New Delhi, June 17 -- The Securities and Exchange Board of India (SEBI) has dismissed allegations against Prime Focus Ltd, a media services company backed by private equity firm Affirma Capital, about misstating its financials and inflating its net worth following two transactions involving transfers of its businesses.

SEBI said in an order issued on Tuesday that the allegations the company, its promoters and its directors violated the Listing Obligations and Disclosure Requirements (LODR) Regulations and the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations couldn't be established.

The two transactions

The regulator had investigated two slump sales done by Prime Focus in FY20 and FY22.

In October 2019, Prime Focus agreed to sell its visual effects (VFX) business division to its indirect subsidiary DNEG Creative Services Ltd (DCSL) for Rs 273.43 crore. In the same fiscal year, DCSL was merged with DNEG India Media Services Ltd and ceased to be a subsidiary of Prime Focus but this was disclosed in the company's FY21 annual report because the merger took effect from April 2020.

In FY20, the proceeds from the sale of this business, which came to Rs 200.27 crore after taxes, were included in Prime Focus's financial statements. Prime Focus then posted a profit of Rs 166.67 and a loss of Rs 67.56 crore on a standalone and consolidated basis. Without the sale, the SEBI investigators noted, Prime Focus would have posted a loss of Rs 33.6 crore and Rs 267.83 crore, respectively, on a standalone and consolidated basis.

In the fiscal year, the company's net worth was noted as Rs 1,264 crore and Rs 476 crore on a standalone and a consolidated basis. Without the transaction, it would have been Rs 1,064 crore and Rs 276.21 crore.

The second slump sale transaction that was under investigation was Prime Focus transferring its post-production related services to DNEG India Media Services Ltd.

Prime Focus got Rs 250.20 crore, after adjusting for working capital requirements and indebtedness, from this transaction. According to SEBI investigators, this resulted in a net profit of Rs 290.7 crore. Without this transaction, Prime Focus would have posted a profit of Rs 40.5 crore. This sale essentially raised the profit by 618% during the year.

The sale improved the company's net worth to Rs 1,582.5 crore and Rs 191.73 crore on a standalone and consolidated basis, from the pre-sale levels of Rs 1,332.3 crore and a negative Rs 58.47 crore, respectively.

SEBI officials claimed that Prime Focus received 79% of the funds from the sale only after the investigation began, and they observed the money transfer was done as an "afterthought".

Final order

However, after examining these findings along with the company's submissions, SEBI's adjudicating officer found that Prime Focus followed the correct accounting treatment in its standalone and consolidated statements.

On the allegation that Prime Focus received most sale proceeds after the investigation started, SEBI said that there was no allegation that sale proceeds were transferred to Prime Focus by rotating funds among group entities.

In the absence of such a finding, and since the accounting treatment was done in line with the standards, SEBI noted: "It cannot be concluded that Prime Focus had prepared misleading financial statements".

Published by HT Digital Content Services with permission from VC Circle.