Shares of Prime Focus hit the 5% upper circuit at ₹245.85 following the Securities and Exchange Board of India's (SEBI) decision to close adjudication proceedings against the company. According to Business Standard, the market response reflects investor confidence in the regulatory outcome, with the stock reaching its daily limit after the closure of proceedings that had been ongoing since December 2023. The case stemmed from SEBI's investigation into two intra-group business transfer transactions undertaken in FY20 and FY22, with the regulator having alleged that the accounting treatment adopted for these transactions inflated profits and net worth, resulting in misleading financial statements.
Market regulator Sebi has closed adjudication proceedings against Prime Focus Limited and its directors after concluding that the company followed correct accounting treatment while transferring business divisions to its indirect subsidiaries. According to reports from The Economic Times, Sebi Adjudicating Officer Amit Kapoor issued an order on June 16 stating that 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, with the regulator finding no evidence of fund rotation among group entities or indication that the transactions were not genuine. As per The Economic Times, 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, but the order found no evidence of fund rotation among group entities or any indication that the transactions lacked commercial substance.
The case involved Prime Focus transferring its visual effects business division to DNEG Creative Services and later selling its post-production services business to DNEG India Media Services, both indirect subsidiaries under common control. As reported by The Economic Times, during this period, the company transferred its visual effects (VFX) business to its indirect subsidiary DNEG Creative Services for ₹273.43 crore, recording a gain of ₹200.27 crore in FY20. In FY22, it sold its post-production services business to another indirect subsidiary, DNEG India Media Services (DIMSL), for ₹365 crore, resulting in a gain of ₹250.20 crore. Without the VFX business transfer gain, Prime Focus would have reported a consolidated loss of ₹267.83 crore in FY20, with the post-production services business transfer adding ₹250.20 crore to earnings in FY22 and representing a significant portion of the company's reported profit for that year.
The adjudicating officer rejected SEBI's allegations that the company should have applied Ind AS 103 differently for intra-group transactions, noting that Appendix C of Ind AS 103 is applicable to the Acquirer/Transferee. According to The Economic Times, the order observed that Prime Focus accounted for the transactions under Ind AS 16 and Ind AS 38 for sale of property, plant and equipment, with gains recognized as disposal proceeds minus carrying value and disclosed as exceptional items rather than revenue. The company had followed correct accounting treatment in its standalone financial statements, with SEBI's investigation having questioned whether Prime Focus should have applied provisions under Ind AS 103, which deals with business combinations involving entities under common control. The order noted that gains arising from intra-group transactions had been eliminated during consolidation in line with the requirements of Ind AS 110, with the company's statutory auditors not raising any qualification regarding either the accounting treatment adopted or the consolidation process. As per The Economic Times, Prime Focus contended that Appendix C of Ind AS 103 applies to the acquirer or transferee in a common-control business combination and not to the transferor, arguing it was the seller of the businesses and had therefore correctly accounted for the transactions under the applicable accounting standards.
Sebi cleared 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. As reported by The Economic Times, since the primary charge against the company failed, the allegations against promoters, directors, audit committee members and the CFO also did not stand. The investigation had alleged that the transactions helped support the company's share price at a time when promoters had pledged 100 per cent of their shareholding, potentially helping them avoid additional collateral requirements. 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, with the related charges against the directors unable to stand on their own since those allegations were not established against the company. As per Business Standard, Adjudicating Officer Amit Kapoor noted that consequent to the failure of the primary charge against Noticee 1, the derivative charges against Noticees 2 to 9 concerning fraud, misleading disclosures, and failure of board oversight cannot stand independently. On a consolidated basis, Prime Focus reported net profit of ₹82.35 crore in Q4 March 2026 as against net loss of ₹230.97 crore in Q4 March 2025, with net sales rising 42.20% YoY to ₹1,375.47 crore in Q4 March 2026.
