see the potential for high returns and get excited.

Impressive Growth

The company’s announcements were so convincing that the number of shareholders skyrocketed from around 1,000 to more than 10,000 between September 2022 and December 2023. As more people bought shares, the stock price went up significantly.

Promoter’s Advantage

Harshawardhan Sabale, the company’s promoter, took full advantage of the rising stock price. He sold his shares, making a massive profit of Rs.122 crores. And that’s not all. He also earned through network entities that held a promoter’s stake in the company, raking in even more money.

Note: We have covered the following articles related to the IPO of different companies.

Go through the above articles for detailed information.

(E) Wrap-Up

The story of Varanium Cloud IPO serves as a cautionary tale for investors. While the company initially promised high returns and growth, underlying issues of financial manipulation and misuse of funds led to its downfall. SEBI’s intervention highlights the importance of transparency and accountability in the financial markets. 

Hence, being an investor, you should always be cautious and conduct thorough research before investing in stocks, especially those that show rapid and extraordinary gains.

We hope this article was helpful to you. Thanks for reading… Don’t forget to share your thoughts in the comment section below!

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Published By: Supti Nandi
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