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

Beyond the standalone financial statements, SEBI also examined the consolidated accounts. The regulator found that the gains from intra-group transactions were properly eliminated during the consolidation process, in strict accordance with Ind AS 110 requirements. Furthermore, it was noted that the company’s statutory auditors had raised no qualifications regarding these accounting methods.

The ruling also provided significant relief to nine individual noticees, including promoter-directors Naresh Malhotra and Namit Malhotra, and CFO Nishant Fadia. Since the primary charge of accounting violations against the company was dismissed, the derivative charges against the directors could not stand. SEBI also found no evidence of improper fund rotation or non-genuine transactions, despite questions regarding the timing of sale proceeds.

Key Takeaways