Key facts
- Sebi has closed adjudication proceedings against Prime Focus and its directors.
- The regulator found no evidence of misleading financial statements, accounting irregularities, or anti-fraud violations.
- The case concerned the accounting treatment of business transfers to indirect subsidiaries during FY20 and FY22.
- Sebi's adjudicating officer ruled that the company correctly applied accounting standards Ind AS 16 and Ind AS 38.
- Allegations that the company should have applied Ind AS 103 for business combinations under common control were dismissed.
- Nine individuals, including promoter-directors and the CFO, were cleared.
The Securities and Exchange Board of India (Sebi) has concluded its adjudication proceedings against Prime Focus Limited and its directors, ruling that the company's accounting practices for transferring business divisions to indirect subsidiaries were compliant with regulations. The market regulator found no evidence to support allegations of misleading financial statements, accounting irregularities, or violations of anti-fraud and listing norms.
The case stemmed from Sebi's investigation into transactions between FY20 and FY22, where Prime Focus transferred its visual effects business to DNEG Creative Services and its post-production services business to DNEG India Media Services. Sebi had alleged that these transfers resulted in significant gains, boosting the company's reported profits and net worth, and questioned the application of accounting standards for business combinations under common control (Ind AS 103).
However, Sebi's adjudicating officer, Amit Kapoor, determined that Ind AS 103 was not applicable because Prime Focus acted as the transferor, not the acquirer. The officer found that the company had correctly accounted for the transactions under Ind AS 16 (Property, Plant and Equipment) and Ind AS 38 (Intangible Assets), recognizing the gains as the difference between sale proceeds and the carrying value of assets, and disclosing them as exceptional items. The gains from these transfers were Rs 200.27 crore in FY20 and Rs 250.20 crore in FY22. Without the FY20 gain, Prime Focus would have reported a consolidated loss of Rs 267.83 crore.
The order also dismissed allegations concerning consolidated financial statements, noting that intra-group gains were eliminated in accordance with Ind AS 110. The adjudicating officer also found no evidence of fund rotation or that the transactions were not genuine, despite a substantial portion of sale proceeds being received after Sebi initiated its investigation. The company's statutory auditors had not issued any qualifications regarding the accounting treatment or consolidation process.
Consequently, Sebi disposed of the proceedings, clearing Prime Focus and nine individuals, including promoter-directors Naresh Malhotra and Namit Malhotra, CFO Nishant Fadia, and independent directors who served on the audit committee. The charges against the directors were deemed derivative of the company's alleged violations, and thus could not stand independently.