SEBI Clears Prime Focus of Misleading Financials and Accounting Charges

Shares of media services giant Prime Focus are expected to see significant movement following a major regulatory breakthrough. The Securities and Exchange Board of India (SEBI) has officially closed its adjudication proceedings against the company and its top management, clearing them of allegations regarding fraudulent accounting practices.

SEBI Dismisses Allegations of Financial Manipulation

The regulatory scrutiny began following an investigation into transactions conducted by Prime Focus during the 2020 and 2022 fiscal years. SEBI had initially alleged that the company engaged in misleading financial reporting by transferring business divisions to indirect subsidiaries under common control. Specifically, the regulator questioned the transfer of the Visual Effects (VFX) division to DNEG Creative Services and the subsequent sale of post-production services to DNEG India Media Services.

The core of the investigation centered on whether Prime Focus had incorrectly applied Ind AS 103, which governs business combinations involving entities under common control. SEBI's examination suggested that these transactions artificially boosted the company's reported profits—generating gains of ₹200.27 crore in FY20 and ₹250.20 crore in FY22. Without these gains, the regulator noted, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20.

Findings on Accounting Standards and Consolidation

In a decisive order issued on June 16, SEBI Adjudicating Officer Amit Kapoor ruled that the allegations of accounting irregularities and violations of anti-fraud regulations could not be substantiated. The officer concluded that Prime Focus had adopted the correct accounting treatment in its standalone financial statements.

Addressing the concerns regarding consolidated financial statements, the order noted that gains from intra-group transactions were appropriately eliminated during consolidation, adhering to the requirements of Ind AS 110. Furthermore, the regulator highlighted that the company's statutory auditors had raised no qualifications regarding the accounting methods or the consolidation process used by the firm.

Relief for Promoters and Directors

The dismissal of the primary charges brings significant relief to nine individuals named in the original show-cause notice issued in December 2023. This includes promoter-directors Naresh Malhotra and Namit Malhotra, CFO Nishant Fadia, and several independent directors from the audit committee.

SEBI clarified that since the fundamental charges of violating accounting standards and publishing misleading statements were not proven against the company, the secondary charges against the directors could not be sustained. Additionally, while SEBI examined the timing of sale proceeds, it found no evidence of "fund rotation" among group entities or any lack of commercial substance in the transactions.

Key Takeaways