PETALING JAYA: The board of public listed companies (PLCs), especially independent directors and the audit committee, must establish effective processes and controls to prevent detrimental related-party transactions (RPTs) as these have become prevalent, said the Securities Commission (SC).

       “They must also ensure that decisions made on RPTs are in the best interest of the PLCs and its shareholders,” the SC said in its 2021 Annual Report.

       “Furthermore, PLCs should ensure that RPT disclosures and disclosures of other dealings between related parties are timely, complete and accurate.

       “Given the potential price impact of RPT announcements, PLCs’ internal policies on the handling and safeguarding of material non-public information should cover RPTs that are likely to have a material price impact,” it added.

       The regulator also said that investors should also pay more attention to general announcements in relation to transactions between related parties who are only connected by common directorships which includes memorandum of understanding or heads of agreement between related parties.

       “This is because such transactions or dealings may still carry the risk of erosion of minority shareholders protection. Generally, RPT refers to a transaction entered into by a PLC which involves the interest of a director, major shareholder, or person connected with such director or major shareholder,” the SC said.The SC said its assessment on several large RPTs ranging from RM250mil to more than RM3bil suggests that RPTs involving PLCs within family groups and those with long serving independent directors whom have served for more than nine years may require closer monitoring to ensure that the transactions are not detrimental to minority shareholders.

       “There were also instances where RPT issues and concerns were uncovered by auditors of financially distressed PLCs,” it said.

       The SC said these findings follow after a thematic assessment to holistically examine the regulatory regime and practices of (RPTs by PLCs, and some were performed in collaboration with academicians from the Monash University Malaysia School of Business.

       “Findings from the assessment and insights on the practices, market impact, and governance arrangements of RPTs may guide the SC’s future regulatory policies on RPTs,” it said.

       The SC noted also that RPTs were quite prevalent here and this is also supported by previous reports by the Organisation for Economic Co-operation and Development and CFA Institute which had highlighted this.

       “While not all RPTs were abusive, occurrences of detrimental RPTs did pose harm to investors,” it said.

       Based on the analysis of 5,500 transaction announcements between 2016 and 2020, the SC noted that some 494 of PLCs or around 50% of all PLCs on Bursa Malaysia made at least one RPT announcement during that period, the SC said.

       The analysis study also revealed that some 148 PLCs made both RPT and recurrent RPT announcements.

       “This indicates that RPTs are considerably prevalent among Malaysian PLC,” the regulatory body said noting that the size of the RPTs varied significantly, ranging from tens of millions of ringgit to several billions.

       “One of the desired outcomes of this assessment is to measure the price impact of RPT announcements. The analysis revealed there was a significant effect on share price movement on the day after RPT announcements were made,” it said.

       The SC also said it observed above-average share price movements on the day leading up to the RPT announcements and this indicates that there could be some leakages of price-sensitive information.

       “As part of the SC’s ongoing regulatory work, it vigilantly monitors emerging and potential harms to investors, and shall take the necessary steps to protect investors,” it said.