The Securities and Exchange Board of India (SEBI) on Tuesday, 25 August barred Varanium Cloud Limited (VCL) and its Managing Director Harshawardhan Hanmant Sabale from the securities market for seven years, after finding that the Mumbai-based company fabricated data centre operations, manipulated financial statements, and diverted investor funds to benefit promoter entities. The regulator has ordered Sabale to disgorge unlawful gains of ₹128.77 crore, along with 12 per cent interest, and directed VCL to recover ₹62.51 crore diverted from investor funds.

The IPO and Rights Issue at the Centre of the Fraud

SEBI's findings stem from VCL's initial public offering (IPO) in September 2022, through which the company raised ₹40.39 crore, stating that proceeds would be used to establish containerised Edge Data Centres and Digital Learning Centres. The following year, VCL raised a further ₹48.45 crore through a rights issue.

According to SEBI, 89.83 per cent of the rights issue proceeds were diverted to promoter-related entities. Of this amount, ₹32.73 crore was transferred directly into Sabale's personal bank account.

Ghost Infrastructure: Data Centres That Did Not Exist

SEBI found that VCL made misleading claims about its data centre infrastructure. The company had announced the commissioning of Edge Data Centres in Goa and Sawantwadi. However, inspections conducted by SEBI and the National Stock Exchange (NSE) allegedly found no such facility at the registered address of the Sawantwadi centre.

The purported Goa facility raised further red flags: it reportedly consumed only six units of electricity over an entire month, indicating that no technology-intensive operations were taking place. SEBI also noted that the primary vendor associated with these projects did not possess the fixed assets required to execute them.

Fictitious Transactions and a Shell Subsidiary

SEBI uncovered evidence of financial manipulation through fictitious sales and purchase transactions. The company's reported sales included ₹594.32 crore attributed to a single entity, Amtelfone Incorporated, across two financial years — transactions the regulator found were only ledger entries with no corresponding banking receipts.

VCL also reported substantial revenue from its US-based subsidiary, Varanium Cloud INC, despite the subsidiary having just $1,000 in capital and no employees. According to SEBI, the subsidiary was shown as generating ₹392.11 crore in revenue in a single quarter.

Inflated Announcements and Promoter Exits

These fabricated financials were accompanied by misleading corporate announcements that inflated the market's perception of VCL's business. A February 2023 announcement concerning the proposed acquisition of Fastway Transmissions Private Ltd for ₹2,683 crore — nearly 20 times VCL's net worth — was among the most egregious. Following the announcement, the company's reported revenue surged by 984 per cent and its share price rose sharply, creating a window for promoter entities to offload holdings at elevated valuations.

SEBI determined that promoter entities made unlawful gains exceeding ₹128.77 crore by selling shares at these inflated prices, causing losses to retail and institutional investors who had no knowledge of the scheme.

Penalties and Bans Across the Network

Beyond the seven-year ban and disgorgement order against Sabale, SEBI has fined him ₹20.4 crore. VCL itself has been penalised ₹1.3 crore.

Raj Jagtani, proprietor of BM Traders — identified by SEBI as a front entity that received more than ₹138 crore from VCL and Sabale — has been fined ₹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 ₹6 lakh and barred from the securities market for one year. This case marks one of the most detailed enforcement actions against a small-cap IPO issuer in recent years, and signals SEBI's intent to scrutinise post-listing conduct far more aggressively.