House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Outline

Schedule 1 to the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014 (Bill) amends the Corporations Act 2001 to facilitate improved trading of retail corporate bonds in Australia.

Date of effect: Sections 1 to 3 of the Bill have effect the day after the Act receives the Royal Assent. Schedule 1 to the Bill has effect on a day fixed by Proclamation or the day after six months after the Royal Assent.

Proposal announced: The measures that give effect to the simple corporate bonds regime were announced by the former Deputy Prime Minister and Treasurer in a Media Release titled 'A competitive and sustainable banking system', of 12 December 2010.

Financial impact: Nil.

Human rights implications: This Bill does not raise any human rights issues. See Chapter 1, paragraphs 1.96 to 1.108 - Statement of Compatibility with Human Rights.

Compliance cost impact: This Bill significantly reduces the compliance costs faced by issuers of certain retail corporate bonds.

Summary of regulation impact statement

Regulation impact on business

Impact: The Office of Best Practice Regulation has assessed the regulation impact statements as meeting the regulation impact statement requirements. The regulation impact statement is at Chapter 2.

Main points:

•

The regulation impact statement (RIS) identified that issuers of simple corporate bonds will incur lower bond disclosure costs due to the reforms set out in this Bill. This is likely to result in increased bond issuance.

•

The RIS also identified the removal of deemed liability for company directors when issuing simple corporate bonds will remove a disincentive to issue retail corporate bonds, but will also retain investors' rights to seek compensation for loss or damage due to an omission or misstatement in disclosure material.

•

Industry feedback indicated that if the reforms were to be put into effect there was likely to be an increase in retail corporate bonds being issued.

Chapter 1 - General amendments

Outline of chapter

1.1 Schedule 1 to this Bill amends the Corporations Act 2001 (Corporations Act) to facilitate increased trading in retail corporate bonds in Australia, through both direct and indirect processes.

Context of amendments

1.2 The proposed measures to facilitate increased trading of retail corporate bonds in Australia are one of the initiatives undertaken by the Government to reduce the regulatory burden on the financial system and promote a competitive and sustainable financial system. The overall objective of the measures are to improve the attractiveness for corporations issuing corporate bonds to retail investors while ensuring effective consumer protections are maintained.

1.3 The measures in this Bill will aid the establishment of a strong and liquid retail debt market in Australia by facilitating increased offerings of corporate bonds to retail investors in Australia through:

•

a streamlined disclosure regime;

•

changes to the civil liability provisions in respect to corporate bonds issued to retail investors; and

•

clarifying the application of the defences in respect to misleading and deceptive statements and omissions in disclosure documents relating to corporate bonds issued to retail investors.

1.4 The Corporations Act governs the fundraising practices of corporate entities in Australia. The provisions in the Corporations Act that relate to fundraising, particularly those that relate to the obligation to prepare a disclosure document (generally a prospectus) and its content, are contained in Chapter 6D.

1.5 Currently, the Corporations Act requires a corporation to prepare a full prospectus for the offer of corporate bonds to retail investors. In a full prospectus a corporation is required to disclose all of the information that investors and their professional advisors may reasonably require to make an informed assessment of:

•

the rights and liabilities attaching to the securities offered; and

•

the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue the securities.

1.6 The prospectus must contain this information to the extent that relevant persons involved in the preparation of the prospectus actually know the information or ought reasonably to have obtained the information by making inquiries. In addition to the general disclosure requirement, the Corporations Act also sets out a number of specific requirements for specific information to be disclosed.

1.7 While the issue of corporate bonds to retail investors requires a full prospectus, the issue of corporate bonds to sophisticated or professional investors (commonly referred to as 'wholesale investors') does not require a disclosure document such as a prospectus, on the basis that wholesale investors are considered to have sufficient resources and experience to evaluate the risks associated with an investment.

1.8 The Corporations Act also sets out a number of prohibitions in connection with the offering of securities, including an:

•

offer of securities in a body that does not exist;

•

offer of securities without a current disclosure document; and

•

offer of securities under a disclosure document that contains a misleading or deceptive statement or has an omission of material impact.

1.9 A contravention of the prohibitions in connection with the offering of securities could lead to both civil and criminal liability. Chapter 6D of the Corporations Act currently includes a special civil liability regime. This civil liability regime provides that each current or proposed director of the company making the offer and an underwriter to the offer, may all be held liable in respect of a misstatement or omission in a prospectus. A person who suffers loss or damage as a result of such a contravention may recover the amount of that loss or damage from any of those persons even if the person did not commit or were not involved in the particular contravention.

1.10 There are a number of defences that apply in relation to civil and criminal liability for a misstatement or omission in a disclosure document. The most important is the due diligence defence for prospectuses. It provides that a person will not be liable because of a misleading or deceptive statement in a prospectus or an omission from a prospectus if a person can prove that:

•

they made all inquiries (if any) that were reasonable in the circumstances; and

•

after doing so believed, on reasonable grounds, that the statement was either not misleading or deceptive, or that there was no omission from the prospectus in relation to a particular matter.

1.11 Stakeholders have indicated that the current requirements under the Corporations Act for offers of corporate bonds to retail investors create a regulatory bias. Companies structure their fundraising either solely to wholesale investors, or only to retail investors in the form of a rights issue or share purchase plan, in order to avoid the obligation to prepare a disclosure document and reduce the liability risk of directors of issuing corporations. This Bill contains measures to address this perceived regulatory bias.

1.12 All legislative references in this chapter are to the Corporations Act, unless otherwise specified.

Summary of new law

1.13 The amendments in this Bill introduce a mandatory, '2-part prospectus' for certain bond issuances to simplify the disclosure obligations for companies. While the framework for the 2-part prospectus will be contained in the Corporations Act, in particular, the eligibility criteria for using a 2-part prospectus, the content and structure of the 2-part prospectus will be specified by regulations.

1.14 The 2-part prospectus will be structured in the following manner:

•

Base: the base part would have a life of three years. The base prospectus will have general information that is unlikely to change significantly over three years about the issuer and the bond issue. Issuers will have the option of releasing a base prospectus in anticipation of making an actual offer of bonds. Issuers will not generally need to update the base document for further tranches of the same bond issue if there was no change in the risk information about the issuer.

•

Offer-specific: for each fund raising tranche, issuers will need to provide a second document outlining the key details of the offer, that being the offer-specific prospectus. The offer-specific prospectus will have similarities with the cleansing notice regime for other offerings, whereby it will include a statement outlining that the issuer has complied with their continuous disclosure obligations. Issuers will also need to disclose in the offer-specific prospectus any matters material to a consideration of an investment in the bonds that have not already been the subject of continuous disclosure.

1.15 To ensure that the new 2-part prospectus regime is sufficiently streamlined, certain material (as prescribed in regulations) will be able to be incorporated by reference in both the base prospectus and the offer-specific prospectus.

1.16 The amendments in this Bill to the directors' liabilities have been designed to reduce the burden on directors when issuing corporate bonds to retail investors under the 2-part prospectus regime and will provide directors with greater clarity on the steps required as part of the due diligence process in relation to certain criminal liability offences.

Comparison of key features of new law and current law

Detailed explanation of new law

Part 1: Amendments Relating to Simple Corporate Bonds

1.17 The amendments to the Corporations Act provide a new disclosure regime for bodies undertaking a fundraising by making an 'offer of simple corporate bonds' (as provided in new section 713A). The subject of the offer, that is the 'simple corporate bonds' are debt securities that satisfy the conditions prescribed in new section 713A. [Schedule 1, items 3 and 5, section 9]

1.18 The new disclosure regime will require body corporates to issue a 2-part simple corporate bonds prospectus (as outlined in new section 713B). The 2-part simple corporate bonds prospectus will consist of a base prospectus (as outlined in new section 713C) and an offer-specific prospectus (as outlined in new section 713D). [Schedule 1, items 1, 2 and 4, section 9]

Parallel trading of simple corporate bonds in the wholesale and retail markets

1.19 To facilitate parallel trading of simple corporate bonds in the wholesale and retail markets, the Corporations Act is amended to allow simple corporate bonds in the wholesale market to be offered to retail investors using depository interests (which is a beneficial interest in the simple corporate bond).

1.20 Depository interests provide retail investors with a beneficial ownership in an underlying security. This practice is commonly used in financial markets. The Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012 passed in late 2012 for the trading of Commonwealth Government Securities (CGS) utilises depository interests to facilitate retail trading of CGS. The use of depository interests for simple corporate bonds recognises the benefits of aligning the market practices associated with retail trading of CGS with simple corporate bonds.

1.21 To enable the beneficial interests to be used for simple corporate bonds, two new definitions have been inserted into the Corporations Act.

•

The definition of a simple corporate bond depository interest means a beneficial interest in simple corporate bonds, where the interest is or was issued by a simple corporate bonds depository nominee

•

The definition of a simple corporate bond depository nominee means a person who issues to someone else one or more beneficial interests, with the agreement of the body that issued the simple corporate bonds, in simple corporate bonds that the person:

-

legally owns;

-

would beneficially own, apart from the issue of those interests; or

-

has a beneficial interest.

[Schedule 1, items 6 and 7, section 9]

1.22 A depository nominee is only able to make an offer of simple corporate bond depository interests if they have the agreement of the issuing body. As such, the disclosure for an offer of simple corporate bond depository interests is the disclosure required to be provided by the issuer of the simple corporate bond (the underlying asset) not the simple corporate bond depository nominee.

1.23 Therefore, in order to remove the disclosure requirements from the depository nominee for the offer of simple corporate bond depository interests, where the simple corporate bonds depository interests are issued under a 2-part simple corporate bonds prospectus, the depository interests are not a security to which provisions that relate to fundraising, particularly those that relate to the requirement to prepare a disclosure document and its content, applies. [Schedule 1, item 10, subsection 700(1)]

1.24 To ensure that the disclosure requirements for the offer of simple corporate bond depository interests are appropriately dealt with in the Corporations Act, the definition of 'security' in section 761A has been modified to include a simple corporate bonds depository interest. [Schedule 1, items 45 and 46, section 761A]

1.25 A regulation making power has been inserted into Chapter 2L so that the requirement for a trust deed and trustee is able to be removed when making specified offers of debentures or a specified class of offers of debentures. This regulation making power has been inserted to ensure that regulations can be made to remove an offer of simple corporate bonds depository interests from Chapter 2L and provided appropriate consumer protections remain in place. [Schedule 1, item 8, subsection 283AA(4)]

1.26 Divisions 3 and 4 of Part 7.11 of the Corporations Act regulate the transfer of title in relation to designated securities. It is necessary to ensure that these provisions apply to simple corporate bonds depository interests, which would partly be achieved by expanding the list of securities in existing section 1073A to include simple corporate bonds depository interests. It is noted that, because of the way the law in this part of the Corporations Act is drafted, an additional regulation will have to be made to ensure that Division 4 of Part 7.11 applies to simple corporate bonds depository interests.

1.27 Therefore, a simple corporate bonds depository interest has been inserted into subsection 1073A(1) and a consequential amendment has been made to the note in subsection 1073E(1). [Schedule 1, items 47 and 48, paragraph 1073A(1)(da) and subsection 1073E(1)]

1.28 The changes to the Corporations Act in respect to simple corporate bonds depository interests provide a strong platform for the parallel trading of simple corporate bonds in the wholesale and retail markets. However, further changes will be required to ensure that all regulatory requirements that affect the trading of simple corporate bonds in wholesale and retail markets can be appropriately satisfied.

Offer of simple corporate bonds

1.29 If a body corporate makes an offer of debt securities where the debt securities are taken to be simple corporate bonds (as they satisfy the conditions set out in the Corporations Act), the offer will be considered to be an offer of simple corporate bonds. [Schedule 1, item 22, subsection 713A(1)]

Simple corporate bonds

1.30 To reduce the possible risk to investors, only relatively low risk and less complex bonds are able to take qualify for the streamlined disclosure regime, which requires that the debt securities satisfy all of the following conditions:

•

The securities must be debentures as defined in section 9 of the Corporations Act. [Schedule 1, item 22, subsection 713A(2)]

•

The securities must be quoted on a prescribed financial market. [Schedule 1, item 22, subsections 713A(3) and (4)]

•

The securities must be denominated in Australian currency. [Schedule 1, item 22, subsection 713A(5)]

•

The fixed term of the securities cannot exceed 15 years. [Schedule 1, item 22, subsection 713A(6)]

•

The principal and any accrued interest must be repaid to the holder at the end of the fixed term of the security. [Schedule 1, item 22, subsection 713A(7)]

•

The interest rate must be either a fixed or floating rate. A floating rate is comprised of a reference rate (to which the issuer has no direct control) and a fixed margin set by the issuer. [Schedule 1, item 22, subsection 713A(8)]

•

The securities can be subject to an increase in the fixed rate or the fixed margin in respect to the interest payable, but cannot be subject to a decrease in the interest payable. [Schedule 1, item 22, subsections 713A(9) and (10)]

•

Interest payments under the security must be paid periodically and cannot be deferred or capitalised by the issuing body. [Schedule 1, item 22, subsection 713A(11)]

•

The face value for the security cannot exceed $1,000. [Schedule 1, item 22, subsection 713A(12)]

•

Securities can only be redeemed prior to the end of the fixed term in the following specific circumstances:

-

at the option of the holder of the security;

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as a result of the acceptance of an offer made to the holder by the issuing body to buy back the security;

-

due to a change in a law, or in the application or interpretation of a law, if that change, application or interpretation has a negative effect on the tax treatment of the securities;

-

when there is a change of control of the issuing body (as defined in the terms of the security) and the redemption does not take effect unless all securities issued under the offer are redeemed; and

-

when fewer than 10 per cent of the securities issued under the offer remain on issue and the redemption does not take effect unless all securities in the class are redeemed.

[Schedule 1, item 22, subsection 713A(13)]

•

Debt to security holders is not subordinated to debts to unsecured creditors. [Schedule 1, item 22, subsection 713A(14)]

•

The securities must not be able to be converted into another class of securities. [Schedule 1, item 22, subsection 713A(15)

•

The price payable for the securities must be the same for all persons who accept the offer. [Schedule 1, item 22, subsection 713A(16)]

•

The body offering the securities must have continuously quoted securities, or is a wholly-owned subsidiary of a body corporate that has continuously quoted securities.

-

If the issuing body is a wholly-owned subsidiary of a body corporate the body corporate must guarantee, or agreed to guarantee, the repayment of any money deposited or lent to the borrower under the securities, and must also guarantee, or agree to guarantee, the repayment of interest payable on the securities.

The trading in those continuously quoted securities must not have been suspended for more than a total of five days during the 12-month period preceding the offer (or if the securities have been quoted for less than 12 months, during the period which the securities have been quoted).

If at a particular time, there is no prospectus, to determine whether a body has continuously quoted securities, it can be assumed that a prospectus exists and the date of that prospectus is the first day of the offer made under that prospectus.

[Schedule 1, item 22, subsections 713A(17) and (18)]

•

The most recent auditor's report on the most recent financial statements (either the yearly or half yearly statements) for the body issuing the securities (and if the securities are issued by a wholly-owned subsidiary of a body corporate which has continuously quoted securities, for that body corporate) must not include:

-

a statement that the auditor is of the opinion that the report is not in accordance with this Act; or

-

a description of a defect or an irregularity in the financial report; or

-

a description of a deficiency, failure or shortcoming in respect of the matters referred to in paragraph 307(b), (c) or (d); or

-

an emphasis of matter paragraph related to going concern.

a.

An auditor is required to include in their report an 'emphasis of matter' paragraph if they conclude that a material uncertainty exists that leads to significant doubt about the ability of the company to continue as a going concern (continue to operate) and that uncertainty has been adequately disclosed in the financial reports. The purpose of the inclusion of an 'emphasis of matter' paragraph is to draw the readers' attention to the relevant disclosures relating to the particular matters.

[Schedule 1, item 22, subsections 713A(19) and 713A(20)]

1.31 In addition to satisfying the above conditions:

•

the securities;

•

the offer of the securities;

•

the body issuing the securities; and

•

if the issuing body is a wholly-owned subsidiary of a body corporate which has continuously quoted securities, that body corporate;

must comply with any other conditions or requirements as set out in the regulations. [Schedule 1, item 22, subsections 713A(24) to (27)]

1.32 The Australian Securities and Investments Commission (ASIC) has the power to make a determination, which has the effect of preventing a body from relying on a 2-part simple corporate bond prospectus to offer simple corporate bonds. The determination must be published by ASIC in the Gazette. [Schedule 1, item 22, subsections 713A(21), (22) and (23)]

2-part prospectus for simple corporate bonds

1.33 When investing in debt securities it is important that retail investors receive all relevant information to enable them to make effective, informed investment decisions. In respect to debt securities, this is facilitated through the requirement for issuers to provide a full prospectus when offering debt securities. However, recognising that the terms of some debt securities make them relatively lower risk and less complex, the measures in the Bill require a 2-part prospectus to be used as the appropriate vehicle to ensure retail investors receive the relevant information.

1.34 A 2-part simple corporate bonds prospectus is a type of prospectus described in Division 3 of Chapter 6D of the Corporations Act as a type of disclosure document. As such, a 2-part simple corporate bonds prospectus will be taken to be a disclosure document of Chapter 6D for all related purposes. [Schedule 1, item 22, subsection 713B(2)]

1.35 A 2-part simple corporate bonds prospectus for an offer of simple corporate bonds for issue by a body is a combination of a base prospectus for the period during which the offer is made and an offer-specific prospectus for the offer. As a 2-part simple corporate bonds prospectus is a combination of a base prospectus and an offer-specific prospectus, the base prospectus and the offer-specific prospectus are not seen to be prospectuses in their own right, and as such they are not taken to be prospectuses or a disclosure document for the purpose of Chapter 6D. [Schedule 1, item 22, subsections 713B(1), (3) and (4)]

1.36 The life of a 2-part simple corporate bonds prospectus for an offer of simple corporate bonds commences on the day the relevant offer-specific prospectus for the offer is lodged with ASIC. The expiry of a 2-part simple corporate bonds prospectus for a simple corporate bond offer is the expiry date for the offer-specific prospectus for the offer. [Schedule 1, item 22, subsections 713B(5) and (6)]

Example 1.1

On 1 August 2013, Marley Ltd lodged a base prospectus with ASIC for offering simple corporate bonds. At the time of lodging the base prospectus, Marley Ltd also lodged with ASIC an offer-specific prospectus for simple corporate bonds. Under the offer of the simple corporate bonds, Marley Ltd disclosed in the offer-specific that the offer ended on 30 September 2013. After the initial success of the first offering of the simple corporate bonds, Marley Ltd undertook a second tranche. In respect to the second tranche, Marly Ltd lodged an offer-specific prospectus with ASIC on 1 March 2014 and disclosed that the offer would end on the 31 April 2014.

Under the initial offering (the first tranche) the life of the 2-part prospectus was two months (1 August to 30 September) and under the second tranche the life of the 2-part simple corporate bonds prospectus was two months (1 March to 31 April).

1.37 To facilitate consumer outcomes, the use of electronic communication in the form of website publication of the 2-part prospectus is required. In this regard, the base prospectus lodged for offering simple corporate bonds must be available on the issuing body's website throughout its life of three years (which begins the date on which the base prospectus is lodged with ASIC). For an offer specific prospectus, the issuing body must make their offer specific prospectus available on their body's website throughout the application period of the offer. [Schedule 1, item 22, subsections 713B(7) and (8)]

Base prospectus

1.38 A document prepared and lodged with ASIC for the purpose of making an offer of debt securities - that satisfies the conditions that establish the debt securities as simple corporate bonds - is a base prospectus for simple corporate bonds if the following requirements are satisfied:

•

the document is expressed such that is to be taken to be the base prospectus for all offers of simple corporate bonds made by the body during the three year life of the document;

•

the document must state that there will be an offer-specific prospectus for each offer of simple corporate bonds during the three year life of the document; and

•

the document must state that the 2-part simple corporate bond prospectus for each such offer will consist of the base prospectus and an offer-specific prospectus for the particular offer.

[Schedule 1, item 22, subsections 713C(1) to (3)]

1.39 If a base prospectus is replaced with a new base prospectus (the replacement document), the period to which the replacement document applies commences at the time at which it is lodged with ASIC and ends at the time the original base prospectus was to end. [Schedule 1, item 22, subsection 713C(4)]

1.40 In addition to satisfying the above conditions, a base prospectus must also contain any information or statements specified in the regulations. [Schedule 1, item 22, subsections 713C(5) and (6)]

1.41 When setting out information in the base prospectus, information contained in documents lodged with ASIC does not need to be incorporated into the base prospectus. Instead it can be incorporated into the base prospectus by reference. When referring to a document lodged with ASIC, the base prospectus must identify the document or the part of the document that contains the information that was lodged with ASIC. The reference must also inform people of their right to obtain a copy of the document lodged with ASIC. [Schedule 1, item 22, subsection 713E(1)]

1.42 Further, the reference must have sufficient information about the contents of the document (to which the reference is being made) to allow a person to decide whether they wish, or need to obtain a copy of a document or the part of a document. [Schedule 1, item 22, paragraph 713E(2)(b)]

1.43 If the information referred to is primarily of interest to professional analysts, advisors or investors with specialist information needs, the reference must also include a description of the document or part of the document. The reference must also include a statement indicating that the information is primarily of interest to those people. [Schedule 1, item 22, paragraph 713E(2)(a)]

1.44 The document, or part of a document to which the reference is being made, must be lodged with ASIC. In addition to documents required by the Corporations Act to be lodged with ASIC, other supplementary documents to which references are made can be lodged with ASIC for this purpose. [Schedule 1, item 22, subsections 713E(3) and (4)]

1.45 The issuer of the proposed offer must provide any documents lodged with ASIC, to which references are made in the base prospectus, free to retail investors during the life of the base prospectus which is the three-year period beginning on the date that the base prospectus was lodged with ASIC. [Schedule 1, item 22, paragraph 713E(5)(a)]

Offer-specific prospectus

1.46 A document that is prepared and lodged with ASIC for the proposed making of a particular offer of debt securities (that satisfy the conditions that establish the debt securities as simple corporate bonds) is an offer-specific prospectus if the following requirements are satisfied:

•

the document must state that it is the offer-specific prospectus for the offer;

•

the document must state that no securities will be issued under the offer after the expiry date specified in the document.

-

The expiry date must not be later than 13 months after the date the document is lodged with ASIC. If a replacement document is provided, the expiry date of the replacement document must be the same as that of the original document;

•

the document must state that there is a base prospectus that is applicable to the offer and that the disclosure document for the offer consists of the offer-specific prospectus and the base prospectus; and

•

the first offer made under the document, which purports to rely on a particular base prospectus lodged with ASIC for offering simple corporate bonds, will be required to have a minimum subscription of $50 million in order for that document to be an offer-specific prospectus. Subsequent offers made in respect to the base prospectus to which an offer has been made (where the minimum subscription requirement has been satisfied) do not have to satisfy the minimum subscription requirement.

[Schedule 1, item 22, subsections 713D(1) to (5)]

1.47 In addition to satisfying the above conditions, the offer-specific prospectus must also contain any information or statements specified in the regulations. [Schedule 1, item 22, subsections 713C(6) and (7)]

1.48 To ensure retail investors are provided with up to date disclosure in respect of a particular offer, the offer-specific prospectus may include material that modifies or supplements the base prospectus. [Schedule 1, item 22, subsection 713C(8)]

1.49 Consistent with the base prospectus, when setting out information in the offer-specific prospectus, information contained in documents lodged with ASIC does not need to be incorporated into the offer-specific prospectus. Instead it can be incorporated by reference. When referring to a document lodged with ASIC, the offer-specific prospectus must identify the document or the part of the document that contains the information lodged with ASIC. The reference must also inform people of their right to obtain a copy of the document lodged with ASIC. [Schedule 1, item 22, subsection 713E(1)]

1.50 Further, the reference must have sufficient information about the contents of the document (to which the reference is being made) to allow a person to decide whether they wish or need to obtain a copy of a document or part of a document. [Schedule 1, item 22, paragraph713E(2)(b)]

1.51 If the information referred to is primarily of interest to professional analysts, advisors or investors with specialist information needs, the reference must also include a description of the document or part of the document and must include a statement indicating that the information is primarily of interest to those people. [Schedule 1, item 22, paragraph 713E(2)(a)]

1.52 The document or part of a document to which the reference is being made must be lodged with ASIC. In addition to documents required by the Corporations Act to be lodged with ASIC, documents to which references are being made can be lodged with AISC for this purpose. [Schedule 1, item 22, subsections 713E(3) and (4)]

1.53 The issuer of the proposed offer must provide any documents lodged with ASIC to which references are being made in the offer-specific prospectus for free during the application period of the offer-specific prospectus. [Schedule 1, item 22, paragraph 713E(5)(a)]

Supplementary or replacement document

1.54 If an issuer becomes aware of a misleading or deceptive statement in the 2-part simple corporate bond prospectus or an omission from the document of information required for the document to be compliant with the 2-part prospectus regime (where there is a material adverse impact on an investor), or when a new circumstance has arisen since the disclosure document was lodged with ASIC, and that particular circumstance would have been required to be disclosed in the document to be compliant with the 2-part simple corporate bonds prospectus regime, an issuer may:

•

if the document is the base prospectus:

-

include material in the offer-specific prospectus to supplement or modify the base prospectus; or

-

lodge a replacement document with ASIC;

•

if the document is the offer-specific prospectus

-

lodge a supplementary offer-specific prospectus with ASIC; or

-

lodge a replacement document with ASIC.

[Schedule 1, item 31, subsection 719A(1)]

1.55 If the bond offerer becomes aware that the wording in a base prospectus or offer-specific prospectus becomes or is not presented in a clear, concise and effective manner, a replacement base prospectus or offer-specific prospectus may be lodged with ASIC. [Schedule 1, item 31, subsections 719A(2) and (3)]

1.56 Section 715A of the Corporations Act provides the general requirement that information in a disclosure document must be worded and presented in a clear concise and effective manner.

1.57 In recognition of the fact that both the base prospectus and the offer-specific prospectus are taken 'in totality' to be the disclosure document in respect to a particular offer of simple corporate bonds, the requirement for the base and offer-specific prospectuses to be presented in a clear, concise and effective manner will apply in such a way that both the base prospectus and the offer prospectus will need to, when read together, be clear, concise and effective.

1.58 While any inconsistencies between the base and offer-specific prospectuses may be seen to result in the simple corporate bond 2-part prospectus not being clear, concise and effective, the fact that the offer-specific prospectus contains information that supplements and/or modifies the base document does not necessarily imply that the 2-part prospectus is not presented in a clear, concise and effective manner.

1.59 If an issuer lodges a supplementary offer-specific prospectus, the issuer must provide, at the beginning of the document, a statement that the document is a supplementary document, a reference to the offer-specific prospectus to which the document supplements, and references to any other previous supplementary documents lodged in respect of the particular offer. [Schedule 1, item 31, subsection 719A]

1.60 A statement that the supplementary document should be read together with the offer-specific prospectus and any other supplementary documents lodged with ASIC is also required to be provided at the start of the document. [Schedule 1, item 31, paragraph 719A(4)(d)]

1.61 Once a supplementary offer-specific prospectus has been lodged with ASIC, it is taken in conjunction with the offer-specific prospectus, which it supplements to be the relevant offer-specific prospectus for the issuance from the time of lodgement. [Schedule 1, item 31, subsection 719A(7)]

1.62 If an issuer lodges a replacement document for a base prospectus or offer-specific prospectus, the issuer must provide, at the beginning of the document, a statement indicating that the document is a replacement document and that it is the replacement document for the previous base prospectus or offer-specific prospectus. [Schedule 1, item 31, subsections 719A(5) and (6) ]

1.63 Once the replacement document is lodged with ASIC, it is taken that:

•

if the replacement document is replacing the offer-specific prospectus, the replacement document is taken to be the specific prospectus for the issuance from that time; or

•

if the replacement document is replacing the base prospectus, the replacement document is taken to be the base prospectus for the issuance from that time.

[Schedule 1, item 31, subsections 719A(8)and (9)]

Directors' liability

Liability to pay compensation

1.64 The Corporations Act prohibits a person from offering securities under a disclosure document if, among other things, there is a misleading or deceptive statement, an omission of required material, or a new circumstance has arisen.

1.65 If there is an offer of securities and a person suffers loss or damage because of a misleading or deceptive statement, an omission of required material, or where a new circumstance had arisen in a disclosure a document, the person has the right to recover compensation for that loss or damage from a range of persons including each director of the body making the offer.

1.66 However, for an offer of simple corporate bonds under the 2-part simple corporate bonds prospectus, the range of persons to which the person has the right to recover compensation for a loss or damage does not include directors or proposed directors of the body making the offer (and, if the body is a wholly-owned subsidiary of a body corporate, does not include directors or proposed directors of that body corporate) unless the director or proposed director is involved in, among other things, the misleading or deceptive statement, the omission of required material, or where new circumstances have not been reflected in the disclosure document as required by the Corporations Act.

1.67 To ensure that the provisions dealing with misstatement in, or omission from, disclosure documents apply to simple corporate bonds prospectuses, references to the 2-part simple corporate prospectus disclosure documents have been made to cover an omission from the disclosure document of information or where a new circumstance has arisen that would have been required to be included in the 2-part simple corporate bond prospectus. [Schedule 1, items 39 and 40, paragraph 728(1)(b) and subparagraph 728(1)(c)(ii)]

1.68 The table in subsection 729(1) has been amended such that the liability for loss or damage for a contravention of subsection 728(1) for each director or person named as a proposed director of a body making an offer if the offer is made by the body, does not apply in respect to a 2-part simple corporate bond prospectus. [Schedule 1, item 41, section 729]

1.69 The liability placed on people liable on a disclosure document to inform the person making the offer about deficiencies in the disclosure document will continue to apply to directors and proposed directors. [Schedule 1, item 44, subsection 730(14)]

1.70 Furthermore, references to the 2-part simple corporate prospectus disclosure documents have been made to ensure that section 730 of the Corporations Act applies appropriately. [Schedule 1, items 42 and 43, paragraph 730(1)(b) and subparagraph 730(1)(c)(ii)]

Part 2 amendments relating to false or misleading statements etc

Reasonable steps obligations

1.71 In respect to the requirement to take reasonable steps in Part 9.4 of the Corporations Act, the person will be taken to have taken reasonable steps to ensure that:

•

a statement or information was not false or misleading in a material particular:

-

if the person proves that all inquiries (if any) that were reasonable in the circumstances were made, and after making those inquiries the person believed on reasonable grounds that the statement or information was not misleading in a material particular. [Schedule 1, items 52 and 53, subsections 1308(10) and 1309(7)]

-

if the person proves that they relied on information provided to them by somebody other than a director, employee or agent of the body (if the person is a body) or someone other than an employee or agent of the individual (if the person is an individual) and the reliance placed on the information by the person was reasonable in the circumstances. [Schedule 1, items 52 and 53, subsections 1308(12) and 1309(9)]

•

the information in a document did not omit or have omitted from it any matter or thing that without which the document would be misleading or deceptive in a material respect:

-

if the person proves that all inquiries (if any) that were reasonable in the circumstances were made, and after making those inquiries the person believed on reasonable grounds that there was no such omission. [Schedule 1, item 52, subsection 1308(11)]

-

if the person proves that they relied on information provided to the person by somebody other than a director, employee or agent of the body (if the person is a body), or someone other than an employee or agent of the individual (if the person is an individual), and the reliance placed on the information by the person was reasonable in the circumstances. [Schedule 1, item 52, subsection 1308(13)]

•

the information in the document did not omit or have omitted from it any matter or thing that would render the information in the document misleading in a material particular:

-

if the person has made all inquiries (if any) that were reasonable in the circumstances to make, and after making those inquiries the person believed on reasonable grounds that there was no such omission. [Schedule 1, item 53, subsection 1309(8)]

-

if the person proves that they relied on information provided to the person by somebody other than a director, employee or agent of the body (if the person is a body), or someone other than an employee or agent of the individual (if the person is an individual), and the reliance placed on the information by the person was reasonable in the circumstances. [Schedule 1, item 53, subsection 1309(10)]

1.72 These amendments apply to disclosures made in any document that is required to be lodged under the Corporations Act. This means that they will apply not only to 2-part simple corporate bond prospectuses as introduced by this Bill, but also to existing disclosure documents for example product disclosure statements.

Application and transitional provisions

1.73 The amendments in sections 1 to 3 of the Bill have effect the day the Act receives the Royal Assent. Schedule 1 to the Bill has effect on a day to be fixed by Proclamation. However, if the provisions do not commence within the period of six months from the day the Bill receives the Royal Assent, they will commence on the day after the end of that period.

Consequential amendments

1.74 The content requirements under Division 2 of Part 6.5 in respect of the contents of a bidder's statement are being amended to include material required by sections 710 to 713, or sections 713C to 713E where:

•

securities (other than managed investment products) are offered as consideration under the bid; and

•

the bidder is the body that has issued or will issue the securities, or a person who controls that body.

[Schedule 1, item 9, paragraph 636(1)(g)]

1.75 The table in section 705 shows which disclosure documents must be used if an offer of securities needs disclosure to investors under Part 6D.2 has been amended to include the 2-part simple corporate bonds prospectus in the types of disclosure documents required when there is an offer of simple corporate bonds.

1.76 Further, to ensure the ability of an issuer of simple corporate bonds to continue to offer simple corporate bonds for two years after commencement, a note has been added to section 705. This note clarifies that in accordance with subsection 709(1) a prospectus other than a 2-part simple corporate bonds prospectus can be issued for retail corporate bonds for two years after commencement. [Schedule 1, items 11 and 12, section 705]

1.77 The ability for issuers to not provide investors with disclosure in respect to offers that are made to existing debenture holders, does not extend to the offer of simple corporate bonds or the offer of debentures if the offer is made to holders of simple corporate bonds. [Schedule 1, item 13, subsection 708(14A)]

1.78 To remove the requirement that a prospectus be prepared for an offer of simple corporate bonds, an amendment has been made so that a prospectus or a short form prospectus disclosure document will not include an offer of securities that is an offer of simple corporate bonds. [Schedule 1, item 14, subsection 709(1)]

1.79 To provide flexibility for issuers of simple corporate bonds for the period of two years after commencement, an issuer will:

•

if the offer of simple corporate bonds needs disclosure under Part 6D.2 and the offer begins during the two-year period:

either prepare:

-

a prospectus; or

-

a 2-part simple corporate bonds prospectus in accordance with sections 713B to 713E; or

•

if an offer of simple corporate bonds needs disclosure under Part 6D.2 and the offer begins after the two year period the issuer must prepare a 2-part simple corporate bonds prospectus.

[Schedule 1, item 15, subsections 709(1A), (1B) and (1C)]

1.80 Under Chapter 6D and issuer may be able to provide a profile statement for an offer of corporate bonds. However, an issuer is not able to provide a profile statement for an offer of simple corporate bonds. [Schedule 1, item 16, subsection 709(2A)]

1.81 An issuer is not able to provide an information statement for an offer of simple corporate bonds after the twoyear period has ended. Prior to the twoyear period ending an issuer will be able to use an information statement if they satisfy subsection 709(4). [Schedule 1, item 17, subsection 709(4)]

1.82 The general disclosure test for content and the specific disclosure requirements that apply to prospectuses do not apply to a 2-part simple corporate bond prospectus. [Schedule 1, items 18 and 19, subsections 710(4) and 711(9)]

1.83 Further, the content requirements for short form prospectuses and the special content rules for continuously quoted securities do not apply to 2-part simple corporate bonds prospectuses. [Schedule 1, items 20 and 21, subsections 712(6) and 713(7)]

1.84 The outcome that a disclosure document is given the date on which it is lodged with ASIC does not apply to a 2-part simple corporate bonds prospectus. Instead the date of a 2- part simple corporate bonds prospectus is the date on which the offer-specific prospectus for the offer is lodged with ASIC. [Schedule 1, item 23, subsections 716(1A) and 716(1B)]

1.85 The table in section 717 that provides an overview of the procedure for offering securities has been amended to include references for the preparation of a 2-part simple corporate bonds prospectus and to include a reference for when supplementary or replacement documents relating to 2-part simple corporate bonds prospectus may be lodged with ASIC. [Schedule 1, items 24, 25 and 26, section 717]

1.86 The general requirement for lodging a disclosure document for an offer of securities does not apply to the 2-part simple corporate bonds prospectus. The requirement for the lodging of the 2-part simple corporate bonds prospectus is set out in section 713B. [Schedule 1, items 27 and 28, section 718]

1.87 A simple corporate bond requires a tailored approach to the lodgement of supplementary or replacement documents. This results in 2-part simple corporate bonds prospectuses not being covered by the operation of section 719. Reflecting this, the heading of section 719 has been repealed and replaced with the heading 'Lodging supplementary or replacement document-general'. [Schedule 1, items 29 and 30, section 719 (Heading), subsection 719(6)]

1.88 The table in section 720 that outlines the consent required for the lodgement of a disclosure document has been amended to ensure that simple corporate bonds offered under a 2-part simple corporate bond prospectus are not included 'offers of securities for issue' and has been amended such that the consent requirements for an offer of simple corporate bonds are outlined as a separate offer.

1.89 In this regard, an offer of simple corporate bonds under the 2-part simple corporate bonds prospectus requires the consent of:

•

every director of, and every person named in the document as a proposed director of, the body; and

•

if the simple corporate bond is in a managed investment scheme made available:

-

by the body every director of that body; or

-

by an individual.

[Schedule 1, items 32 and 33, section 720]

1.90 Issuers of 2-part simple corporate bond prospectuses are given choices in how they must act if there is an omission from the disclosure document, or where a person becomes aware of a new circumstance that would have been required to be included in the 2-part simple corporate bond prospectus. [Schedule 1, items 34, 36 and 37, subparagraphs 724(1)(c)(ii) and (d)(ii), subsection 724(3)]

1.91 The note to subsection 724(2) has been amended to provide a reference to new section 719A in respect to the lodging of supplementary or replacement documents for a 2-part simple corporate bonds prospectuses. [Schedule 1, item 35, subsection 724(2)]

1.92 The table in subsection 724(3) has been amended to exclude 2-part simple corporate bonds prospectuses from a prospectus in row 3, and inserts a new circumstance - that being the disclosure document is a 2-part simple corporate bonds prospectus. The document requirements for this new circumstance - that of a supplementary or replacement document - corrects deficiencies or changes the terms of the offer is also inserted. [Schedule 1, items 36 and 37, subsection 724(3)]

1.93 Under a 2-part simple corporate bond prospectus, an issuer is able to lodge a base prospectus with ASIC and use that base prospectus for a period of three years. In order to make an offer of simple corporate bonds the issuer is required to provide an offer-specific prospectus that together with the base prospectus forms the disclosure document for the offer. As the base document can be used for a period of three years, the issuer may wish to offer subsequent tranches of the simple corporate bonds. When the issuer makes additional offers no waiting period will apply after the lodgement of the offer-specific prospectus before processing applications for simple corporate bonds provided the simple corporate bonds are the same class as existing securities that are quoted on a prescribed market immediately before the application period with the exception of differences in respect to the:

•

fixed term of the securities (if any);

•

rate at which the interest is payable under the securities; or

•

date on which the holders are to be paid interest under the securities.

[Schedule 1, item 38, subsection 727(3)]

1.94 To avoid doubt that ASIC is not prevented from making a determination under new section 713A(23) a reference to the new subsection has been inserted into the provisions relating to the effect of a failure to comply with an infringement notice in Chapter 9 of the Corporations Act. [Schedule 1, item 49, subparagraph 1317DAG(5)(a)]

1.95 When considering whether reasonable steps have been taken when there was false or misleading, or if an omission of a thing that without that thing the document would be misleading in respect to an offer, materiality is to be taken into account. [Schedule 1, items 50 and 51, subsection 1308(4)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014

1.96 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.97 This Bill amends the Corporations Act to reduce the regulatory burden on issuers of corporate bonds and to provide company directors with more certainty of their liability in relation to disclosure material.

1.98 This Bill fulfils the Government's commitment to reduce regulatory burdens on business. It also delivers on the Government's commitment in Our plan: real solutions for all Australians in which it states it will give priority to the recommendations of the report by the Australian Financial Services Task Force, Australia as a Financial Centre: Building on our Strengths (Johnson Report).

1.99 The Johnson Report recommendation 4.6 is that, 'Such issuers [retail corporate bonds issuers] would no longer be required to issue a detailed prospectus. Rather a short prospectus could be issued, cross referencing all relevant documents already lodged with ASIC or the market operator [such as the ASX]. Those companies with a program of issues over time could use a base prospectus with a supplementary prospectus for each new issue.'

Human rights implications

1.100 The impact of the reforms in this Bill have been considered in relation to the human right to a fair trial and fair hearing.

1.101 The Bill provides greater clarity on what constitutes 'reasonable steps' in relation to the criminal offences of making false or misleading statements where those statements are required by, or for the purposes of, the Corporations Act 2001 (Corporations Act) or lodged with or submitted to the Australian Securities and Investments Commission (ASIC).

1.102 The Bill provides for a person to be deemed to have taken reasonable steps if they made reasonable inquiries or placed reasonable reliance on information provided by others, and after making their inquiries the person believed that the statement or information was not misleading in a material way.

1.103 The changes to what constitutes reasonable steps will take effect from the date on which the Bill receives the Royal Assent.

1.104 The changes reflect the practical application of the criminal liability provisions in the Corporations Act (sections 1308 and 1309). This clarifies duties required by individuals who make or authorises disclosure material. It is not a dilution of criminal liability.

1.105 Article 15 of the International Covenant on Civil and Political Rights (ICCPR) provides that no one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence, under national or international law, at the time when it was committed. Nor shall a heavier penalty be imposed than the one that was applicable at the time when the criminal offence was committed. If, subsequent to the commission of the offence, provision is made by law for the imposition of a lighter penalty, the offender shall benefit thereby.

1.106 The Bill engages Article 15 in that it provides clarity on the defence available to those who authorise or make statements.

1.107 The amendments to the Corporations Act provided by the Bill will give those involved in preparing and authorising statements required by the Corporations Act or lodged/submitted to ASIC greater certainty in their defence of any claims of them having made a false or misleading statement. It does not diminish the defence available to a person accused of making a false or misleading statement. The reforms do not apply any changes retrospectively. It has the potential to improve the person's rights in defending themselves against accusations of making a false or misleading statement.

Conclusion

1.108 This Bill is compatible with human rights as it does not raise any human rights issues.

Chapter 2 - Regulation impact statement - streamlining disclosure and liability requirements

Policy objective

2.1 An effective retail corporate bond market offers investors an opportunity to diversify their investments in terms of the risk they face and in the length of fixed income investment choices.

2.2 It also enables bond issuers to access another source of funding which may be more attractive to them than the wholesale market, lending institutions or offering equity. During the global financial crisis when access to funding became very tight, enabling business to access funds from retail investors could have given business more flexibility and reduced their risk. Also, as lending institutions would not be as heavily sought to provide funding for big business, it may provide scope for lending institutions to lend to other sectors of the economy.

2.3 The Government's objective is to aid the development of a strong retail corporate bond market in Australia while maintaining appropriate investor protection. This may include removing regulatory burdens that could act as disincentives to bond issuance. The Government is also conscious of the need to ensure adequate investor protection from undisclosed risks to promote confidence in the retail corporate bond market.

2.4 If Australia is to develop into a leading financial centre that provides effective and efficient financial services across a broad range of products and asset classes, then a more diversified and liquid bond market is required.

Background

2.5 Corporate bonds are a financial instrument companies use to raise funds from investors. Investors 'buy' bonds in return for the company paying the investor interest over the life of the bond with the principal purchase amount being repaid at the end of the bond's life, that is, at the bond's maturity date. A company may make one or more tranches of bonds from a bond offer.

2.6 An offer of retail corporate bonds requires disclosure to investors under Chapter 6D of the Corporations Act 2001 (the Corporations Act). Retail investors are similar to 'retail clients' as defined in sections 761G and 761GA and are investors who have net assets of less than $2.5 million, or gross income for each of the last two financial years of less than $250,000 per annum or a person who is not controlling $10 million or more in assets. This is in contrast to wholesale bonds, which may be offered to sophisticated or professional investors (commonly referred to as wholesale investors).

2.7 As at June 2013, $300 million of corporate bonds were on issue in the Australian retail market. In the international wholesale market Australian corporate entities had bonds worth $612.4 billion on offer.

2.8 Where financial products, including corporate bonds, are offered, the Corporations Act imposes disclosure obligations on product issuers. The Corporations Act also provides the right to those who suffer loss or damage resulting from misstatements or omissions in disclosure material. Persons liable for loss or damage include directors (or proposed directors) of the body making the offer and underwriters named in the disclosure material. Criminal penalties can also apply where a person makes misstatements or omissions in disclosure material and a person suffers loss or damage.

2.9 The degree of disclosure required by the Corporations Act is greater where the financial product, such as a bond, is offered to retail customers compared to wholesale customers. Retail customers are less likely to have the financial background or analytical tools available to be able to make their own assessment of risks associated with a financial product and the information provided through the disclosure obligations is intended to enable the retail investor to better understand the risks of the financial product they are investing in.

2.10 Disclosure relief is available for certain offers of 'vanilla' bonds, which are offered under a simplified vanilla bonds prospectus.^[1] Vanilla bonds are bonds which are straight forward and do not have complex or unusual terms and conditions. For example, features the bond must have include that: the bond be denominated in Australian dollars, have a maturity length of no more than 10 years, repay the principal to the investor at the bond's maturity, pay interest periodically, not be convertible to any other form of security and rank at least equally with amounts owed to unsecured creditors of the issuer.

2.11 The current relief for vanilla bonds allows offers of bonds to be made using a simplified two-part prospectus where:

•

investors are provided with a base prospectus (which could be used for a number of offers, and has a maximum life of two years), together with a second part prospectus (which relates to the specific or variable aspects of the bond offer, such as the terms of the bond, the interest payable on the bond and the timing of interest payments);

•

the combined documents must contain information on the key features, risks and benefits of the bonds, brief details of the business of the issuer and a description of its financial position; and

•

bond issuers are required to update key financial disclosures on a half-yearly basis, and provide these updates with other quarterly reports to the relevant market operator and include them on the issuer's website.

2.12 Australian corporate entities generally have good access to finance through wholesale markets, lending institutions or equity financing. However, there are benefits of a deeper and more liquid retail corporate bond market for bond issuers and investors.

2.13 As at December 2013, Australian corporate entities had $612.4 billion of bonds on offer in international markets with another $9.4 billion of Australian Government Treasury bonds on offer internationally^[2]. This contrasts with only $300 million of bonds on offer in the domestic retail market. Further, where securities including bonds are offered in Australia, corporate bonds represent only 0.1 per cent of the total fixed interest securities listed on the ASX and only 0.8 per cent of the total private sector fixed interest securities listed on the ASX (see Table 2.1).

Source: http://www.asx.com.au/documents/products/ASX_IRM_Monthly_update_-_June_2013_(2).pdf

2.14 The Report by the Australian Financial Services Task Force on 'Australia as a Financial Centre: Building on our Strengths' (the Johnson Report)^[3] assessed the strengths and weaknesses of Australia's financial sector and found that Australia's retail corporate bond market is one area of weakness in an otherwise relatively efficient and competitive financial sector. This is in contrast to the retail bond markets of Europe, the United States and the United Kingdom, which all have thriving bond markets.

2.15 The Johnson report found that there was very limited choice for consumers in the retail bond market in Australia with only a small number of corporate bonds on offer and that the corporate entities offering bonds were dominated by the banking sector. It also noted that the bonds on offer provided a low diversity in maturity life and it was significantly shorter (as average maturity of bond issues was 2.5 years) than the bonds on offer in other countries which also had a greater variation of maturity lengths. Further, in Australia there was little development of a secondary market to trade in corporate bonds or their derivatives which restricted the liquidity of the bond market.

2.16 Costs can be a major deterrent to raising finance through the retail market. Table 2.2 below shows indicative costs of raising finance through different mechanisms.

¹ Estimates based on investment grade 'BBB - band' ASX200 corporate borrower seeking $200 million. Pricing is dynamic and will depend on the company, its business and financial performance and prospects.

² Professional fees will depend on the advisory firm and any complexities introduced by the bond issuer and the capital raising option chosen.

2.17 It is worth noting that despite the higher cost of raising finance through a retail corporate bond offer, the offer of retail corporate bonds can be a viable option for raising finance. For example, companies who are not large enough to be eligible for a credit rating cannot access the wholesale bond market. At other times a corporate entity may be unable to raise finance as it may breach ASX listing rules which prohibit a listed company from issuing more than 15 per cent of its issued equity securities in any 12-month period.

2.18 Issuing corporate bonds in the retail market generally requires a detailed prospectus. Retail investors are provided with a prospectus to alert them to the risks involved with the bond as the Corporations Act assumes that retail customers are not fully aware, or are not sufficiently equipped, to evaluate the full range of risks that can be inherent in a corporate bond. A bond issued in the wholesale market however, does not require a prospectus as wholesale market investors are considered to have sufficient information and possess sufficient resources to evaluate the investment.

2.19 To ensure that bond issuers satisfy the disclosure requirements, prospectus material tends to be long and highly detailed. Creating highly detailed and lengthy prospectus documents can be a major cost for bond issuers with the costs of some prospectus reaching $1.5 million for a retail bond issue. It is also the case that lengthy, highly detailed disclosure documentation does not necessarily improve the retail client's understanding of the risks of the bond as most people find it difficult to absorb the large volume of information and the detailed nature of the disclosure requirements makes it difficult to identify, or deters clients from identifying, key information about the risks of the bond.

2.20 Relief from some of the disclosure requirements is available where a bond has 'vanilla' features through ASIC Class Order CO 10/321. However, the disclosure relief provided by CO 10/321 has not been sufficient to make it attractive for corporate entities to issue bonds in the retail market. Since the CO 10/321 came into effect in May 2010, only two bond issues have been made utilising CO 10/321's disclosure relief. In addition, when one of the issuers offered bonds under the conditions set out in CO 10/321, the issuer was uncertain as to what information needed to be included in each of the parts of the two-part prospectus and undertook considerable work to ensure the content in each of the documents was appropriate. This resulted in the bond issuer incurring greater costs and time delays than it was expecting. In targeted consultations, Treasury was told by industry stakeholders that bond issuers were reluctant to issue bonds under CO 10/321 as they were concerned that the process could be too time consuming and costly.

2.21 In its submission to the former Government's Discussion Paper: Development of the retail corporate bond market: streamlining disclosure and liability requirements (former Government's Government Discussion Paper), the Australian Bankers' Association (ABA) considered that the 'existing regulatory relief [provided by CO 10/321] is too restrictive with regards to the conditions applied to the bonds'.

2.22 A non-regulatory, but relevant additional element of the high cost of issuing bonds in the retail market is the need to liaise with a larger broker network than is required when selling bonds in the wholesale market. Bond issuers incur costs through the need to distribute information, liaise and pay fees through a broker network. Selling a bond in the retail market may require engaging with hundreds of brokers (and advisers) to inform and educate them about the bond. This compares to dealing with only a handful of brokers to sell bonds in the wholesale market. Further to higher distribution costs compared to the wholesale market, the purchases of bonds by retail investors can take longer resulting in a delay in the entity raising funds and potentially increasing the entity's costs.

2.23 The second major deterrent to issuing retail corporate bonds is the law concerning civil and criminal liability risk borne by company directors. Section 729 of the Corporations Act provides that a person who suffers loss or damage as a result of a misleading or deceptive statement or omission in a prospectus may recover the amount of that loss or damage from the company, underwriter and each current or proposed director of the company even if they did not commit, or were not involved in, the particular statement or omission. Directors can also be criminally liable for false or misleading statements or omissions under sections 1308 and 1309 of the Corporations Act.

2.24 This risk acts as a disincentive to company directors undertaking retail bond issuance. Where a retail bond issue does occur, a high degree of (costly) due diligence is undertaken by the company (including involvement by one or more directors to ensure they have checked and understood the documentation to a sufficient level that they are comfortable enough to release the offer documentation). On the other hand, where a bond is issued in the wholesale market a prospectus is not required and company directors do not face the same criminal or civil liability risk.

2.25 The ABA noted in its submission to the former Government's Discussion Paper that it 'considers the criminal and civil liability imposed on directors of companies imposes an unreasonable and unnecessary burden on corporate issuers'.

2.26 The NAB in its submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 identified the complexity of prospectus requirements and directors liability risk as key impediments to developing the retail bond market and as reasons why there has been so little bond issuance under ASIC Class Order CO 10/321. The Government understands through targeted consultation that, given industry's uncertainty about prospectus requirements and current directors' liability risk there is no intention by any corporate entities to issue corporate bonds to the retail market.

2.27 Australian companies wanting to obtain funding usually do not issue retail bonds. Instead they generally prefer to:

•

access overseas debt markets (generally the United States, the United Kingdom or Europe);

•

borrow from the Australian wholesale market;

•

borrow from lending institutions such as banks; or

•

issue equity (for example, issuing shares via a placement, rights issue or share purchase plan) or issue some combination of debt and equity (for example, hybrids or convertible bonds).

2.28 While some of the problems identified above are inherent to the industry (such as requiring more brokers to access the retail market compared to the wholesale market) other issues such as the degree of regulation affecting disclosure and risks for company directors can be addressed through changes in Government policy.

Assessment of impacts

Implementation options

Option 1 - Reduce disclosure burden and reduce company directors' risk

Disclosure

2.29 It is proposed that corporate entities issuing bonds to the retail market be able to meet the Corporations Act disclosure obligations by more targeted disclosure. Some information will be able to be incorporated into the disclosure documentation by reference and to allow first tranche prospectuses to be used for subsequent tranches of bond offers. It is proposed to achieve this goal by requiring that issuers provide a two-part prospectus for simple corporate bonds. The two-part prospectus would consist of an offer-specific prospectus and a base prospectus.

2.30 The offer-specific prospectus would be a short document setting out the key information specific to the bond offer while the base prospectus would set out general information about the issuer and the bond issue that is unlikely to change significantly over the life of the base prospectus. This disclosure regime would require less disclosure documentation to be reproduced and checked than is currently the case, it would result in lower disclosure costs for business and reduce the time taken to issue bonds.

2.31 This less burdensome approach to disclosure for simple corporate bonds takes into account the information about the entity and its financial position already available via existing continuous disclosure requirements. Accordingly, the proposed disclosure regime places more emphasis on the rights and liabilities attached to the bond being issued rather than corporate information.

2.32 This approach is consistent with the Johnson Report recommendation that the regulatory requirements for listed companies issuing high quality corporate debt^[4] to retail investors be reduced. The recommendation stated that:

•

Such issuers would no longer be required to issue a detailed prospectus. Rather a short prospectus could be issued, cross-referencing all relevant documents already lodged with ASIC or the market operator [such as the ASX]. Those companies with a program of issues over time could use a base prospectus with a supplementary prospectus for each new issue.

2.33 It is proposed that some disclosure obligations could be met by incorporation by reference, that is, by providing a reference to another document or location where the required information can be found, instead of including the information in full in the prospectus. Incorporation by reference will reduce the length of a prospectus and require less cross checking of information, reducing costs to issuers, and will benefit consumers by allowing for more targeted disclosure.

2.34 Access to a shorter, simpler two-part prospectus may also encourage investors to take up corporate bonds as it will be easier for investors to focus on the information that they consider relevant in assessing the risks of the bond.

2.35 To reduce the possible risk to investors, only relatively low risk simple bonds would be able to take advantage of the two-part prospectus regime. It is proposed that the regime only apply where the corporate bonds:

•

are quoted on a prescribed financial market;

•

are denominated in Australian dollars;

•

have a maturity length of no more than 15 years;

•

have a fixed or floating rate of return, that cannot be reduced, paid periodically by the bond issuer;

•

are not convertible to any other form of security;

•

cannot be subordinated to debts to unsecured creditors^[5]; and

•

are not able to be converted into any other type of security.

2.36 Further, it is also proposed that eligibility be limited to bonds that are offered by a corporate entity (or a wholly-owned subsidiary where the listed parent guarantees payment on the bond) listed on a financial market which requires continuous disclosure as part of the market's listing rules. A bond offer must also have a minimum subscription of at least $50 million. A minimum bond offer of $50 million would restrict bond issuance to those corporate entities that are well-established and will ensure a sufficient number of bonds are on issue to enable the growth of a secondary market. This would further improve the liquidity of the bond market.

2.37 The disclosure relief proposed would put into the bulk of the provisions of ASIC Class Order CO 10/321, but it would also modify several conditions. Option 1 would allow bonds with a 15-year maturity to qualify for disclosure relief (a five-year increase from the Class Order 10-year maturity) and allow the base prospectus to be used for three years, instead of two years as in Class Order 10/321.

2.38 The framework for the two-part prospectus would be contained in the Corporations Act with the content and structure of the two-part prospectus being specified in the Corporations Regulations 2001 (Corporations Regulations).

2.39 Detail of what will be required to be included in the specific and base prospectus will be provided in the Corporations Regulations. This will give issuers greater confidence that they are able to comply with the disclosure requirements under the proposed two-part simple corporate bond prospectus than they would have in complying with the requirements of CO 10/321.

Offer-Specific Prospectus

2.40 The offer-specific prospectus would be required to be provided to a retail customer prior to the customer deciding to purchase the bond. The offer-specific prospectus would outline the key details of the variable information relating to the bond offer including:

•

maturity length of the bond;

•

interest rate and interest payment dates;

•

the minimum subscription amount;

•

offer size;

•

issue price;

•

timetable of the offer process;

•

application process;

•

the purpose of the bond issue and the effect of the offer on the issuer, including details of the issuer's debt profile following the issue of the bonds;

•

the issuer's capacity to meet its obligations under the bonds;

•

the gearing ratio for the issuer, together with an explanation of what this means for investors and how investors can use the ratio as an indication of the potential risks the issuer faces in terms of its level of debt funding;

•

the interest cover^[6] for the issuer, together with an explanation of what this means for investors and how investors can use interest cover as an indication of the issuer's ability to meet its interest payments from earnings;

•

the working capital ratio^[7] for the issuer, together with an explanation of what this means for investors and how investors can use the ratio as an indication of whether an issuer has sufficient short-term assets to meet its short-term liabilities;

•

details of whether the issuer has materially breached any loan covenants or debt obligations in the two years prior to the date of the prospectus;

•

a statement by the bond issuer that it has complied with its financial market continuous disclosure obligations as at the date of the offer-specific prospectus and which includes any information about the offer that has been has been excluded from a continuous disclosure notice because the issuer has relief or an exemption in the listing rules; and

•

any significant information necessary to update the information in the base prospectus.

2.41 It is considered that requiring the disclosure of this information in the offer-specific prospectus will provide potential investors with the key information required to assess the attractiveness and risks associated with the bond. These information requirements also align with the disclosure requirements (set out in the transactions specific prospectus provisions (section 713) of the Corporations Act) when a corporate bond is traded on a financial exchange. It is proposed that these information requirements would be set out in the Corporations Regulations.

2.42 The specific-offer prospectus and the base prospectus may meet the obligation to include information by including a reference to information contained in documents lodged with ASIC with sufficient detail for the reader to obtain a copy of the documents. The reference would also state if the information is primarily of interest to professional analysts, advisers or investors with specialist information needs.

Base Prospectus

2.43 The base prospectus would have a life of three years (which is one year longer than is currently provided for in CO 10/321) and would set out information about the issuer and the bond issue that is unlikely to change over the life of the base prospectus. Issuers would also be able to use the same base prospectus for offers of subsequent tranches of the same bond offer over the three years. This would provide the benefit to issuers that they would not need to update the base document over its life unless a significant change to the base prospectus was required (for example, following a significant change in the business of the bond issuer).

2.44 The base prospectus would contain information including:

•

significant features of the bond;

•

guarantees associated with the bond;

•

explanation of how simple corporate bonds work; and

•

ranking of subordination.

2.45 The base prospectus would also contain information about the issuer including:

•

type of business of the issuer;

•

risks that the business may face;

•

management structure and personnel;

•

business strategy; and

•

governance arrangements.

Creating depository interests to enable parallel trading in the wholesale and retail markets

2.46 To further reduce the cost burden of retail corporate bond issuance, it is proposed to create architecture which will provide bond issuers with the option of parallel trading of simple corporate bonds in the wholesale and retail markets.

2.47 Legislation will be introduced to enable parallel trading of Commonwealth Government Securities (CGS) in the wholesale and retail markets established through a depository interests framework^[8]. A framework broadly along CGS lines would be extended to simple retail corporate bonds. An advantage of creating a depository interests framework is that the bond issuer can make offers more quickly and it has the potential to increase demand by wholesale clients as they would be able to sell/buy the bonds in the retail market giving them more flexibility.

Directors' liability and clarification of 'reasonable steps' defence

2.48 Option 1 would also reduce the civil liability burden on directors when issuing corporate bonds to retail investors and clarify the operation of the 'reasonable steps' defence. This is different to ASIC Class Order CO 10/321 which does not provide any liability relief or clarification of reasonable step.

2.49 Section 729 of the Corporations Act provides that a person who suffers loss or damage as a result of a misleading or deceptive statement or omission in a prospectus may recover the amount of that loss or damage from the company and any underwriter, and also from each current or proposed director of the company even if they did not commit, or were not involved in, the particular statement or omission.

2.50 It is proposed to remove this deemed civil liability so that for an offer of simple corporate bonds, the person who suffers loss or damage does not have a right to recover compensation from directors or proposed directors where the company director is not at fault. However, any director or other person involved in a misleading or deceptive statement or omission will continue to be liable. The meaning of involvement of a person is set out in section 79 of the Corporations Act. A person is involved where they:

•

aided, abetted, counselled or procured a contravention;

•

induced a contravention;

•

have been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to a contravention; or conspired with another to effect a contravention.

2.51 It is considered that removing director's deemed liability for offers of simple corporate bonds will not materially reduce investor protection. The corporate entity, any underwriter, and anyone involved in the misleading or deceptive statement or omission will still be liable and a person who suffers loss or damage would still have a right to claim compensation from them. Further, given that the removal of deeming liability applies to disclosure statements for simple retail corporate bonds it is considered that there is a relatively low risk to consumer protection as simple retail corporate bonds are by their eligibility criteria, low risk.

2.52 Removing directors' deemed liability would be consistent with Council of Australian Governments' (COAG) agreement that there is a case for reform to promote a consistent and principled approach to the imposition of personal criminal liability for corporate fault (similar considerations apply to civil liability).

2.53 The COAG harmonisation of director liability is aimed at making director liability comply with a specific set of agreed-upon principles (the COAG Principles). These principles include the removal of deemed liability of directors for corporate fault where it is not appropriate and that where the derivative liability is imposed, it should be imposed in accordance with principles of good corporate governance. The proposed removal of directors' deemed liability is not directly in the scope of the COAG Principles, but is consistent with the COAG Principles.

2.54 This option would also insert into the Corporations Act (sections 1308 and 1309) greater clarity on what constitutes reasonable steps in relation to certain criminal liability offences^[9]. A person would be deemed to have taken 'reasonable steps' if they made reasonable inquiries or placed reasonable reliance on information provided by others, and after making their inquiries the person believed that the statement or information was not misleading in a material way. The proposed changes reflect the practical application of the criminal liability provisions in the Corporations Act. This will be a clarification of duties, not a dilution of criminal liability.

Summary

2.55 Currently, the process for offering corporate bonds to retail investors is costly and onerous compared to other avenues for raising funds as the law often requires that a full prospectus be prepared, and that directors are subject to personal liability for the content of a prospectus. Australian companies would benefit from being able to issue retail corporate bonds in a more cost-effective way.

2.56 Reducing disclosure requirements and liability risk for company directors would remove some of the impediments bond issuers face when issuing bonds in the retail market.

2.57 More targeted prospectuses would also assist investors in locating key information that they need to make informed decisions.

Option 2 - Remove the requirement to provide additional disclosure information for simple retail corporate bonds

2.58 Under the Corporations Act offers of bonds to wholesale investors do not require a disclosure document. However, bond offers to the wholesale market are commonly accompanied by documentation to inform investors about the bond. The documentation usually covers the terms and conditions of the bond, fees, bond application process, withdrawal from the investment and background on the bond issuer and those companies associated with the bond offer (for example, entities managing the bond offer). Documentation also provides information on risk factors that may affect the bond issuer. However this information is commonly provided at a high level unlike under the detail description of risk and other mattes required to be provided in a prospectus to a retail investor.

2.59 The information provided to wholesale investors is not required to be lodged with ASIC by the Corporations Act (unlike a prospectus to retail investors).

2.60 Where the bond issuer is a listed company on the ASX, the company is required to comply with the ASX's continuous disclosure and periodic disclosure requirements and this information could be accessed by potential investors.

2.61 Option 2 would remove the requirement to provide full disclosure when bonds are issued in the retail corporate bond market and instead allow retail investors to be provided with the same (low) level of disclosure as wholesale investors.

2.62 Requiring a bond issuer to meet the current retail client disclosure obligations is time consuming and costly. Under Option 2 these costs would be reduced. The significance of the cost saving for the bond issuer would be modest (potentially up to $1 million) in comparison to the value of the bond offer (ranging from $50 million up to one billion dollars).

2.63 Although a significant amount of information would not be provided in a prospectus at the time of the bond offer, the retail client would be able to ascertain some information through the continuous disclosure requirements of the financial market on which the issuer is listed and through the entity's financial statements and annual reports.

2.64 The type of bonds to which this low level of disclosure would be applied would be to 'simple' bonds - that is, those bonds which have the same features as the simple bonds proposed in Option 1.

2.65 The creation of a depository interest architecture to enable parallel trading in the wholesale and retail markets described in Option 1 would also be proposed. As no regulated disclosure document under Chapter 6D of the Corporations Act would be required, no deemed liability under section 729 of the Corporations Act would be created.

Option 3 - Leave regulatory settings unchanged

2.66 Another option is to leave the current disclosure requirements unchanged where bonds are offered to retail customers.

2.67 The disclosure obligations set out in Chapter 6D of the Corporations Act would continue to apply and so too would the disclosure relief provided by ASIC Class Order 10/321 for vanilla corporate bonds.

2.68 Similarly, the circumstances identified in sections 708 and 708AA of the Corporations Act which provide disclosure relief would not be changed.

Impact group identification and analysis of costs/benefits

Option 1 - Reduce disclosure burden and reduce company director's risk

Benefits and costs to business

2.69 Industry has been consulted extensively on reform proposals and in particular on the Option 1 proposal and industry is supportive of Option 1.

2.70 It is estimated that this proposal would provide a modest reduction in the cost of issuing simple corporate bonds to the retail market. A substantial amount of the costs currently related to issuing a bond are driven by the length of the prospectus and the amount of factual and financial information requiring detailed verification. It is expected that bond issuers will receive cost savings due to the reduced time taken to scrutinise documentation by company directors. This will particularly be the case for the base prospectus costs where information is included by reference and where the base prospectus is used for more than one tranche of bond offers.

2.71 While it is expected that the cost of raising finance through the issue of retail corporate bonds would fall, raising finance through the wholesale market or equities would continue to be less costly than raising finance through the retail market. However, there may also be some downward pressure on the cost of finance from lending institutions. Similarly, finance raised through equity capital raising would remain a cheaper finance raising option than issuing bonds in the retail market.

2.72 Reducing the regulatory burden on bond issuance to the extent it is viable compared to other finance raising means will provide corporate entities with greater flexibility in how they fund their operations. Bond issuers may also benefit through lower risk as domestically sourced funding does not carry the currency risk which is incurred when accessing funds on overseas markets.

2.73 The actual cost of issuing bonds varies from issuer to issuer and from issue to issue due to factors such as the manner in which each issuer conducts its due diligence, internal corporate processes and the way in which bond issuers liaise with brokers and financial advisers. An estimate of the cost of a bond issue to the retail market is generally up to $2 million for bond offers up to $500 million and above^[10]. The cost of a bond issue above or below $500 differs only marginally.

2.74 As opposed to the issue cost, the change in the regulatory cost due to Option 1 is calculated by applying the cost saving from the regulatory changes, to the number of bonds expected to be issued under the current regulatory settings in the future. The Treasury understands that no corporate entities intend to issue retail corporate bonds in the future under the current regulatory regime. Therefore, as there are no corporate bonds expected to be issued in the retail market under the current regulatory settings, there are no regulatory savings or costs from Option 1. This is shown in Table 3.

2.75 In contrast to the lack of willingness to issue bonds to the retail sector under the current regulatory settings, the Treasury has been advised that one corporate entity intends to issue retail corporate bonds as soon as possible under Option 1 if it is put into effect. Also, industry expectation is that six bond issues would be brought to the retail market in the first year of Option 1 being in effect with the number of bond issues rising to around 20 issues over a 10-year period.

2.76 An increase in the number of bonds by six in one year is a significant increase in bond issuance. As shown in Table 1, there are only four corporate bonds currently on offer for retail investors. If the value of the bonds offered were $200 million per issue^[11], the new bonds on issue would significantly exceed the $300 million of bonds currently on offer. The expected increase in private sector securities if six simple corporate bonds are issued, would represent a 6.4 per cent increase in the value of fixed income bonds on offer on the ASX.

2.77 Industry's confidence in issuing increasing numbers of bonds stems from the greater ease of issuing bonds and the expected increase in investor demand due to the demonstration effect of bond issuance increasing retail investors' levels of exposure to retail corporate bonds. Industry believes that when investors see other investors investing in simple corporate bonds they will have a better understanding of how bonds work and the risks associated with them. Industry also considered that financial advisers would become more familiar with bonds over time and be more comfortable in recommending bond investment to their clients. It is considered that the investors most likely to be attracted to corporate bonds would be older Australians and the trustees of self-managed superannuation funds who are seeking to diversify their investments while still maintaining a predictable income stream at relatively low risk.

2.78 Although there will not be a regulatory cost saving shown above, there will be operating cost savings for simple retail corporate bond issues in the future. An estimate of the cost savings under Option 1 based on a $200 million bond issue indicated that savings are around $420,000. This cost saving would be achieved from reduced design/printing costs ($30,000), legal drafting ($160,000), accounting review of prospectus material ($80,000) and management direction and conducting due diligence ($150,000).

2.79 It was also estimated that if the bond offer had subsequent tranches of bond issues using the same base prospectus and limited changes to the offer-specific prospectus, the further cost saving would be in the order of $610,000 per tranche. This cost saving would be achieved from reduced costs for design/printing ($40,000), legal drafting ($270,000), accounting review of prospectus material ($50,000), rating of bond ($100,000) and management direction and conducting due diligence ($150,000). This is a total saving of $1 million compared to the cost of issuing a bond under the current regulatory settings.

2.80 Estimates from NAB indicate that under Option 1 another major cost reduction for bond issuers is expected to be the reduction in brokerage fees from 1 per cent to 0.75 per cent due to the simple nature of the bonds and the increased volume of sales that will be able to be made due to the reduced directors' costs and other costs. This equates to a saving for bond issuers of about $250,000 per $100 million bond issue.

2.81 While stakeholders indicated that the current liability regime imposed significant liability risk on company directors, there was no indication from stakeholders that company directors had been pursued for loss or damage arising from an omission or misstatement in a retail corporate bond prospectus. More broadly than corporate bonds, action has been taken against company directors by investors seeking compensation for loss or damages due to inadequate disclosure material. Similarly ASIC has taken action against corporate entities for breaches of the disclosure law requirements.

2.82 The mandatory requirement of issuing a two-part prospectus when issuing a simple bond may reduce the flexibility for some bond issuers. It may also mean that some bond issuers would need to develop a new approach to their disclosure arrangements as they have not used a two-part disclosure in the past. However, this will be a lower cost disclosure activity and the bond issue is likely to be able to issue a bond quite easily that does not meet the specific criteria of a simple bond.

2.83 Under this option, over time it is expected that retail investors will become more familiar with bonds and readily invest in them. This will provide corporate entities with an alternate source of funding to raising funds in the wholesale market, securing a loan from a lending institution or issuing equity. Submissions from banking businesses also noted that the reduced reliance of corporate entities on bank lending will 'free up the banks' balance sheets to continue to support SMEs [small and medium sized enterprises]'^[12].

Benefits and costs to retail investors

2.84 It is expected that the number of bond issues will increase, giving retail investors greater choice in their investment decision. Bond issuance to retail investors would allow investors to diversify their risk and access a higher fixed interest income than would be available through bank fixed-interest investments. With an ageing population and demand for fixed interest income by people in their retirement, this option is considered to be in demand by these investors.

2.85 Investors will be able to access the same amount of disclosure information under Option 1 as they can under the current disclosure obligations, however the information being disclosed would be packaged in a more targeted manner through a two-part prospectus. The disclosure documentation that investors receive will be more effective in enabling customers to more easily identify the key information relevant to their investment decision. This approach balances the convenience of shorter disclosure documentation with the need to inform investors fully about risky or complex products. As investors will have access to all key information it is considered that investors will not face any greater risk than is currently the case. And as the key risk information will be easier for the investor to find in the disclosure material, there is the potential for the 2-part prospectus to reduce the risk of an investors not being aware of important information.

2.86 However, if investors want to read all of the information required to be disclosed, including that information that is not key to their investment decision, they would need to locate the information on the bond issuer's website and access documents lodged with ASIC which has been incorporated into the two-part prospectus by reference.

2.87 Retail investors are likely to face the cost of becoming familiar about retail corporate bonds and potentially incur the cost of financial advice on retail corporate bonds. However, as it will be the investor's choice as to whether they seek advice and/or invest in the bonds, this cost is likely to be acceptable to the investor. This cost is no greater than would occur under the current regulatory regime. There are no significantly greater risks under Option 1 than under the current regulatory regime.

2.88 The risk that could be generated by removing company director's deemed liability for offers of simple corporate bonds will not materially reduce investor protection. The corporate entity, any underwriter, and anyone involved in the misleading or deceptive statement or omission will continue to be liable for any loss or damage. If the investor suffers any loss or damage the investor would still have the right to claim compensation.

Option 2 - Remove the requirement to provide additional disclosure information for simple retail corporate bond

Benefits and costs to business

2.89 Business would receive a modest reduction in the cost of issuing bonds if only wholesale client disclosure obligations were applied. As noted earlier, the disclosure costs associated with a bond issue are a major share of the costs incurred when issuing a bond.

2.90 The reduction in disclosure cost will be greater under Option 2 than those under Option 1 including subsequent tranche issues. Based on a bond issue of $200 million^[13] the saving would be in the order of $1.2 million comprising reduced costs for legal drafting, management direction and conducting due diligence ($900,000), accounting review of prospectus material ($165,000) and rating of the bond ($150,000).

Benefits and costs to retail investors

2.91 The Corporations Act differentiates between wholesale and retail clients such that consumer protection provisions (through disclosure obligations on securities issuers) apply only to retail clients. It is considered that wholesale clients do not require the same level of disclosure because they are better informed and better able to make their own assessment of the risks involved in financial transactions. However, penalties for misleading and deceptive conduct and certain other breaches of the Corporations Law apply equally to bonds issued to wholesale and retail clients.

2.92 Reducing the disclosure costs on bond issuers is likely to increase the number of bonds offered to the retail market. More bonds being offered to retail investors will provide a greater choice of investment products, giving investors the opportunity for greater diversity in their investment portfolio. The benefit of lower issuance costs may be passed on to investors, however, given the size of the cost savings compared to the value of the bond issue, which is a minimum of $50 million, there is unlikely to be a material cost benefit flowing to bond investors.

2.93 All bonds carry some degree of risk and removing the disclosure obligation on corporate bond issuers is likely to result in buyers being unaware of the risks they are being exposed to. This will particularly be the case where buyers invest in bonds with high returns which generally reflect a greater degree of risk. However, it is noted that as far as the Treasury is not aware of any no default in repayments on corporate bonds in Australia.

2.94 Retail investors are likely to be cautious of investing in a financial product which does not disclose all risks/details. However, information about the issuer would be available to investors from sources such as the issuer's financial statements and annual reports and through the company's continuous disclosure requirements of being a listed entity on a financial market. This information would not be as readily available as that appearing in a retail market prospectus and nor would it relate specifically to the bond on offer or be as extensive as the information disclosed in a prospectus.

2.95 The investor caution created by a lack of easily available information may limit demand for bond offers and is likely to reduce investor confidence in investing in retail corporate bonds.

Option 3 - Leave regulatory settings unchanged

2.96 The cost and effort required to issue a retail corporate bond would remain high if the regulatory settings were left unchanged.

2.97 There is unlikely to be any increase in the number of retail corporate bonds on offer under this option and the retail bond market would remain underdeveloped.

Benefits and costs to business

2.98 There are no significant benefits to bond issuers by retaining the current regulatory settings. The only benefit to business by leaving the regulatory settings unchanged is that businesses would not need to adjust to new regulatory requirements. Industry feedback indicated that no bonds will be issued in the retail market in the near term under the current regulatory settings.

2.99 There would be no adverse impact on bond issuers, with bond issuers continuing to be able to raise finance in the wholesale market, loans from lending institutions and through the sale of equity securities.

2.100 However, there would be no change to the investor protection than currently exist. Company directors would continue to be deemed liable for omissions and misstatements in disclosure documentation. Company directors would continue to be unclear about what reasonable steps they are required to take to ensure disclosure material is adequate to meet the law.

2.101 There are no direct administration costs that would be imposed on business by not implementing the proposed relief. However, the existing high costs and liability risk of offering corporate bonds to retail investors would remain.

Benefits and costs to retail investors

2.102 There are no benefits that would accrue to retail investors by not implementing the proposed relief. Maintaining the status quo would not increase the likelihood of issuers offering corporate bonds to retail investors.

2.103 There are no costs that would be imposed on retail investors by not implementing the relief. However, investors would also not be given increased opportunities to participate directly in offers of corporate bonds. This in turn would mean that investors would not be afforded greater opportunities to diversify their investment portfolios by investing in corporate bonds.

Consultation

2.104 Extensive consultation has been undertaken on proposed reforms to the retail corporate bond market. A Bill encompassing the vast bulk of Option 1 was introduced into the Parliament by the former Government. The Bill received support from the current Government when it was in Opposition in the House of Representatives. The Bill was not debated in the Senate prior to the election being called and as a consequence the Bill lapsed. The development of the retail corporate bond market is also one of the recommendations of the Johnson Report. The current Government gave a public commitment during the election to give priority to the Johnson report recommendations. Given these considerations, the Treasury has prepared a single-stage RIS. In addition, as no decision has been announced by the current Government a Single-Stage RIS is appropriate and an Options-Stage RIS is not required.

2.105 The former Government released a discussion paper on the Development of the retail corporate bond market: streamlining disclosure and liability requirements in December 2011 seeking views from interested parties on options to reduce the burden of disclosure and liability requirements on bond issuers to aid development of the corporate bond market in Australia.

2.106 Thirty-three submissions were received on the discussion paper and included submissions from bond issuers, financial advisers, law firms and credit ratings agencies. There were no submissions received from individual investors or investor representative groups. The Discussion Paper and the submissions received are available on the Treasury website. The public consultation process was accompanied by targeted industry consultation, including with the regulator of corporate bonds issuance - the Australian Securities and Investments Commission. The majority of submissions supported the former Government's proposals, in addition to suggesting various changes on particular aspects of the proposal. Bond issuers generally preferred the inclusion of more risky features than was proposed in the Discussion Paper for a simple bond. The former Government's overall analysis of the feedback received through the consultation process was that to ensure that investor risk was low, the bonds eligible for streamlined disclosure and liability requirement, should contain low risk features.

2.107 The following is a summary of the issues raised and the Government's proposed response in relation to the issues.

•

The majority of bond issuers (for example, ABA, Australian Financial Markets Association (AFMA) and NAB), financial advisers and law firms supported the bonds being subordinated debt with some respondents seeking a lower level of subordination matching that of unsecured creditors. The Commonwealth Bank of Australia (CBA) raised concerns with allowing any subordination.

-

The Treasury considers that ranking the subordination of debt equal to that of unsecured creditors enables the bond to pay a premium for the risk to the investors while also limiting the risk such that the bonds are still considered to be low risk and attractive to investors.

•

The majority of respondents supported a longer bond life than the 10-year bond life proposed in the Discussion Paper, for example with ANZ Bank (ANZ) proposing a bond life of 25 years.

-

The Treasury proposal increases the bond life from 10 to 15 years to enable more bonds to be eligible for the streamlined arrangements. Treasury considers the additional risk created by allowing bonds with an additional five year life is low risk given the other eligibility requirements.

•

Respondents differed in their views on the design of a two-part prospect with ANZ, AFMA and Baker & McKenzie preferring a regime which required the bond issuer to disclose any matter material to a consideration of an investment in the bonds which has not already been the subject of continuous disclosure.

-

The Government will undertake further targeted and public consultation on the content of the offer-specific and base prospectus to be prescribed in regulations.

•

Many respondents wanted the two-part prospectus to be voluntary.

-

The Treasury considers that issuing a two-part prospectus for all simple retail corporate bonds will provide consistency across bond issues and allow for greater comparability of bonds. It is also noted that bond issuers can avoid the requirement to issue a two-part prospectus by making minor changes to their bond issue to ensure that it is not considered a simple bond.

•

Some stakeholders indicated that directors' liability should be reduced (ABA, AFMA, ANZ and CBA) while KPMG, Baker & McKenzie considered that further relief is not required.

-

The Treasury considers that removing the deemed liability from company directors is considered to be an appropriate balance between removing the disincentive of liability risk for company directors and ensuring investor protection.

•

Stakeholders proposed a range of amounts as the minimum bond issue size. Four respondents (Baker & McKenzie, Challenger, Global Credit Investors and Mr Philip Henty) considered it was not necessary, RBS Morgan supported a $50 million bond issue while noting that the market was still quite illiquid with a $50 million bond issuance. Three respondents considered it should be less than $50 million (Australia Ratings, C&Co and a confidential submission). KPMG considered a minimum was necessary, but it was undecided on the amount.

-

The Treasury considers that a $50 million minimum bond issue strikes an appropriate balance between making the streamlined arrangements accessible to bond offers and there being sufficient bonds on offer to develop a secondary market in corporate bonds.

•

The Discussion Paper proposed requiring bond issuers to have a minimum credit rating. This proposal received very little support from any of the groups who responded to the paper.

-

The Treasury consider that requiring a credit rating may unfairly exclude small to medium issuers as they would be too small to qualify for a credit rating. Also, a credit rating may not be an accurate indicator of the riskiness of the bond. The Treasury is not proposing to include credit ratings as an eligibility criterion.

•

A number of respondents raised broader issues affecting the retail bond market. These included concerns about the taxation of interest income vis a vis equity, the perceived under allocation of fixed income by superannuation funds investor education and the availability of credit ratings.

-

These matters can be considered outside of the scope of this proposal which focuses on streamlining disclosure and liability requirements.

2.108 Following consultation on Development of the retail corporate bond market: streamlining disclosure and liability requirement the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 (Bill) was introduced into the Parliament in March 2013 by the former Government. The Bill would have made into law the option proposed in Option 1 except for the length of the bond life being 10 years rather than the 15 years proposed in Option 1.

2.109 The Bill was passed by the House of Representatives in May 2013 receiving bilateral support.

2.110 The Parliamentary Joint Committee on Corporations and Financial Services conducted an inquiry into the Bill and reported its findings on 15 May 2013. The Committee received seven submissions on the simple retail corporate bonds' Schedule of the Bill.^[14] Submissions were received from groups representing bond issuers, intermediaries and investors. All submissions supported the changes proposed in the Bill. The Committee supported the progress of the Bill in the Senate and the Committee's report noted that 'the Bill proposes measures that seek to streamline the regulatory burden faced by directors in issuing simple corporate bonds'.

2.111 The NAB representative at the Committee hearing supported the proposed changes and noted that:

•

A deeper and more liquid retail corporate bond market has benefits for corporates, businesses and investors. For corporates, it will broaden their funding sources and help facilitate their growth aspirations. For investors, a fully functioning retail corporate bond market will offer investors more choice and an opportunity to diversify their investments. Facilitating this funding will free up the banks' balance sheets to continue supporting SMEs, who traditionally do not have the same access level of access to capital markets as their larger counterparts.

2.112 The investor group SMSF Owners' Alliance Limited stated that:

•

Combined with the offer of Commonwealth Government bonds to the retail market, easier access to corporate bonds will assist SMSF owners to adjust asset allocation in accordance with their investment strategy, taking into account yield and risk. We believe the conditions set in the Bill for the issue of retail corporate bonds will provide sufficient protection for SMSFs and these can be complemented by Regulations to be developed.

2.113 ASIC also undertook a significant public consultation process when it developed Class Order C0 10/321 which provides very similar disclosure relief to that proposed in Option 1. ASIC received 31 submissions in response to its Consultation Paper 26 Facilitating debt raising. Submission were generally in support of the proposal in the Consultation Paper with respondents also raising a number of mattes of detail. ASIC also prepared a regulation impact statement prior to issuing CO 10/321. The Consultation Paper, ASIC's response to the issues raised in submissions in response to the Consultation Paper and the Regulation Impact Statement relating to CO 10/321 are available on the ASIC website.

Conclusion and recommended option

2.114 The options described in this RIS provide two deregulatory options (Option 1 and Option 2) and one option that maintains the regulatory status quo.

2.115 Option 1 proposes that where simple corporate bonds are issued, the disclosure required will be reduced through the use of a base prospectus and specific-offer prospectus in addition to removing deemed liability for responsibility for misstatements and omissions in prospectus documents.

2.116 Option 1 will reduce the costs to bond issuers by around $420,000 for a first tranche issue and by around $1 million for tranches after the first compared to current issuance costs. While these costs are modest in relation to the size of the bond issues, they are significant to the issuer. Coupled with the benefit to bond issuers is the benefit to investors of the opportunity to invest in a relatively safe security and diversify their investment portfolios.

2.117 Option 2 proposes that the disclosure that is required for bond issues to the retail market be removed for simple corporate bonds. Retail corporate bond investors would rely on information disclosed to the wholesale market and information available through the company's discontinuous disclosure obligations and that provided to ASIC, such as its financial statements, and other information publicly available. This proposal would result in the initial bond offer and subsequent offer tranches with a cost saving of $1.2 million which is larger than the savings under Option 1. However, Option 2 does not require the bond issuer to provide a two-part prospectus resulting in the investors having to search for information on the issuer and the risks associated with the bond. It is unlikely that the investor would be able to find out as much information as that provided under the proposed disclosure requirements of Option 1. This would leave the investor unaware of some of the risks associated with the bond. This may also deter people investing in the bonds as they may be too wary of undisclosed risks and reduce investor confidence in retail corporate bonds.

2.118 Option 3 proposes that there be no change in the regulatory settings. Under the current settings there are no proposed bond issues to the retail market. While under Option 1 there are expected to be six bond issues in the first year the option is in effect with the number of bonds being issued rising to 20 over 10 years. It is considered that Option 3 would not aid the development of a strong corporate bond market in Australia which is integral to the objective of the proposal in this RIS.

2.119 Both Options 1 and 2 reduce the regulatory burden on bond issuers to aid the development of the retail corporate bond market, but Option 2 exposes investors to greater risks and could create too high a risk for investors which could also act to stifle demand for bonds. Ensuring that appropriate investor protection is in place is an integral part of the objective of this proposal and it is considered that Option 2 does not achieve this part of the objective. Option 1 continues to provide investor protection through the higher level of disclosure.

2.120 Option 1 is the option considered to best reduce regulatory burdens to meet the Government's objective of developing the corporate bond market in Australia while ensuring that appropriate consumer protection is maintained. In addition, it is considered that Option 1 is the only option which would increase investor confidence in the bond market over time.

2.121 The proposal detailed in Option 1 has been heavily consulted with stakeholders who have indicated their strong support.

Implementation and review

2.122 It is proposed that Option 1 be implemented through legislative amendments and regulations. It is proposed that a Bill that would put Option 1 into the law be brought before the Parliament as soon as possible.

2.123 It is proposed that the legislation would apply the requirement to provide a 2-part simple corporate bond prospectus up to six months after the legislation receiving the Royal Assent. It is considered that if an entity wanted to issue a bond shortly after the proposed reform becomes law, the entity should not be 'caught out' by the new requirements of the law. In addition, it is considered that a transition period of six months will provide sufficient time to develop regulations on the prescribed contents of the prospectus documentation.

2.124 The removal of the deemed civil liability burden on directors and clarification of the operation of the reasonable steps defence would be proposed to take effect upon the legislation receiving the Royal Assent. In this way company directors will not have to wait to have the civil and criminal liability risk reduced.

2.125 Treasury will publicly consult on draft regulations and on template disclosure documents. Treasury will work with key stakeholders to develop the content required for the disclosure documents to ensure they strike an appropriate balance between streamlining disclosure for issuers, and ensuring that the documents are easily comprehensible for retail investors.

2.126 Treasury has established an industry task force to develop a template disclosure document to provide industry greater certainty of what is required to be disclosed in the two-part simple corporate bonds prospectus. This task force will also continue its work on developing the template document.

2.127 ASIC will monitor the date on which the legislation comes into effect and will revoke Class Order CO10/321 with effect from when the new law becomes operative.

2.128 The Government and ASIC would continue to monitor the retail corporate bond market to ensure that the change to the law operates as intended.

Index

Schedule 1: Amendments