Advisory CorpGov the Ties That Bind

NUS supervising professor:Associate Professor Mak Yuen Teen

Project team members (NUS):Apple Goh Su Yi

Chua Hui Yi, PamelynLew Karxieu

Phua Chong Wee

KPMG supervising partner:Lee Sze Yeng

Project team members (KPMG):Institutes

This report is based on a field service project undertaken by a group of final-year BBA (Accountancy) honours students at the National University of Singapore in collaboration with KPMG.

FOREWORDRelated party transactions 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.

While related party transactions 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 Singapore, there are two main sources of rules governing related party transactions. These are Financial Reporting Standard (FRS) 24 on Related Party Disclosures and Chapter 9 of the SGX Rulebooks for SGX Mainboard and Catalist companies on Interested Person Transactions.

The objectives of these two sources of rules are different. FRS24 focuses on the disclosure of related party transactions, while the SGX rules go beyond disclosures to ensure proper governance over related party transactions. The approaches to defining related party transactions between FRS24 and Chapter 9 are different.

In this report, we present findings from a study of Interested Person Transactions (IPTs) carried out by companies listed on the SGX pursuant to Chapter 9 of the Rulebooks for the period between June 2011 and June 2012. We exclude real estate investment trusts, business trusts and investment funds.

While we report on the scale and scope of reported IPTs undertaken by listed companies generally, we also compare:

• local companies against foreign companies

• companies of different market capitalisation

• government-linked companies against founder or family-controlled companies, and

• companies in different industries.

We also report on the most common types of reported IPTs and persons engaging in such IPTs, and also compare the current SGX rules governing IPTs against those of other major markets.

Our objectives are two-fold. First, we hope to give directors, and particularly those sitting on audit committees, a better understanding of common IPTs and interested persons. This is so that they can better ensure that proper controls are in place to identify key IPTs, proper governance over their review and approval, and proper compliance with the SGX rules. To that end, we have provided some tools to assist companies and directors.

Second, we have provided recommendations to improve current SGX rules on IPTs so that there is better protection for minority investors from IPTs which disadvantage them.

This report is the result of a field service project undertaken by four highly-motivated BBA (Accountancy) honours students, Apple Goh Su Yi, Pamelyn Chua Hui Yi, Lew Karxieu and Phua Chong Wee, in collaboration with KPMG.

We hope that audit committee members, directors and other stakeholders will find the report useful.

Associate Professor Mak Yuen Teen PhD, FCPA (Aust.)Project Supervising ProfessorDepartment of AccountingNUS Business School

Irving LowHead of Risk ConsultingKPMG in Singapore

CONTENTSMain Findings 1

Introduction 2

Section 1: Comparison of listing rules 3

1.1 Definition of related party 4

1.2 Types of related party transactions 6

1.3 Provision for general mandate 8

1.4 Benchmarks used to determine materiality thresholds 9

1.5 Disclosure and approval of related party transactions 10

1.6 Materiality levels triggering disclosure/announcement and shareholder approval obligations 11

1.7 Shareholder approval requirements 12

1.8 Recommendations 13

Section 2: A study of interested person transactions (IPTs) conducted by SGX-listed companies 14

2.1 Profile of sample companies 15

2.2 Prevalence and significance of IPTs 16

2.3 Materality thresholds and compliance with SGX rules 19

2.4 Common types of interested person transactions 22

2.5 Recommendations 24

Section 3: Improving compliance with IPT rules 25

3.1 Tools for IPT identification and compliance 26

3.2 Enhancing the role of stakeholders involved 27

Conclusion 31

Appendix A: Checklist for enhancing internal controls for IPT 32

Acronyms used in report 39

1 Although this study focuses on Interested Person Transactions (IPTs) under Chapter 9 of the Singapore Exchange (SGX) Rulebook, rather than Related Party Transactions (RPTs) under Financial Reporting Standard (FRS) 24, we use the term “related party” when making comparison of rules with other countries. This is because other countries use different terms to describe IPTs in their stock exchange rules and the term “related party transactions” is the most commonly term used internationally to describe IPTs.

2 Under the SGX listing rules, related party transactions are referred to as interested person transactions.

The Ties That Bind | Page 1

Comparison of the listing rules in Singapore, Malaysia, Hong Kong, United Kingdom (UK) and Australia Singapore has the most limited scope in defining ‘related party’.1 The UK and Australia adopt a more principles-based approach in their definition of related party.

Of all five countries studied, only Hong Kong and Australia consider transactions carried out between an entity at risk and its non-wholly owned subsidiaries to be related party transactions (RPTs).

Acquisition and disposal of assets are the most common types of RPT listed in the rules. Four out of the five countries studied offered these types of transaction as examples of RPTs.

Singapore, Malaysia and Hong Kong adopt a more rules-based approach in defining the types of RPTs. Australia and the UK adopt a more principles-based approach.

Singapore, Malaysia and Hong Kong provide for general mandates under their respective listing rules, but such provisions are not available in the UK and Australia.

Singapore and Australia use a single materiality benchmark. Singapore adopts the Net Tangible Asset (NTA) ratio, and Australia adopts the equity interest ratio. The other three countries adopt multiple materiality benchmarks in determining the significance of related party transactions. Malaysia has up to eight benchmarks.

In Singapore, RPTs above the 3 percent materiality threshold are required to make announcements. The relevant threshold in both the UK and Malaysia is 0.25 percent. Hong Kong uses a 0.1 percent threshold. There are no announcement requirements in Australia.

Shareholder approval is required for transactions above the 5 percent materiality threshold in all five countries, although exemptions are available.

In Singapore, Malaysia, Hong Kong and Australia, entities must seek and/or disclose an opinion in writing from an Independent Financial Adviser (IFA) for RPTs that exceed their respective thresholds for requiring shareholder approval.

In addition to an IFA opinion, Singapore and Malaysia require the Audit Committee to give its opinion for transactions exceeding minimum thresholds of 3 percent and 0.25 percent, respectively.

Study of Interested Person Transactions (IPTs) in Singapore2 48 percent of SGX-listed companies conducted IPTs during the 2011/2012 financial year, engaging in 1,229 disclosed IPTs with a total value of S$14.97 billion and a median value of S$633,000.

21 percent of companies with IPTs conducted six or more IPTs, 42 percent conducted between two and five IPTs and 37 percent conducted only one IPT.

82 percent of IPTs conducted had NTA ratios below 3 percent, the minimum materiality threshold. These IPTs were thus not subject to the requirements for announcements and shareholder approval set out in the SGX listing rules.

55 percent (681) of IPTs fell under the provision and receipt of services transaction types, 9 percent (104) were classified as provision and receipt of financial assistance, and 8 percent (99) were categorised as acquisition and disposal of assets.

The most common type of interested person relationship involved in IPTs was ‘associate of controlling shareholder’. Some 36 percent of the IPTs involved this type of interested person and 23 percent of the IPTs were carried out with associates of directors.

Main Findings

3 Organisation for Economic Co-operation and Development. (2009). Corporate Governance Series: Guide on Fighting Abusive Related Party Transactions in Asia.

IntroductionRelated party transactions (RPTs) are common and serve various economic and business objectives. In Asia, the prevalence of company groups and concentrated ownership by families or by the state makes such transactions commonplace. Although RPTs can be beneficial for businesses, the prevention of abusive RPTs is one of the biggest corporate governance challenges in the Asian business landscape today.3 Although anecdotal evidence suggests that RPTs are common in Singapore, there are no studies on the prevalence of different types of RPTs or the effectiveness of the current rules governing them.

In Singapore, there are two main sets of rules dealing with RPTs: (a) the Financial Reporting Standard (FRS) 24 on Related Party Disclosures, which applies to all entities that have to comply with FRSs, and (b) Chapter 9 of the Singapore Exchange (SGX) Rulebook on Interested Person Transactions (IPTs), which applies to listed companies. FRS 24 deals with financial statement disclosures, while the SGX Rules govern disclosure through SGX announcements and in financial statements, and shareholder approval requirements.

In this report, we focus on IPTs as defined in the SGX Rulebook, Chapter 9. The report covers the following subjects:

Introduction

• The existing regulatory framework with respect to the control and prevention of abusive IPTs, and how this framework compares with those of other major exchanges

• The prevalence and nature of reported IPTs in Singapore

• Tools and recommended improvements for better compliance with IPT rules by companies

Definition of related party transactions (RPTs)Although most countries now follow international financial reporting standards (IFRS) and therefore have a consistent approach to the disclosure of RPTs in financial statements, the definition of RPTs under listing rules differs somewhat across countries.

An RPT is generally any transaction carried out between an issuer and interested persons. Yet, different exchanges have different specific definitions of ‘related party’ and ‘interested person’. In Singapore, SGX Rule 904 defines an interested person transaction (IPT) as any transaction between an entity at risk and an interested person. In the case of a company, ‘interested person’ refers to a director, chief executive officer, controlling shareholder or an associate of any such person. The SGX Rule defines ‘interested person’ more narrowly than the IFRS. FRS 24 specifically defines which persons or entities are considered to be interested

persons. For a person, the term refers to any key manager in the reporting entity, or in a parent of the reporting entity, or anyone who has control, joint control or significant influence over the reporting entity.

Structure of this report This report is organised into three sections. The first section compares the various listing rules on RPTs. The second section presents findings on IPTs conducted by SGX-listed companies. The third section deals with improving compliance by companies.

Note on terminologyThe listing rules in Singapore use the term ‘interested person transaction’, Hong Kong uses the term ‘connected transaction’, the UK and Malaysia use ‘related party transaction’ and Australia refers to ‘transaction with persons in position of influence’. In comparing the rules across countries in the first part of the report, we use the universally understood term ‘related party transaction’, or ‘RPT’, except within direct quotations. In the second and third sections of this report, where we examine the extent and nature of such transactions in Singapore and provide tools to assist companies to ensure compliance with the SGX rules, we use the term ‘interested person transactions’, or ‘IPTs’, to be consistent with the terminology used by the SGX.

Page 2 | The Ties That Bind

SECTION 1

Comparison of listing rules This section examines the current SGX listing rules

governing RPTs in Singapore, and benchmarks these

rules to those in Malaysia, Hong Kong, the UK and

Australia. We compare the scope and stringency of the

rules in each of these countries.

The listing rules governing RPTs differ across countries.

Limitations in the scope and stringency of the listing rules

can potentially increase the risk that transactions that are

harmful to the shareholders’ interests may be undertaken

without disclosure or without approval by shareholders.

However, overly strict rules can potentially impede the

smooth operation of businesses or require excessive

resources for enforcement. A fine balance is thus required

in formulating the listing rules in each country.


The definition of a related party is the starting point for identifying and monitoring RPTs. It is important for the definition to be broad enough to capture important relationship types.

Singapore the most limited in scopeAs seen in Figure 1, Singapore has the most limited scope in defining what constitutes a ‘related party’. Amongst the five broad relationship types – director, substantial shareholder, CEO/person with significant influence, subsidiary, and others – only the former three relationship types fall under the definition of a related party in Singapore’s listing rules.

Broader principles-based definitions of ‘related party’ in the UK and AustraliaFigure 1 shows that the UK has the widest definition of a ‘related party’. Although it does not specifically list CEOs and their associates as related parties, the requirement that all persons and their associates who exert significant influence over the listed issuer must be considered as related parties encompasses a potentially wide net of relationships.

The requirements in Australia are largely similar to those in the UK, as they attempt to cast a wide net in defining a ‘related party’. According to Australian rules, a

related party includes ‘a person whose relationship to the issuer is such that, in ASX’s opinion, the transaction should be approved by security holders’. Like the UK, Australia does not explicitly identify CEOs and their associates as related parties of an issuer.

Although the requirements in Australia and the UK potentially cast a wider net, and hence may provide better protection to shareholders by increasing the coverage of transactions, their requirements are also more subjective and may therefore provide issuers with more room for manipulation. This issue may be exacerbated by the fact that CEOs are not explicitly identified as related parties. As CEOs typically have significant control over major operational decisions, transactions carried out with them carry significant risk.

Given that the SGX does not practise a principles-based approach in the same way as the UK and Australia, it can consider providing more guidance on the inclusion of key management personnel as related parties. Transactions with these managers can pose a high risk to shareholder’s interests.

Non-wholly owned subsidiary as related party in Hong Kong and Australia

Of the five countries we study, only Hong Kong and Australia consider transactions carried out between an issuer at risk and its non-wholly owned subsidiaries to be RPTs. This omission by the other countries could be due to a belief that a majority of at-risk transactions are already captured through the other rules on transactions with related parties. Conflict of interests will likely only arise where the individuals involved have interests in both an entity at risk and a non-wholly owned subsidiary, in which case, the relationship will probably already be captured under the definition of an associate of a related party.

In the case of a non-wholly owned subsidiary with no overlapping interest with an entity at risk, the interests of both controlling shareholders and minority shareholders are aligned, as there is no apparent incentive for controlling shareholders in the entity at risk to conduct RPTs that may be against the interest of the entity at risk.

It is possible that RPTs with wholly or non-wholly owned subsidiaries may be prejudicial to the interests of other stakeholders, such as depositors or policyholders in the case of financial institutions. However, listing rules on RPTs are primarily focused on protecting the interests of shareholders, especially minority shareholders.

4 Definition of ‘Associate’:(a) in relation to any director, chief executive officer, substantial shareholder or controlling shareholder (being an individual): (i) his immediate family; (ii) the trustees of any trust of which he or his immediate family is a beneficiary or (in the case of a discretionary trust) is a discretionary object; and (iii) any company in which he and his immediate family together (directly or indirectly) have an interest of 30% or more(b) in relation to a substantial shareholder or a controlling shareholder (being a company): (i) any other company which is its subsidiary or holding company or is a subsidiary of such holding company or one in the equity of which it and/or such other company or companies taken together (directly or indirectly) have an interest of 30% or more (SGX Rulebook Definitions and Interpretation)


1.1 Definition of related party

Figure 1: Definitions of ‘related party’

Related Party (to issuer) Scope Singapore Malaysia UK Hong Kong Australia

Director

Director of listed issuer

Associate of Director 4

Director of subsidiary (of listed issuer) × × ×

Associate of Director of subsidiary × × × ×

Director of parent/holding company × ×

Associate of Director of holding company × × ×

Issuer controlled by Director (or his associates) of issuer and parent company

× × × ×

Substantial Shareholder

Substantial shareholder of listed issuer

Substantial shareholder of subsidiary/parent company of issuer

× × × ×

Associate of substantial shareholder of issuer

CEO

CEO of listed issuer

Persons exerting significant influence (SI) on the issuer

×

CEO of subsidiary or parent of listed issuer × × × ×

Associate of CEO/ Persons connected to CEO

Associate of a person exerting SI

×

Subsidiary – × × ×

Others

– Member (and connected persons) of a Special Purpose Acquisition Company’s (SPAC) management team (or was within the preceding six months)

– Supervisor (or its Associate) of PRC issuer; Issuer controlled by family of a director, chief executive or substantial shareholder of the listed issuer

A person whose relationship to the issuer or person referred to above is, in the ASX’s opinion, a related party, a transaction with whom should be approved by security holders


5 SGX Rulebook, Chapter 9, Interested Person Transaction, 901


Defining the types of transactions that are categorised as RPTs also determines the scope of transactions. The list of examples under FRS24 serves to illustrate the type of transactions which will fall under related party transactions and hence, are not expected to be exhaustive. The SGX rule on the other hand specify the types of transactions that will be considered as IPT. Given the wider scope and principles set out in FRS24, more transactions are likely to be caught as opposed to SGX rule. Although a wider scope would increase the likelihood that at-risk transactions will be identified, it could also subject issuers to excessive red tape and/or increase the monitoring costs for exchanges. The most common type of RPT listed among the five jurisdictions examined is the acquisition and disposal of assets. Four out of the five countries studied use this type of transaction as an example of an RPT.

Principles-based approach in Australia and the UK As Figure 2 shows, the Australian listing rules identify only four specific types of transactions with related parties as RPTs. This may be attributed to the principles-based approach adopted in Australia. Similarly, the UK listing rules focus solely on the principle underlying the RPT definition, with no specific guidance for interpretation of the stated principle. A principles-based approach may capture more transactions as RPTs. In fact, any lack of specific guidance, may result in excessive compliance cost and greater room for issuers to undertake abusive RPTs.

Rules-based approach in Hong Kong, Singapore and MalaysiaIn Singapore, Malaysia and Hong Kong, the listing rules state an overarching principle that the RPT rules are meant to protect shareholders. For example, in Singapore, the Rulebook states that ‘the objective of this Chapter is to guard against the risk that interested persons could influence the issuer, its subsidiaries or associated companies, to enter into transactions with interested persons that may adversely affect the interests of the issuer or its shareholders’.5

In applying this principle, however, the exchanges in Singapore, Hong Kong and Malaysia go on to provide a comprehensive list of transactions that qualify as RPTs, and the types of transactions that are exempt. The wording accompanying these lists may lead issuers to interpret them as exhaustive, which may then lead to compliance in form but not in substance.

Hong Kong lists the greatest number of transaction types as RPTs. Such an extensive list is perhaps well suited to the nature of businesses in Hong Kong, where concentrated ownership structures are prevalent. However, unless it is clear that the list of transactions is not exhaustive, the list may shift the focus away from the principle underlying the RPT definitions.

This observation also holds true in Singapore and Malaysia, where the definitions of RPT are essentially rules-based. Therefore, transactions with related parties that are not specifically listed may be ignored, even if they pose a risk to shareholders’ interests. As Figure

2 shows, there are certain transactions that are included by one exchange but omitted by others.

It is debatable whether a more principles-based or a rules-based approach works better. The business landscape and occurrence of RPTs in a particular country has to be considered. Australia and the UK have more dispersed shareholdings, whereas concentrated ownership is common in Asia. As such, it may be appropriate to provide more specific examples in the Asian countries to ensure that at least the more common types of RPT do not go undetected due to ambiguity in the rules. Another consideration is whether regulators can, through adequate monitoring and enforcement, effectively ensure compliance with the spirit and not just the letter of the rules.

Given the risk of a rules-based interpretation, which can result in specified transactions being viewed as exhaustive, we believe that the listing rules should clearly emphasise a broad overarching principle. The rules should clearly indicate that the lists of RPTs are not exhaustive, and reiterate that the exchanges can direct an issuer to follow the RPT rules as long as a transaction is, in substance, an RPT.

The SGX may wish to consider including a principles-based definition of an RPT such as the following: ‘An interested person transaction is any transaction between an entity at risk and an interested person that may adversely affect the interests of the issuer or its shareholders’. Specific examples and a list of exemptions could then be included to provide additional guidance.

1.2 Types of related party transactions

Figure 2: Comparison of the specified examples of RPTs6

Listed Examples of RPTs Singapore904(6)

Malaysia10.02(L)(ii)

Hong Kong14A.10(13)

AustraliaChapter 10

Provision of financial assistance ×

Receipt of financial assistance × ×

Granting of or being granted options × ×

Establishment of joint ventures ×

Provision or Receipt of services

(Any business transaction or arrangement entered into)

×

Sharing of services × × ×

Acquisition and Disposal of assets

Leasing of assets ×

Issuance of securities ×

Subscription of securities × ×

(Acquisition by related party)

Acquisition or Disposal of interest in a company × × ×

A person’s subscription of shares on a favourable basis in a company in which the listed issuer is a shareholder × × ×

Providing or acquiring raw materials, intermediate goods or finished products × × ×

Increase in payments to directors × × ×

(No minimum threshold)

Termination benefits to company officers × × ×

6 An ‘×’ in Figure 2 does not necessarily mean that a particular transaction type will not be considered an RPT under the country’s listing rules, but only indicates the absence of that particular transaction type among the RPTs specified in the rules.


7 HKEX Listing Rules, Chapter 14A, Connected Transactions, 14A.22

In some countries, listed companies can seek a general mandate from their shareholders at the annual general meeting for recurring transactions that are carried out in the ordinary course of business. Such a mandate allows the RPTs to be carried out in a more efficient manner, as issuers do not have to repeatedly disclose or seek approval for transactions. Of the five countries studied, Singapore, Malaysia and Hong Kong provide for such mandates.

General mandates under the listing rules in Singapore, Malaysia, and Hong Kong In Singapore and Malaysia, recurrent transactions that are in the ordinary course of business and are of a revenue nature can be conducted pursuant to a general mandate. Such transactions are required to be on commercial terms, or terms no less favourable to the issuer than those available to/from independent third parties.

For all three countries, the related parties are required to abstain from voting on the resolution for approving the mandate. Such general mandates are subject to annual renewal. In seeking a general mandate in Singapore and Hong Kong, issuers have to provide a circular with the required information, including an Independent Financial Adviser (IFA)

opinion and an Audit Committee (AC) opinion. Malaysia only requires the disclosure of the AC’s opinion. The AC is generally required to state whether the transactions are on normal commercial terms, whether they are prejudicial to the interests of the issuer and minority shareholders, or if the procedures in place are sufficient to ensure protection of shareholder interests. In Singapore, the requirements for IFA opinions are similar to those for AC opinions. In Hong Kong, however, IFA statements must, in addition to the above requirements, advise the shareholders on how they should vote. The statements must disclose the ‘reasons for, key assumptions made and factors taken into consideration’7 in forming the IFAs opinion.

For all three countries, the related parties have to abstain from voting on the resolution to approve the mandate. Such general mandates are subject to annual renewal.

In Singapore, an IFA’s opinion is not required for the renewal of a general mandate, provided that the AC confirms that the methods or procedures for determining the transaction prices have not changed since the last shareholders’ approval, and that the transactions will be carried out on normal commercial terms and will not be prejudicial to the interests of the issuer or its minority shareholders.

1.3 Provision for general mandate


8 ASX Listing Rules, Chapter 10, Transactions with persons in a position of influence, 10.2 and 10.19.The definition of equity interests is the sum of paid-up capital, reserves, and accumulated profits or losses, disregarding redeemable preference share capital and outside equity interests, as shown in the consolidated financial statements. (Chapter 19, Interpretation and definitions, 19.12)

9 The interpretation of accounts (Chapter 19, Interpretation and definitions, 19.11A) is as follows:(a) If the entity controls an entity within the meaning of section 50AA of the Corporations Act or is the holding company of an entity, required by any law, regulation, rule or accounting standard, or if ASX requires, the accounts must be consolidated accounts.(b) The accounts must be prepared to Australian accounting standards. If the entity is a foreign entity the accounts may be prepared to other standards agreed by ASX.

The definition of accounts (Chapter 19, Interpretation and definitions, 19.12) is:(a) statement of financial position;(b) statement of comprehensive income;(c) statement of cash flows;(d) statement of changes in equity.

10 ASX Listing Rules, Chapter 10, Transactions with persons in a position of influence, 10.2 and 10.19.

Regulators can adopt a wide range of ratios as benchmarks for calculating materiality thresholds in determining whether an RPT requires disclosure or shareholder approval. Having multiple ratios makes the identification of RPTs requiring disclosure or approval more rigorous. However, having fewer benchmarks or a single benchmark simplifies implementation of the rules and reduces compliance costs for issuers.

Australia and Singapore: Only one benchmark employedAustralia uses only one benchmark – ‘equity interests of the entity’8 – for the acquisition and disposal of assets and the termination benefits transaction types. For the other two named transaction types, acquisition of securities in the entity and payments to directors), no benchmark is applied. Instead, the rules disallow any issue of equity securities to related parties or any increase in directors’ fees payable unless shareholder approval is obtained. There is also only one materiality threshold. The value of a transaction (the asset or consideration value for the acquisition/disposal of assets, or the value of benefits for termination benefits) is considered substantial when it exceeds 5 percent of the equity interests of the issuer ‘as set out in the latest accounts9 given to ASX’.10

Singapore adopts a similar approach with a single 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 percent and 5 percent, which trigger requirements for announcement and shareholder approval respectively.

Although a single benchmark may simplify application for issuers and regulatory authorities, it may also mean that many significant RPTs are not covered. For example, for RPTs involving the provision and/or receipt of services, revenue may be a better benchmark in determining materiality. An RPT that is immaterial based on NTA may be material relative to other benchmarks.

Multiple benchmarks and thresholds for the other countriesIn the UK, four tests based on different benchmarks are used to determine the significance of RPTs. These are the Gross Assets test (gross assets that are the subject of transaction/gross assets), the Profits test (profits attributable to assets that are the subject of transaction/profits), the Consideration test (consideration for the transaction/aggregate market value of all ordinary shares) and the Gross Capital test (gross capital of the company or business being acquired/gross capital). These ratios are computed and compared against thresholds of 0.25 percent and 5 percent, which trigger requirements for announcements and shareholder approval, respectively.

1.4 Benchmarks used to determine materiality thresholds


11 Bursa Malaysia Listing Requirements, Chapter 10 ,Transactions, 10.02(g) Percentage Ratios: (i) the value of the assets which are the subject matter of the transaction, compared with the net assets of the listed issuer; (ii) net profits (after deducting all charges and taxation and excluding extraordinary items) attributable to the assets which are the subject matter of the transaction, compared with the net profits of the listed issuer; (iii) the aggregate value of the consideration given or received in relation to the transaction, compared with the net assets of the listed issuer; (iv) the equity share capital issued by the listed issuer as consideration for an acquisition, compared with the equity share capital previously in issue (excluding treasury shares); (v) the aggregate value of the consideration given or received in relation to the transaction, compared with the market value of all the ordinary shares of the listed issuer (excluding treasury shares); (vi) the total assets which are the subject matter of the transaction compared with the total assets of the listed issuer; (vii) in respect of joint ventures, business transactions or arrangements, the total project cost attributable to the listed issuer compared with the total assets of the listed issuer or in the case where a joint venture corporation is incorporated as a result of the joint venture, the total equity participation of the listed issuer in the joint venture corporation (based on the eventual issued capital of the joint venture corporation) compared with the net assets of the listed issuer. The value of the transaction should include shareholders’ loans and guarantees to be given by the listed issuer; or (viii) the aggregate original cost of investment of the subject matter of the transaction divided by the net assets of the listed issuer, in the case of a disposal and where the acquisition of the subject matter took place within last 5 years.

Hong Kong has five ratios: the Assets, Profits and Consideration ratios, which are similar to those used in the UK; the Revenue ratio, which considers the revenue attributable to assets that are the subject of transaction relative to revenues; and the Equity Capital ratio, which is the nominal value of equity capital issued as consideration relative to the nominal value of the issuer’s equity capital immediately before the transaction. The prescribed thresholds are 0.1 percent, 1 percent, 5 percent and 25 percent.

Malaysia has the largest number of benchmarks among the countries studied, defining eight in total.11 These benchmarks are largely similar to those employed in the UK, with some slight variations. Threshold limits are 0.25 percent, 5 percent and 25 percent for ordinary RPTs and 1 percent for recurrent RPTs that are not under a general mandate. For recurrent RPTs under a general mandate, the listed issuer needs to make an announcement if the actual value of the RPT exceeds the estimated value of the RPT disclosed in the circular by 10 percent.

We believe that a single NTA benchmark which is currently used in Singapore for determining materiality thresholds for transactions requiring disclosure and shareholders’ approval is inadequate. The type of benchmark used should be linked to the type of RPT. We recommend that the SGX includes multiple benchmarks, similar to what is practised in most other countries.

Listing rules generally impose obligations on issuers when they carry out substantial RPTs that exceed predefined materiality levels. In most countries, transactions that exceed a first (lower) threshold have to be disclosed to shareholders through an announcement to the exchange or relevant authority. The announcement has to provide certain details about the RPT and its terms. These are often referred to as discloseable transactions.

Transactions that exceed a second, higher threshold generally require a circular to be

1.5 Disclosure and approval of related party transactions


sent to shareholders and approval at a general meeting of shareholders. Typically, a confirmation or opinion is required from an IFA and/or the AC stating that the transaction is carried out on normal commercial terms and is not prejudicial to the shareholders’ interests.

The stringency of rules relating to disclosure and approval of RPTs differs across the five countries, in terms of stipulated materiality levels that trigger announcement and/or shareholder approval obligations.

Different materiality thresholds can affect the level of shareholder protection. High materiality levels run the risk of not capturing significant RPTs that can potentially hurt shareholders’ interests. However, thresholds that are too low may increase compliance costs.

Australia is less stringent in terms of materiality thresholdsIn Australia, RPTs below the materiality threshold of 5 percent do not trigger any obligations such as announcements. This high threshold makes it more difficult for shareholders to monitor such transactions.

The other four countries have much more stringent requirements, as can be seen in Figure 3. In Singapore, transactions with ratios above 3 percent require announcement, and ratios greater than 5 percent require shareholders’ approval. Transactions are exempted from these requirements if their values do not exceed S$100,000 (US$80,200).

In Malaysia and the UK, ratios exceeding 0.25 percent trigger the need for an announcement, although only ratios above 5 percent trigger the need

for shareholder approval. Malaysia’s listing rules also exempt transactions with values less than MYR250,000 (US$76,970) from compliance with the RPT rules, but the UK listing rules do not stipulate a minimum value.

In Hong Kong, transactions above 0.1 percent require announcements, unless they are valued at less than HK$1 million and are below 5 percent. For example, a HK$900,000 RPT that is 4 percent is exempt from announcement requirements. Similarly, ratios above 5 percent trigger a requirement for shareholder approval, unless the transaction is valued less than HK$10 million, in which case the ratio limit is 25 percent.

Exemption and aggregation of smaller transactionsThe UK requires transactions with the same related party that have not been approved by shareholders to be aggregated. Upon aggregation, if any ratio exceeds 5 percent, shareholder approval is required.

Although the SGX Rulebook also requires transactions with the same related party

1.6 Materiality levels triggering disclosure/announcement and shareholder approval obligations


Figure 3: Relevant materiality thresholds12

Relevant Materiality Thresholds: (applicable to all bases in each respective country)

Singapore Malaysia UK Australia Hong Kong

Announcement to Exchange

3 percent S$100,000

(US$76,970)

0.25 percent MYR250,000 (US$78,675)

0.25 percentNo

announcement requirement

0.1 percent However, if transaction is less than HK$1 million (US$128,700) and less than 5 percent, it is exempted; if > 5 percent, announcement must be made regardless of transaction value

Shareholder Approval 5 percent

5 percent However, if transaction is less than HK$10 million (US$1.287 million) and less than 25 percent, it is exempted

12 1 MYR = 0.3147USD; 1 SGD = 0.7697USD; 1 HKD = 0.1287USD (Rates as at 31 Dec. 2011, retrieved from http://www.oanda.com/currency/historical-rates/)

during a financial year to be aggregated, it exempts transactions below $100,000 for both discloseable transactions and transactions requiring shareholders’ approval. Such an exemption may encourage issuers to structure RPTs into multiple RPTs with individual values below S$100,000 to avoid triggering compliance obligations. To prevent such possible abuse, we recommend that smaller transactions with the same related party should be aggregated and become subject to disclosure/approval requirements upon exceeding the thresholds. We also recommend that the authorities review the threshold amount for relevance.

We also recommend that the exemption criterion should be based on both the absolute amount and percentage relative to the relevant benchmark, similar to the rules in HK.

SGX should also consider incorporating the nature of the IPT in determining exemptions. For example, where an AC member is an interested person and the service involves internal audit or other accounting services, the conflict of interest is so serious that timely disclosure/approval may be warranted.


In Singapore, Malaysia, Hong Kong and Australia, listing rules require issuers to disclose written IFA opinions for RPTs exceeding the 5 percent materiality level that require shareholder approval. The IFA opinion is generally required to state whether the transaction is fair and reasonable, and whether it is prejudicial to the interests of the issuer and minority shareholders. Malaysia and Hong Kong go further to require that the IFA give advice on how shareholders should vote, and the rules in Hong Kong state that the IFA should provide the ‘reasons for, key assumptions made and factors taken into consideration’13 in forming that opinion.

In addition to the IFA opinion, Malaysia further requires that the AC give its opinion on transactions exceeding a minimum threshold of 0.25 percent. This opinion must indicate whether the transactions are carried out in the best interest of the listed issuer on fair, reasonable and normal commercial terms, and whether the transactions are detrimental to the interests of minority shareholders.14 Similarly, Hong Kong requires that when shareholder approval is necessary, an independent board committee must provide both an opinion and a recommendation to independent shareholders. This opinion and recommendation can provide an

1.7 Shareholder approval requirements

additional level of assurance for investors. In contrast, the UK only requires a board opinion. In Singapore, for cases where shareholder approval is required, an AC opinion is only required when it differs from the IFA’s opinion.15

Exclusion from voting for related partiesIn all five countries, the related party and his associates/connected persons are not allowed to vote on the RPT. Furthermore, the listing rules of all countries require issuers to include a statement in a circular sent to shareholders which indicates that the relevant related parties and their associates/connected persons will abstain from voting.

There is a trend towards voting by poll on resolutions at general meetings in many countries, rather than the traditional voting by ‘show of hands’ which is still practised here by many companies. We believe that it is particularly important for RPTs requiring shareholder approval to be voted by poll. In addition to complying with the spirit of the one-share one-vote principle, poll voting on RPTs will better ensure that related parties and their associates do not vote on these transactions. Where voting on RPTs is conducted by show of hands, it will be difficult to ensure that related parties and their associates do not vote.

13 HKEX Listing Rules, Chapter 14A, Connected Transactions, 14A.2214 Bursa Malaysia Listing Requirements, Chapter 10, Transactions, Appendix 10C(3)(a)15 SGX Rulebook, Chapter 9, Interested Person Transaction, 917(4)(a)(i)


The following are our recommendations for enhancing the listing rule requirements for RPTs in Singapore.

Adopt a more principles-based approach, as a rules-based approach can potentially 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. When a transaction should be considered an RPT according to the general definition, the SGX should require that an issuer follow the RPT rules even if the type of related party involved is not specifically listed in the rules.

Provide more guidance on the inclusion of key management personnel as related parties, as

transactions with key management personnel beyond those who are currently specified in the rules can pose risks to shareholders’ interests.

Adopt multiple benchmarks for determining materiality thresholds for transactions requiring disclosure and shareholders’ approval is inadequate. The type of benchmark used should be linked to the type of RPT.

Require aggregation of related transactions that are below the de minimis criterion. This requirement can discourage companies from splitting RPTs into a series of small transactions.

Base exemptions from disclosure/approval on both absolute amount and percentage relative to the appropriate benchmark, and also on the nature of the transaction.

1.8 Recommendations

SECTION 2

A study of interested person transactions (IPTs) conducted by SGX-listed companies This section reports the results from a study of IPTs

undertaken by companies listed on the SGX. Using

data16 from 677 companies from June 2011 to June

2012, the study examined the prevalence of IPTs, the

nature of IPTs, and their compliance with IPT rules.

These results can provide insights into potential areas

for improvement to existing rules and to the internal

processes of companies to better protect minority

shareholders’ interests.


16 Publicly available information from company annual reports, websites and announcements was used, supplemented by information from the Capital IQ database.


Figures 4 to 7 show the profile of the 677 companies included in the study, in terms of ownership type, market capitalisation, domicile, and industry type, respectively.

2.1 Profile of sample companies

Figure 4: Ownership type

Ownership type No. of companies Percentage

Family/Founder-Controlled Companies 449 66 percent

Government-linked Companies (GLCs) 21 3 percent

Others 207 31 percent

Total 677 100 percent

Figure 5: Market capitalisation

Market Capitalisation No. of companies Percentage

Large (Above S$1 billion) 65 10 percent

Mid-sized (S$300 million to S$1 billiion) 82 12 percent

Small (Less than S$300 mllion) 530 78 percent


Figure 6: Domicile

Domicile No. of companies Percentage

Local 436 64 percent

Foreign 241 36 percent


Figure 7: Industry

Industry No. of companies Percentage

Consumer Discretionary 100 15 percent

Consumer Staples 52 8 percent

Energy 38 6 percent

Financials 68 10 percent

Healthcare 19 3 percent

Industrials 225 33 percent

Information Technology 104 15 percent

Materials 57 8 percent

Telecommunication Services 8 1 percent

Utilities 6 1 percent


IPTs are common amongst SGX-listed companiesFigure 8 shows that almost half (327) of the companies conducted some form of IPT. These IPTs include both non-recurrent IPTs and those conducted pursuant to a general mandate. These 327 companies engaged in a total of 1,229 disclosed IPTs over a one-year period, which amounted to an aggregated value of S$14.97 billion. The mean transaction value was S$12.18 million and the median transaction value was S$633,000, which is consistent with some very large IPTs.

As small IPTs (below S$100,000) are exempt from reporting requirements, there were probably other IPTs conducted that were not captured in this survey. Hence, the 52 percent (350) of companies reported here as having not conducted any IPTs may in fact have engaged in smaller undisclosed IPTs.

Of the 327 companies that conducted IPTs, 42 percent conducted between 2 and 5 IPTs, 13 percent conducted 6 to 10 IPTs and 8 percent conducted more than 10 IPTs (Figure 9).

2.2 Prevalence and significance of IPTs


Figure 8: Prevalence of IPTs

Figure 9: Number of IPTs conducted

Total sample size = 677(Numbers in parentheses denote number of companies)


0

Did not conduct IPTs

52%(350)

48%(327)

Conduct IPTs

10

0

37%(123)

42%(139)

13%(41)

8%(24)

1 IPT

2 - 5 IPTs

6 - 10 IPTs

More than 10 IPTs

10 20 30 40 50

20 30 40 50 60


Founder- and family-controlled companies account for a higher proportion of IPTs Of the 327 companies that conducted IPTs during the year, 69 percent were founder- or family-controlled companies (Figure 10). Only 5 percent of the IPTs were undertaken by GLCs. This small percentage is largely attributable to the small number of GLCs in the sample (3 percent).

Figure 10: Percentage of IPTs by firm ownership type

Total sample size = 327(Numbers in parentheses denote number of companies that conducted IPTs)

0 10 20 30 40 50 60 70 80

Family/Founder-controlled

companies

GLCs

Others

69%(226)

5%(17)

26%(84)

IPTs are more prevalent among GLCs than family- or founder-controlled companies Amongst the GLCs in the sample, 81 percent conducted some form of IPT during the year, compared to 50 percent of the founder- or family-controlled companies (Figure 11). The prevalence of IPTs among GLCs is not surprising, given their size and complexity. A large proportion of their transactions were carried out with other GLCs.

Figure 11: Prevalence of IPTs among different firm ownership types


0 20 40 60 80 100

Government-linked companies (GLCs)

Family/Founder-controlled

companies

81% (17)

50% (226)

19% (4)

50% (223)

IPTS(s (Conducted) No IPT Conducted


Figure 13: Transaction value as a percentage of the different bases under the Hong Kong rules

Figure 12: Transaction value as a percentage of Net Tangible Assets

Most transactions fall below the minimum materiality threshold for reporting requirementsFigure 12 shows that 82 percent of the IPTs had NTA ratios17 below 3 percent, the minimum materiality threshold that requires an announcement.

Unlike Singapore, Hong Kong (and a number of other exchanges) employs multiple bases and ratios, as discussed in the previous section. These multiple bases are applied for each IPT, and reporting requirements will apply if any of these ratios exceed the materiality thresholds.

To determine how the disclosure and shareholder approval requirements would have been different for the IPTs in our study if the Hong Kong rules had been in effect, we applied the multiple bases used in Hong Kong to re-compute the ratios for the IPTs in our study. The re-computed ratios are then matched against the materiality thresholds for announcement and shareholder approval requirements in Hong Kong. Figure 13 shows the ratios for the IPTs based on the Hong Kong listing rules.

Under Hong Kong rules, announcements are required for IPTs above the 0.1 percent materiality threshold, subject to exemptions for those that are below 5 percent and less than HK$1 million. Shareholder approval is required for IPTs above the 5 percent materiality threshold, subject to exemptions for those below 25 percent and less than HK$10 million. In other words, exemptions are based on the percentage and dollar amount of the transaction, and therefore take into account the size of the company. These exemptions have been accounted for in Figure 13.

We estimate that if the Hong Kong rules were applied to the IPTs in our study, 61

2.3 Materiality thresholds and compliance with SGX rules

percent of the IPTs would have required announcements. This dwarfs the 18 percent that required announcements under the Singaporean rules as shown in Figure 12. The discrepancy could be attributed to Hong Kong’s multiple

ratios that cast a wider net and capture more IPTs. However, the percentage of transactions requiring shareholder approval is similar under both sets of rules, amounting to 14 percent in both Figures 12 and 13.

17 The NTA ratio is calculated by dividing the transaction value by NTA. Information on transaction values was obtained from the disclosure of IPTs in the annual reports, and the NTA data were based on the audited statements of financial position in the annual reports.

Total sample size =1229(Numbers in parentheses denote number of transactions)

Total sample size = 944(Numbers in parentheses denote number of transactions)

0 10 20 30 40

Below 0.1%

0.1 - 0.99%

1 - 4.99%

5 - 25%

Above 25%

39%(364)

31%(295)

16%(152)

7%(63)

7%(70)

0 20 40 60 80 100

Below 3%

3 - 4.99%

5 - 25%

Above 25%

82%(1003)

4%(54)

10%(118)

4%(54)


18 Rule 917 of the SGX listing rules requires the AC of an issuer to disclose a statement in its announcement to shareholders indicating whether a particular IPT is being conducted on normal commercial terms and whether it is prejudicial to the interests of the issuer or its minority shareholders.19 Rule 915 under chapter 9 of the SGX listing rules lists eight types of transactions that are exempted from reporting requirements.

Non-disclosure of AC opinion18 Of the companies that had IPT values of 3 percent or more of NTA and hence were required to disclose an AC opinion in their announcement to the exchange, we find that 61 percent (138) gave such an opinion (Figure 14). Another 8 percent (17) of the transactions were conducted under general mandate and hence did not require such a disclosure.

The remaining 31 percent (70) of the 225 transactions did not disclose an AC opinion as required. One possible reason is that these transactions met the exemption criteria under chapter 9 of the SGX listing rules.19 However, this cannot be confirmed based on the limited public information available. Only one company provided an explicit statement that an IPT was exempted, and this case is excluded from the sample in Figure 14.

If exemptions are not the reason behind non-disclosure, these transactions could be cases of non-compliance, hence indicating a possible lack of proper processes within these companies for identifying and reporting IPTs. To better ensure compliance, the SGX may consider requiring companies exempted from certain requirements to make a disclosure statement indicating the exemptions applicable to them.

In all cases when an AC opinion was disclosed, the opinions were positive.

Figure 14: Disclosure of Audit Committee opinion

(Transactions with values above 3 percent of Net Tangible Assets)


0 10 20 30 40 50 60 70 80

Disclosed a positive AC opinion

Not required to have AC opinion

Did not disclose AC opinion

61%(138)

8%(17)

31%(70)


20 Rule 921 of the SGX listing rules requires the disclosure of an IFA opinion in a separate letter under the circular requirements. The opinion must state whether a transaction is conducted on normal commercial terms, and whether it is prejudicial to the interests of the issuer or its minority shareholders.

Non-disclosure of IFA opinion20 For transactions with values above 5 percent of NTA, an IFA opinion is required unless these transactions are conducted under an existing general mandate. Out of the 1,229 transactions, 172 exceeded the 5 percent threshold (Figure 15). For these 172 transactions, 53 percent were conducted under existing general mandates, and hence were not required to disclose an IFA opinion.

Similar to the situation with disclosure of AC opinion, a significant 41 percent of these transactions did not disclose an IFA opinion even though it appears they were required to do so. This non-disclosure could be due to exemptions from this requirement under rule 921(4)(b) of the SGX listing rules. Again however, this cannot be confirmed given the limited public information available.

All of the IFA opinions that were disclosed were positive.

Figure 15: Disclosure of Independent Financial Adviser opinion

(Transactions with values above 5 percent of Net Tangible Assets)


0 10 20 30 40 50 60

Disclosed a positive IFA opinion

Were not required to disclose IFA opinion

Did not disclose IFA opinion

6%(10)

53%(92)

41%(70)


Provision and receipt of services are the most common transaction typesFigure 16 shows that the provision and receipt of services were the most common types of IPTs among the 1,229 transactions conducted. This pattern is not surprising due to the large range of transaction types that this category covers, including the sharing of management or other administrative services, the provision or receipt of raw materials/inventories for use in the ordinary course of business, and services provided or received in the ordinary course of business. The prevalence of this type of IPT calls for additional vigilance by regulators and boards of directors.

Provision and receipt of goods are not well categorisedThe study found that a large percentage of IPTs categorised under the provision of receipt of services were in fact transactions for the provision or receipt of goods, which is not a listed category in rule 904(6). The purchase and sale of goods includes transfers of raw materials, intermediate products and finished products that are revenue in nature. A rules-based interpretation of the listing rules may result in manipulation and/or omission of such transactions from the reporting requirements even if they are in essence IPTs. Adding the term ‘goods’ into the provision or receipt of services category will provide greater clarity on the intent of the rules.

2.4 Common types of interested person transactions

Figure 16: Distribution of IPTs across transaction types


0 5 10 15 20 25 30

Provision of services

Receipt of services

Others

Leasing of assets

Acquisition of assets

Provision of financial assistance

Receipt of financial assistance

Multiple types

Disposal of assets

Subscription of securities

Option grants

Issuance of securities

Establishment of joint ventures

29%(359)

26%(322)

13%(162)

10%(128)

5%(67)

5%(58)

4%(46)

3%(38)

3%(32)

0%(5)

0%(4)

0%(4)

0%(4)


Disclosure requirements can be enhancedIn Figure 16, the category ‘Others’ makes up 13 percent of total IPTs and is the second most common transaction type after the provision and receipt of services. This category consists of IPTs whose nature is undisclosed in the financial statements. The high frequency of non-disclosure is not surprising given that there is no requirement in the SGX rules to disclose the nature of IPTs. Under rule 907, only the ‘name of the interested person’, ‘the corresponding aggregate value of the interested person transactions entered into with the same interested person’ and whether the IPT is conducted pursuant to a general mandate must be disclosed in the annual report. The lack of disclosure requirements on the nature of IPTs may lead to certain IPTs being undertaken without being subject to scrutiny by shareholders and stakeholders.

For example, in the highly publicised case of China Sky, the accounting and internal audit services provided to the company by a related company, SK Lai & Co., were disclosed as fees for services provided by a related party. There was no specific disclosure on the nature of this transaction.

To better protect shareholders, the SGX may consider enhancing the disclosure requirements to include the nature of the IPT and the relationship of the company with the interested person.

Associate of Controlling Shareholder is the most common type of interested person relationshipFigure 17 shows that 36 percent of the surveyed IPTs were conducted between the entity at risk and an associate of a controlling shareholder, and 23 percent were between the entity at risk and an associate of a director. Compared to IPTs directly involving a director or a

controlling shareholder, IPTs involving their associates may face a higher risk of not being properly identified. This lack of clarity can lead to potential omission of significant IPTs.

It is thus important for listed companies to ensure that they have robust internal processes in place for identifying associates of the controlling shareholder, directors and the CEO. For example, there can be checklists (as is shown

Figure 17: Distribution of IPTs across relationship types


0 10 20 30 40

Director

Associate of Director

CEO

Associate of CEO

Controlling Shareholder

Associate of Controlling

Shareholder

Not disclosed

Others - Associate of executive

11%(141)

23%(282)

0%(5)

3%(33)

13%(157)

36%(439)

14%(170)

0%(2)

in Appendix A) in place for the relevant individuals (i.e., controlling shareholder, directors and CEO) to disclose their associates as accurately as possible. Companies should also obtain periodic confirmations/declarations ofrelationships and transactions from the individuals. Internal auditors should seek to ensure that the internal checklists are adequate. This process is necessary to prevent unintentional omissions of significant relationships.


The following are our recommendations for enhancing the listing rule requirements for RPTs in Singapore based on the analysis of IPT data.

Enhance disclosure requirements to include the nature of transaction and nature of relationship with the interested person. This requirement will ensure more transparency and can highlight serious conflicts of interest relating to IPTs.

2.5 Recommendations

Add ‘Provision of goods’ and ‘Receipt of goods’ as transactions that can be considered as IPTs. As the provision and receipt of goods makes up a significant proportion of the IPTs conducted, this modification will provide greater clarity in the IPT rules.

Consider requiring companies that qualify for exemptions from SGX requirements to disclose such exemptions. This requirement can allow for greater ease in monitoring by the SGX and the shareholders.

SECTION 3

Improving compliance with IPT rules This section provides recommendations to companies

to improve their identification of IPTs and their

compliance with IPT rules.



The SGX rules governing IPTs can be confusing and cumbersome. The separate accounting standard for dealing with related party transactions, with its different objectives and definitions, can add to that confusion.

Companies can use standardised templates/tools to simplify IPT identification and ensure compliance. Figure 18 provides a flowchart to aid

3.1 Tools for IPT identification and compliance

companies in applying the existing SGX rules to properly identify IPTs and comply with the relevant rules. The flowchart includes the relevant disclosure and approval requirements for different classes of IPTs.

Appendix A provides another example of such tools – a checklist that provides a step-by-step process to ensure compliance with each requirement in the IPT rules.


3.2 Enhancing the role of stakeholders involved

The SGX listing rules governing IPTs have multiple layers of safeguards against IPTs, such as the requirement to obtain an AC or IFA opinion when IPTs meet or exceed materiality thresholds. The AC and IFA are expected to provide independent opinions to shareholders, especially in cases when shareholder approval for IPTs is required by the listing rules. However, though the SGX listing rules broadly state the kinds of information that the AC and IFA have to include in their opinions, there is a lack on guidance on how the AC and IFA can go about providing useful and relevant information that complies with the spirit and not just the letter of the listing rule requirements.

To enhance the role of the AC as a safeguard against abusive IPTs, ACs can refer to the Guidebook for Audit Committees in Singapore,21 jointly published by the Monetary Authority

of Singapore (MAS), SGX, and the Accounting and Corporate Regulatory Authority (ACRA). The Audit Committee Guidance Committee (ACGC) guidebook sets out comprehensive guidance, case studies and best practices taken from industry, the ACGC members’ own experiences and those obtained from a focus group-based feedback process. This guidebook explains how the AC can play a more effective role for achieving company objectives in various circumstances, including those related to IPTs.22

The role of the IFA and other important stakeholders such as the internal auditors can be further enhanced in protecting against abusive IPTs through similar guidance provided by relevant organisations. Such additional practical guidance can increase the effectiveness and usefulness of these stakeholders.

21 http://www.mas.gov.sg/regulations-and-financial-stability/regulatory-and-supervisory-framework/corporate-governance/corporate-governance-of-listed-companies/audit-committee-guidance-committee.aspx22 Guidebook for Audit Committees in Singapore, Section VI: Other Duties and Responsibilities. A. Interested Person Transactions


*Definition of Associate:

(a) in relation to any director, chief executive officer, substantial shareholder or controlling shareholder (being an individual) means:(i) his immediate family;(ii) the trustees of any trust of which he or his immediate family

is a beneficiary or, in the case of a discretionary trust, is a discretionary object; and

(iii) any company in which he and his immediate family together (directly or indirectly) have an interest of 30% or more;

(b) in relation to a substantial shareholder or a controlling shareholder (being a company) (i) any other company which is its subsidiary or holding company

or is a subsidiary of such holding company or one in the equity of which it and/or such other company or companies taken together (directly or indirectly) have an interest of 30% or more

Figure 18: Flowchart for identification of IPTs and compliance with IPT rules

Step 1: Identifying Entity at Risk and Type of Interested Person

NO

NO

YES

YES

YES

YES

YES

NO

NO

NO

Transaction carried out with interested party

A

Transaction is made

Transaction is not an IPT


No further action required


Is the transaction is carried out by an entity at risk:

(a) The issuer (listed entity); or (b) A subsidiary of the issuer that is not listed on the Exchange or an

approved exchange; or (c) An associated company of the issuer that is not listed on the Exchange, or an approved exchange,

provided that the listed group, or the listed group and its interested person(s), has control

over the associated company?

Is the aggregate value of all transactions

entered into with the same interested person in the same financial

year >S$100k?

Is transaction carried out with a (i) director

of the issuer, or (ii) his associates*?

Is the transaction carried out with (i) CEO of the issuer, or (ii) his

associates*?

Is the transaction carried out with a (i) controlling shareholder of the issuer, or (ii)

his associates*?


NO

YES

NO

NO

YES

YES

Determine Nature of Transaction. Is it: (a) the provision or receipt of financial assistance;(b) the acquisition, disposal or leasing of assets;(c) the provision or receipt of services;(d) the issuance or subscription of securities;(e) the granting of or being granted options; and(f) the establishment of joint ventures or joint investments;

Check whether transaction meets any of the following criteria: (1) A payment of dividends, a subdivision of shares, an issue of securities by way of a bonus issue, a

preferential offer, or an off-market acquisition of the issuer’s shares, made to all shareholders on a pro-rata basis, including the exercise of rights, options or company warrants granted under the preferential offer.

(2) The grant of options, and the issue of securities pursuant to the exercise of options, under an employees’ share option scheme approved by the Exchange.

(3) A transaction between an entity at risk and an investee company, where the interested person’s interest in the investee company, other than that held through the issuer, is less than 5%.

(4) A transaction in marketable securities carried out in the open market where the counterparty’s identity is unknown to the issuer at the time of the transaction.

(5) A transaction between an entity at risk and an interested person for the provision of goods or services if: -(a) the goods or services are sold or rendered based on a fixed or graduated scale, which is publicly

quoted; and (b) the sale prices are applied consistently to all customers or class of customers. Such transactions include telecommunication and postal services, public utility services, and sale

of fixed price goods at retail outlets. (6) The provision of financial assistance or services by a financial institution that is licensed or approved by the

Monetary Authority of Singapore, on normal commercial terms and in the ordinary course of business. (7) The receipt of financial assistance or services from a financial institution that is licensed or approved by the

Monetary Authority of Singapore, on normal commercial terms and in the ordinary course of business. (8) Director’s fees and remuneration, and employment remuneration (excluding “golden parachute” payments).

A


IPT exempted from chapter 905, 906, 907 requirements END

Disclosure requirements in annual report:• Discloseinterestedpersonand

aggregate value of transactions conducted for the financial period

Circular to shareholders to seek general mandate:• Disclosedetailsandnatureof

interested person, terms of transaction, and rationale for the entity at risk

• DiscloseIFAopinion(unlessseekingfor renewal of general mandate)

• DiscloseACopinionifitdiffersfromIFA opinion

• Yearlyrenewalofgeneralmandate

Does the transaction meet any

of these criteria?


of these criteria?

Was general mandate sought?

Is transaction recurring and of a revenue or trading nature for its day-to-day

operations?

YES


Step 2: Identifying type of Interested Person transaction


YES

NO

Check if transaction meets the following criteria:

(1) The entering into, or renewal of a lease or tenancy of real property of not more than 3 years if the terms are supported by independent valuation.

(2) Investment in a joint venture with an interested person if:— (a) the risks and rewards are in proportion to the equity of each joint venture partner; (b) the issuer confirms by an announcement that its audit committee is of the view that the risks and

rewards of the joint venture are in proportion to the equity of each joint venture partner and the terms of the joint venture are not prejudicial to the interests of the issuer and its minority shareholders; and

(c) the interested person does not have an existing equity interest in the joint venture prior to the participation of the entity at risk in the joint venture.

(3) The provision of a loan to a joint venture with an interested person if:— (a) the loan is extended by all joint venture partners in proportion to their equity and on the same terms; (b) the interested person does not have an existing equity interest in the joint venture prior to the

participation of the entity at risk in the joint venture; and (c) the issuer confirms by an announcement that its audit committee is of the view that:—

(i) the provision of the loan is not prejudicial to the interests of the issuer and its minority shareholders; and

(ii) the risks and rewards of the joint venture are in proportion to the equity of each joint venture partner and the terms of the joint venture are not prejudicial to the interests of the issuer and its minority shareholders.

(4) The award of a contract by way of public tender to an interested person if:— (a) the awarder entity at risk announces following information:—

(i) the prices of all bids submitted; (ii) an explanation of the basis for selection of the winning bid; and

(b) both the listed bidder (or if the bidder is unlisted, its listed parent company) and listed awarder (or if the awarder is unlisted, its listed parent company) have boards, the majority of whose directors are different and are not accustomed to act on the instructions of the interested person or its associates and have audit committees whose members are completely different.

(5) The receipt of a contract which was awarded by way of public tender, by an interested person if:— (a) the bidder entity at risk announces the prices of all bids submitted; and (b) both the listed bidder (or if the bidder is unlisted, its listed parent company) and listed awarder (or if

the awarder is unlisted, the listed parent company) have boards, the majority of whose directors are different and are not accustomed to act on the instructions of the interested person or its associates and have audit committees whose members are completely different.

C

B

IPT exempted from chapter 906 requirements

IPT subjected to full set of requirements under chapter 9


of these criteria?


NO

NO

NO

YES YES

Calculate percentage of net tangible assets

(NTA)

Calculate percentage of net tangible assets

(NTA)

B C

Issuer to make immediate announcement: • Disclosedetailsandnatureof


• Announceaggregatevalueoftransactions conducted for the financial period

• DiscloseACopinion

Issuer to make immediate announcement: • Disclosedetailsandnatureof


• Announceaggregatevalueoftransactions conducted for the financial period

• DiscloseACopinion

Disclosure requirements in annual report:• Discloseinterestedparty

and aggregate value of transactions conducted for the financial period

Circular to shareholders to seek shareholder approval• DisclosevalueofIPTentered

into during the financial year in annual report

• DiscloseIFAopinion• DiscloseACopinionifitdiffers

from IFA opinion• Interestedpartyandassociate

of interested party to abstain from voting



Is transaction value is > or

= 3% of NTA?

Is transaction value is > or = 3% but

<5% of NTA?

Is transaction value is > or = 5%

of NTA?


Step 3: Reporting requirements


CONCLUSIONOur study shows that IPTs are a common occurrence among SGX-listed companies. Close to 50 percent of these companies are engaged in IPTs. Over the one-year period covered in our study, the total value of IPTs amounted to S$14.97 billion with a median value of S$633,000. Although there are business reasons for undertaking IPTs, they pose significant risks to minority shareholders if the regulatory framework is not sufficiently robust, if the conduct of such transactions lacks of transparency or proper governance, and if monitoring by regulators, shareholders or other stakeholders is weak.

The following are our key recommendations for improving the transparency and governance of IPTs in Singapore.

(i) Enhancements of SGX listing rulesAdopt a more principles-based approach, as a rules-based approach can potentially result in issuers complying with the letter but not the spirit of the rules. This can be accomplished by including a general definition of what constitutes an RPT, followed by specific examples and a list of exemptions to provide additional guidance. Where a transaction should be considered an RPT based on the general definition, the SGX should require that the issuer should follow the RPT rules even if the type of related party is not specifically listed in the rules.

Provide more guidance on the inclusion of key management personnel as related parties, as transactions with key management personnel beyond those who are currently specified in the rules can pose risks to shareholder interests.

Require aggregation of related transactions that are below the de minimis criterion. This requirement will discourage companies from splitting RPTs into a series of small transactions.

Adopt multiple benchmarks for determining materiality thresholds for transactions requiring disclosure and

shareholders’ approval is inadequate. The type of benchmark used should be linked to the type of RPT.

Base exemptions from disclosure/approval on both absolute amount and percentage relative to the appropriate benchmark, and also on the nature of the transaction.

Enhance disclosure requirements to include the nature of transaction and nature of relationship with the interested person. This will ensure more transparency and can highlight serious conflicts of interest relating to IPTs.

Add ‘Provision of goods’ and ‘Receipt of goods’ as transactions that can be considered an IPT. As the provision and receipt of goods make up a significant proportion of IPTs conducted, adding this category will provide greater clarity in the IPT rules.

Consider requiring companies that qualify for exemptions from SGX requirements to disclose such exemptions. This will allow for greater ease in monitoring by the SGX and shareholders.

(ii) Improving internal processes of companies

Establish robust internal tools for ease in identifying interested persons. The difficulty in identifying significant relationships such as the associates of interested persons warrants more focus. Providing ways to systematically check for such relationships can help to prevent non-compliance.

Use tools to ensure proper identification of IPTs and compliance with IPT rules.

Provide additional guidance on best practices to enhance the roles of stakeholders, including Audit Committees, Independent Financial Advisers and Internal Auditors, to advise them in preventing abusive RPTs.

General Requirements Yes No Comment

905 a Is the interested person transaction of a value equal to or more than 3 percent of the group’s latest audited net tangible assets (excluding transactions less than $100,000)?

b Has the issuer made an immediate announcement of any interested person transaction of a value equal to or more than 3 percent of the group’s latest audited net tangible assets?

c Does the aggregate value of all transactions entered into with the same interested person during the same financial year amount to 3 percent or more of the group’s latest audited net tangible assets?

(i) Did the issuer make an immediate announcement of the latest transaction and all future transactions entered into with that same interested person during the financial year?

906 a Is the interested person transaction of a value equal to or more than 5 percent of the group’s latest audited net tangible assets (excluding transactions of less than $100,000.)

b Did the issuer obtain shareholder approval for any interested person transaction of a value equal to or more than 5 percent of the group’s latest audited net tangible assets?

c Does the aggregate value of all transactions entered into with the same interested person during the same financial year amount to 5 percent or more of the group’s latest audited net tangible assets?

(i) Has the issuer obtained shareholder approval for the transactions entered into with that same interested person during the financial year that have yet to be approved by the shareholders?

907 a Has the issuer disclosed the:

(i) Name of the interested person; and

(ii) Aggregate value of the interested person transactions entered into with the same interested person?

b Has the issuer disclosed the above in the required format under Chapter 9 of the listing rules?


Appendix A: Checklist for enhancing internal controls for IPT

Sale of Property Units Yes No Comment

910 a Has the issuer announced a sale or proposed sale of any units of its local property projects, or those of its entity at risk, to an interested person or the relative of a director, chief executive officer or controlling shareholder within two weeks of the sale or proposed sale?

b Has the issuer make any sale or proposed sale of any units of its non-local property projects, or those of its entity at risk, to its interested persons?

(i) Is the sale or proposed sale value equal to or more than 3 percent of the group’s latest audited net tangible assets (excluding transactions of less than $100,000)?

(ii) Did the issuer make an immediate announcement of the above interested person sale or proposed sale with a value equal to or more than 3 percent of the group’s latest audited net tangible assets?

911 a Did the issuer state in the announcement relating to any sale or proposed sale of units of the issuer or those of its entity at risk’s property projects:

(i) The name of the project;

(ii) The name of each of the purchaser;

(iii) The unit number;

(iv) The sale price; and

(v) The percentage discount given?

912 a In the sale of units of its property projects to an issuer’s interested persons or the relative of a director, chief executive officer or controlling shareholder:

(i) Is the issuer’s board of directors satisfied that the terms of the sale(s) are not prejudicial to the interests of the issuer and its minority shareholders?

(ii) Has the audit committee reviewed and approved of the sale(s) and satisfied itself that the number and terms of the sale(s) are fair and reasonable and are not prejudicial to the interests of the issuer and its minority shareholders?

913 a Does the sale or proposed sale to an interested person require shareholder approval?

b Did the issuer obtain the approval within six weeks of the date of the sale or proposed sale?

914 a Have the interested person and any nominee of the interested person abstained from voting on all resolutions to approve the sales or proposed sales to the interested persons?


Exceptions (Compliance with Rules 905, 906 and 907 not required) Yes No Comment

915 a Is the transaction:

(i) a payment of dividends;

(ii) a subdivision of shares;

(iii) an issue of securities by way of a bonus issue;

(iv) a preferential offer; or

(v) an off-market acquisition of the issuer’s shares made to all shareholders on a pro-rata basis, including the exercise of rights, options or company warrants granted under the preferential offer?

b Is the transaction a grant of options, and is the issue of securities pursuant to the exercise of options under an employees’ share option scheme approved by the Exchange?

c Is the transaction between an entity at risk and an investee company, where the interested person’s interest in the investee company, other than that held through the issuer, less than 5 percent?

d Is the transaction in marketable securities carried out in the open market where the counterparty’s identity is unknown to the issuer at the time of transaction?

e Is the transaction between an entity at risk and an interested person for the provision of goods or services where:

(i) the goods or services are sold or rendered based on a fixed or graduated scale, which is publicly quoted; and

(ii) the sale prices are applied consistently to all customers or class of customers? (Such transactions include telecommunications and postal services, public utility services, and sale of fixed price goods at retail outlets.)

f Is the provision of financial assistance or services by a financial institution that is licensed or approved by the Monetary Authority of Singapore on normal commercial terms and in the ordinary course of business?

g Is the receipt of financial assistance or services from a financial institution that is licensed or approved by the Monetary Authority of Singapore on normal commercial terms and in the ordinary course of business?

h Is the transaction for Director’s fees and remuneration and for employment remuneration (excluding ‘golden parachute’ payments)?


Exceptions (Compliance with Rule 906 not required) Yes No Comment

916 a Is the transaction an entering into, or renewal of a lease or tenancy of real property of not more than 3 years, provided that the terms are supported by independent valuation?

b Is the transaction an investment in a joint venture with an interested person where:

(i) the risks and rewards are in proportion to the equity of each joint venture partner;

(ii) the issuer confirms by an announcement that its audit committee is of the view that the risks and rewards of the joint venture are in proportion to the equity of each joint venture partner, and the terms of the joint venture are not prejudicial to the interests of the issuer and its minority shareholders; and

(iii) the interested person does not have an existing equity interest in the joint venture prior to the participation of the entity at risk in the joint venture?

c Is the transaction between an entity at risk and an investee company, where the interested person’s interest in the investee company, other than that held through the issuer, less than 5 percent?

(i) the loan is extended by all joint venture partners in proportion to their equity and on the same terms;

(ii) the interested person does not have an existing equity interest in the joint venture prior to the participation of the entity at risk in the joint venture; and

(iii) the issuer confirms by an announcement that its audit committee is of the view that:

(1) the provision of the loan is not prejudicial to the interests of the issuer and its minority shareholders; and

(2) the risks and rewards of the joint venture are in proportion to the equity of each joint venture partner, and the terms of the joint venture are not prejudicial to the interests of the issuer or its minority shareholders?

d Is the transaction in marketable securities carried out in the open market where the counterparty’s identity is unknown to the issuer at the time of transaction?

(i) the awarder entity at risk announces the following information

(1) the prices of all bids submitted;

(2) an explanation of the basis for selection of the winning bid; and

(ii) both the listed bidder (or if the bidder is unlisted, its listed parent company) and listed awarder (or if the awarder is unlisted, its listed parent company) have boards, the majority of whose directors are different are not accustomed to act on the instructions of the interested person or its associates and have audit committees whose members are completely different?

e Does the transaction involve the receipt of a contract that was awarded by way of a public tender by an interested person where

(i) the bidder entity at risk announced the prices of all bids submitted; and

(ii) both the listed bidder (or if the bidder is unlisted, its listed parent company) and listed awarder (or if the awarder is unlisted, its listed parent company) had boards, the majority of whose directors were different, not accustomed to act on the instructions of the interested person or its associates, and had audit committees whose members were completely different?


Announcement Requirements Yes No Comment

917 a Does the announcement contain the details of the interested person transacting with the entity at risk, and does it report the nature of that person’s interest in the transaction?

b Does the announcement contain details including relevant terms of the transaction, and the bases on which the terms were arrived at?

c Does the announcement contain the rationale for and benefit to the entity at risk?

d Does the announcement include a statement that states:

(i) whether the audit committee of the issuer is of the view that the transaction is on normal commercial terms, and is not prejudicial to the interests of the issuer and its minority shareholders; or

(ii) that the audit committee is obtaining an opinion from the independent financial adviser before forming its view, which will be announced subsequently?

e Does the announcement include the current total for the financial year of all transactions with the particular interested person whose transaction is the subject of the announcement?

f Does the announcement include the current total of all interested person transactions for the same financial year?

g Does the announcement contain information regarding the issuer’s acceptance of a profit guarantee or a profit forecast (or any covenant that quantifies the anticipated level of future profits) from the vendor of businesses/assets?

Shareholder Approval Yes No Comment

918 a Was the shareholder approval obtained prior to the transaction being entered into, or, if the transaction was expressed to be conditional on such approval, prior to the completion of the transaction?

919 a Did the interested person and any associate of the interested person abstain from either voting on the resolution or accepting appointments as proxies (unless specific instructions on voting are given)?


General Mandate Yes No Comment

920 a Did the issuer disclose the general mandate in the annual report and give details of the aggregate value of the transactions conducted pursuant to the general mandate during the financial year?

b Did the issuer announce the aggregate value of transactions conducted pursuant to the general mandate for the financial periods that it is required to report on within the time required for the announcement of such report?

c Did the issuer disclose the general mandate in the form set out in Rule 907?

d Did the issuer send out a circular to shareholders seeking a general mandate?

(i) whether the audit committee of the issuer is of the view that the transaction is on normal commercial terms, and is not prejudicial to the interests of the issuer and its minority shareholders; or

(ii) that the audit committee is obtaining an opinion from the independent financial adviser before forming its view, which will be announced subsequently?

e Did the circular include:

(i) the class of interested persons with which the entity at risk will be transacting;

(ii) the nature of the transactions contemplated under the mandate;

(iii) the rationale for, and benefit to, the entity at risk;

(iv) the methods or procedures for determining transaction prices;

(v) the independent financial adviser’s opinion on whether the methods or procedures in (iv) are sufficient to ensure that the transactions will be carried out on normal commercial terms and will not be prejudicial to the interests of the issuer or its minority shareholders;

(vi) an opinion from the audit committee if it takes a different view to that of the independent financial adviser;

(vii) a statement from the issuer that it will obtain a fresh mandate from shareholders if the methods or procedures in (iv) become inappropriate; and

(viii) a statement that the interested person will abstain (and has undertaken to ensure that its associates will abstain) from voting on the resolution to approve the transaction?

f Is it a renewal of a general mandate?

g For renewal, has the audit committee confirmed that:

(i) the methods or procedures for determining the transaction prices have not changed since the last shareholder approval; and

(ii) the methods or procedures in (i) are sufficient to ensure that the transactions will be carried out on normal commercial terms and will not be prejudicial to the interests of the issuer or its minority shareholders?


Circular Requirements (except in the case of a general mandate) Yes No Comment

921 a Does the circular include the details of the interested person transacting with the entity at risk, and the nature of that person’s interest in the transaction?

b Does the circular include the details of the transaction (and all other transactions that are subject of aggregation) including relevant terms of the transaction and the bases on which the terms were arrived at?

c Does the circular include the rationale for, and benefit to, the entity at risk?

d Does the circular include an opinion in a separate letter from an independent financial adviser who is acceptable to the Exchange stating whether the transaction (and all other transactions that are subject of aggregation) is on normal commercial terms and is not prejudicial to the interest of the issuer or its minority shareholders?

e Does the circular include an opinion from the audit committee for:

(i) the issue of shares or the issue of other securities of a class that is already listed, for cash?

(ii) the purchase or sale of any real property where

(1) the consideration for the purchase or sale is in cash;

(2) an independent professional valuation has been obtained for the purchase or sale of such property; and

(3) the valuation of such property is disclosed in the circular?

f Does the circular include an opinion from the audit committee, if it takes a different view from that of the independent financial adviser?

g Does the circular include all other information known to the issuer or any of its directors that is material to shareholders in deciding whether it is in the interests of the issuer to approve the transaction?

h Does the circular include a statement that the interested person will abstain (and has undertaken to ensure that its associates will abstain) from voting on the resolution to approve the transaction?

i Does the circular include information regarding the issuer’s acceptance of a profit guarantee or a profit forecast (or any covenant that quantifies the anticipated level of future profits) from the vendor of businesses/assets?


AC : Audit Committee

ASX: Australian Exchange

IFA: Independent Financial Advisor

IPT: Interested Person Transaction

NTA: Net Tangible Asset

RPT: Related Party Transactions

SGX: Singapore Exchange

Acronyms used in report


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. KPMG Services Pte. Ltd. and National University of Singapore accept no responsibility for any loss which may arise from information contained in this publication. No part of this publication may be reproduced without prior written permission of KPMG Services Pte. Ltd. and National University of Singapore. © September 2013, KPMG Services Pte. Ltd. and National University of Singapore. All rights reserved. Printed in Singapore.

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