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.

Alivio para los directores y la gerencia

El fallo brinda un alivio significativo a nueve personas mencionadas en la notificación inicial de requerimiento de explicaciones emitida en diciembre de 2023. Esto incluye a los directores promotores Naresh Malhotra y Namit Malhotra, al Director Financiero Nishant Fadia y a varios directores independientes del comité de auditoría.

Dado que el cargo principal —que Prime Focus violó las normas contables y publicó estados financieros engañosos— no fue probado, los cargos secundarios contra el equipo directivo no pudieron sostenerse. SEBI también investigó el momento de la recepción de los ingresos por ventas, señalando que una gran parte se recibió después de que comenzara la investigación; sin embargo, el regulador no encontró evidencia de una rotación indebida de fondos o de una falta de sustancia comercial en estas operaciones.

Conclusiones clave