SEBI Clears Prime Focus of Misleading Financials and Accounting Charges

Shares of Prime Focus are expected to react positively as the market regulator, SEBI, has officially closed adjudication proceedings against the company and its top management. The regulator concluded that the firm followed appropriate accounting treatments regarding the transfer of business divisions to its indirect subsidiaries.

The Core of the SEBI Investigation

The regulatory scrutiny focused on transactions carried out by Prime Focus during FY20 and FY22. 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 had raised concerns that these transactions were used to artificially boost reported profits. Specifically, the regulator alleged that the VFX transfer generated gains of ₹200.27 crore in FY20, and the post-production transfer added ₹250.20 crore to earnings in FY22. Without these gains, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20. The regulator had questioned whether the company should have applied Ind AS 103, which governs business combinations involving entities under common control.

Ruling in Favour of Prime Focus

In an order issued on June 16, SEBI Adjudicating Officer Amit Kapoor ruled that the allegations of misleading financial statements and violations of anti-fraud regulations could not be substantiated. The officer noted that the company had followed the correct accounting treatment in its standalone financial statements.

Furthermore, SEBI dismissed concerns regarding the company's consolidated financial statements. The regulator observed that gains arising from intra-group transactions were correctly eliminated during consolidation in compliance with Ind AS 110. A key point in the ruling was that the company's statutory auditors had not raised any qualifications regarding the accounting treatment or the consolidation process.

The investigation also looked into the timing of sale proceeds, noting that a significant portion was received after the probe had commenced. However, the adjudicating officer found no evidence of fund rotation among group entities or any lack of commercial substance in the transactions.

Relief for Promoters and Directors

The decision provides significant legal relief to nine noticees, including promoter-directors Naresh Malhotra and Namit Malhotra, CFO Nishant Fadia, and the independent directors of the audit committee.

Since the primary charge—that Prime Focus violated accounting standards and published misleading financials—was not established, the secondary charges against the individual directors could not stand. Consequently, the adjudication proceedings initiated via the show-cause notice in December 2023 have been officially disposed of.

Key Takeaways