Explanatory Memorandum
(Circulated by authority of the Minister for Industry, Scienceand Resources, Senator the Hon Nick Minchin)NOTES ON CLAUSES
POOLED DEVELOPMENT FUNDS AMENDMENT BILL 1999
The following new arrangements will apply to existing PDFs as well as new entrants to the Program from the start of the 1999-2000 income year, except as indicated under Item 27.
This Clause provides that this Bill may be cited as the Pooled Development Funds Amendment Act 1999 .
This Clause provides for the Act to commence on the day on which it receives the Royal Assent.
This Clause provides that each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned. Any other item in a Schedule to this Act has effect according to its terms.
Schedule 1 - Pooled Development Funds Act 1992
As a consequence of the Programs 1998 review, the object of the Act has been amended by these items to better reflect its rationale.
Item 1 repeals section 3 of the Act, that the object of the Act is to encourage the provision of equity capital to small or medium-sized Australian companies whose primary activities are not excluded activities.
Item 1 substitutes a new section 3, that the object of the Act is to develop, and demonstrate the potential of, the market for providing patient equity capital (including venture capital) to small or medium-sized Australian enterprises that carry on eligible businesses.
The amended object reflects the PDF Programs aim to develop and deepen the market for equity capital.
Item2 clarifies the definition of shareholders' funds in subsection 4(1) of the Act.
Item3 inserts in subsection 4(1) a reference to the definition of a widely-held complying superannuation entity in section 4A.
This item adds section 4A to the Act defining a widely-held complying superannuation fund .
In deciding on a registration, under subsection 14(1) of the Act, the Pooled Development Funds Registration Board (the Board) must grant a registration application if the Board is satisfied that a number of conditions are satisfied.
One of these conditions, subsection 14(1) paragraph (e), is that an applicant can and will implement the applicant's plans. It is more appropriate that the Board base its decision on a reasonable expectation that the plans are likely to be implemented based on the evidence presented in the application.
Item 5 amends subsection 14(1) paragraph (e) so that the Board must now be satisfied that an applicant for PDF registration is reasonably likely to be able to implement the plans it provides, based on the evidence provided.
See also Item 27.
Subsection 4(3) of the Act states that a PDF's articles of association may not contain either a capital reduction provision or a buy-back provision. Also subsection 18(c) states that a PDF's registration is given on the condition that a PDF not reduce its share capital or buy back its shares. This part of the Act prevents PDFs from undertaking either of these activities.
This item amends subsection 18(c) of the Act to permit PDFs to buy back their own shares and to return capital to their shareholders, subject to a waiting period of two years for a new or merged PDF.
This change will improve the flexibility of PDFs by effectively providing another exit mechanism for investors in PDFs. The change will make investment in PDFs more attractive to some investors who require certainty about the ability to return capital.
The Act is to be amended to provide greater commercial flexibility to PDFs by adding to the kinds of eligible investment, other than unregulated investment.
This item adds, in section 19 of the Act, the additional kinds of investment a PDF can make.
This item amends subsection 20(1) of the Act, to reflect the alternative types of eligible investment introduced under section 19. The note to subsection 20(1) changes the heading to section 20.
Subsection 20(1) of the Act states that investments by PDFs must only be made by subscribing for or buying:
- (a)
- ordinary shares in a company; or
- (b)
- some other kinds of shares in a company that the Board approves the PDF investing in.
This part of the Act is being amended, by section 20A, to permit PDFs to acquire non-transferable options in investee companies where the PDF has initially satisfied either the minimum 10per cent equity requirement under section 27, or a requirement set where the Board has granted a discretion to that PDF under section 27. The Board can exercise its discretion to allow PDFs to invest in less than 10per cent of the total of all amounts paid on the issued shares of an investee in a number of circumstances (many of these circumstances are included in the Board's Policy Papers).
This change is being made to enable PDFs to provide tranches of capital as required by the investee when the investee meets pre-determined milestones. Non-transferable options are a mechanism for facilitating follow-on injections of capital.
Further, this part of the Act is being amended, by section 20B, to permit PDFs to make loans to equity investees subject to a maximum of 20per cent of the PDFs shareholders' funds where either the PDF has initially satisfied either the minimum 10per cent equity requirement under section 27, or a requirement set where the Board has granted a discretion to that PDF under section 27. The Board can exercise its discretion to allow PDFs to invest in less than 10per cent of the total of all amounts paid on the issued shares of an investee in a number of circumstances (many of these circumstances are included in the Board's Policy Papers). At no time are the outstanding loans allowed to exceed 20per cent of the shareholders' funds of a PDF.
Where a PDF subsequently raises more capital or retains profits, the aggregate amount that can be loaned increases. On the other hand, where a PDF pays out dividends or reduces its capital, then the aggregate amount that can be on loan may have to be reduced so that the amount does not exceed 20per cent of shareholders' funds at that time.
This change will improve the commercial flexibility of PDFs by enabling them to provide loans to their investees as part of their financial support service. The cap of 20percent will ensure that the equity investment focus of the Program is maintained.
Item10 amends subsection 21(1) of the Act in line with the changes in the types of investments allowed, discussed under Item 9.
Item 11 clarifies subsection 21(4) also in line with the changes in the types of investments allowed.
This item clarifies section 22 of the Act by notifying that nothing in Division1 of the Act, Making Investments , prevents a PDF from making an investment in relation to the merger of PDFs, discussed under Item20.
This item amends subsection 25(1)(b) so that the total amount invested in and/or lent to an investee company is not to exceed 30per cent of the PDF's committed capital, unless otherwise approved by the Board. In practice, such approval has been given during the formative stage of PDFs.
This item amends section 27 of the Act, by the insertion of new section 27A, to require a PDF to provide as soon as practicable or within 30 days full particulars of initial investments made in investee companies.
The provision of such information is required to assist in evaluating the activities of PDFs including capital raising and sources of income. These changes will enable better monitoring and evaluation of the PDF Program against its objectives.
See also Item 27.
Item 15 changes the Act by inserting a new section 28A which specifies that the Act applies to investments made by a PDF through controlled interposed entities as if the PDF had made the investments directly.
This change is to prevent PDFs from participating indirectly in investments that are not in keeping with the objectives of the PDF Program. Some PDFs had undertaken, or were considering, investments in businesses, through controlled eligible investee companies, which would not satisfy the Act's eligibility criteria if they were made directly by the PDF.
The use of the term interposed in section 28A denotes where a PDF is controlling the investment but has some conduit entity or chain of entities perform the necessary legal transactions.
This item amends subsection 29(2) paragraph (a) of the Act in line with the change to section 32A, discussed under Item20.
Subsection 31(1) of the Act states that unless the Board otherwise approves, a person (not being an ADI or life office), together with associates (not being banks or life offices) of the person, must not hold more than 30 per cent of the issued shares in a PDF. An ADI is an Approved Deposit Institution.
These items amend subsection 31(1) to include widely-held complying superannuation funds and similarly regulated overseas pension funds and limited partnerships of such funds among persons or associates of persons not restricted to a 30 per cent holding of the issued shares in a PDF. Item 18 also updates the term bank to ADI.
In the case of Australian superannuation funds, the term widely-held complying superannuation fund is taken to mean a complying regulated, but not-excluded superannuation fund, and is a term used in the Superannuation Industry (Supervision) (SI(S)) Act.
In the case of foreign-owned funds, the PDF legislative amendments require foreign-owned pension funds to provide evidence to the Board that they comply with legislation in their country of origin that requires them to be for the sole or prime purpose of providing retirement income for fund members; and they are widely held.
In the context of both Australian and foreign owned funds, by virtue of subsection 4A(1) of the Act as amended by this Bill, the term widely-held means that the fund must have 5 or more members.
These amendments have been made to make the PDF Program more attractive to superannuation and overseas pension funds. It will put them on par with Australian banks and life offices, thus improving competitive neutrality in the financial sector. This change is expected to increase investment funds flowing into PDFs.
This item amends subsection 31(2) of the Act, defining the term associate by inserting two new subsections 31(2A) and 31(2B).
Subsection 31(2A) amends the current broad definition of the term associate to state that it does not apply where the association did not exist prior to the persons becoming shareholders in a PDF. Prior associations will continue to be subject to the associate rule. This will assist individual investors in the process of establishing a PDF who might otherwise, simply by virtue of a work relationship, be deemed associates and restricted to holding together not more than 30per cent of the issued shares in the merged PDF.
Subsection 31(2B) is inserted to ensure that the existing section 31 does not defeat the purpose of the new section 32A (see Item 20). Subsection 31(1) prevents any person from owning more than 30per cent of the issued shares in a PDF. This would prevent a PDF from acquiring all the shares in another PDF so as to merge with that other PDF. Subsection 31(2B) therefore creates an exception to the general rule in section 31 so that mergers allowed by section 32A may take place despite section 31.
Section 22 of the Act currentlystates that a PDF cannot invest in a company that is itself a PDF. This part of the Act effectively prevents PDFs from merging with other PDFs. Section 22 is being amended, see Item 12, so as not to prevent a PDF from making an investment allowed by the newly inserted section 32A.
Section 32A of the Act permits PDFs to merge as long as no cash consideration is paid to shareholders as part of the merger, other than as a bona fide dividend. This change will assist smaller PDFs seeking to create a larger and more viable fund. The change has been structured to ensure that there is no cash leakage out of the PDF Program.
Subsection 41(1) of the Act requires that a PDF must, within 4months after the end of each financial year, give the Board a written return that includes such information as particulars of investments, disposal of investments and capital raised during the year.
Item 21 amends subsection 41(1) paragraph (d) to improve the compliance and performance monitoring aspects of the Program. This part of the Act has been amended to ensure more regular and comprehensive reporting requirements. A PDF must provide in its annual return to the Board full particulars of the making and disposal of investments by it during the financial year.
Item 22 amends subsection 41(1) by inserting a new paragraph (ia) requiring full particulars of dividends paid by the PDF to shareholders during the financial year.
See also Item 27.
Subsection 47(1) of the Act states that the Board may revoke a PDFs registration if certain parts of the Act are not complied with.
These items amend the subsection to provide the Board with the power to revoke registration of a PDF that is not complying with any part of the Act. The revocation process provides a PDF with an opportunity to make a submission to the Board, before the Board decides what action to take.
See also Item 17.
This item repeals subsection 47(4) of the Act.
This item amends the table under subsection 50(1) of the Act to specify penalties in terms of penalty units rather than dollars. The item also amends the section 19 provision and inserts a new section 27A provision in the table.
See also Item 27.
Except as otherwise indicated under this item the amendments made by this Act apply, in relation to a PDF, from the beginning of the PDF's 1999-2000 income year (the transition time). Income year has the same meaning as in the Income Tax Assessment Act 1997 .
The amendment made by Item 5 applies to a decision about registration that the Board makes after the transition time, even if the application for registration was made before that time.
Notification of initial investments
The amendments made by Items 14 and 26 apply to investments made after this item commences.
With respect to the amendment made under Item 15, from 5August 1999 any lower tier investments by controlled investee companies must comply with the requirements of the Act unless the Board is satisfied that the PDF had a legal obligation before 5August 1999 to make the investment. For the purposes of section 28A, investments includes any additions to investments in place before 5August 1999.
The amendments under Items 21 and 22 apply to annual returns from the 1999-2000 financial year.
The Board's power to revoke a PDF's registration if certain parts of the Act are not complied with, by the amendments under Items 23 and 24, applies to contraventions of this Act, or of a condition of a PDF's registration, that happen after this item commences.
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