SEBI Clears Prime Focus of Misleading Financial Statements Allegations

The Securities and Exchange Board of India (SEBI) has officially disposed of adjudication proceedings against Prime Focus Limited and its directors, bringing an end to a high-stakes investigation into its financial reporting. The regulator concluded that the media major had adhered to the correct accounting standards regarding the transfer of business divisions to its subsidiaries.

The Core of the SEBI Investigation

The investigation, which centered on transactions conducted during FY20 and FY22, initially raised alarms regarding the company's reported profits. SEBI had alleged that Prime Focus engaged in accounting irregularities by transferring its visual effects (VFX) business to DNEG Creative Services and its post-production services to DNEG India Media Services—both indirect subsidiaries under common control.

The regulator pointed out that these transactions resulted in significant gains: ₹200.27 crore in FY20 and ₹250.20 crore in FY22. SEBI argued that without these gains, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20. The primary suspicion was whether the company had bypassed Ind AS 103, which governs business combinations under common control, to artificially boost its net worth and reported earnings.

Clarification on Accounting Standards

In a decisive order dated June 16, adjudicating officer Amit Kapoor ruled that the allegations were not established. The ruling hinged on a technical but crucial distinction in accounting law: the application of Ind AS 103. The officer noted that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control transaction, not to the transferor selling the business.

Since Prime Focus acted as the transferor, the provisions cited by the investigation team were deemed inapplicable. Instead, the company had correctly accounted for the transactions under Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The gains were recognized as the difference between disposal proceeds and the carrying value of assets and were transparently disclosed as "exceptional items" rather than regular revenue.

Exoneration of Directors and Auditors

Das Urteil befasste sich auch mit Bedenken hinsichtlich des Konzernabschlusses. SEBI stellte fest, dass Gewinne aus Transaktionen innerhalb der Unternehmensgruppe während der Konsolidierung ordnungsgemäß eliminiert wurden, in Übereinstimmung mit den Anforderungen von Ind AS 110. Darüber hinaus stellte die Aufsichtsbehörde fest, dass die gesetzlichen Abschlussprüfer des Unternehmens keine Einschränkungen in Bezug auf diese Bilanzierungsmethoden abgegeben hatten.

Die Anordnung gewährte neun einzelnen Betroffenen Entlastung, darunter die Gründungsdirektoren Naresh Malhotra und Namit Malhotra, CFO Nishant Fadia sowie die unabhängigen Mitglieder des Prüfungsausschusses. Da die Hauptanklage gegen das Unternehmen nicht bestand, konnten die abgeleiteten Vorwürfe gegen die Direktoren nicht aufrechterhalten werden. SEBI fand zudem keine Beweise für eine betrügerische Mittelrotation zwischen den Unternehmenseinheiten der Gruppe im Zusammenhang mit dem Zeitpunkt der Verkaufserlöse.

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