Enhance RPT rules to protect minority holders

PUBLISHED DECEMBER 16, 2013

Enhance RPT rules to protect minority holders

Use standardised templates or tools to simplify RPT identification: report

MICHELLE QUAH MICHQUAH@SPH.COM.SG

RULES governing related party transactions (RPTs) here could be enhanced to better protect minority investors who end up being disadvantaged from such transactions, says a new study on RPTs here.The study looked at the most common type of RPTs here, and compared the rules and laws governing RPTs with those of neighbouring and major jurisdictions. It examined Singapore listed companies between June 2011 and June 2012, and the exercise was led by associate professor Mak Yuen Teen with the Department of Accounting at NUS Business School and Lee Sze Yeng, a partner with KPMG in Singapore.

“RPTs are widely considered to be an important source of governance risk. This is particularly so in companies with substantial and controlling shareholders who may be their founders, their families or the state,” their report, The Ties That Bind, said.

“While RPTs may be beneficial to companies and shareholders as a whole, they are also a common means by which those in control of companies transfer wealth to themselves at the expense of minority shareholders.”

In fact, according to the OECD (Organisation for Economic Co-operation and Development), the prevention of abusive RPTs is one of the biggest corporate governance challenges in the Asian business landscape today.

In Singapore, there are two main sources of rules governing RPTs – Financial Reporting Standard (FRS)24 on Related Party Disclosures, and Chapter 9 of the Singapore Exchange (SGX) Rulebooks for SGX Mainboard and Catalist companies on Interested Person Transactions.

FRS24 focuses on the disclosure of RPTs, while the SGX rules go beyond disclosures to ensure proper governance over related party transactions.

“The SGX rules governing RPTs can be confusing and cumbersome. The separate accounting standard for dealing with RPTs, with its different objectives and definitions, can add to that confusion,” the report said.

It suggests having companies using standardised templates or tools to simplify RPT identification and ensure greater compliance.

The study found that RPTs are common among listed companies here; 48 per cent of listed companies conducted RPTs during the 2011/2012 financial year, engaging in 1,229 disclosed RPTs with a total value of $14.97 billion and a median value of $633,000.

It also found that 21 per cent of companies with RPTs conducted six or more RPTs, 42 per cent conducted between two and five RPTs and 37 per cent conducted only one RPT.

More than half (55 per cent) of RPTs fell under the provision and receipt of services transaction types; the most common type of interested person relationship involved in RPTs was “associate of controlling shareholder”.

Based on its findings, the report suggests enhancing companies’ disclosure requirements to include the nature of transaction and nature of relationship with the interested person. It also suggests adding “Provision of goods” and “Receipt of goods” as transactions that can be considered as RPTs.

In comparing Singapore’s listing rules to those in Malaysia, Hong Kong, the United Kingdom and Australia, the report suggests that Singapore adopt a more principles-based approach in defining “related party” – as the United Kingdom and Australia do – because a rules-based approach could result in issuers complying with the letter but not the spirit of the rules.

“This approach can be achieved by including a general definition of what constitutes an RPT, followed by specific examples and a list of exemptions to provide additional guidance,” it said.

It also says Singapore ought to have multiple benchmarks for determining materiality thresholds for transactions requiring disclosure and shareholders’ approval, with the type of benchmark used being linked to the type of RPT.

Singapore currently only uses one benchmark – the Net Tangible Assets (NTA) ratio, which is based on the latest audited accounts of the listed issuer. The relevant materiality thresholds are 3 per cent and 5 per cent, which trigger requirements for announcement and shareholder approval, respectively.

The report believes this is inadequate and that the SGX should include multiple benchmarks, similar to what is used in other jurisdictions. In the UK, four tests based on different benchmarks are used to determine the significance of RPTs; Hong Kong has five ratios, while Malaysia has eight benchmarks.

The study also said the SGX should require aggregation of related transactions that are below the minimum criterion, to discourage companies from splitting RPTs into a series of small transactions.

It said that the regulator should also base exemptions from disclosure/approval on both absolute amount and percentage relative to the appropriate benchmark, and also on the nature of the transaction.