HC Deb 19 October 1976 vol 917 cc1286-96

'In Schedule 4 to the Act of 1948 (matters to be specified in prospectus etc.), in paragraph 6 after the words "on each share" there shall be inserted the words "including the amount, if any, payable by way of premium" and at the end of that paragraph there shall be inserted the words "including the amount, if any, paid by way of premium".'.—[Mr. Clinton Davis.]

Brought up, and read the First time.

Mr. Clinton Davis

I beg to move, That the clause be read a Second time.

This, too, is a complex point. It came to our notice during the Recess, and for that reason was not discussed in Standing Committee. It concerns a matter which in the Government's view is of considerable importance and ought to be dealt with in the Bill. It is a suitable vehicle for it, even though it has entailed introduction at a rather late stage.

The need for the amendment has arisen principally in relation to a type of company known as an oversea mutual fund. Mutual funds in corporate form are common on the Continent and in North America, but cannot be established in this country because it is a fundamental principle of our company law that a company should not buy back its own shares.

The amendment will not affect unit trusts, the promotion of which is regulated by the Department of Trade under the Prevention of Fraud (Investments) Act, or listed mutual funds, since under the Companies Act 1948 these enjoy exemption from Schedule 4.

It has been the Department's view that unlisted mutual funds sell and repurchase shares continually at frequently varying prices could not promote themselves here because of their inability to state in their prospectus the amount which the investor will have to pay for his shares.

Schedule 4 to the 1948 Act requires "the amount payable" on each share to be stated in the prospectus. The interpretation to be placed on the expression "the amount payable" has been called in question, and it is for that reason that we have thought it appropriate to use the Bill as a vehicle for introducing this matter. To avoid a situation in which unlisted mutuals might be able to offer their shares continually in this country, free of either Department of Trade or Stock Exchange control, it is necessary to clarify the meaning of paragraph 6 of Schedule 4.

The point is of rather more general application. For all companies which issue shares at a premium, the prospectus should state the full amount payable on allocation or allotment of each share, not just the nominal value.

In order to ensure, first, that the law states precisely what is required to be specified in a prospectus in respect of the amount payable, and more particularly, second, to ensure that unlisted mutual funds cannot operate in this country, we have to amend the law so that it states clearly that the amount payable on shares, as required to be disclosed in a prospectus in accordance with paragraph 6 of Schedule 4 to the 1948 Act, is the total amount payable, including any amount payable by way of premium, and not simply the nominal value.

The Government have come to the view that advantage should be taken of this opportunity to present this new clause to deal with this specific point. I hope that the House will recognise that it would be wrong if we were to take no action while knowing that the courts could sanc- tion a different interpretation of paragraph 6. I do not think this is in any way a contentious party political matter.

Mr. Tim Renton (Mid-Sussex)

Would the Under-Secretary clarify one point at this time in his speech. He said that this matter was one of general interest. Is it the case that this has arisen only with regard to open-ended mutual funds? Is it only in their case that it is necessary to legislate in this manner to make certain that the amount payable is included in the Bill or has it arisen in relation to other prospectuses in regard to other companies?

Mr. Davis

It has arisen in respect of an open-ended mutual fund. It is not a matter which has received general application in that sense. I was coming to the general interest points in a moment.

The fact is that if unlisted mutual funds were to be free to operate here unregulated, they would be promoting their activities alongside authorised unit trusts but with two important differences. First, the day-to-day supervision of the operations of a unit trust authorised by the Secretary of State for Trade is vested in a trustee who also assumes responsibility for the safe custody of the unit trust's assets, whilst the oversea mutual fund may or may not have a trustee. Even if it has one, it is by no means certain that the trustee's responsibilities will match those which the United Kingdom investor has come to expect of the unit trust trustees.

Secondly, these oversea mutual funds may invest in property other than securities—for example, commodities, land, bullion and so on. In short, their promotional activities would not be subject to our control and we would be putting back the clock some considerable time—indeed, to the time when finance and commodity pools flourished unchecked and swindles arising from them were common place.

I am not seeking to suggest that all overseas mutual funds are disreputable. That would be quite wrong and quite unjust to some who thought that they were caught by that general description. That is not intended. But the fact is that without the new clause we may find that we have opened up an avenue for the unscrupulous promoter to push his shares at a public which has become accustomed to a tradition of relative safety and supervision in the field of collective investment.

I ought also to mention that the EEC Commission has been concerned with the open-ended type of collective investment institution and a draft directive has been published which will seek to lay down minimum standards for both unit trusts and corporate-type funds. These investment institutions will require some form of authorisation before they will be able to promote themselves to the public not only in their own member State but in other member States of the Community. It would be wise for us to take this opportunity of ensuring that this country did not act as a back door for the entry of unauthorised mutual funds.

I would also suggest that it is desirable to clarify the meaning of paragraph 6 in the context of British as well as overseas company prospectuses. I take the point—part of it at least—that the hon. Member for Mid-Sussex (Mr. Renton) made in his intervention.

Mr. Tim Renton

As the Under-Secretary has said, this is a highly complex matter. It was not discussed in Committee. It is a great pity that it should be brought to us at 12.29 a.m., rather than, for example, being delayed until the larger securities legislation that I believe the Government intend to introduce during the coming Session—if they can find the time to do that.

12.30 a.m.

One thing that puzzles me about the hon. Gentleman's explanation of the new clause is that he implies that this matter came to the Government's notice during the summer months, rather suddenly, and that it was for that reason necessary to plug this loophole now. However, our legislation has been like this ever since the Companies Act 1948, and open-ended mutual funds have existed for a great many years. It is, therefore, hard to see or know what has happened during the months of the Summer Recess that makes it necessary for the Government to bring in this brand new and highly complex point at this very late hour. It would have been much better had we had more time to consider it. It would be very helpful if the hon. Gentleman could explain the danger in rather more detail, and what has happened in recent months that makes it necessary for this point to be introduced now.

When I first read the new clause I wondered what on earth could be the reason behind it, because it is very hard to see how, in any prospectus, the description of the value being placed on each share is not adequate. If a prospectus does not say what is the total amount of money to be subscribed, how will the person issuing the prospectus ever raise the money? Therefore, my instinctive reaction was very much to wonder what was behind the new clause.

The hon. Gentleman has given some explanation. However, I want to go rather further and to ask him whether, in seeking to plug this one loophole in prospectuses, he has considered the EEC draft directive on prospectuses, and what is the implication and the effect of that draft directive on United Kingdom legislation concerning the general issue of prospectuses.

I return to the point with which I started. The hon. Gentleman has frequently said that this is an interim Bill, that it is merely to plug a few gaps, while he promises us a lot more, and much more weighty, legislation in the months ahead. The Parliamentary Secretary to the Law Officers' Department nods his head in approval. However, surely it is a mistake to take just one small point about prospectuses—we do not know the real reason why this is being brought forward at present, or its urgency—when we are faced with the sixth EEC directive on prospectuses, which will make very substantial changes in how prospectuses are handled in Britain.

The most obvious point to be taken from the draft directive is that at present there is legislation for prospectuses only under the Companies Act 1948, which states only what has to be contained in the prospectus when shares are offered to the public. The 1948 Act does not cover the situation when shares are listed on the Stock Exchange. The EEC directive will change all this because its purpose is to cover the point in time at which shares are listed. That will be a very substantial change. This point should surely be taken on board at present.

Unless there is some genuine urgency behind this matter which the hon. Gentleman did not make clear, there is a moment in time when we should consider the whole question of prospectuses and how they will fit in with EEC legislation, rather than trying to plug this one small loophole. Therefore, what consideration have the Government been giving to the EEC draft directive on this point of the contents of prospectuses at the moment of listing of shares?

There is the further point that the draft directive will require that member States shall appoint one or more national authorities to ensure that a prospectus is not published until it satisfies the requirements of the directive. Presumably, in Britain that duty will fall on the Department of Trade, but it will very much lessen the responsibility which at present falls on the Stock Exchange, and that also is a matter to be taken on board and considered in a general review of prospectuses.

In parenthesis, I must add that, apart from the question of mutual funds, this whole worry about the amount, if any, payable by way of premium would not arise if we were to have no par value shares in this country. The Under-Secretary knows that I argued in Committee for no par value shares to be allowed, and I think it a great pity that the Government set their face against them. If they were to accept them, they would be moving with the times. They would be moving into a situation in which, for example, the dividends payable by a company could be equated to the market value of the shares rather than par value, which is a prehistoric notion and not something of any great importance in most companies today.

I hope that the Under-Secretary will be able to tell us that the Government are prepared to look again at the question of no par value shares. It would, I am sure, please both sides of the House if he were to do that.

The Under-Secretary did not talk about Government Amendment No. 71, in Schedule 2, page 42, line 11, at end insert— 'In section 38(5)b) of the Act of 1948 for the words "dealt in or quoted" there shall be substituted the word "listed". In section 39(1)b) of the Act of 1948 for the words "dealt in or quoted" there shall be substituted the word "listed". In section 51(1) of the Act of 1948 for the words "dealt in" there shall be substituted the word "listed". In section 52(1) of the Act of 1948 at the end of paragraph (a) there shall be inserted the words "whether on account of the nominal value of the share or by way of premium". That is grouped with New Clause 5.

Mr. Clinton Davis

On a point of order, Mr. Deputy Speaker. It is my understanding that it is no longer so grouped. I think that that was agreed by Mr. Speaker and was notified to the hon. Member for Worthing (Mr. Higgins).

Mr. Deputy Speaker (Mr. Oscar Murton)

Amendment No. 71 is to be taken later.

Mr. Higgins

Further to that point of order, Mr. Deputy Speaker. The Under-Secretary informed me earlier that he thought that there was some confusion in the grouping, but certainly the House has not been informed, and nor have I, that Mr. Speaker has made a change in the grouping. With respect, it seems a little late at this stage in the debate suddenly to say that the grouping is not what we have on the published list. We have not been officially informed, and the House has not been informed, that there has been a change in the grouping. It is late at night, and one understands that problems are created by dealing with so complex a Bill in this way, but I am surprised by what the Under-Secretary has said.

Mr. Deputy Speaker

Perhaps it is appropriate that I inform the House now that it has been decided, on the order of Mr. Speaker, that Government Amendment No. 71 should go to the second page of Mr. Speaker's selection list and be taken with Government Amendments Nos. 72, 75, 77 and 78. After Government Amendment No. 69, the next group will begin with Government Amendment No. 71, and include Nos. 72, 75, 77 and 78.

Mr. Higgins

I am most grateful, Mr. Deputy Speaker. At the moment, the thirty-third debate, that is, the one on Amendment No. 69, is noted at the top of the second page of the selection list. As I understand it, you are now proposing that the next debate should be on Government Amendment No. 71, but I am not quite sure whether that is on its own or with No. 72 and the others.

Mr. Deputy Speaker

It is to be grouped with Government Amendments Nos. 72, 75. 77 and 78.

Mr. Higgins

I am very grateful.

Mr. Renton

I thought that I heard an hon. Member say, from a sedentary position, "Is that clear?". In fact, it is not at all clear. Government Amendment No. 71, which I was about to discuss, contains four items, and, although the fourth item properly belongs with New Clause 5, the first three do not. The arrangement that Amendment No. 71 is now to be grouped with No. 72 does not help the Government a great deal, because the thirty-fourth debate, to which my hon. Friend the Member for Worthing (Mr. Higgins) alluded—to which I am looking forward with great pleasure and which will come at about this time tomorrow—is to deal with the question of quoted and listed companies.

The amendment to section 52 of the 1948 Act has nothing to do with listed and quoted companies. It deals with the normal value of the share. The Government have got themselves into a hideous muddle on account of the amendments that now appear grouped together under Amendment No. 71. They are clearly imperfectly grouped. In the circumstances, is it appropriate to talk to that part of Amendment No. 71 which is relevant to the new clause that we are now discussing?

Mr. Clinton Davis

The difficulty is that Amendment No. 71 dealt most effectively with the later amendments. It was thought desirable, therefore, to concentrate the debate on Amendment No. 71 on those points. The amendment also contains one matter which deals with New Clause 5 and if it helps the House at this stage I shall just refer to it. It provides that the "amount payable" which, under Section 52(1) of the 1948 Act is to be stated in a return to the Registrar of an allotment of shares, shall be the total amount including any amount my way of premium—as New Clause 5 requires in the case of prospectuses. It may be helpful to deal with that at this stage.

Mr. Deputy Speaker

I hope that that will be satisfactory to both sides of the House.

Mr. Higgins

It is not satisfactory. Why was this amendment not drafted as two separate amendments? The present situation leads to confusion. I see no reason why the Government should draft omnibus amendments and then say that we must discuss parts of them with some amendments and other bits with yet other amendments. The matter could have been resolved simply if the draftsmen had been on the ball.

Mr. Renton

My hon. Friend is right. It is obviously a hybrid amendment and unfortunate that the grouping should take this form. We look forward to coming back to Amendment No. 71 much later in the night.

I return to the question of mutual funds. The Under-Secretary could be helpful by making plain that there are many highly respectable open-ended mutual funds operating internationally, particularly in the American market. They have operated for many years and are an important part of the investment scene. I find it difficult to imagine how it is possible for the Under-Secretary's suggested interpretation to be put on the present reading of Schedule 4 of the 1948 Act. It is clear that the words "of each share" mean the total monetary value of each share. But if the Under-Secretary says that there is an important loop-hope, I do not want to stand in his way. We need to hear more about the urgency this summer which has made it necessary for us to consider the matter now rather than in consideration of total securities legislation.

Mr. Clinton Davis

The hon. Gentleman said that some of his remarks were in parenthesis and, in parenthesis, I shall not reply to them. The debate is not about part value shares and it would be out of order to deal with them. In reply to the hon. Gentleman's repetitive remarks I must tell him that the Department's interpretation has been public knowledge for many years. That was the interpretation presented to the Jenkins Committee.

It was not until this summer that any serious challenge to the interpretation was made. We should place the matter beyond any shadow of doubt. There is a possibility that certain proceedings will be commenced. An interpretation which the hon. Gentleman has accepted, and which he would want to continue to be accepted, and therefore placed beyond challenge, is the Government's goal in making these proposals.

12.45 a.m.

Mr. Tim Renton

Will the Minister be more specific about the challenge? Can he tell us what it involved and how it has come about?

Mr. Davis

It arises from a Jersey-based mutual fund which produced an opinion from counsel challenging the departmental view, the hon. Gentleman's view and that conventional understanding. As we are anxious to avoid the serious damage to the confidence of investors to which such a misunderstanding or different interpretation might give rise, and which might enable unscrupulous promoters to push their shares on an unsuspecting public, we want to put the matter right. It was not possible to foresee this at the Committee stage.

The EEC directive on prospectuses is only a draft directive. It will make substantial changes to Schedule 4, which sets out the matters to be covered in a prospectus in respect of listed companies. I do not think that it is likely to affect the subject matter of the amendment. In any event, I have already spelt out the urgent need. It is desirable to require every company to state in a prospectus the amount to be paid up on each share, including any amount to be paid in respect of a premium. The prospective investor is entitled to be made aware of the amount he will have to pay, and a statement of the amount to be paid merely in respect of the nominal value would not be very helpful. Here we are on common ground with the hon. Gentleman, and I hope that he and my hon. Friends will support the clause.

Sir B. Rhys Williams

I voted against New Clause 1, not because I was convinced that it was wrong, but because it seems to me objectionable for the Government to introduce on Report a matter which should have been introduced in Committee. That seems to apply to New Clause 5 as well, but the Minister has given his explanation of a particular case which has arisen. The Government must have discretion to bring urgent matters to the House at short notice if they think it appropriate to tack them on to an omnibus Bill. However, this is so recondite that it is difficult for hon. Members to appreciate what it is aimed at.

I was brought to realise that the clause had a bearing on the Commission's draft directive on unit trusts only when the Minister pointed that out. Only on Monday afternoon I had to introduce the subject of the draft directive in the European Parliament's Economic and Monetary Affairs Committee in the capacity of draftsman for an opinion to the Legal Committee, where Lord Ardwick is rapporteur. I should like the Minister to explain a little more clearly how the Department's proposal relates to the Commission's proposals in its draft directive on unit trusts.

Mr. Clinton Davis

I have already indicated that I do not think that the provision will have an impact on the proposals that we are putting forward. I do not think that this is the right time to invite a debate on the draft directive.

Question put and agreed to.

Clause rend a Second time, and added to the Bill.

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