Missing Data Centres: SEBI Opens Varanium Cloud's Rs 190 Crore Financial Mirage, Orders Disgorgement

The Securities and Exchange Board of India (SEBI) has found that Varanium Cloud Limited (VCL) and its Managing Director, Harshawardhan Hanmant Sabale, fabricated data centres, manipulated financial statements and diverted investor funds in a scheme designed to inflate the company's share price and benefit promoter entities.

SEBI has banned VCL and Sabale from the securities market for seven years. It has directed Sabale to disgorge Rs. 128.77 crore in unlawful gains, along with 12% interest, and ordered the company to retrieve Rs. 62.51 crore of diverted investor funds.

The foundation of Varanium's deception was built on its Initial Public Offer (IPO) and a subsequent Rights Issue. In September 2022, VCL raised Rs. 40.39 crore via an IPO, ostensibly to construct containerised Edge Data Centers and Digital Learning Centers.

A year later, it raised another Rs. 48.45 crore through a Rights Issue. However, SEBI's investigation revealed that these funds never served their stated objectives. Instead, an astonishing 89.83% of the Rights Issue proceeds were diverted to promoter-related entities, with Rs. 32.73 crore landing directly into the personal bank account of Managing Director Sabale.

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To maintain the illusion of a booming tech enterprise, Varanium made bold public announcements regarding its infrastructure. The company claimed to have successfully commissioned data centers in Goa and Sawantwadi. The reality, however, was starkly different.

SEBI and the National Stock Exchange (NSE) conducted site visits which exposed these claims as complete fabrications. The highly touted Sawantwadi Edge Data Center was entirely missing from its registered address.

Meanwhile, the Goa facility, purported to be a high-tech hub, consumed a mere six units of electricity over a month, unequivocally proving the absence of any legitimate tech-intensive operations. The primary vendor lacked the fixed assets necessary to execute such projects.

The financial engineering did not stop at phantom infrastructure. VCL's balance sheets were heavily window-dressed using fictitious sales and purchase transactions. A massive chunk of its reported sales, amounting to Rs. 594.32 crore across two financial years, was attributed to a single obscure entity named Amtelfone Incorporated.

SEBI found that these were mere ledger entries completely devoid of actual banking receipts. In an even more audacious move, VCL announced the incorporation of a US-based subsidiary, Varanium Cloud INC, with a paltry capital infusion of just $1,000. Astoundingly, the company reported that this zero-employee subsidiary generated a staggering Rs. 392.11 crore in revenue within a single quarter.

These fabricated financials were weaponised alongside a series of misleading corporate announcements designed to aggressively inflate the company's stock price. The most glaring example was an announcement in February 2023, where VCL declared its board's approval to acquire Fastway Transmissions Private Limited for Rs. 2,683 crore.

This proposed acquisition amount was nearly twenty times VCL's entire net worth, rendering it a logistical and financial impossibility. These tactics successfully engineered a massive 984% spike in reported revenue and a corresponding surge in share prices, creating a highly lucrative exit opportunity.

Consequently, promoter entities offloaded their holdings at peak valuations, illegally pocketing over Rs. 128.77 crore at the expense of unsuspecting retail investors.

SEBI's crackdown extended beyond the promoters. The regulator imposed a massive penalty of Rs. 20.4 crore on Harshawardhan Sabale and Rs. 1.3 crore on the company itself. Furthermore, complicit entities that facilitated this grand illusion faced severe repercussions.

Raj Jagtani, the proprietor of BM Traders, a front entity that inexplicably received over Rs. 138 crore from the company and Sabale, was slammed with a Rs. 10.1 crore penalty and a four-year market ban.

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Key Managerial Personnel (KMPs), including Executive Directors Vinayak Vasant Jadhav and Fahim Iunus Shaikh, alongside Chief Financial Officer Mukundan Raghavan, were penalised Rs. 6 lakh each and banned for one year.

The gatekeepers of the market did not escape scrutiny. First Overseas Capital Limited, the lead merchant banker for the IPO, was banned for two years and fined Rs. 10 lakh for its abysmal failure to exercise due diligence and verify the blatant misstatements in the prospectus.

Similarly, Athos Capital Advisors Private Limited and its director Jinesh Mehta, who acted as unregistered merchant bankers and drafted the misleading prospectus, were slapped with a Rs. 50 lakh fine each and handed a two-year debarment.

This decisive regulatory action underscores SEBI's strict zero-tolerance approach towards corporate fraud and its commitment to safeguarding the integrity of the regulated Indian securities market against such elaborate and devastating financial mirages.

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