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SEC to tighten grip on related party transactions

24 Sep 2012 - {{hitsCtrl.values.hits}}

The Securities and Exchange Commission of Sri Lanka has issued a consultation paper aimed at tightening regulations pertaining to disclosures and governance in related party transactions.

The paper, which invites suggestions from the public as to potential regulations and their impact, has a stated objective of improving regulations regarding audit committee approval, independent shareholder approval and disclosures to the market and via annual reports.

Acquisition and disposal of substantial assets by related parties as well as alteration of threshold limits on the value of related party transactions have also been put forward for consultation.

Amongst the proposed amendments are clauses requiring all related party transactions to gain audit committee approval and where necessary directors should obtain professional expert advice in order to assess all areas of a related party transaction.

The paper further prescribed the obtaining of independent shareholder approval in related party transactions equal or exceeding 20% of the company’s equity or 10% of its total assets when aggregated with other transactions entered into with the same related party during the same financial year, in other words, preventing parties from avoiding regulations by carrying out multiple transactions under threshold limits on value through the year.

Notably, the paper requires parties to obtain special independent shareholder approval for the acquisition and disposal of assets to related parties equal or over threshold values.

If passed, such regulations may apply to transactions similar to the controversial deal pertaining to the sale of the marketing subsidiary of Watawala Plantations PLC to its majority shareholder Estate Management Services.

Meanwhile, with regard to market disclosures, the paper proposes that immediate announcements be made of the latest and any future related party transaction exceeding a value of 10% of equity or 5% of total assets.

Similar disclosures via a company’s annual report will also require parties to clearly disclose details of the transaction, including the relationship between the parties, terms and conditions of the transactions and the rationale behind entering into the transaction.

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SEC to tighten grip on related party transactions

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