SEBI Drops Proceedings Against Prime Focus Over 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. The regulator concluded that the media services major had correctly applied accounting standards during significant business division transfers.

The Core of the Investigation: Accounting Irregularities

The investigation by SEBI focused on transactions undertaken by Prime Focus during the financial years 2020 (FY20) and 2022 (FY22). The regulator had raised concerns that the company's transfers of business divisions to indirect subsidiaries—specifically the visual effects division to DNEG Creative Services and the post-production services to DNEG India Media Services—were used to artificially inflate profits.

According to the investigation, these transactions resulted in reported gains of ₹200.27 crore in FY20 and ₹250.20 crore in FY22. SEBI suggested that without the VFX business transfer, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20. The regulator questioned whether the company should have followed Ind AS 103, which governs business combinations under common control.

SEBI’s Findings on Accounting Standards

In a decisive order dated June 16, adjudicating officer Amit Kapoor ruled that the allegations of violating listing and anti-fraud regulations were not established. The crux of the decision rested on the technical application of Indian Accounting Standards (Ind AS).

The officer noted that the provisions of Ind AS 103 cited by the investigation team applied to the acquirer or transferee in a common-control transaction, rather than the transferor selling the business. Since Prime Focus was the transferor, the specific provisions SEBI questioned were deemed inapplicable. Instead, the company correctly accounted for the transactions under Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The gains were appropriately disclosed as "exceptional items" rather than regular revenue.

さらに、規制当局は、Ind AS 110に準拠して連結過程でグループ内取引による利益が消去されているため、連結財務諸表は正確であると判断しました。また、命令書では、同社の法定監査人がこれらのプロセスに関して何の指摘も行っていないことが強調されました。

取締役およびプロモーターの免責

この裁定は法人にとどまらず、9名の個人の被通知人にも及びます。これには、プロモーター取締役のNaresh Malhotra氏とNamit Malhotra氏、CFOのNishant Fadia氏、および監査委員会の独立取締役が含まれます。

SEBIは、個々の取締役に対する容疑は、会社に対する主要な申し立てから派生したものであると判断しました。Prime Focusが会計基準に違反し、誤解を招く記述を公表したという主たる容疑が根拠なしと判断されたため、経営陣に対する容疑も単独で成立することはありませんでした。また、調査では、売却代金のタイミングに関する疑問はあったものの、グループ企業間における疑わしい資金回転の証拠は見つかりませんでした。

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