SEBI Drops Proceedings Against Prime Focus Over Misleading Financials Case

The Securities and Exchange Board of India (SEBI) has officially disposed of adjudication proceedings against Prime Focus Limited and its directors, clearing them of allegations regarding misleading financial statements. The regulator concluded that the media services major had correctly applied accounting standards during significant business division transfers.

The Core of the Investigation: Accounting Irregularities

The investigation by SEBI focused on transactions undertaken by Prime Focus during the financial years 2020 (FY20) and 2022 (FY22). The regulator had raised concerns that the company's transfers of business divisions to indirect subsidiaries—specifically the visual effects division to DNEG Creative Services and the post-production services to DNEG India Media Services—were used to artificially inflate profits.

According to the investigation, these transactions resulted in reported gains of ₹200.27 crore in FY20 and ₹250.20 crore in FY22. SEBI suggested that without the VFX business transfer, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20. The regulator questioned whether the company should have followed Ind AS 103, which governs business combinations under common control.

SEBI’s Findings on Accounting Standards

In a decisive order dated June 16, adjudicating officer Amit Kapoor ruled that the allegations of violating listing and anti-fraud regulations were not established. The crux of the decision rested on the technical application of Indian Accounting Standards (Ind AS).

The officer noted that the provisions of Ind AS 103 cited by the investigation team applied to the acquirer or transferee in a common-control transaction, rather than the transferor selling the business. Since Prime Focus was the transferor, the specific provisions SEBI questioned were deemed inapplicable. Instead, the company correctly accounted for the transactions under Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The gains were appropriately disclosed as "exceptional items" rather than regular revenue.

Furthermore, the regulator found that the consolidated financial statements were accurate, as gains from intra-group transactions were eliminated during consolidation in compliance with Ind AS 110. The order also highlighted that the company's statutory auditors had raised no qualifications regarding these processes.

Exoneration of Directors and Promoters

The ruling extends beyond the corporate entity to include nine individual noticees. This includes promoter-directors Naresh Malhotra and Namit Malhotra, CFO Nishant Fadia, and the independent directors of the audit committee.

SEBI determined that the charges against the individual directors were derivative of the primary allegations against the company. Because the principal charge—that Prime Focus had violated accounting standards and published misleading statements—was found to be baseless, the charges against the management could not stand independently. The investigation also found no evidence of suspicious fund rotation among group entities, despite questions regarding the timing of sale proceeds.

Key Takeaways