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.

Além disso, a SEBI constatou que as demonstrações financeiras consolidadas estavam corretas, uma vez que os ganhos provenientes de transações intragrupo foram eliminados durante a consolidação, de acordo com a Ind AS 110. O regulador também observou que os auditores estatutários da empresa não apresentaram ressalvas em relação a esses tratamentos contábeis.

Absolvição de Diretores e Promotores

A decisão estende-se para além da entidade corporativa, alcançando os indivíduos envolvidos. A SEBI absolveu nove notificados, incluindo os diretores-promotores Naresh Malhotra e Namit Malhotra, o CFO Nishant Fadia e os diretores independentes do comitê de auditoria.

Como as alegações principais contra a Prime Focus relativas a violações contábeis não prosperaram, as acusações derivadas contra os diretores — que se baseavam inteiramente na suposta má conduta da empresa — não puderam ser sustentadas. Além disso, embora a SEBI tenha questionado o momento do recebimento dos valores da venda, a autoridade julgadora não encontrou evidências de rotação de fundos ou qualquer indicação de que as transações não fossem genuínas.

Principais Conclusões