David Coleman (Banks, Liberal Party) Share this | Hansard source

I am very pleased to have the opportunity to speak on this important legislation about the simplification of the debt issuance process in Australia. It is an area that I have a little bit of experience in from my previous career in the private sector. What this legislation really does is recognise the inadequacy of legislation currently to support the issuance of bonds to retail investors in Australia. I will come in a moment to how the legislation changes the existing situation.

But it is important to reflect on the reality of what an Australian company faces at the moment if they want to issue debt. Because the retail bond market is pretty much non-existent, you can issue an institutional bond, so to speak. What is more likely is that you would seek to obtain wholesale debt finance, and that basically involves going to banks and asking them for money. A lot of the time that happens overseas, because there is inadequate capital within the Australian market to raise the levels of debt that are often required.

I had occasion last year, on behalf of my former employer, to go to the United States and seek to raise a substantial amount of debt in the New York capital markets. Whilst that is a very important part of the debt equation and will continue to be, it would be a much better situation if Australian companies had a realistic way of accessing debt from Australian households as well, because households have immense wealth in Australia. Our household wealth per capita is right at the top of the world, but virtually none of that wealth is currently accessed by corporations through direct investment by households in bonds.

Sensible policy is: give businesses as many opportunities as possible to access funding. When businesses can access sensible debt funding, they invest more; and, when they invest more, they contribute to greater economic activity. Why do we care about that? Because that means jobs.

Ultimately, whilst this is a technical piece of legislation, what it comes down to is: this helps Australian companies to issue debt and to have access to funding from households which in turn can enable them to grow and employ more people.

The global bond market is immense. It is about US$100 trillion, which is a hard number to conceptualise. It is an enormous number. About half of that is government, and about half of it is private sector. Within the private sector component much of that is issued by banks and financial institutions, but about 12 per cent of that total US$100 trillion is issued by corporations. Around the world, especially in the US, corporations are able to access funding from households. It is quite common for households in the US to purchase corporate bonds in well-established names. We are hopeful that the propensity of Australian households to invest in these products will increase following the passage of this legislation.

At the moment, according to the ABS financial accounts data, households provide only about one per cent of debt issued by Australian companies. When you contrast that to the huge investment in superannuation by Australian households, the huge equity investment, it frankly does not make sense that Australian households are so leveraged to equity products and to institutional products as opposed to directly investing in the debt of Australian companies, because giving those companies the capacity to raise debt is good for the investor. It is another investment opportunity, and it is good for the company itself.

In 2012 corporations issued only seven per cent as much debt as our financial institutions did overseas, whereas in the United States 40 per cent as much debt was issued by corporates as financial institutions. So that is a much lower ratio of corporate debt issuance relative to financial institutions—that is banks, basically, in Australia and the US. That again points to the difficulty of issuing bonds in Australia.

It is very interesting when you look back over a number of decades at the way the bond market in Australia has developed. If you go back 50 or 60 years, households were the biggest purchasers of corporate bonds in the Australian market. The ABS research by Susan Black, Josh Kirkwood, Alan Rye and Thomas Williams on this topic that was published in 2012 found that, back in the 50s, households took about 45 per cent of all corporate bonds. But then legislation started to make it a lot more complicated for households to invest in corporate bonds. There started to be very onerous disclosure requirements, sophisticated investor requirements and so on. So households basically said, 'This is all a bit too hard.' Between 1990 and 2010, households reduced the total amount that they invested in corporate bonds. When you look at a financial product, you look at the flow into that—how much money is flowing in and from what sources. Households over the last 20 years had a negative flow of investment into corporate bonds. That means they took money out of corporate bonds over the last 20 years, and that is not something that anyone wants to see.

Because households basically vacated this space, the slack was taken up by foreign investors, who in that 20 year period accounted for about 70 per cent of the entire Australian corporate bond market. So, whilst we of course want to encourage foreign investors to take up Australian bonds, we certainly also want Australian households to do so. There is clearly a need to do something here, and this is a very sensible and overdue effort to do just that.

Because of the way the rules work at present, it is very hard for someone to invest in a corporate bond unless they were described as a sophisticated investor. Sophisticated investors are almost always companies or institutions. The limit on investment is $500,000—the minimum. So, unless you have $500,000 to invest and unless you comply with the definition of a sophisticated investor, you basically do not proceed and, as a consequence, next to no investment in corporate bonds by households actually occurs.

There are other issues in the existing law where directors are deemed to have a liability for any misleading or inaccurate statement that might be in a prospectus that accompanies a corporate bond, as opposed to the general principle of needing to establish that the person was in fact involved in the production of the prospectus. That is a problem as well because, for obvious reasons, a director is going to be very reluctant to authorise the issuance of corporate debt to households if they will be personally liable for things that might go wrong in that process. That is why the government has moved in this legislation to introduce some important changes.

The very first change is to the disclosure regime. At the moment, if a corporate bond is to be issued, a very detailed document is required to be lodged with ASIC. That document has to be specifically tailored to the circumstance of that particular issuance and must be comprehensive in nature. If there are 200 matters that are relevant to the company in the issue of the bond, then all 200 of those matters need to be disclosed in the prospectus. As you can imagine, it is often the case that preparing all that information is very onerous. It will often already exist in some other form—on the company's website or through the continuous disclosure requirements to ASIC or, indeed, in a prospectus that has been lodged for other purposes. So it should be possible for a company to simply refer to those pre-existing documents in its prospectus for a corporate bond issue rather than having to reinvent the wheel every time it seeks to raise debt in this market.

Basically, under the legislation the precise terms of the particular offer need to be covered in the offer-specific prospectus. But, beyond the points that are very specifically related to that prospectus, the prospectus may refer to a broader base prospectus that has been previously lodged with ASIC. That is a good thing because, again, it means that the corporation is not required to reinvent the wheel, go back to page 1 and gather a whole lot of information that has in fact already been stated.

There is an important time period here. Within 13 months of the issue of the offer-specific prospectus, if the company wants to issue a further amount of bonds under that same offer, it can do so without having to go through a whole new process. It can also refer to a base prospectus for up to three years. So it needs to publish a base prospectus, and then, as the offer-specific prospectuses are subsequently published, as long as they are within a three-year period of that base prospectus, that is all well and good and can be proceeded with. It is a very sensible change, stopping the need for companies to reinvent the wheel and get involved in a whole lot of very onerous activity.

The other important change in the legislation is the change to directors liability provisions. Previously, directors were personally liable for any defects in bond issue documentation, even if those directors had in fact no involvement with the preparation of the prospectus at all. As I said before, that did not lead to a lot of enthusiasm on the part of directors to issue such a prospectus if they were going to be personally liable for anything that went wrong. This bill sensibly says that, if something is inappropriate, if something is unlawful, either through a statement or omission in the prospectus, then absolutely there is an action on the part of any wronged parties, but that action is against the company itself—anyone who underwrote the prospectus or was otherwise involved in the creation of it. There is no strict liability of the directors. That is a sensible reform because the consequence of that strict liability was that prospectuses were not getting issued and corporate bonds were not circulating in the market.

The other important thing that this bill says is: 'In order to comply with these provisions and these simple rules, you need to issue at least $50 million worth of bonds.' We want to encourage the trading of bonds in a secondary market and we do not want a situation of lots of dribs and drabs of very small issuances without the capacity to really foster a strong secondary market, which is so important.

It is a very good piece of legislation. It will hopefully get us to a situation where Australian families can once again look at investing in corporate bonds. Fifty years ago, they invested very heavily in corporate bonds. They basically stopped doing that for various reasons, including the failure of the previous legislation, so it is a good thing for Australian companies. Rather than being so much at the mercy of banks, be they foreign or domestic, Australian companies will now have a much more serious option of accessing the immense wealth of Australian households by issuing corporate bonds. I am very pleased to speak in support of the legislation.

See this speech in context