SEC attempts to get Colombo bourse on track with new rules
View(s):The Securities and Exchange Commission (SEC) with its new guidelines on Related Party Transactions (RPT) and other compliances have advocated transparency in securities transactions, Ayanthi Abeywickrama, Director Legal SEC said, addressing an eminent gathering at a regulatory compliance symposium on “Minimum Public holding as a continuous listing requirement for public listed companies” recently.
This was an awareness programme which was intended to guide the public listed companies on the recently issued SEC “Directives on Maintenance of Minimum Public Holding as a Continuing Listing Requirement, Code of Best Practices on Related Party Transactions, and Disclosure Requirements for Directors’ Dealings in Shares”.
Harshana P. Suriyapperuma Director-Corporate Affairs (SEC)
Minimum public float
Under a directive issued by the SEC, maintaining a minimum public float will be a continuous requirement to all the public listed companies in the Colombo Stock Exchange with effect from 1st of January 2014.
Accordingly, in a listed entity on the Main Board, a minimum public holding of 20 per cent of its total ordinary voting shares should be held by a minimum of 750 public shareholders or a market capitalization of Rs 5 billion should be held by at least 500 public shareholders while maintaining a 10 per cent minimum public float, Ms. Abeywickrama explained. She said that for companies listed on the DiriSavi Board a minimum public holding of 10 per cent in the hands of 200 public shareholders is mandatory.
Non-complaint companies are considered under three separated categories – namely, firms which are non-compliant as at 01st January 2014, those which are compliant as at 01st January 2014 but become non-compliant thereafter and companies falling short after 1, January 2014 due to supervening extraordinary events.
Companies which are non-compliant as at 01st January 2014 have been granted three years to comply with the rule on a staggered basis. “They need to submit a status report to the SEC and to the Colombo Stock Exchange (CSE) on the current distribution of shares as at 01st January 2014. This report should be submitted on or before 31st March 2014. Thereafter these companies are given a period of two years commencing 01st January 2014,” she said.
All these companies must be compliant with the rule on or before 31st December 2016 (at the end of three years). If these companies are unable to comply with the above they can apply to the Commission for an extension of time. After obtaining the extension on time they must make a market announcement stating that the shortfall will be corrected within the extended time period granted.
Ms. Abeywickrama said that firms that are compliant with the rule on 01st January 2014 but become non-complaint thereafter will be granted an automatic extension of time. “Such companies shall endeavour to cure (make up) the shortfall within a period of 30 market days and if they are unable to do so they must make an immediate non-compliance announcement to the market giving the information provided in the rules”.
Upon making the non-compliance announcement the companies are automatically entitled to a period of 12 months commencing the date of the non-compliance announcement to correct the shortfall. Thereafter they must also make a “status announcement” to the market on the first working day of every quarter providing information given in the rules. Simultaneously they must also give to the SEC a report on the progress of the rectification plan.
A sizeable public holding is a necessity for a transparent and liquid market, Ms. Abeywickrama said, noting that it’s perceived that greater the public holding less is the potential for market abuse. “Therefore, a minimum public holding as a continuous listing requirement is introduced with the aim of promoting a liquid and transparent market with a better price discovery mechanism.Further, the maintenance of a minimum public holding is expected to provide a greater opportunity for the citizens of Sri Lanka to share the wealth produced by the listed firms.”
The SEC in the new code of best practices on related party transactions has said that no director should participate in any discussion of a proposed RPT for which he or she is a related party. There’s an exception when the director, at the request of Related Party Transactions Review Committee, may participate in discussions for the express purpose of providing information concerning the RPT to the Committee. Where deemed necessary because of the potential conflict issues presented, the Committee may recommend the creation of a special committee to review and approve the proposed RPT.
Immune to embarrassment
Harshana P. Suriyapperuma, Director Corporate Affairs at the SEC speaking on the “Code of Best Practices on Related Party Transactions” said that the regulator is promoting transparent conduct in RPT. “RPT has grown in complexity,” he said, explaining its intricacies covering the salient features of the Code including the nature and functions of the Related Party Transactions Review Committee, the circumstances within which the shareholder’s approval is needed for certain related party transactions, immediate and annual disclosures on related party transactions and exemptions provided within the SEC Directive.
Dhammika Perera, Officer-in-Charge/Deputy Director General of the SEC, making the final presentation on new rules on “Disclosures of Directors” dealing in shares called on the participants to question the panel without hesitation. “The regulators are getting embarrassed all the time and we are quite immune to it,” he said, calling on the crowd to be unafraid of embarrassing the panelists. He emphasized that rules were introduced to minimize ambiguities in the existing rules on timely disclosures of directors’ dealings. The other salient feature of the rule is the inclusion of “Chief Executive Officer” to the existing definition of directors’ dealing in shares.
In these rules, a firm has to announce to the exchange pertaining to the relevant interest in shares and other classes of shares held by its directors and CEO on the same date the entity is listed on the CSE. Where such director or CEO has no relevant interest, such entity shall be required to disclose such fact to the market on the said date of listing on the CSE. The firm has to announce to the exchange pertaining to the relevant interests in shares and other classes of shares held by its directors and CEO not later than two market days immediately following the appointment or cessation of office of a director or CEO. “Where such director or CEO has no relevant interest, such entity shall be required to disclose that fact to the market within said period,” Mr. Perera said, adding that all listed firms are further directed to put in place a procedure to ensure that its directors and the CEO makes these disclosures in a timely manner to enable it to comply with the requirements stipulated in this directive.