Sebi drops proceedings against Prime Focus in misleading financials case

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Market regulator Sebi has disposed of adjudication proceedings against Prime Focus Limited and its directors after concluding that the company had followed the correct accounting treatment while transferring business divisions to its indirect subsidiaries.

In an order dated June 16, Sebi’s adjudicating officer Amit Kapoor held that allegations of misleading financial statements, accounting irregularities and violations of listing and anti-fraud regulations were not established.

The case stemmed from Sebi’s investigation into transactions undertaken by Prime Focus during FY20 and FY22. The company had transferred its visual effects business division to DNEG Creative Services and later sold its post-production services business to DNEG India Media Services, both indirect subsidiaries under common control.

Sebi investigation had alleged that these transactions resulted in gains of Rs 200.27 crore in FY20 and Rs 250.20 crore in FY22, which significantly boosted the company’s reported profits and net worth. The regulator had questioned whether Prime Focus should have applied accounting provisions under Ind AS 103 governing business combinations under common control.

According to the investigation, without the gain from the VFX business transfer, Prime Focus would have reported a consolidated loss of Rs 267.83 crore in FY20. Similarly, the FY22 post-production services transfer contributed Rs 250.20 crore to profits, accounting for a substantial portion of the company’s reported earnings for that year.

However, the adjudicating officer disagreed with the allegations.

The order noted that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control transaction and not to the transferor selling the business. Since Prime Focus was the transferor and not the acquiring entity, the accounting provisions cited by Sebi investigation team were found to be inapplicable.

The order further observed that Prime Focus had accounted for the transactions under Ind AS 16 and Ind AS 38 relating to the sale of property, plant and equipment and intangible assets. The gains were recognised as the difference between disposal proceeds and carrying value of assets and were disclosed as exceptional items rather than revenue.

“The Noticee has followed correct accounting treatment in its standalone financial statements,” the adjudicating officer said.

The order also rejected allegations relating to consolidated financial statements. It found that gains arising from intra-group transactions had been eliminated during consolidation in accordance with Ind AS 110 requirements.

The adjudicating officer noted that the company’s statutory auditors had not issued any qualification regarding the accounting treatment or consolidation process.

Sebi had also questioned the timing of receipt of sale proceeds, noting that a substantial portion was received after the regulator initiated its investigation. However, the order stated that there was no evidence of fund rotation among group entities or any indication that the transactions were not genuine.

The order also cleared nine noticees, including promoter-directors Naresh Malhotra and Namit Malhotra, Chief Financial Officer Nishant Fadia and independent directors who served on the company’s audit committee.

Sebi said the allegations against the individual directors were derivative in nature and based entirely on the primary charge that Prime Focus had violated accounting standards and published misleading financial statements. Since the principal allegations against the company failed, the charges against the directors could not survive independently.

Accordingly, the adjudication proceedings initiated through a show-cause notice issued in December 2023 have been disposed of.