IPO fund diversion: Why SEBI banned Synoptics Technologies, promoters from markets

Indian Express

07-05-2025

The Securities and Exchange Board of India (SEBI), in an interim order, has restrained Mumbai-based Synoptics Technologies Ltd (STL), a small and medium-sized (SME) information technology products and solution provider company, from trading in securities market for diversion and misutilisation of funds raised through initial public offering (IPO). Taking stern action on First Overseas Capital Ltd (FOCL), the merchant banker to the IPO, the regulator barred it from undertaking any fresh IPO-related assignments.
How much money did STL raise through its IPO?
STL came out with a Rs 54.04 crore IPO and got listed on the SME Platform of NSE Ltd on July 13, 2023. The IPO was a fixed-priced issue priced at Rs 237 per share. Of the Rs 54.04 crore, Rs 35.08 crore was raised through a fresh issue of shares and the remaining Rs 18.96 crore was through an offer for sale of shares made by two promoters — Jatin Shah, also the company's managing director, and Jagmohan Manilal Shah.
As per the disclosures made in the red herring prospectus (RHP) filed by STL, issue-related expenses amounted to Rs 80 lakh, of which Rs 50 lakh was to be paid from the proceeds of the fresh issue, while the remaining Rs 30 lakh was to be met by the selling shareholders under the offer for sale. Net of these expenses, STL was projected to receive Rs 34.58 crore from the public issue, to be utilised for repayment of borrowings (Rs 5 crore), working capital (Rs 17.58 crore), investment in strategic acquisition/ joint venture (Rs 5.3 crore) and general corporate purpose (Rs 6.7 crore).
Misutilisation of IPO proceeds
The issue proceeds from STL's IPO were deposited into an escrow account maintained with Fort Branch, Mumbai, of HDFC Bank, the banker to the issue, on July 12, 2023.
In its investigation, SEBI found that Rs 19 crore from the issue proceeds was transferred out of the escrow account on July 12, 2023 — a day prior to the listing of the shares of the company and the grant of trading approval. The funds were transferred to ABS Tech Service (Rs 7 crore), CN IT Solutions (Rs 6 crore) and to Dev Solutions (Rs 6 crore) on an instruction issued by FOCL to HDFC Bank. FOCL said the payments pertained to 'amounts due from the company as issue management fees, underwriting and selling commissions, registrar fees, and other IPO related expenses'.
SEBI said that the amount actually transferred was more than 23 times the disclosed figure (Rs 80 lakh), raising concerns about the nature, basis, and legitimacy of these payments.
When the regulator sought an explanation from STL on this transfer of funds, the company informed that the payments were not related to issue expenses and were instead for working capital (payment made to Dev Solutions) and strategic investment/joint venture objects (payment made to CN IT Solution and ABS Tech Services), as disclosed in the RHP.
The order said that as on the date of filing the RHP (June 22, 2023), STL disclosed that the target entities for the proposed strategic investment had not yet been identified. However, within 20 days of the RHP filing — and on the very day the IPO proceeds were credited to the issue account — funds earmarked for strategic investment and general corporate purposes were transferred to CN IT Solution and ABS Tech Services toward the object of strategic acquisition.
The agreements with CN IT Solutions and ABS Tech Services were executed on July 11, 2023 — a day prior to the credit of IPO proceeds to the escrow account maintained with HDFC Bank. Both agreements listed the same address for CN IT Solutions and ABS Tech Services. However, during a site visit conducted by NSE, it was found that neither of the entities was present/located at the stated address.
With respect to the Rs 6 crore transferred to Dev Solutions — classified by STL as utilisation towards working capital — SEBI said the company failed to provide any reasonable justification for divergence in classification. A site visit to the address of Dev Solutions revealed that no such business existed at the stated location, raising serious concerns about the nature and authenticity of the payments made.
On scrutinising the bank statements of the accounts to which funds were directed to be transferred by FOCL, SEBI found that these bank accounts were not held by the entities to whom FOCL had directed the transfers and with whom STL had purportedly entered into agreements.
SEBI's interim order
The markets regulator said that the facts brought out during the examination reveal a 'well laid out plan of the Company (STL) and the Lead Manager, FOCL, to siphon away funds raised in the IPO'.
'It, therefore, becomes necessary to restrain the promoters of the Company (STL) from alienating or encumbering their shareholding during the pendency of proceedings,' it said.
SEBI, in the order, barred Synoptics Technologies Ltd, and its three promoters — Jatin Shah, Jagmohan Manilal Shah and Janvi Jatin Shah — from 'buying, selling or dealing in the securities market or associating themselves with the securities market, either directly or indirectly'.
The regulator also prohibited First Overseas Capital Ltd from taking up any new assignment relating to merchant banking activities in the securities market till further directions.
'Findings, taken together, lead to a strong prima facie conclusion that FOCL, acting in concert with the company (STL), siphoned off a substantial portion of the issue proceeds,' the interim order said.