The constant publicity over specific issues at the Securities and Exchange Commission (SEC) to some extent distracted the public perception of the stock market, alleged Nalaka Godahewa, Chairman SEC at a seminar this week on ‘Related Party Transactions (RPT)’ to discuss a SEC consultation paper on this subject which is now receiving public comments.
“As all of you are aware the SEC has been in the public eye during the greater part of the last two years,” he said, wondering whether the role of the regulator is fully understood and appreciated by the concerned parties. Obviously there was high media attention due to the volatility of the Colombo Stock Exchange (CSE), he said, adding that the final outcome of all these undue media publicity was negative sentiments that adversely affected the market.
“Therefore one of the key challenges for us in the recent past was rectifying this situation. However, after a very turbulent period the market has now settled down and we are now focusing more on fulfilling our overall responsibilities as a regulator.”
Dr. Hareendra Dissa Bandara, Director General – SEC, said that the recent international publication on ‘Related Party Transactions and Minority Shareholder Rights’ in 2012 has said that around the world, the potential to abuse related party transactions covering both equity and non-equity transactions is viewed as an important policy issue. “Several jurisdictions have sought to put in place management and approval processes to minimise the negative potential.
While the introduction of IFRS (and therefore LKAS 24 for ‘Related Party Transactions’) around the world has introduced an important standard for transparency, it is alone not sufficient. Therefore several jurisdictions have introduced requirements for ongoing disclosure of material transactions,” he said.
SEC’s RPT consultation paper says that in approving related party transactions, great emphasis has been placed on boards’ approval, the tendency being for this task to be given to a committee of independent board members.
There are often continuing questions about how to ensure effective independence of board members from controlling shareholders. “In several jurisdictions shareholders have been given a say in approving certain transactions, with interested shareholders excluded,” the paper said.
The paper has suggested that companies get their Audit Committee approval for all related party transactions. Directors are required to have access to knowledge and expertise to obtain appropriate professional and expert advice. “A director having material personal interest must not be present while the matter is being considered and must not vote on the matter,” the consultation paper said.
Independent Shareholder approval (Special Resolution) has to be passed if the RPT (individually or in aggregation) is equal to or more than 20 per cent of the equity or 10 per cent of the total assets, acquisition from or disposal to of a substantial asset where value or the consideration exceeds 10 per cent of the equity or five per cent of the total assets.
For acquisitions and disposal of substantial assets a special resolution has to be passed, but it does not apply to transactions between entity and a wholly owned subsidiary or wholly owned subsidiaries of the entity, according to the paper.