SEBI drops action against Prime Focus in misleading finance case

D-Street Newsmakers

Markets regulator Sebi has disposed of the decision proceedings against Prime Focus Ltd and its directors, alleging that the company followed the correct accounting treatment while transferring business divisions to its indirect subsidiaries.

In an order dated June 16, Sebi adjudicating officer Amit Kapoor said allegations of misleading financial statements, accounting irregularities and violation of listing and anti-fraud rules were not established.

The matter arose out of SEBI’s probe into transactions carried out by Prime Focus during FY20 and FY22. The company 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.

The SEBI probe alleged that these transactions led to a loss of Rs. 200.27 crore and in FY22 Rs. 250.20 crore, which significantly increased the company’s reported profit and net worth. The regulator questioned whether Prime Focus should apply the accounting provisions under Ind AS 103 Governing Business Combinations Under Common Control.

As per the investigation, without benefiting from the VFX business transfer, Prime Focus in FY20 received Rs. 267.83 crore would have been a consolidated loss. Similarly, FY22 transfer of post-production services contributed to profit of Rs. 250.20 crore, which accounted for a significant portion of the company’s reported earnings that year.

However, the adjudicating officer disagreed with the allegations.

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

The order further noted that Prime Focus accounted for transactions under Ind AS 16 and Ind AS 38 relating to sale of property, plant and equipment and intangible assets. Gains were recognized as the difference between the proceeds of disposal and the carrying value of the assets and were disclosed as extraordinary items rather than income.

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

The order also rejected the allegations related to the consolidated financial statements. It is found that gains arising from intra-group transactions were eliminated during consolidation as per Ind AS 110 requirements.

The Adjudicating Authority noted that the statutory auditors of the company had not issued any qualification regarding the accounting treatment or consolidation process.

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

The order also sanctioned nine notices, including promoter-directors Naresh Malhotra and Namit Malhotra, chief financial officer Nishant Fadia and independent directors serving on the company’s audit committee.

Sebi said the allegations against the individual directors were derivative in nature and based entirely on the prima facie allegation that Prime Focus had violated accounting standards and published misleading financial statements. As the main charges against the company failed, the charges against the directors could not stand independently.

Accordingly, the adjudication proceedings initiated vide show-cause notice issued in December 2023 are disposed of.