SEBI Drops Proceedings Against Prime Focus in 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. After a thorough investigation, the market regulator concluded that the company’s accounting treatments for business transfers were accurate and compliant with Indian Accounting Standards.

The Core of the Investigation: Business Transfers and Profits

The case originated from SEBI’s scrutiny of transactions conducted by Prime Focus during the financial years 2020 and 2022. The investigation focused on two major business transfers: the visual effects (VFX) division was transferred to DNEG Creative Services, and the post-production services business was later sold to DNEG India Media Services—both of which are indirect subsidiaries under common control.

The regulator had raised concerns that these transactions artificially inflated the company's financial health. Specifically, the VFX transfer resulted in gains of ₹200.27 crore in FY20, and 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.

Clarification on Ind AS Compliance and Accounting Norms

The central dispute revolved around 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 company's situation.

The order clarified that Appendix C of Ind AS 103 applies to the acquirer (the entity taking over the business), whereas Prime Focus acted as the transferor (the entity selling the business). Instead, the company correctly applied Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The gains were recognized as the difference between the disposal proceeds and the carrying value of the assets, and crucially, they were disclosed as "exceptional items" rather than regular revenue.

Relief for Directors and Consolidation Accuracy

Au-delà des états financiers individuels, la SEBI a également examiné les comptes consolidés. Le régulateur a conclu que les gains issus des transactions intra-groupe avaient été correctement éliminés lors du processus de consolidation, en stricte conformité avec les exigences de l'Ind AS 110. De plus, il a été noté que les commissaires aux comptes de la société n'avaient émis aucune réserve concernant ces méthodes comptables.

La décision a également apporté un soulagement significatif à neuf personnes mises en cause, notamment les administrateurs-promoteurs Naresh Malhotra et Namit Malhotra, ainsi que le CFO Nishant Fadia. Étant donné que le chef d'accusation principal de violation des règles comptables contre la société a été rejeté, les chefs d'accusation dérivés contre les administrateurs n'ont pas pu être maintenus. La SEBI n'a également trouvé aucune preuve de rotation de fonds inappropriée ou de transactions non authentiques, malgré des interrogations concernant le calendrier du produit des ventes.

Points clés