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Tuesday, 1 February 1994
Page: 41


Mr PUNCH (Parliamentary Secretary to the Minister for Defence) (5.06 p.m.) —The Corporate Law Reform Bill 1993 before us is yet another step in the essential progress towards a fairer and more informed fundraising market. The essence of the proposed changes in the bill is to insist upon greater disclosure of financial information to enable investors to make informed decisions on the relative attractiveness of securities on offer as investments. Undoubtedly, we still have a long way to go as a nation to live down the unfortunate experiences of the 1980s where high flying individuals misappropriated the term `entrepreneurs' and gave it a bad connotation.

  One way to explain the manifest greed motive of the corporate raiders of that period is to say the investors, small and not so small alike, were naive and did not know what they were going into as they chased higher earning assets in the high inflation climate of the 1980s. I think there is an element of this but this, of course, is not the full story. The evidence shows that many small investors either followed their own judgment and chose what appeared to be sound investments or were advised by independent experts to invest in such apparently promising openings.

  What happened was that investors, small and not so small alike, were effectively fleeced by misleading or false public information accompanying the invitation to the public to invest in particular securities or, just as relevantly, insufficient information. Some were also victims of white-collar fraud. In hindsight this served neither the public nor the genuine entrepreneurs well, and some of the worst offenders have yet to be brought to trial. So the climb back to respectability and corporate credibility on the national and international stage has not been without some difficulty.

  The paramount need to restore these qualities to our capital markets and enhance them is, of course, unquestioned by both sides of the House. How best to do it quickly is the trick. This bill is a further step in the right direction. This bill is primarily addressed to the fundraising activities from the public of some 4,000 entities. This target comprises some 1,200 entities listed on the Stock Exchange and a further 300 entities not required to list. It also includes the numerically greater `prescribed interest schemes' estimated to number around 2,500.

  The commission found that the term `prescribed interests' was a less than helpful term, except for the cognoscenti, and suggested that it be replaced by the expression `collective investment schemes'. Whichever term is used, the type of investments included are, for example, unit trusts—such as cash management trusts, equity trusts and property trusts—and also enterprise schemes where an asset, such as a farm, time share flat or racehorse, is managed for fun or profit for several investors.

  One of the spectacular growth investments is, of course, superannuation which is now driven in large part by the compulsory levy legislation and controlled separately under the Superannuation Industry (Supervision) Act 1993, although, of course, there are still some areas where super fund managers must have regard to the Corporations Law. But, to repeat: this bill does not address superannuation, which is now covered by its own supervisory legislation. Similarly, it does not apply to other specially regulated fund managers, such as banks, credit unions, building societies, life offices and friendly societies.

  To be particular, the bill addresses four matters. These are amendments relating to enhanced disclosure, amendments relating to fund raising, amendments relating to indemnifying or insuring an officer or auditor of a company, and amendments relating to the use of the ASC's database in court proceedings.

  I turn firstly to the disclosure provisions. Basically, the thrust of the disclosure provisions of the bill is to require increased provision of data to the Australian Stock Exchange at more frequent intervals. The enhanced corporate disclosure scheme has been designed in such a way as to minimise compliance costs to disclosing entities, while at the same time ensuring that the objectives of disclosure are achieved. No significant additional costs should result for listed entities which ensure, in accordance with present ASX listing rules, that material information is disclosed to the ASX on a timely basis; they will continue to disclose information to the ASX under its listing rules.

  Unlisted disclosing entities whose securities are sold or traded, including regulated prescribed interest schemes, should also not incur significant additional costs. This is because disclosure by unlisted disclosing entities will not be required where the information is required to be disclosed in accordance with the prospectus requirements. In most cases, the prospectus requirements will require unlisted entities to disclose material information in a prospectus and material changes or material new matters in a supplementary prospectus.

  Some costs can be expected in ensuring compliance with the requirement to disclose, in a timely manner, ongoing material information, especially where entities do not presently have reporting systems in place to make this disclosure. Some additional costs can also be expected for entities in complying with the new periodic reporting requirements, in particular, for half-year reporting.

  The additional compliance costs, however, are justified on the basis that increased disclosure by disclosing entities, being entities in which members of the public invest, will enable them to make more informed decisions about the allocation of their investment funds. Reporting will be to the Australian Stock Exchange, not to the Australian Securities Commission, thus avoiding present duplication—and that was referred to by the shadow Attorney-General, the honourable member for Tangney (Mr Williams).

  The ASC will receive from the ASX all the information which the ASX provides to the public. This represents a re-affirmation of the role of the Australian Stock Exchange as an industry self-regulator, with the ASC having an enhanced role as enforcer of fair disclosure if the ASX defaults. I am sure that many people on both sides of the House, including me, will watch with interest to ensure that it is, in fact, effective. For example, under the new provisions, the ASX has a statutory requirement to inform the ASC of serious contraventions of the Corporations Law, the listing rules and the business rules.

  The emphasis throughout this bill is on continuous disclosure. This means that it is not enough for a prospectus to be issued and allowed to stand in the marketplace if circumstances or conditions have changed which would materially affect the quality of information available to the prospective investor. If changed circumstances dictate, it will be necessary for a supplementary prospectus to be issued.

  There is a primary obligation under the bill for the relevant body corporate to disclose price sensitive information. There is provision for substantial penalties to be imposed on directors or other officers of corporations who knowingly fail to disclose relevant and material information to potential investors. Such penalties could arise either from civil or criminal actions or both where negligent misstatements are proven. Of course, under the Trade Practices Act, the TPA, proven falsity is sufficient grounds for the award of damages even in the absence of any proof of negligence. The provisions of this bill supplement existing sanctions under the TPA and Corporations Law.

  The obligation for continuous disclosure under this bill falls on the relevant body corporate but not on the directors as individuals. Directors and expert advisers would still be liable under the Crimes Act, of course, when non-disclosure was deliberate and was intended to deceive investors. These disclosure provisions will not apply to secondary trading in securities as investors in these markets are presumed to be professionals with greater knowledge of the fair market price of securities.

  Turning to the fund raising provisions of the bill, the ASC has adopted a broad interpretation to allow a person to lodge a supplementary prospectus to provide additional information in relation to a defective prospectus or to correct minor defects. While the ASC view is open as a matter of interpretation, it is not free from doubt. This was recognised by the prospectus law reform subcommittee of the Companies and Securities Advisory Committee in its March 1992 report. That report recommended that the law should be amended to ensure that supplementary prospectuses are allowed to be lodged where it is subsequently realised that a matter in existence at the prospectus issue date requires some form of amendment. The report also recommended that the law be amended to make it clear that an issuer can issue a reprinted prospectus which incorporates amendments. The amendments contained in the bill give effect to the recommendations of that report.

  In relation to indemnities, the bill will enable a company officer or auditor to be indemnified against a liability to another person, provided that the liability does not arise out of conduct involving a lack of good faith. A company will be able to insure its officers and auditors against a liability, again provided no wilful breach of duty to the company is involved. Finally, in relation to the database arising from enhanced disclosure and fund raising provisions, the bill provides that data given to the ASC can be used in evidence in court proceedings.

  To sum up, the provisions of this bill will go a long way towards restoring credibility to Australia's financial securities markets. This is all the more important now that the Stock Exchange is buoyant and the economy is in a strong recovery mode. A prosperous and dynamic economy needs appropriate mechanisms for entrepreneurs in the true sense to appraise prospective businesses, to take risks in the pursuit of profits and to issue invitations to fellow Australians to share in the adventure with their eyes wide open to the prospects and the pitfalls. This bill is a further important step in the right direction if we are to mobilise community savings to finance business expansion and thereby underpin economic growth with its concomitant benefits of enhanced job opportunities and a higher standard of living for everyone in our nation. I commend the bill to the House.