SEBI Clears Prime Focus of Misleading Financials and Accounting Charges

Shares of Prime Focus are poised for significant movement following a major regulatory victory as SEBI officially halted adjudication proceedings against the company. The market regulator has concluded that the media services firm did not engage in accounting irregularities or violate anti-fraud regulations during key business transfers.

The Core of the Investigation: Business Transfers and Gains

The legal scrutiny centered on transactions conducted by Prime Focus during the 2020 and 2022 financial years. During this period, the company transferred its visual effects (VFX) business division to DNEG Creative Services and subsequently sold its post-production services business to DNEG India Media Services. Both entities were indirect subsidiaries operating under common control.

SEBI’s initial investigation alleged that these moves artificially inflated the company's books. Specifically, the regulator pointed out that the transactions generated gains of ₹200.27 crore in FY20 and ₹250.20 crore in FY22. The regulator argued that without these gains, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20, suggesting that the company had bypassed Ind AS 103 provisions regarding business combinations under common control.

SEBI Validates Accounting and Consolidation Practices

In a decisive order issued on June 16, Adjudicating Officer Amit Kapoor ruled that the allegations of misleading financial statements could not be substantiated. The officer noted that Prime Focus had followed the correct accounting treatment in its standalone financial statements.

Furthermore, SEBI dismissed concerns regarding the company’s consolidated financial statements. The investigation found that gains from intra-group transactions were properly eliminated during the consolidation process, strictly adhering to Ind AS 110 requirements. Crucially, the regulator highlighted that the company’s statutory auditors had raised no qualifications or concerns regarding the accounting treatment or the consolidation methods used.

Relief for Directors and Management

The ruling extends significant relief to nine individuals named in the initial show-cause notice issued in December 2023. This includes promoter-directors Naresh Malhotra and Namit Malhotra, Chief Financial Officer Nishant Fadia, and various independent directors on the audit committee.

Since the primary charge—that Prime Focus violated accounting standards and published misleading financials—was not proven, the secondary charges against the management team could not stand. SEBI also investigated the timing of sale proceeds, noting that a large portion was received after the investigation began; however, the regulator found no evidence of improper fund rotation or a lack of commercial substance in these deals.

Key Takeaways