SEBI Clears Prime Focus of Misleading Financial Statements Charges

In a significant development for D-Street, the Securities and Exchange Board of India (SEBI) has disposed of adjudication proceedings against Prime Focus Limited and its top management. The regulator concluded that the media services major followed appropriate accounting standards during its business restructuring, effectively dismissing allegations of financial irregularities.

The Core of the Investigation: Alleged Profit Inflation

The investigation by SEBI focused on transactions undertaken by Prime Focus during the financial years 2020 and 2022. The regulator had raised concerns regarding the transfer of business divisions to indirect subsidiaries under common control.

Specifically, the company transferred its visual effects (VFX) business to DNEG Creative Services and subsequently sold its post-production services to DNEG India Media Services. SEBI alleged that these maneuvers resulted in reported gains of ₹200.27 crore in FY20 and ₹250.20 crore in FY22. The regulator's primary concern was that these gains artificially boosted the company’s reported profits and net worth; for instance, without the VFX transfer, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20.

The crux of the legal battle rested on the interpretation of Ind AS 103, which governs business combinations under common control. SEBI’s investigation team suggested that these provisions should have been applied differently. However, SEBI's adjudicating officer, Amit Kapoor, overturned this view.

The order clarified that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control transaction, not to the transferor selling the business. Since Prime Focus acted as the transferor, the regulator found the cited accounting provisions inapplicable. Instead, the company correctly applied Ind AS 16 and Ind AS 38, treating the transactions as the sale of property, plant, equipment, and intangible assets. Crucially, these gains were disclosed as "exceptional items" rather than regular revenue, ensuring transparency in the standalone financial statements.

Exoneration of Directors and Consolidation Accuracy

В постановлении также рассматривался вопрос достоверности консолидированной финансовой отчетности компании. SEBI установил, что прибыль от внутригрупповых операций была надлежащим образом исключена в процессе консолидации в соответствии с требованиями стандарта Ind AS 110. Кроме того, регулятор отметил, что официальные аудиторы компании не выносили никаких оговорок относительно этих процессов.

Постановление освобождает от ответственности девять физических лиц, в отношении которых было вынесено уведомление, включая директоров-учредителей Нареша Малхотру и Намита Малхотру, финансового директора Нишанта Фадию и независимых директоров комитета по аудиту. Поскольку основное обвинение против компании в нарушении правил бухгалтерского учета не нашло подтверждения, производные обвинения против директоров также были отклонены. SEBI также не обнаружил доказательств ненадлежащего оборота средств или отсутствия подлинности в отношении сроков получения выручки от продажи.

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