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 charges regarding misleading financial statements. The regulator concluded that the company’s accounting treatment for business transfers to its subsidiaries was consistent with established Indian Accounting Standards.

The Core of the Investigation

The investigation by SEBI centered on transactions conducted by Prime Focus during the 2020 and 2022 financial years. The company had transferred its visual effects (VFX) business division to DNEG Creative Services and later sold its post-production services business to DNEG India Media Services. Both entities were indirect subsidiaries under common control.

SEBI’s investigation team alleged that these transfers artificially boosted the company's profitability. Specifically, the VFX business transfer resulted in a gain of ₹200.27 crore in FY20, while the post-production services transfer contributed ₹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, raising concerns about the accuracy of the reported net worth and profits.

Accounting Standards and Regulatory Findings

A major point of contention was whether Prime Focus should have applied the provisions of Ind AS 103, which governs business combinations under common control. However, SEBI's adjudicating officer, Amit Kapoor, ruled that these specific provisions were inapplicable to the case.

The order clarified that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control transaction, not the transferor selling the business. As the transferor, Prime Focus correctly accounted for these transactions under Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The gains were recorded as the difference between disposal proceeds and the carrying value of the assets, and were transparently disclosed as "exceptional items" rather than standard revenue.

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

Clearance for Directors and Promoters

The ruling extends beyond the corporate entity to the individuals involved. SEBI cleared nine noticees, including promoter-directors Naresh Malhotra and Namit Malhotra, CFO Nishant Fadia, and the independent directors of the audit committee.

Since the primary allegations against Prime Focus regarding accounting violations failed, the derivative charges against the directors—which were based entirely on the company's purported misconduct—could not be sustained. Additionally, while SEBI questioned the timing of the sale proceeds, the adjudicating officer found no evidence of fund rotation or any indication that the transactions were not genuine.

Key Takeaways