Most shareholders or stakeholders of companies are only informed of related-party transactions (RPT) a year after it happens through the annual report, the head of a Sri Lankan regulatory body said.
Chairman of the Securities and Exchange Commission (SEC), Udaya Sri Kariyawasam at a forum on ‘Related Party Transactions’ in Colombo on Wednesday raised the question in terms of adequate transparency on whether such disclosure should be made at the time the transactions are done – not a year later.
“We report RPT a year later. Isn’t it too late?” he asked during a discussion on RPT. A presentation on RPT was also made by Kha Loon Lee, Head of the CFA Institute for Financial Markets Integrity, Asia Pacific.
The event was jointly organized by CFA Sri Lanka, the SEC and the Colombo Stock Exchange. Mr Kariyawasam, saying he was hoping his comments would trigger some discussion or debate, noted that although disclosure provisions in annual reports satisfy auditors as it is in line with the normal reporting provisions, they may not satisfy all stakeholders – partly because it’s a long time after the event.
“Are investors and shareholders happy over these disclosures? I have found many problems in Related Party Transactions. For example some people (directors) have left the country after such (doubtful) transactions. Some tender their resignations (long after the event),” he said. The SEC chief said the annual reports duly make the disclosures but ‘the damage is already done.’
Mr Kariyawasam said there have been many shell companies used as a vehicle to raise funds for illegal and hidden purposes. “For example, one company (recently) diverted funds of Rs 1 billion to an associate company. The same company diverted Rs 3 billion to other companies,” he added.
The same directors commonly serve in different boards. “They go to one board meeting and request funds (from another associated company) and then to the other (associate board) and approve the request – both times sitting in the same boards,” he said.
Corporate analysts agree on the need for better disclosure and point to a case of conflict of interest, many years ago, in the public sector where the Deputy Secretary of the Treasury was also concurrently serving as Chairman of the Ceylon Petroleum Corporation (CPC). “This high official – wearing his CPC hat - sends a letter to the Deputy Treasury Secretary (himself) requesting a tax break for the CPC. He then (himself) replies (from the Treasury) approving the tax break,” one analyst noted.
Mr Kariyawasam said he believes disclosing transactions a year later (even though it is provided for in the rules) is similar to non disclosure ”because the event has occurred at the beginning of the year and shareholders know of it only later – not at the time the event happened.” Analysts say the collapse of Golden Key and many other companies in the Ceylinco Group was also essentially to do with inter-company transactions, among other problems.
Kha Loon Lee, Head of the CFA Institute for Financial Markets Integrity, Asia Pacific, in his presentation referred to a survey done by the Institute in Hong Kong, China and South Korea on RPT and the dangers that go with it if proper disclosures are not made. Giving several examples and samples of cases of RPT, he said that even if there are no proper rules to govern RPT, one cannot escape investors.
In the Satyam Computers case for example, he said on December 16, 2008 the chairman obtained board approval to buy some property and construction companies. Later on the same day, at a briefing to investors, he was asked why the company was investing in non related businesses. He was also asked for an indepth valuation (of the purchase) which he (chairman) refused to respond nor name the valuer concerned. Later Satyam investors sold their stocks and the prices crashed. The rest (company collapsing) is history. |
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