SEBI Clears Prime Focus of Misleading Financials and Accounting Charges

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 giant had adhered to correct accounting treatments during significant business transfers to its indirect subsidiaries.

The Core of the Investigation: Business Transfers and Reported Profits

The legal scrutiny began following SEBI's investigation into transactions conducted by Prime Focus during the 2020 and 2022 financial years. The company had transferred its visual effects (VFX) division to DNEG Creative Services and subsequently sold its post-production services business to DNEG India Media Services—both of which are indirect subsidiaries under common control.

The regulator had raised concerns that these maneuvers artificially inflated the company's financial health. Specifically, the VFX business transfer resulted in gains of ₹200.27 crore in FY20, while the post-production transfer contributed ₹250.20 crore in FY22. SEBI's investigation suggested that without these gains, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20, effectively making the reported profits and net worth look significantly stronger than they were.

Technical Clarification on Ind AS Accounting Standards

The crux of the dispute rested on whether Prime Focus should have applied the accounting provisions of Ind AS 103, which governs business combinations under common control. However, SEBI's adjudicating officer, Amit Kapoor, ruled that the investigation team had misapplied these standards.

The order clarified 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. As Prime Focus acted as the transferor, the specific provisions cited by SEBI were deemed inapplicable. Instead, the company correctly utilized Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The resulting gains were appropriately disclosed as "exceptional items" rather than standard revenue, ensuring transparency in their standalone financial statements.

Clearance of Directors and Consolidation Integrity

SEBI s'est également penchée sur l'intégrité des états financiers consolidés de la société. Le régulateur a conclu que les gains découlant de transactions intra-groupe avaient été correctement éliminés lors de la consolidation, conformément aux exigences de la norme Ind AS 110. De plus, les commissaires aux comptes de la société n'avaient émis aucune réserve concernant ces processus comptables.

Concernant le calendrier de réception du produit de la vente, bien que la SEBI ait noté qu'une grande partie des fonds a été reçue après le début de l'enquête, il n'y avait aucune preuve de rotation de fonds inappropriée ou d'intention frauduleuse. Par conséquent, le régulateur a blanchi neuf personnes mises en cause, dont les administrateurs-promoteurs Naresh Malhotra et Namit Malhotra, le directeur financier (CFO) Nishant Fadia, ainsi que les administrateurs indépendants du comité d'audit. Puisque l'accusation principale contre la société a été rejetée, les accusations dérivées contre les administrateurs individuels ont également été abandonnées.

Points clés