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 charges regarding misleading financial statements. The regulator concluded that the company’s accounting treatment for business transfers to its subsidiaries was consistent with established Indian Accounting Standards.

The Core of the Investigation

The investigation by SEBI centered on transactions conducted by Prime Focus during the 2020 and 2022 financial years. The company had transferred its visual effects (VFX) business division to DNEG Creative Services and later sold its post-production services business to DNEG India Media Services. Both entities were indirect subsidiaries under common control.

SEBI’s investigation team alleged that these transfers artificially boosted the company's profitability. Specifically, the VFX business transfer resulted in a gain of ₹200.27 crore in FY20, while the post-production services transfer contributed ₹250.20 crore in FY22. The regulator argued that without these gains, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20, raising concerns about the accuracy of the reported net worth and profits.

Accounting Standards and Regulatory Findings

A major point of contention was 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 case.

The order clarified that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control transaction, not the transferor selling the business. As the transferor, Prime Focus correctly accounted for these transactions under Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The gains were recorded as the difference between disposal proceeds and the carrying value of the assets, and were transparently disclosed as "exceptional items" rather than standard revenue.

さらに、SEBIは、Ind AS 110に従って連結プロセス中にグループ内取引による利益が相殺されていたため、連結財務諸表は正確であると判断しました。また、規制当局は、同社の法定監査人がこれらの会計処理に関して限定事項を提起していないことも指摘しました。

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、関与した個人にも及びます。SEBI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を含む9名の被通知人を免責しました。

会計違反に関するPrime Focusへの主要な申し立てが認められなかったため、同社の不正行為とされる事実に全面的に基づいていた取締役への派生的な容疑も、成立しませんでした。さらに、SEBIは売却代金のタイミングについて疑問を呈しましたが、裁定官は資金の回転を示す証拠や、取引が真正でないことを示す兆候は見当たらないと判断しました。

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