Shares of Prime Focus will be in focus heading into trade on Wednesday after market regulator Sebi closed adjudication proceedings against the firm and several of its directors after concluding that the company adopted the appropriate accounting treatment for the transfer of certain business divisions to its indirect subsidiaries.
In an order issued on June 16, Sebi Adjudicating Officer Amit Kapoor said allegations relating to misleading financial statements, accounting irregularities and violations of listing and anti-fraud regulations could not be substantiated.
The proceedings arose from Sebi's examination of transactions carried out by Prime Focus during FY20 and FY22. During this period, the company transferred its visual effects (VFX) business division to DNEG Creative Services and subsequently sold its post-production services business to DNEG India Media Services. Both entities were indirect subsidiaries operating under common control.
Sebi's investigation had alleged that the transactions generated gains of Rs 200.27 crore in FY20 and Rs 250.20 crore in FY22, materially boosting the company's reported profits and net worth. The regulator had questioned whether Prime Focus should have applied provisions under Ind AS 103, which deals with business combinations involving entities under common control.
According to the investigation, excluding the gain arising from the VFX business transfer, Prime Focus would have reported a consolidated loss of Rs 267.83 crore in FY20. Similarly, the transfer of the post-production services business added Rs 250.20 crore to earnings in FY22 and represented a significant portion of the company's reported profit for that year.
However, the adjudicating officer did not agree with these findings."The Noticee has followed correct accounting treatment in its standalone financial statements," the adjudicating officer said in the order.
Sebi also dismissed allegations concerning the company's consolidated financial statements. The order observed that gains arising from intra-group transactions had been eliminated during consolidation in line with the requirements of Ind AS 110. It further noted that the company's statutory auditors had not raised any qualification regarding either the accounting treatment adopted or the consolidation process.
The regulator had additionally examined the timing of the receipt of sale proceeds, pointing out that a significant portion was received after the investigation had begun. However, the order found no evidence of fund rotation among group entities or any indication that the transactions lacked commercial substance.
The order also provided relief to 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.
According to Sebi, the allegations against these individuals depended on the primary charge that Prime Focus had violated accounting standards and published misleading financial statements. Since those allegations were not established against the company, the related charges against the directors could not stand on their own.
As a result, the adjudication proceedings initiated through a show-cause notice issued in December 2023 have been disposed of.
