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, providing a significant relief to the media services major. After a detailed investigation, the regulator concluded that the company’s accounting treatments during specific business transfers were compliant with established Indian Accounting Standards (Ind AS).

The Core of the SEBI Investigation

The regulatory probe centered on transactions undertaken by Prime Focus during the financial years 2020 (FY20) and 2022 (FY22). 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 of which are indirect subsidiaries under common control.

SEBI's investigation team had raised red flags regarding the impact of these transfers on the company’s bottom line. Specifically, the regulator alleged that these transactions resulted in gains of ₹200.27 crore in FY20 and ₹250.20 crore in FY22. The investigation suggested that without these gains, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20, implying that the transactions artificially boosted the company's reported profits and net worth.

Technical Compliance and Accounting Standards

The crux of the dispute rested on 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 the investigation team had misapplied the standard.

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 specific provisions cited by SEBI were found to be inapplicable. Instead, the officer noted that Prime Focus correctly accounted for these transactions under Ind AS 16 and Ind AS 38, relating to the sale of property, plant, equipment, and intangible assets. Crucially, these gains were disclosed as "exceptional items" rather than regular revenue, ensuring transparency in their standalone financial statements.

Clearance for Directors and Group Entities

The ruling also addressed the consolidated financial statements and the conduct of the company's leadership. SEBI found that gains from intra-group transactions were appropriately eliminated during consolidation per Ind AS 110 requirements. Furthermore, the company’s statutory auditors had raised no qualifications regarding these accounting processes.

Regarding the timing of sale proceeds, SEBI noted that while a substantial portion was received after the investigation began, there was no evidence of improper fund rotation among group entities. 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. As the primary charges against the company failed, the derivative allegations against the directors were also dismissed.

Key Takeaways