SEBI Clears Prime Focus of Misleading Financials and Accounting Allegations

Prime Focus shares are poised for significant market attention following a major regulatory breakthrough. The Securities and Exchange Board of India (SEBI) has officially closed its adjudication proceedings against the company and its key directors, clearing them of allegations regarding financial irregularities.

The Core of the Investigation: Accounting Treatment Disputes

The regulatory scrutiny began following an examination of transactions conducted by Prime Focus during the financial years 2020 (FY20) and 2022 (FY22). The investigation centered on the transfer of two major business divisions to indirect subsidiaries operating under common control.

Specifically, the company transferred its visual effects (VFX) business to DNEG Creative Services and later sold its post-production services business to DNEG India Media Services. SEBI's initial investigation alleged that these maneuvers artificially inflated the company's reported profits. The regulator claimed that the VFX transfer generated a gain of ₹200.27 crore in FY20, and the post-production transfer added ₹250.20 crore to the earnings in FY22.

The central question was whether Prime Focus had bypassed the provisions of Ind AS 103, which governs business combinations involving entities under common control. SEBI suggested that without these gains, the company would have reported a consolidated loss of ₹267.83 crore in FY20.

SEBI’s Ruling: No Evidence of Misconduct

In a significant reversal, SEBI Adjudicating Officer Amit Kapoor ruled that the allegations of misleading financial statements and violations of anti-fraud regulations could not be substantiated. The regulator concluded that Prime Focus had adopted the appropriate and correct accounting treatment in its standalone financial statements.

Addressing the concerns regarding consolidated statements, the officer noted that gains from intra-group transactions were appropriately eliminated during consolidation, adhering to the requirements of Ind AS 110. A crucial point in the order was the observation that the company's statutory auditors had not raised any qualifications regarding the accounting methods or the consolidation process used by the firm.

יתרה מכך, בעוד ש-SEBI הטילה ספק בתזמון קבלת תמורת המכירה — וציינה כי חלק ניכר ממנה הגיע לאחר תחילת החקירה — הרגולטור לא מצא ראיות לסיבוב כספים בין ישויות בקבוצה או לחוסר מהות מסחרית בעסקאות.

הקלה עבור הדירקטורים והמייסדים

דחיית האישומים העיקריים העניקה הקלה משפטית משמעותית לתשעה אנשים ששמם הוזכר בהליכים. זה כולל את המייסדים-דירקטורים נאריש מהלואטרה ונמיט מהלואטרה, סמנכ"ל הכספים נישנט פאדיה, ודירקטורים עצמאיים שונים בוועדת הביקורת.

מכיוון שהאישום היסודי — לפיו Prime Focus הפרה תקני חשבונאות ופרסמה דוחות כספיים מטעים — לא הוכח, האישומים המשניים נגד הדירקטורים בוטלו. כתוצאה מכך, הליכי ההכרעה שהחלו באמצעות הודעת ה-show-cause מדצמבר 2023 נסגרו רשמית.

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