Prime Focus gets relief as SEBI drops proceedings in accounting case

Market regulator Securities and Exchange Board of India (Prime Focus Ltd (PFL)

) has disposed of adjudication proceedings against Prime Focus Ltd (PFL), its promoters, directors, chief financial officer and audit committee members after concluding that allegations relating to the company's accounting treatment of two business transfer transactions were not established.

The proceedings stemmed from a show-cause notice issued in December 2023 over two slump-sale transactions undertaken by Prime Focus in FY20 and FY22. The company had transferred certain business divisions to indirect subsidiaries and recognised gains from those transactions in its standalone financial statements.

SEBI's investigation had alleged that the transactions involved transfers between entities under common control and should have been accounted for under Appendix C of Ind AS 103, which governs business combinations involving entities under common control. According to the regulator, the accounting treatment adopted by the company resulted in the recognition of gains that allegedly inflated profits and net worth, causing the financial statements to not present a true and fair view.

The regulator had also alleged violations of provisions under the SEBI Act, the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations and the Listing Obligations and Disclosure Requirements (LODR) Regulations by the company, its promoters and certain key managerial personnel.

In its defence, Prime Focus argued that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control business combination and not to the transferor. The company maintained that it was the seller of the businesses and had therefore correctly accounted for the transactions under the accounting standards applicable to disposals.

Prime Focus also submitted that the gains were appropriately disclosed in its standalone financial statements and that all intra-group gains were eliminated at the consolidated financial statement level in line with applicable accounting requirements.

Adjudicating Officer Amit Kapoor accepted the company's submissions.

Kapoor, in his order noted, “the allegation that the accounting treatment adopted by PFL (Noticee 1) violated Ind AS 103—or that its financial statements were false, , misleading, or untrue so as to attract the provisions of the SEBI (PFUTP) Regulations or SEBI (LODR) Regulations—has not been established”.

The officer further observed that the gains arising from the transactions were recognised in the standalone financial statements and that no material had been placed on record to show that the accounting treatment violated the applicable accounting framework.

With the principal allegations against Prime Focus not established, the adjudicating officer also found no basis to proceed against the company's promoters, directors, CFO and audit committee members, and disposed of the proceedings.