SEBI Clears Prime Focus of Misleading Financials and Accounting Charges

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 giant had adhered to correct accounting treatments during significant business transfers to its indirect subsidiaries.

The Core of the Investigation: Business Transfers and Reported Profits

The legal scrutiny began following SEBI's investigation into transactions conducted by Prime Focus during the 2020 and 2022 financial years. The company had transferred its visual effects (VFX) division to DNEG Creative Services and subsequently sold its post-production services business to DNEG India Media Services—both of which are indirect subsidiaries under common control.

The regulator had raised concerns that these maneuvers artificially inflated the company's financial health. Specifically, the VFX business transfer resulted in gains of ₹200.27 crore in FY20, while 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, effectively making the reported profits and net worth look significantly stronger than they were.

Technical Clarification on Ind AS Accounting Standards

The crux of the dispute rested on whether Prime Focus should have applied the accounting provisions of Ind AS 103, which governs business combinations under common control. However, SEBI's adjudicating officer, Amit Kapoor, ruled that the investigation team had misapplied these standards.

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. As Prime Focus acted as the transferor, the specific provisions cited by SEBI were deemed inapplicable. Instead, the company correctly utilized Ind AS 16 (Property, Plant, and Equipment) and Ind AS 38 (Intangible Assets). The resulting gains were appropriately disclosed as "exceptional items" rather than standard revenue, ensuring transparency in their standalone financial statements.

Clearance of Directors and Consolidation Integrity

SEBI also addressed the integrity of the company's consolidated financial statements. The regulator found that gains arising from intra-group transactions had been properly eliminated during consolidation, following the requirements of Ind AS 110. Furthermore, the company's statutory auditors had not issued any qualifications regarding these accounting processes.

Regarding the timing of sale proceeds, while SEBI noted that much of the money was received after the investigation began, there was no evidence of improper fund rotation or fraudulent intent. Consequently, the regulator cleared nine noticees, including promoter-directors Naresh Malhotra and Namit Malhotra, CFO Nishant Fadia, and the independent directors of the audit committee. Since the primary charge against the company failed, the derivative charges against the individual directors were also dismissed.

Key Takeaways