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

Karar, ayrıca şirketin konsolide mali tablolarının doğruluğunu da ele aldı. SEBI, grup içi işlemlerden elde edilen kazançların Ind AS 110 gerekliliklerine uygun olarak konsolidasyon sırasında uygun şekilde elendiğini tespit etti. Ayrıca düzenleyici kurum, şirketin yasal denetçilerinin bu süreçlerle ilgili herhangi bir şerh düşmediğini belirtti.

Karar; kurucu direktörler Naresh Malhotra ve Namit Malhotra, CFO Nishant Fadia ve denetim komitesinin bağımsız direktörleri de dahil olmak üzere dokuz bireysel muhatabı da kapsamaktadır. Şirkete yönelik muhasebe ihlalleriyle ilgili asıl suçlamanın düşmesi nedeniyle, direktörlere yönelik türev suçlamalar da reddedildi. SEBI ayrıca, uygunsuz fon rotasyonu veya satış gelirlerinin zamanlamasına ilişkin gerçeklik eksikliğine dair herhangi bir kanıt bulamadı.

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