The Colombo Stock Exchange (CSE) on Wednesday directed listed entities to make ‘immediate’ disclosures with regard to related party transactions, a move that was welcomed by the market.
Immediate disclosure will be required for related party transactions exceeding 10% of the equity or 5 % of the total assets, whichever is lower.
The CSE said the Securities and Exchange Commission, had directed the exchange to amend the listing rules on disclosure requirements in relation to related party transactions of listed firms. This follows a Business Times story a week ago highlighting this issue pertaining to listed firm directors’ disclosures.
"It’s a good move as many listed Sri Lankan companies are closely held. Related party transactions could be used to the detriment of the minority shareholders of the company and this timely reporting brings attention to these transactions and analysts could better scrutinize these transactions,” an analyst noted.
He said that many stock exchanges in Asia, which also have many closely held, family owned companies, are paying close attention to related party transactions. “There have been many cases where such firms in China, Hong Kong, South Korea, etc have used related party transactions to deprive opportunities of wealth creation by others by increasing holding of the listed entity,” he said, noting that such businesses are more often than not managed by a main shareholder who also has controlling ownership in other, often dissimilar, interests.
He said that such dominant control composition makes it easy for related-party transactions to happen.