Varanium Cloud Ltd: How Retail Investors Can Avoid Such Traps

Recently, SEBI (Securities and Exchange Board of India) issued an order against Varanium Cloud Limited and its promoter Mr Harshawardhan Sabale. In the order, SEBI highlighted how the promoter (Mr Sabale) syphoned off the money raised by the company in the IPO, falsified sales and corporate announcements to increase the share price and then sold his shares at a big profit. Overall, the promoter benefited himself for more than ₹150 cr at the cost of investors.

In the current article, we analyse the key findings by SEBI in its order dated May 10, 2024. In addition, we have also analysed the public information about the company to understand, if a retail investor could have identified the issues/red flags in Varanium Cloud Limited and Mr Harshawardhan Sabale.

In the end, we have also shared our recommendations about what an investor could have done to avoid falling into the trap laid by the promoter.

Over the years, after reading multiple orders of SEBI on different companies, we have realized that these orders are a very educative tool for investors to learn the tricks used by the promoters and their companies to mislead investors.

SEBI orders always highlight the modus operandi, the tools used and the narrative created by promoters to keep their misdeeds hidden from investors while simultaneously portraying a much better picture of the business and financial position of the company in the minds of investors.

Reading real-life instances of such misdeeds helps an investor by raising her awareness and attention to potential red flags, which improves her analytical skills. She can become better at detecting fraud and thereby become a better investor.

Now, let us see what we can learn from this case study of Varanium Cloud Limited.

Background

Varanium Cloud Ltd is an SME (small and medium enterprise) claiming to provide data centres, distance learning solutions, payment gateway services, e-commerce as a service (EAAS), IT infrastructure as a service (IAAS) etc.

The company came out with an initial public offer (IPO) in September 2022 and raised about ₹40 cr net of expenses. Thereafter, the company claimed that it had used all the IPO money and had completed three edge data centres (EDC) in Goa, Kudal and Mumbai.

Shortly thereafter, in Dec. 2022, the company proposed a huge preferential issue of ₹1,250 cr for an acquisition; however, it did not succeed in this fundraising. Nevertheless, in FY2024, it raised about ₹49 cr via a rights issue.

Things were going relatively fine for the company until January 2024 until the time when it disclosed its shareholding pattern for December 31, 2023. Until now, since the IPO, the promoters maintained about 63% stake in the company; however, in the December quarter, their stake fell sharply to about 36%.

SEBI order, page 3:

There was a huge uproar among the investors who had invested their hard-earned money in the company trusting the promoter of the company. To quell the investors’ discontent, Varanium Cloud Ltd announced that there was some error in classifying promoters’ shares and that it would file a revised shareholding declaration soon.

SEBI order, page 3:

for the quarter ended 31st December 2023, we hereby inform you that there was an inadvertent error in classification of the promoter group shares. In consideration of aforesaid matter, we will file the revised shareholding pattern by 29th January 2024

However, after queries raised by the NSE (National Stock Exchange) and multiple follow-ups, Varanium Cloud Ltd did not file any revised shareholding pattern.

At this stage, SEBI and NSE started their investigation and SEBI issued an interim order on May 10, 2024, highlighting serious misdeeds conducted by the company and its promoter, Mr Harshwardhan Sabale.

Let us see the key findings of the SEBI order (Link to the complete order on SEBI website).

Key Findings in the SEBI Order on Varanium Cloud Ltd

SEBI, primarily, found that:

1. The promoter, Mr Sabale, syphoned off the money raised by the company in IPO.
2. The company falsified its financials to show a great business performance whereas, on the ground, there was no business activity.
3. The company misled investors by making false announcements to increase its share price and after pumping up the share price, the promoter dumped its shares in the market and made huge capital gains at the cost of investors.

Let us try to understand each of these acts of the promoter.

1) Syphoning off IPO money:

In September 2022, Varanium Cloud Ltd raised about ₹40 cr net of expenses primarily to construct 3 data centres and 3 digital learning centres.

Red herring prospectus, September 8, 2022, page 56:

Thereafter, in its FY2023 annual report, the company declared that it had completed all three edge data centres.

FY2023 annual report, page 7:

We commissioned our first data center in Panjim, Goa in December 2022, followed by our second installation at Kudal, Sindhudurg district and a third in Mumbai.

On enquiry by SEBI about the status of these data centres, in April 2024, the company stated that its Mumbai data centre is yet to be launched. So, currently, there are only two data centres.

SEBI order, page 11:

please consider that the Mumbai data center is yet to be launched.

However, when the NSE team visited its two data centres, then it noted that there were no data centres at these locations.

SEBI order, page 12:

Even at the other site, there was no data centre and the premises had very low to nil electricity consumption whereas data centres have very power-intensive operations.

SEBI order, page 12:

Therefore, it became clear that the promoter had taken away all the IPO money without using it to create assets like data centres.

Thereafter, SEBI investigated what the promoter did with the money. It found out that the promoter syphoned off most of the IPO money (about ₹24 cr out of an IPO of ₹40 cr) by transferring it to other companies.

SEBI order, page 15:

One entity, BM Traders had received the bulk of the money (more than ₹18 cr). It turned out that BM Traders is in the wholesale business of fruits and vegetables. Moreover, it did not have a single employee and its premises were a residential address without any business activity.

SEBI order, page 16:

showed that BM Traders was involved in the wholesale business of fruits and vegetables…BM Traders in its letter…stated that it…did not have any employee in the business. During a site visit to the business address of BM Traders by PNB officials, it was found that it was a residential address and had no business activity.

In addition, the company invested money in one of the promoters’ companies, Turmeric Lifestyle Pvt Ltd (TLPL), which rented out villas in Goa.

SEBI order, page 9:

Bank Statement of Varanium Cloud Ltd…showed that immediately upon receipt of net IPO proceeds in its bank account, Varanium transferred Rs.1.50 Crore to TLPL…as per social media account of TLPL, it is engaged in the hospitality business of renting villas for vacations

It was a clear case where the promoter raised money from investors in an IPO and then syphoned it off.

Also read: Why Management Assessment is the Most Critical Factor in Stock Investing?

2) Fake financials with no business activity on the ground:

SEBI’s investigation found that Varanium Cloud Ltd did not have any business activity on the ground. Its edge data centres, which it claimed to construct using the IPO money, did not exist.

Moreover, its distance learning centre (Edmission) at Sawantwadi, which it claimed in the RHP that was functional since February 2019 also did not exist.

RHP, page 104:

February 2019: Inauguration of the Edmission Centre in Sawantwadi

When the NSE team visited the site of its Edmission Centre at Sawntwadi, then it did not find any distance learning centre there.

SEBI order, page 14:

Therefore, with no business activity in the real world, it was a question of how the company reported ever-growing sales and profits. The company showed an especially huge jump in its sales after its IPO.

2.1) Fake sales of Varanium Cloud Ltd:

The company reported its sales increase from ₹4 cr in FY2021 to ₹923 cr in 12 months ended December 2023 (i.e. January to December 2023). At the same, it showed its quarterly sales consistently increased from ₹13 cr in the March 2023 quarter to ₹395 cr in the December 2023 quarter.

Upon investigation, SEBI found out that these sales were not genuine and were only on paper with mere accounting entries without actual business on the ground and cash inflow in the bank account.

For example, SEBI found that the company reported 70%-80% of sales to a single customer, Amtelfone Incorporated. However, NSE could not find any information about this company in the public domain other than its address, which was common with many companies found in the Panama Papers leak.

SEBI order, page 20:

Varanium had recorded sales worth Rs.326.22 Crore (83.91% of total sales) in FY23 and Rs.268.10 Crore (71.44% of total sales) in first-half of FY24 with Amtelfone.

SEBI order, page 22:

Amtelfone’s address was Suite 9, Ansuya Estate, Revolution Avenue, Victoria, Mahe, Republic of Seychelles. The said address is common with various companies found in Panama Papers as available in Offshore Leaks Database.

Other than the above, no information about Amtelfone was found in public domain. Even as per OpenCorporates, no company named ‘Amtelfone Incorporated’ was found by NSE.

It seemed that Amtelfone Incorporated was a fake company.

Moreover, even though, Varanium Cloud Ltd claimed that it had received hundreds of crores of rupees from Amtelfone; however, SEBI did not find any such receipt in the bank accounts of the company.

SEBI order, page 24:

Company received Rs.266.01 Crore in FY23 out of the total sales of Rs.326.22 Crore made to Amtelfone. However, no corresponding Bank Receipt entries were found in the ledger of Amtelfone or in the Bank Statement of the Company in FY23.

It indicated that the sales transactions shown by Varanium Cloud Ltd with Amtelfone were fake.

During April-Sept 2023, Varanium Cloud Ltd reported sales of about ₹107 cr to an entity named Courage Clothing LLP (CCL). However, NSE could not find any entity by this name in the public domain.

SEBI order, pages 29,30:

Varanium had recorded sales worth Rs.107.16 Crore (28.56% of total) with CCL in First Half of FY24.

No details were found regarding any entity by the name Courage Clothing LLP, while doing a public domain search.

SEBI also found other instances of fake sales where Varanium Cloud Ltd showed sales of ₹11.8 cr in FY2023 to a company Varanium Networks Private Limited (VNPL, 99.99% owned by Mr Sabale). However, VNPL did not show any purchases from any entity in FY2023.

SEBI order, page 28:

VNPL’s revenue in FY23 stood at Rs.0.41 Crore only, with nil purchases and other expenses of Rs.0.21 Crore. However, Varanium reported sales of Rs.11.80 Crore to VNPL for the same period

In addition, Varanium Cloud Ltd disclosed that in the Oct.-Dec 2023 quarter, it generated more than 99% of its sales i.e. ₹392 cr out of total sales of ₹395 cr from its subsidiary in the USA, which it had formed just two months back in Nov. 2023.

SEBI order, page 40:

Rs.392.11 Crore out of the consolidated revenue of Rs.395.15 Crore was earned from the newly formed subsidiary, viz. Varanium Cloud INC, in less than two months.

Upon investigation, SEBI found that this newly formed USA subsidiary had zero employees.

SEBI order, page 40:

Therefore, it became clear that the sales shown by Varanium Cloud Ltd in its disclosures are fake. At the same time, SEBI also found out that the expenses shown by the company were also fake.

Also read: How Companies Inflate their Profits

2.2) Fake expenses by Varanium Cloud Ltd:

As an information technology (IT) company, Varanium Cloud Ltd showed major expenses as server, and data centre charges as purchases from Amazon Web Services India Pvt. Ltd. (AWS) to the extent of 80%-100% of its overall purchases ranging in hundreds of crores of rupees.

However, SEBI noted that all these expenses were on paper and no payments were made to AWS from the bank account of the company.

SEBI order, pages 31, 32:

It was observed that Varanium recorded purchases worth Rs.201.85 Crore (77.79% of total) in FY23 and Rs.243.53 Crore (100%) in First Half of FY24, with AWS.

AWS’ ledger from April 01, 2023 to December 31, 2023 also showed that there were no payment entries for nine months of FY24

Similarly, SEBI questioned purchases of about ₹34 cr done by Varanium Cloud Ltd in FY2023, with a company SecUR Credentials Ltd (SCL) where Mr Sabale owned about 18% stake on March 31, 2024.

SCL provides services for the verification of the background of employees.

SEBI order, page 33:

It was observed that Varanium recorded purchases worth Rs.33.88 Crore (13.06% of total) with SCL in FY23…SCL…provides services relating to verification of employee background. Harshawardhan Sabale…His current stake in SCL as of March 31, 2024 stands at 17.83%

In FY2023, Varanium Cloud Ltd had employee benefits expenses of only ₹1.75 cr (FY2023 annual report, page 71).

Therefore, Varanium Cloud Ltd did not have so many employees that it needed to pay ₹38 cr for their background verification.

Moreover, SEBI found out that out of the total purchases of ₹38 cr shown from SCL, Varanium Cloud Ltd had made an actual payment of only ₹0.25 cr.

SEBI order, page 34:

Varanium paid Rs.0.25 Crore only to SCL and the remaining balance was adjusted against Sale of IT services and adjustment journal entry with ‘Amtelfone Incorporated’

The company’s actions were not limited only to reporting fake financial performance to investors. During the investigation, the company refused to give numerous documents asked by NSE and SEBI to them stating that these documents are with GST authorities as it is undergoing a CGST audit.

However, the company could not provide any proof that its GST audit is going on, any intimation from GST authorities that they are going to audit its books or that GST authorities have taken its documents.

SEBI order, page 22:

It was observed that though the Company repetitively claimed in its submission to SEBI and NSE that it was unable to provide supporting documents…on account of ongoing GST Audit, it failed to provide the copy of Audit intimation or any documentary proof evidencing that GST department had taken possession of all the relevant records of the Company.

Also read: Finding out whether a Company is Cooking its Books/Manipulating its Numbers

3) Pump-and-dump operation by Mr Harshwardhan Sabale:

SEBI noted that despite no real business on the ground, Varanium Cloud Ltd kept on making fake highly positive announcements to investors via stock exchanges to boost its share price.

These announcements ranged from the start of edge data centres that did not exist on the ground to plans for numerous new businesses sometimes in completely unrelated areas.

For example, the company announced its partnership with The Pokemon Company, Japan for launching apparel and stationery. It announced the launch of jewellery for young women with Sky Gold Ltd. It announced about entering into the OTT platform business (Cable Cloud) and its plans to acquire Fastway Transmission Private Limited for this purpose. (SEBI order, pages 36, 37 and 38).

Due to a continuous flow of such positive announcements and disclosure of continuously increasing sales and profits, the share price of Varanium Cloud Ltd increased sharply from the IPO price of ₹30.5 (adjusted for one split and one bonus share) to a high of ₹393 per share.

Disclosure of growing sales and profits accompanied by an increasing share price led many retail investors to invest their hard-earned money into shares of Varanium Cloud Ltd.

However, as soon as the lock-in on the pre-IPO shares of the promoter Mr Harshwardhan Sabale ended on October 12, 2024, the promoter started selling his stocks in huge quantities in the market and got rid of all the shares that were free from lock-in.

SEBI order, pages 43, 44:

the first lock-in on shareholding of Promoter and Promoter Group was released on October 12, 2023.

Mr. Harshawardhan Hanmant Sabale sold his entire shareholding in Varanium, which was not under lock-in

An investor can see a significant increase in volume in the trading of Varanium Cloud Ltd due to the selling of shares by Mr Sabale after Oct. 12, 2023, in the chart below (Source: Screener).

As per SEBI, the promoter made a gain of more than ₹140 cr by selling his shares in the market.

SEBI order, page 46:

This is a classic case of a pump-and-dump operation in which retail investors lost a huge amount of money.

The promoter, Mr Sabale, wanted to take more money from investors through the company’s plans to raise ₹1,250 cr via preferential issue for the acquisition of a cable operator, Fastway Transmissions Pvt. Ltd.

However, the investors were saved when the bubble burst before the company could get NSE approval for the preferential issue when the owner of the target company, Fastway Transmissions Pvt. Ltd absconded and police started a manhunt to arrest him.

SEBI order, page 42:

As per a news media report in the month of December 2023 – “Punjab Police launched a manhunt for the ‘absconding’ owner of Fastway Transmissions Gurdeep Singh Jujhar and others associated with it…”

Also read: How to know if Promoters are Losing Commitment to the Company

Interim directions by SEBI:

After its investigation, SEBI concluded that Varanium Cloud Ltd mis-utilized the IPO money and manipulated its financial statements. There was no business activity on the ground and all the transactions were on paper only. The company presented a rosy picture of business to investors, which led to an increase in share price and the promoter offloaded his shares and made huge gains.

Therefore, SEBI barred Varanium Cloud Ltd and Mr Harshwardhan Sabale from the securities market and stopped Mr Sabale from being associated with any listed company. SEBI also asked the National Financial Reporting Authority to investigate the role of the auditor of the company, AK Kocchar & Associates in the whole episode.

Analysis of Public Information of Varanium Cloud Ltd

An investor may think that SEBI can find out all the issues and frauds in companies because they have the power to ask for all documents and information, which companies have to provide. Retail investors do not enjoy any such special privileged access to information.

Therefore, we analysed publicly available information and documents about Varanium Cloud Ltd and Mr Harshwardhan Sabale like red herring prospectus, letter of offer for rights issue, annual reports, corporate announcements, media articles etc. to understand if a retail investor, solely relying on public information, could find any issues or red flags related to Varanium Cloud Ltd.

Our analysis brings forward the following points:

1) History of cases/allegations of misdeeds against the promoter, Mr Harshwardhan Sabale:

There are numerous media articles about allegations of misdeeds against the promoter of Varanium Cloud Ltd, Mr Harshwardhan Sabale.

The earliest one goes back to December 2009 when he was arrested by Goa police for misappropriating ₹14 cr from a company by promising them FDI of ₹46 cr. (Source: One-held-for-siphoning-Rs-14-crore: Herald, Goa: Web Archives)

PANJIM, DEC 8 Panjim police on Tuesday arrested one Harshvardhan Sable for misappropriating investment money to the tune of Rs 14 crore. PI Sandesh Chodankar said Sable acted as a consultant to get foreign direct investment (FDI) of Rs 46 crore for a company which is based in Pernem.

Mr Sabale accepted that it was he who was arrested by Panjim Police for cheating and forgery in 2009, in a hearing of another case in the Bombay High Court (Source). In the order, Mr Sabale is referred to as Award Debtor No. 1.

in the cross examination of the Award Debtor No. 1 (Q & A 75), to the query as to whether he could tell the Arbitral Tribunal as to what were the charges under which the Panaji Police had arrested him in 2009, he had answered that the charges where for cheating and forgery.

the valuation of the shares held by Award Debtor No. 1 in Varanium Cloud Limited is Rs. 190,51,56,068/-.

Just like in 2009, when Mr Sabale was arrested for cheating someone of ₹14 cr by promising them an FDI of ₹46 cr, recently, the Economic Offences Wing (EoW) of the Mumbai police booked him for cheating Mr Kamal Singh, Chairman and CEO of Rolta India Ltd of ₹15 cr by promising him a loan of ₹5,000 cr from a bank in Mauritius.

As per the media reports, Mr Singh paid ₹15 cr to Mr Harshwardhan Sabale in the name of margin  money for the loan (Source: Mumbai News: Asset Management Firm MD Booked For Cheating Defence Software Company)

registered a case against Harshawardhan Sabale, the chairperson and managing director of Varanium Cloud…for cheating another company to the tune of Rs15 crore…complainant in the matter is Kamal Singh, chairman and CEO of Rolta India

Varanium Cloud offered Rolta India a loan amount of Rs5,000 crore. The loan was applied through Mauritius-based bank named AfrAsia Bank Ltd and…Rolta India was asked to pay the margin amount of Rs15 crore to the bank for sanctioning the loan…margin amount paid in dollars through him.

The news about dealings of Mr Sabale with Rolta India via “The Streamcast Group”, founded by Mr Harshwardhan Sabale has been in the media since 2019. For example, the following article from 2021: The ‘Streamcast Group’ scam and Rolta: Was it deceitful collusion? (May 28, 2021)

on May 11, 2019, RIL announced an investment of Rs 5,500 crore by ‘The Streamcast Group’ supposedly an international group.

Turns out ‘Streamcast Group’ is a scam…incorporated in Malta as three companies…by two promoters of Indian origin…One a relatively young, (said to be Chartered Accountant) hailing from Pune Harshawardhan Sabale

Apart from the above, in 2020, there were many media articles where Mr Harshwardhan Sabale along with Mr Dharmesh Pandya had dubious dealings with the Malta govt. where they promised to invest a large amount of money to build data centres in Malta. There was an investigation by media led by “The Shift News” in the whole episode (Source: EXCLUSIVE: Leaked report shows Malta Enterprise knew past of Streamcast ‘investor’ who left trail of debt behind)

Apparently, later on, Maltese companies sued Streamcast group to recover their dues (Source: Streamcast ordered to pay Malta state utility €400,000 over botched €75m data centre project, Nov. 4, 2020)

Therefore, there were many instances even before the IPO was launched that created doubts about Mr Sabale.

Moreover, in the RHP before the IPO, Varanium Cloud Ltd disclosed that Mr Sabale is of 47 years of age (RHP, page 121) with no wife or kids.

RHP, Sept 2022, page 122:

Such a situation also raises questions about succession planning.

Also Read: How to do Management Analysis of Companies

2) Relying completely on investors’ money for projects with nil promoters’ contribution:

In the RHP, while raising about ₹40 cr net of expenses for 3 edge data centres and 3 digital learning centres, the company attempted to meet the entire cost of these projects (₹23.4 cr for data centres and ₹8.4 cr for learning centres, RHP, pages 59-60) by IPO with almost no contribution from existing shareholders (promoters).

RHP, September 2022, page 56:

Since the entire fund requirement are to be funded from the proceeds of the Issue, there is no requirement to make firm arrangements of finance under Regulation 230(1)I of the SEBI ICDR Regulations through verifiable means towards at least 75% of the stated means of finance, excluding the amounts to be raised through the proposed Issue.

By proposing 100% funding by IPO proceeds, the promoter could escape the assessment of projects by any lender (bank or NBFC), which would be necessary if even a minuscule debt was proposed as a source of funds.

RHP, September 2022, page 27:

Our funding requirements and deployment of the issue proceeds are based on management estimates and have not been independently appraised by any bank or financial institution.

This prevented the benefit of independent verification of the existence of projects for investors, which could have reduced the possibility of outright deception where a project is declared complete without any presence on the ground.

Moreover, the only money put in by the company/promoters before the IPO was a meagre ₹15 lac, which was also under public issue expenses, which might have been reimbursed out of the IPO proceeds.

RHP, September 2022, page 63:

Having such a small contribution to the project by the promoters indicated very little skin in the game for the promoter where almost the entire risk was being borne by new investors in the IPO.

Also read: How to do Financial Analysis of a Company

3) Keeping the issue size below the threshold for higher compliance requirements:

Varanium Cloud Ltd kept the IPO size at about ₹40 cr, which was less than the limit of ₹100 cr above which companies need to appoint external independent monitoring agencies to check the usage of funds raised from investors.

RHP, September 2022, page 27:

The deployment of the funds towards the objects of the issue is entirely at the discretion of the Board of Directors and is not subject to monitoring by external independent agency. As per SEBI (ICDR) Regulations, 2018, as amended, appointment of monitoring agency is required only for Issue size above ₹10,000.00 lakhs. Hence, we have not appointed any monitoring agency to monitor the utilization of Issue proceeds.

It became easy for the promoter to syphon off funds as there was no external independent agency that was checking the usage of funds.

Once again, while raising money by rights issue, Varanium Cloud Ltd kept the issue size at ₹49.46 cr (page 47 of letter of offer for rights issue), which did not require the appointment of an external independent monitoring agency to check the usage of funds.

Letter of offer for rights issue, September 2023, page 26:

Our Company’s management will have flexibility in utilizing the Net Proceeds. There is no monitoring agency appointed by our Company and the deployment of funds is at the discretion of our Management and our Board of Directors…per SEBI (ICDR) Regulations, 2018, as amended, appointment of monitoring agency is required only for Issue size above ₹10,000.00 lakhs. Hence, we have not appointed any monitoring agency to monitor the utilization of Issue proceeds.

In addition, it seems that the size of the rights issue was kept at ₹49.46 cr i.e. marginally less than ₹50 cr because companies with rights issue sizes more than ₹50 cr have to get approval from SEBI for the issue. In case, the company had decided to keep the issue size slightly more to exceed ₹50 cr, then it would have to face scrutiny of SEBI, which might have exposed its wrongdoings.

Letter of offer for rights issue, September 2023, page 132:

The Letter of Offer has not been filed with SEBI in terms of SEBI (ICDR) Regulations as the size of issue is up to ₹5,000.00 Lakhs.

4) The company had changed its auditors every year before the IPO even though it did not have any major business activity:

In the RHP, the auditor of Varanium Cloud Ltd, M/s. A K Kocchar & Associates highlighted that they have audited financials for only FY2022. Financials for FY2021 were audited by M/s. A P R A & Associates LLP and for FY2020 were audited by M/s Garg Goel & Co.

RHP, September 2022, page 130:

Financial Statements for the Financial Year 2022 have been audited by us. The Financial Statements for the year ended March 31, 2021 was audited by M/s. A P R A & Associates LLP, Chartered Accountant, LLP and audit for FY 2020 has been conducted by M/s Garg Goel & Co.,

Every year change in auditor is usually a trigger sign for investors to increase their due diligence of any company.

5) Profits that were not received in cash (CFO):

After its IPO, Varanium Cloud Ltd started reporting a sharp jump in its sales and profits. Sales that were ₹35 cr in FY2022 before IPO, increased to ₹383 cr in FY2023 and further to ₹923 cr in 12 months ended December 2023 (i.e. Jan-Dec. 2023).

Similarly, it reported a significant jump in profits also. Net profit after tax (PAT) increased from ₹8 cr in FY2022 before IPO to ₹82 cr in FY2023 and further to ₹199 cr in 12 months ended December 2023 (i.e. Jan-Dec. 2023).

However, these sharply increasing profits of Varanium Cloud Ltd were not accompanied by cash flow from operations (CFO). In FY2023, the company reported a PAT of ₹82 cr but it had a CFO of only ₹3 cr. Thereafter, in H1-FY2024 (April-Sept 2023), the company reported a PAT of ₹96 cr but it had a CFO of only ₹5 cr.

As a result, in the 18 months of FY2023 and H1-FY2024 period, the company reported a cumulative PAT of ₹178 cr but only a minuscule CFO of ₹8 cr, which corroborates with the finding by SEBI that most of the sales and profits of Varanium Cloud Ltd were only on paper with no inflows in the bank account (remember sales to Amtelfone Incorporated discussed above).

We believe that the conversion of profits into cash flow from operations is one of the major parameters of financial, business and management analysis as it helps expose underlying weaknesses like competitive weaknesses as well as manipulations like fake sales and profits.

Also read: How Companies Manipulate Cash Flow from Operating Activities (CFO)

6) Very high pledge of promoter’s shares in Varanium Cloud Ltd:

Soon after the IPO, the promoter of the company started pledging his stake in the company. On March 31, 2023, 10.84% stake of the promoters’ stake was pledged, which increased to 64.16% on September 30, 2023. As per the latest available data on NSE, on December 31, 2023, 43.5% of the promoter’s stake was pledged.

A high pledging of stake of promoter’s stake in the company is always a red flag because pledging provides the promoters of any company a way to take out the economic value of their shareholding without selling those shares.

The pledged shares are in the control of lenders and if any promoter is not able to repay the loan, then the lenders may sell the promoter’s shares in the market, which is a very adverse event that leads to a massive decline in the trust of the market in the promoter and her abilities to sustainably run the company on an ongoing basis. As a result, such selling of shares by lenders leads to a massive sell-off of shares by other investors leading to a significant loss of value for all investors including retail investors.

Therefore, a high pledge of promoters’ stake in any company must be seen with great caution by investors.

Also read: Share Pledge by Promoters: A Complete Guide

7) Promoters’ remuneration by Varanium Cloud Ltd:

In its communications with shareholders, the company stressed that the promoter, Mr Harshwardhan Sabale has reduced his remuneration significantly to set up an example of a very good corporate governance.

For example, in the presentation for H1-FY2023 results soon after its IPO, it reported an 89% reduction in employee expenses from ₹8.29 cr to ₹0.83 cr. At that time, Varanium Cloud Ltd highlighted that it was due to lower promoter remuneration as he wanted to share profits with the shareholders for better corporate governance.

However, an investor would note that the company compared the promoter’s remuneration with his remuneration of ₹7.5 cr FY2022, which was an unusually high salary withdrawal by any promoter when, in FY2022, the company had a profit of ₹8 cr. Moreover, it was before IPO when the company was private and the promoter may deal with the money/profits as she wishes.

However, after the IPO, the promoter reduced his salary to create an impression of very good corporate governance in the company. Whereas at the same time, as per SEBI, the promoter was busy syphoning off the IPO money, falsifying sales and profits and he ended up benefiting himself for more than ₹140 cr via pump-and-dump operations in the stock price.

Also read: Why We cannot always Trust What Management Claims

8) Mismatches in the information disclosed by Varanium Cloud Ltd in its public documents:

There were occasions when the information provided by the company in one document did not corroborate with the information disclosed in another document or within another section of the same document.

Let us see some examples.

8.1) Declaration of fixed assets by the company:

As per the FY2022 annual report, Varanium Cloud Ltd had spent about ₹27.75 cr for the construction of its data centres.

FY2022 annual report, page 22:

However, as discussed earlier, in the RHP, the company disclosed that it has spent only ₹15 lac towards projects, which was also as public issue expenses, which seems a significant deviation from what it disclosed a few months back.

Moreover, despite declaring that it has spent crores of rupees on data centres and digital learning centres (inaugurated in February 2019), the company’s auditors continued to claim that it did not have any fixed assets.

FY2021 annual report, page 6:

The Company does not hold any immovable property (in the nature of ‘fixed assets’).

FY2022 annual report, page 7:

The Company does not have any immovable property during the year.

FY2023 annual report, page 67:

The Company does not have any immovable property during the year.

Moreover, while declaring the list of equipment owned by the company in the letter of offer for the rights issue in September 2023, Varanium Cloud Ltd copied the table from its RHP for IPO in September 2022 even though it had claimed that during this period, it had completed three edge data centres.

The table below contains the list of equipment at the time of IPO in September 2022.

RHP, September 2022, page 95:

The table below is from the letter of offer for the rights issue, September 2023, one year after the IPO after the company had claimed that it completed three edge data centres. However, the list of equipment in September 2023 is exactly the same as RHP including the number of computers (110), wifi equipment, mesh etc.

Letter of offer for rights issue, September 2023, page 80:

If one relies on such disclosures of the list of major equipment and the declaration by auditors that the company did not have any immovable property, then the company might be hinting that in reality there was no project/edge data centre on the ground. Nevertheless, it does point out the carelessness in preparing important documents like the annual report, letter of offer etc.

Also read: How to read the Annual Report of a Company

Let us see other examples where Varanium Cloud Ltd depicted a carelessness in preparation of its disclosure documents indicating weakness in internal control and processes.

8.2) Carelessness and weakness in internal controls and processes:

In the RHP (September 2022) as well as in the letter of offer for rights issue (September 2023), the company stated that its average power consumption for the last three months was 3119 KVA even though during the intervening period, the company had claimed to commission three data centres, which are supposed to be power-intensive operations.

RHP, September 2022, page 95:

Our average consumption as per our billing history for last 3 months is 3119 KVA and the same is available from Adani Electricity Mumbai Limited.

Letter of offer for rights issue, September 2023, page 80:

Our average consumption as per our billing history for last 3 months is 3119 KVA and the same is available from Adani Electricity Mumbai Limited.

The carelessness of the company in its disclosures was also reflected in its letter of offer for the rights issue in September 2023 when it mentioned that there is no market for its equity shares as its shares are not listed on any exchange even though they were trading on NSE for about a year since its IPO.

Letter of offer for rights issue, September 2023, page 28:

The Equity Shares have never been publicly traded and the Issue may not result in an active or liquid market for the Equity Shares. Prior to the Issue, there has been no public market for the Equity Shares, and an active trading market on the Stock Exchanges may not develop or be sustained after the Issue.

There are other instances as well where the carelessness of the company in preparing financial reports was visible. For example, in the April-Sept 2022 results, Varanium Cloud Ltd made a mistake in the calculation of EPS (earning per share).

NSE announcement, Oct. 21, 2022, page 1:

Basic EPS was inadvertently shown as Rs. 26.24/- instead of Rs 41.47/- per share. It was a Typographical error and the said mistake was erroneous and unintentional.

Similarly, in the FY2022 annual report, it made errors in the calculations/totalling of CWIP. The starting CWIP for technologies was ₹257.62 lac and the company added ₹61.74 lac in the year. So, at the end of the year, the total CWIP for technologies should have been ₹319.36 lac (= 257.62+61.74). However, the company made a mistake in its annual report and mentioned the year-end value as ₹61.74 lac. This one mistake was reflected further in the Sub Total for CWIP as well as the Grand Total for Gross Block.

FY2022 annual report, page 21:

In both, the RHP of Sept 2022 as well as the letter of offer for rights issue in Sept 2023, Varanium Cloud Ltd disclosed that it does not own any of the trademarks/logos that it uses including the company logo.

RHP, September 2022, page 28:

We have not obtained the registration of our trademarks used in our businesses and our inability to obtain or maintain these registrations may adversely affect our competitive business position. Our Company is not the legal owner of any of the logos

Letter of offer for rights issue, September 2023, page 26:

We have not obtained the registration of our trademarks used in our businesses and our inability to obtain or maintain these registrations may adversely affect our competitive business position. Our Company is not the legal owner of any of the logos

This is a huge risk to the brand of any company as any copyright infringement can impact its brand value significantly. However, the same status over the period of one year may indicate just a copy-and-paste work or might indicate a weakness in the seriousness of the company to protect its brand.

In addition, the auditor of the company in its RHP stated that it did not conduct any audit test to verify its transactions etc. So, the auditor refused to express any opinion on its transactions.

RHP, September 2022, page 133:

We did not perform audit tests for the purpose of expressing an opinion on individual balances of account or summaries of selected transactions, and accordingly, we express no such opinion thereon.

As per the FY2023 annual report, pages 53-54, the secretarial auditor pointed out that Varanium Cloud Ltd did not comply with regulatory guidelines. It did not meet the minimum number of directors in April 2022. Also, it did not give an advance intimation to the stock exchange of its board meeting for discussing the declaration of dividend.

Such instances indicated that the company had weaknesses in its internal control and processes.

The company had continuously received whistleblower complaints; however, unfortunately, none of the whistleblowers could bring the extent of wrongdoings in the media.

FY2023 annual report, page 68:

We have taken into consideration the whistle blower complaints received by the Company during the year while determining the nature, timing and extent of our audit procedures

Also read: Are professionally managed companies safer for shareholders?

8.3) Payment facilitation service of Varanium Cloud Ltd:

While providing details of its payment facilitation services (Payfac), in the RHP, the company clarified that it does not handle payments and therefore, does not require any license from RBI for the same.

RHP, September 2022, page 93:

at no point in time, does the Company itself process any payments or collect any form of payment information from the user. The entire payment processing is done by the selected payment gateway in accordance with the relevant RBI guidelines for the same. Consequently, the Company does not require any license to operate this facilitation service.

However, the annual reports of the company disclosed that it provided payment facility services to two promoter entities: Varanium Earth Private Limited (VEPL) and Varanium Lifestyle Private Limited (VLPL) and it was yet to pay crores of rupees to these companies, which indicated that Varanium Cloud Ltd handled payments themselves as the money flowed through its accounts.

In FY2022, the company was holding ₹6.24 cr to be paid to VEPL and VLPL for payment facilitation services.

FY2022 annual report, page 31:

In the above disclosure, an investor would note that the transaction amount during the entire year and the outstanding amount at the year-end are the same. It might also indicate that Varanium Cloud Ltd collected money from third parties, those who paid money using its payment facilitation services and continued to hold it in its bank accounts without settling/paying it to the final merchants (VEPL and VLPL).

Normally, payment facilitation services/payment aggregators settle the money received from customers in 2-3 days to the bank accounts of merchants.

In FY2023, the company was holding ₹25.8 cr to be paid to the two promoter companies: VEPL and VLPL.

Holding money in its own accounts on behalf of customers of payment facilitation services without holding any license from RBI would have indicated increased due diligence by investors.

8.4) Investment in Fincraft Media and Entertainment Private Limited:

In RHP for IPO, Varanium Cloud Ltd disclosed that it had invested about ₹1 cr in a company named Fincraft Media and Entertainment Private Limited (Fincraft).

RHP, September 2022, page 148:

However, when the company appointed a valuer to do a valuation for its preferential issue in January 2023, then in the valuation report, the valuer, Sagar V Shah disclosed that this investment by Varanium Cloud Ltd is not visible in the balance sheet of Fincraft. As a result, the valuer refused to consider it in its valuation of the company. (Source: Valuation report by Sagar Shah)

Valuation Report of Varanium Cloud Limited by Registered Valuer Sagar Shah, page 15:

Further, it appears that there has been an investment appearing in the company named Fincraft Media. However, per the management representation, same is not investment in shares of company and was transaction of different nature and same is also supported with the fact that financial of Fincraft does not show name of VCL in its balance sheet neither as Equity nor as any other Capital instrument and hence, we have not considered the amount of investment in arriving at the total value of Non- current investments.

9) Disclosures of litigations against promoters:

Both in the RHP for IPO as well as the letter of offer for the rights issue, Varanium Cloud Ltd declared that there are no litigations involving its directors, promoters and promoter group.

RHP, September 2022, page 165:

LITIGATION INVOLVING OUR COMPANY, OUR DIRECTORS AND OUR PROMOTER: Nil

From the above discussion, an investor may note that before the IPO, Mr Sabale was involved in a cheating and forgery case in Goa in 2009 and in disputes regarding the data centre in Malta in 2020.

Letter of offer for rights issue, September 2023, page 19:

Litigation involving our Directors, Promoters and Promoter Group: Nil

However, before the letter of offer for the rights issue (September 26, 2023), an arbitration court had given an award against him dated December 22, 2022, where he was asked to pay about ₹36.91 cr to Mr Cherag Shah. Mr Sabale (Award Debtor) had filed an appeal against this award (Source)

Award Debtor has filed an Arbitration Petition under Section 34 of the Arbitration Act 1 2016 SCC OnLine Bom 5895 9-IAL-16702-23.doc and though an undertaking was given to this Court that there will be 100% bank guarantee furnished for stay of the impugned Award dated 22nd December 2022

The amount as per arbitral Award is Rs. 36,91,79,142/- (as per exchange rate Rs. 83.12 is on August 2023). Further, it is mentioned that the total amount awarded plus interest at the rate of 6% per annum till date amounts to Rs. 50,80,61,542/-.

It was in this case that in March 2024, the Bombay High Court ordered the arrest of Mr Harshwardhan Sabale (Source: Bombay High Court orders arrest of Varanium Cloud promoter Sabale; stock hits 5% lower circuit: March 22, 2024)

Whether a retail investor could have found red flags about Varanium Cloud Ltd and Mr Harshwardhan Sabale from public documents?

We believe that the publicly available information about the company and its promoter had signs that could have alerted retail investors about the issues that have gained major attention recently and are clearly highlighted in the SEBI order.

From the media articles, annual reports, red herring prospectus for IPO, letter of offer for the rights issue, corporate announcements to NSE etc. an investor could have got to know about:

• Existing history of allegations of misdeeds against the promoter like his arrest in 2009 in Goa for cheating & forgery, mystery around their actions and litigations against them in Malta etc. In addition, disputes with Mr Cherag Shah and the incidence of promising unusually large funding to Rolta India Ltd were also in the public domain.
• After the IPO, Varanium Cloud Ltd could never convert its profits into cash flow from operations (CFO). In fact, the CFO was almost always very miniscule when compared to reported profits. In such situations, when any company announces plans for humungous acquisitions like Fastway Transmissions Pvt. Ltd for more than ₹2,000 cr when it had hardly generated ₹8 cr in CFO since IPO, then it becomes a significant red flag.
• The company changed its auditors back-to-back before the IPO as none of the auditors was continuing with it. On a side note, the auditor that continued with it is now referred by SEBI to the National Financial Reporting Authority (NFRA) for investigation and action for its role in the entire episode.
• A very high pledge of promoters’ stake in the company was a cause of concern for investors.
• The company almost never put any of its own money into creating projects. It proposed to fund the entire cost of 3 edge data centres and 3 digital learning centres solely from the IPO, which resulted in no skin in the game for the promoter as the entire financial risk was borne by subscribers to the IPO. This was a risky proposition for investors to subscribe to.

Recommendations: What should a retail investor do to safeguard herself from such traps?

After analysing the case of Varanium Cloud Ltd and Mr Harshwardhan Sabale, we believe that an investor should keep the following things in mind while investing in any IPO or any company for that matter.

• Do a thorough background check of the promoter on Google and other online sources and be very cautious when she finds a history of any suspicious/wrongdoing in the past. Please keep in mind what a senior banker once said: “There is nothing called a reformed promoter.”
• Invest in IPOs where the amount of money raised is at least ₹100 cr or more (or any revised limit by SEBI in this regard) so that there is an oversight of an external monitoring agency on the usage of funds to stop blatant siphoning off of money by promoters.
• Prefer to invest in IPOs/projects where at least some portion is funded by debt and the company has already tied up the debt with any reputed bank/financial institution. This will ensure that at least some external agency has gone through the project proposal and has put its mind to the cost estimates. It also brings down the probability of outright fraud where the projects are declared to be complete with nothing happening on the ground.
• Be prepared to spend a significant time reading documents like the red herring prospectus, past annual reports, credit rating reports etc to do a thorough analysis of the company. The following articles will help you in knowing what you should see while reading these documents:
  • How to do Financial Analysis of a Company
  • How to do Business Analysis of a Company
  • How to do Management Analysis of a Company
  • How to find red Flags/Accounting Shenanigans in a Company
  • How to read the Annual Report of a Company

Please invest in any stock or any IPO only after doing a complete analysis because only after reading and analysing any company, we, as investors, will be able to safeguard our hard-earned money from outright frauds that take place in financial markets.

We wish you the best for a happy and safe investing journey!

Regards,

Dr Vijay Malik

P.S.

• Subscribe to Dr Vijay Malik’s Recommended Stocks: Click here
• Mumbai “Peaceful Investing” Workshop, July 27, 2025: Register here
• To learn stock investing through videos, you may subscribe to the Peaceful Investing – Workshop Videos
• 25% savings on buying our Stock Analysis Excel Template and all ebooks together: Analysis Package: Excel Template + All eBooks (25% savings)
• To download our customized Stock Analysis Excel Template for analysing companies: Stock Analysis Excel
• Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
• To learn how to do business analysis of companies: e-book: Business Analysis Guide
• To pre-register/express interest in a “Peaceful Investing” workshop in your city: Click here

Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.