SEBI Drops Proceedings Against Prime Focus in Misleading Financials Case, Clearing Path for Company.
The recent adjudication by the market regulator Sebi has concluded investigations into Prime Focus Limited and its directors, affirming that the company adhered to the proper accounting treatments during the transfer of its business divisions to indirect subsidiaries. Sebi’s adjudicating officer, Amit Kapoor, ruled that the allegations of misleading financial statements and accounting irregularities were unfounded, particularly concerning transactions that significantly impacted reported profits and net worth in FY20 and FY22. The investigations traced transactions associated with the transfer of Prime Focus’s visual effects business and post-production services, which purportedly resulted in substantial gains contributing to the company’s profitability during those fiscal years.
Specifically, the company’s decision to transfer its visual effects division was associated with a gain of Rs 200.27 crore in FY20, which would have shifted the company from profit to a reported consolidated loss of Rs 267.83 crore had this gain been excluded. Similarly, the transfer of its post-production services division yielded a gain of Rs 250.20 crore in FY22, again significantly boosting reported earnings. However, Sebi’s adjudication found that the allegations concerning the application of Ind AS 103 were inapplicable as Prime Focus acted as a transferor, not as an acquirer, thereby legitimizing the accounting practices followed by the company, which included compliance with Ind AS 16 and Ind AS 38 for asset sales.
The order also dismissed concerns regarding the timing of sale proceeds, highlighting the absence of evidence suggesting any fund rotation among group entities or any insincerity in the transactions. Furthermore, the adjudicating officer confirmed that the gains were appropriately accounted for as exceptional items rather than being conflated with regular revenue streams. This decision effectively nullifies the charges against nine key individuals, including promoter-directors and the Chief Financial Officer, as these were contingent upon the primary allegations against the company failing. The outcome of this ruling ultimately reflects a robust defense of Prime Focus’s accounting practices and may serve to enhance investor confidence amidst scrutiny.
Source: The Economic Times
(Expert Note: This report was prepared by the Wealthova team.)