§ The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. Neil Hamilton)I beg to move,
That the draft Disclosure of Interests in Shares (Amendment) Regulations 1993, which were laid before this House on 27th May, be approved.The motion stands in the name of my right hon. Friend the President of the Board of Trade, whom I am sure we all wish a speedy return to the House.The regulations will, if Parliament approves them, be made under section 210A of the Companies Act 1985. They will amend part VI of the 1985 Act, which contains the law on the disclosure of interests in the shares of public companies.
The basic rule in part VI is that anyone who acquires or disposes of an interest of 3 per cent. or more in the vote-bearing share capital of a public company must disclose that fact to the company. In addition, the stock exchange rules—the so-called yellow book—require listed companies to inform the exchange of disclosures made to it under Part VI; the information is then made public.
The regulations are needed to take account of the EC Directive on the information to be published when a major holding in a listed company is acquired or disposed of—known as the major shareholdings directive. Our domestic legislation and the directive share a common purpose—greater transparency concerning concentrations of interests in companies. The directive will introduce transparency in other member states comparable to that which exists already in the United Kingdom. We supported it for that reason, and the directive has already been implemented in nine member states.
In most respects, our own legislation is stricter than the directive; the threshold for disclosure is lower—3 per cent. against 10 per cent.; the time limit for disclosure is shorter—two days against seven; our criterion for disclosure is that someone has an interest of any kind in the shares, whereas the directive requires disclosure only where there is control of voting rights; and our domestic legislation applies to all public companies whereas the directive applies only to listed companies. Since the directive is a "minimum standards" measure, not a harmonisation measure, it is open to us to keep our stricter legislation, and we intend to do so.
There are certain respects in which the directive goes further than our domestic legislation. In particular, it contains fewer exemptions from the obligation to disclose. We must bring those aspects of our law into line with the directive, and that is the purpose of the regulations. But we have taken the opportunity to make some other improvements not related to the directive. The regulations take the form of amendments to the present legislation, and in two cases, entire sections of the 1985 Act have been replaced.
The organisations most affected by the regulations are likely to be the banks and the major institutional investors. Those bodies often hold interests in the shares of individual companies in various parts of their organisations. They maintain procedures for aggregating those interests, so as to be able to disclose them under the legislation when required to do so. The removal of some current exemptions from disclosure will inevitably increase the regulatory burden on them to some extent, but we have 933 minimised the increase through close consultation with those affected and have been able to reduce the burden of compliance in other ways.
I shall explain the contents of the regulations in more detail. They are somewhat complicated, mainly because we have gone to some length to preserve, so far as permitted under the directive, the substance of the exemptions provided for under our present law. I hope that the House will bear with me.
First, it has been possible, consistently with the directive, to preserve—with modifications—the current exemptions for interests held by market makers and for interests held by banks and others by way of security. But whereas the current exemptions cover only British firms in those categories, the regulations extend the exemptions to their counterparts in other member states and the market-maker exemption has been extended to market makers in derivatives.
The relevant provisions are to be found in regulation 8, which substitutes a new section 209 for the present version. The new exemption for a security interest is in the new section 209, subsections (I)(c) and (2) and that for a market maker is in the new section 209, subsections (8) and (9).
Secondly, there are a number of categories of interest which are now exempt from disclosure for which the directive provides no specific exemption, but which will not normally be caught by the directive because they do not as a rule exercise voting rights. Those include interests of trustees, including unit trust trustees; custodians; a personal representative of an estate; unit holders in unit trusts; beneficiaries under a retirement benefits scheme; and the interests of a takeover bidder whose offer has not yet succeeded or failed.
All those categories remain exempt from disclosure so long as they do not exercise or control voting rights. This "voting rights proviso" is in subsections (5) to (7) of section 209. In addition, we have widened the exemptions for trustees and custodians so that they benefit all persons in the relevant categories. The existing exemptions are limited by reference to United Kingdom law or to establishment in the EC. That change will benefit international groups active in the London market without compromising the purpose of the legislation.
Thirdly, there are the categories of interest which now enjoy exemptions but for which no equivalent exemption is provided in the directive and which do normally exercise voting rights. Those include two major groups of interest—those of investment managers and unit trust managers, and a miscellaneous class of more specialised interests listed in the new section 209(10). For those categories, we cannot maintain a complete exemption, but we can minimise the burden by requiring disclosure only from the directive threshold of 10 per cent. instead of from the domestic threshold of 3 per cent., and that is what we propose.
The relevant provision is to be found in regulation 4, which replaces the present section 199(2) of the Act with a new and inevitably more complex set of provisions. I draw particular attention to the new section 199(2A)(d). This will ensure, among other things, that parent companies 934 can take advantage of the 10 per cent. threshold in respect of interests held through their subsidiaries, in the same way as they may do so in respect of interests held directly.
The interests to which I referred as miscellaneous will retain a complete exemption as regards unlisted companies and are most unlikely ever to reach the 10 per cent. threshold in listed companies. So, for practical purposes, they are unlikely ever to be subject to disclosure.
Unit trust managers have considered themselves to be exempt under the present legislation, although that is, I am advised, not altogether free from doubt. There is no corresponding exemption under the directive, and the regulations will, therefore, require them to disclose from the 10 per cent. threshold. That requirement will apply to interests in both listed and unlisted companies. Disclosure of interests in unlisted companies is not a directive requirement, but unit trust managers are active and important investors and there is no good reason for a complete exemption for their interests in unlisted companies.
Investment managers now enjoy exemption from disclosure, but only where their sole right is to dispose of the shares they control as managers. I understand that very few investment managers fall into that category and that the present exemption may therefore be something of a dead letter. The regulations will put investment managers in exactly the same position as unit trust managers, which, I am sure, is logical.
The main provisions of the regulations are, as I have explained, to be found in regulations 4 and 8. Regulation I provides for a 60-day delay between the making of the regulations and their entry into force. That is to allow those affected a reasonable time to adapt their internal reporting systems so as to comply with the new requirements.
Regulations 2, 3, 5, 6 and 7 contain technical and consequential provisions; regulation 9 contains a complete new set of definitions for the interpretation of part VI of the Companies Act; regulation 10 revokes two statutory instruments now superseded by provisions to be inserted by the regulations into the body of the Act; and regulation 11 makes transitional provisions so that once the regulations enter into force, any interests which become disclosable because of changes in the law will have to be disclosed within two days.
I commend the regulations to the House.
§ Mr. Stuart Bell (Middlesbrough)I am grateful to the Minister for taking us through the regulations in the way that he did. He mentioned the President of the Board of Trade. Opposition Members extended to the right hon. Gentleman our best wishes when he took ill. We welcome him back to our country and wish him a speedy recovery.
Ten years ago, we heard the former Minister, Alan Clark, present his first affirmative order. He was criticised at that time by the hon. Member for Lancaster (Dame E. Kellett-Bowman) for going too slowly, he was criticised by my hon. Friend the Member for Birmingham, Ladywood (Ms Short) for going to quickly, and he was then criticised further by my hon. and learned Friend the Member for Leicester, West (Mr. Janner), who could not understand what he was saying. Tonight, the Minister took us through the intricacies of the regulations in such a way that their 935 purpose and the amendments are clear and, of course, we note that he is referring to amendments of the Companies Act 1985.
I have with me a copy of the Act and of the handbook on the 1985 and 1989 legislation. It is not surprising that the Minister has set himself the task of cutting through the red tape that those tomes have engendered and we wish him well in that task. He gave himself a deadline of July, which is approaching fast, and we look forward to hearing how he is progressing with cutting that red tape. Before he fell ill, the President of the Board of Trade said at a pharmaceutical dinner that the Department had carved through 3,500 regulations, but he had to admit that they were duplicate regulations, the same as 3,500 others on the statute book, so the Government still had a long way to go.
The regulations touch on a variety of amendments, some coming from European legislation and some being tidying-up measures. Although we want to cut through red tape and get rid of the regulations on small and medium-sized companies, we want an appropriate framework of corporate governance and regulation to cover the very shareholders to whom the regulations apply and also other shareholders.
Opposition Members embrace the principle of the share-owning democracy. We want to protect the small shareholder as well as the large company, subject to the terms of the regulations. With the Companies Acts that we are amending, a climate was created which set loose an orgy of profligacy in the City—an orgy of creative accountancy and of laxness which has culminated in a series of awesome corporate failures, the likes of which we hope never to see again.
The hon. Member for Norfolk, North-West (Mr. Bellingham), for whom I have high regard, mentioned last week that he was one of 61,000 small shareholders who lost their money, if not their shirts, on Asil Nadir's Polly Peck. Those small shareholders were seduced—if that is the right word—to part with their money in a dubious enterprise when the true owner, Asil Nadir, who had 24 per cent. of the shares, transferred £300 million from Polly Peck International to companies such as Unipac, operating not out of Northern Cyprus but, believe it or not, out of Jersey.
It is a fact, of course, that many of the small investors would not have been covered by these regulations tonight, for many of the investments were made by fund managers and they would be exempted from declaring their interest, as I understand it, by the amendment to section 199(2)(a).
Asil Nadir used the money to purchase his own shares, which kept the share price high, so that he could borrow more money—the share price stood at 418p in August 1990—but he also used it to finance his life style and, as we know, for donations to Conservative central office.
It is not my intention to broaden the debate, but to stay within the guidelines of the regulations. As we know, the declaration of political contributions is listed with charitable gifts under paragraphs 3, 4 and 5 of schedule 7 of the Companies Act 1985, which we are amending today. No political contributions ever appeared in the balance sheets of Polly Peck, however, not surprisingly they have not surfaced, so far as anyone can tell, in the financial statements of Unipac.
We are, of course, dealing with the changes that the regulations make in relation to the disclosure of interests in shares, and we have to ask ourselves where, in accordance with these regulations and this Companies 936 Act, we are going in relation to the share-owning democracy. The proper route to a share-owning democracy is not the route which led the hon. Member for Norfolk, North-West to invest in Polly Peck and lose his money, but that of enlarging share schemes through which the work force who invest their lives in gainful employment can also invest in their companies.
I am glad to see the hon. Member for Esher (M r. Taylor) in his place, as he has done sterling work in this area and is one of the hon. Members who has understood what is an appropriate route to a share-owning democracy. The hon. Gentleman has properly understood that we on this side of the House have always sought to extend protection and participation for workers in their place of work. Clearly, protection and participation would not come through this order, but it was thought that they would come through nationalisation, perceived to be the simplest route to common ownership and the fulfilment of clause 4.
The principle had its attractions for us on the Labour side. One took over an industry and once it belonged to the state the workers got both the protection and the participation that they had sought for years, but that simplistic approach has not worked in practice. As the hon. Member for Esher has pointed out, one could not possibly take over every company, even under a Companies Act as wide and munificent as the one that we are modifying tonight, so we could not, by nationalisation alone, extend worker protection and participation to every employee.
Common ownership is not a principle that we on this side of the House propose to abandon. As we discuss these regulations and the Companies Act, we accept that we already have common ownership, because the major companies are owned by the institutions referred to by the Minister earlier, who use our money—and yours, too, Madam Deputy Speaker—through pension funds and insurance. The trick for a future Labour Government will be to decide how to bring such common ownership under control. We hope and believe that it can be done without a major Act of the size of the Companies Act 1985, which we are amending tonight.
We believe that employee share-ownership schemes should be expanded. We believe that we should examine the question of allowing investors in employee share-owning schemes to elect one of their own to company boards. We believe that share option schemes should be expanded to cover employees of subsidiary as well as parent companies.
I am seeking to show, Madam Deputy Speaker, and I am sure that you will follow me in this, that there is a link between the Companies Act 1985, the regulations that we are debating tonight, and what goes on in the outside world.
These Acts that we are modifying tonight—in particular, the Companies Act—have not prevented the perpetration of huge frauds in the City of London, thereby reducing the respectability and the reputation of the City. These Acts have never been fully followed by companies in our own country, and there have never been proper investigations into known abuses, such as the failure to declare political donations. When I asked the President of the Board of Trade——
§ Madam Deputy Speaker (Dame Janet Fookes)Order. Before the hon. Gentleman continues, I remind him that 937 what is under consideration tonight is fairly narrow. The hon. Gentleman is now broadening out the debate in a way that is not acceptable.
§ Mr. BellI am grateful to you, Madam Deputy Speaker. I had one eye on you in the hope that I should stray only within the narrow bounds of the regulations. Having strayed outside them, I seek to return——
§ Mr. Malcolm Bruce (Gordon)Good lad.
§ Mr BellI point out to the hon. Gentleman that the instrument is a draft, and that my speech is only a draft too. Nevertheless, I respect your kind advice, Madam Deputy Speaker.
We hope that the regulations are a forerunner of others which will bring stricter and tighter regulation to the City of London. That is called for by City practitioners and would give stronger powers, if they are needed, to the investigation branches within the Department of Trade and Industry. Such regulations would also inaugurate a more vigorous approach to company law, which is so badly needed to enhance the reputation of the City so that it is not diminished still further.
Through the regulations, we are redefining the disclosure requirements of shareholders. However, the regulations do not cover corporate governance, nor the aspects of the shareholder's role in the enterprise. Those questions may be dealt with in future orders, and in future directives and regulations coming from the Department of Trade and Industry. The House could then fully debate the questions of corporate governance, the direction that the City should take and how we might get back a sense of respect for the City of London.
The regulations define derivatives. The Minister referred to derivatives and to market makers, which shows how the statute book is catching up with City practice. According to David Walker, deputy chairman of Lloyds bank and former chairman of the Securities and Investments Board, derivative trading has become the most significant growth area in financial services. Estimates of amounts outstanding in important exchange traded and over-the-counter contracts show growth from $1,000 million five years ago to $8,000 million at the end of 1991.
As the Minister has defined derivatives in the regulations and places the term in our Companies Act, as well as in the Financial Services Act 1986—I relieve him of giving me an immediate response to these questions and he does not need to answer them tonight—I ask him how he sees an appropriate regulation of the derivatives market. He might tell the House eventually whether he believes that such regulation should be collaborative and international, and whether it should be based on a shared understanding of problems.
I am sure that the exchanges that make up the derivatives market, which have been recognised by the SIB, will be gratified that the statute book is catching up with their practice. However, at present we have self-regulation of those markets, where the exchanges are required to have sufficient resources to provide adequately for the protection of investors and to have procedures for the monitoring of business, the enforcement of rules and the investigation of complaints.
938 Depositary receipts are also defined in the regulations. That is another example of the statute book catching up with the global market place, as depositary receipts are used in the United States for the purchase of non-American quoted shares. They are a legal way round the United States Securities and Exchange Commission, whereby receipts are offered in place of non-American shares bought on behalf of customers. They have added suppleness to our financial markets.
I am sure that you will be happy, Madam Deputy Speaker, that I am staying within the remit of the regulations when I refer to the Banking Coordination (Second Council Directive) Regulations 1992 (d). Every time I mention them to my parliamentary colleagues, their eyes glaze, predictably and perceptibly. I note, however, that the paragraph dealing with the European institutions carrying on home-regulated investment business in the United Kingdom is now revoked, presumably because that paragraph is now subsumed in the text of the regulations. In section 202 of the Companies Act 1985 and the modifications proposed in paragraph 9 of the order, we see how the intricacies of the European Community and its laws entwine in our legislation.
I began my short speech by congratulating the Minister on the presentation of the facts and his marshalling of the arguments. I referred to the former Member, Alan Clark. Before he took his first order on the Floor of the House 10 years ago, he went to see Lord Tebbit and was told to stick to his script and avoid any jokes. Tonight, we have avoided the jokes and stuck to our scripts. I hope that we have provided an enlightened debate, which is narrow but nevertheless broad enough to allow us to make some points in the interests of the City of London. The House can do no better than that.
§ 11 pm
§ Mr. Malcolm Bruce (Gordon)I do not wish unduly to detain the House, but I want to clear up one or two points. As the hon. Member for Middlesbrough (Mr. Bell) said, this is a technical area in which I do not claim expertise. I doubt whether many other hon. Members who are not directly involved in it can claim to have such expertise.
The draft order derives from the EC directive passed in 1988. I want clarification that I have understood the thrust of the order, which is that the 3 per cent. rule will remain, other than for special exemptions, and that the exemptions will remain or be subject to the 10 per cent. rule. I want to know at which point the 10 per cent. rule will come into effect as opposed to the 3 per cent. rule.
As I understand the Department's release, the member states can continue to operate a threshold lower than 10 per cent., while ours is 3 per cent. It is the intention of the United Kingdom that that will continue, although the directive allows our threshold to be raised to 10 per cent. I should be grateful if the Minister could tell me whether there is any forward thinking on extending that. I appreciate that he is trying to simplify the procedure for shareholdings and groups that have no specific reason to disclose because their intentions are not likely to lead to any degree of hostility to the management of the company. The House needs to be assured that we will not inadvertently create any new loopholes and that the categories embraced are only those that cannot and will not be presumed to have any hostile intent. The hon. Member for Middlesbrough referred to Asil Nadir.
939 We would like an assurance about pension funds. Such funds might be able to get through the net by acting as trustees and securing in some way a position in which they have hostile intent which they would not be required to disclose until such time as it became apparent. If the Minister tells me that I have wholly misunderstood the thrust of the regulations, I am happy to be rebuked. However, I would simply like some clarification and development of that point.
I am concerned that the climate relating to takeovers in the United Kingdom is fundamentally different from that in the other member states. Generally speaking, hostile takeovers in the other 11 member states are rare events, but they are normal or frequent events in the United Kingdom. In that different climate, the EC directive may be only the lowest common denominator, but it would not be especially appropriate to the United Kingdom. I simply seek an assurance that our basic rules are not being fundamentally altered. We are talking about the details of certain categories that are currently exempted. I hope that the regulations do not provide for any inadvertent modifications that could lead to any future problems with people getting through the net.
I appreciate that the intention of the regulations is constructive and non-controversial. I hope that they will help to simplify the procedure and not create any untoward problems. While it may be a positive start to the simplification process, the Government must address the matter of how we lower the threshold cost of dealing with small groups of shares. That is relevant to the regulations.
There is no doubt that many shareholders currently hold only those shares that they bought in a privatisation portfolio. They have not gone on to transact in shares, partly as a result of ignorance about how to do that and concern that the fixed charges are disproportionate to the value of the shares. Any measures that the Minister can introduce to simplify that process will help to achieve the broader share ownership that the Conservative party wants. It would also enable people to deal in shares rather than just hold on to those that were bought in discounted sales.
I hope that the Minister will he able to set my mind at rest.
§ 11.4 pm
§ Mr. Neil HamiltonWith permission, I will reply lo the debate.
I thank the hon. Member for Middlesbrough (Mr. Bell) for his support for the deregulation initiative. I assure him that my scissors for cutting red tape will be as sharp as his intellect. I am also grateful to him for the welcome that he gave to the regulations.
If I may say so, most of the hon. Gentleman's remarks dealt with the more cosmic surroundings of the regulations 940 than the regulations themselves. I will not, therefore, spend too much time for addressing those larger issues. I should be happy to return in due course to the question whether we should extend more regulation to the derivatives market. I do not believe, however, that it would be proper for me to consider that now.
I can give the hon. Member for Gordon (Mr. Bruce) the assurance that he sought. We are not seeking to change the fundamental rules of our disclosure system. We are enabled to keep the stricter regime that we have had in the United Kingdom and we intend to do so. Regulation 4 is the relevant regulation that answers the hon. Gentleman's question. It provides for different thresholds at which an interest in shares is to become notifiable, according to the type of interest that is involved.
Most types of disclosable interest will continue to he disclosable at the existing 3 per cent., as set out in section 199 of the Companies Act 1985. A person who has interest falling within paragraphs (a), (b) and (c) of section 199(2A), as proposed, would be obliged to disclose it only when his total interest reached 10 per cent. That will cover investment managers, unit trust operators and a variety of recondite miscellaneous provisions in subsection (10). I believe that that gives the hon. Gentleman the assurance he requested.
The hon. Gentleman also asked whether pension funds would become vehicles for getting around the obligation of disclosure. Pension fund trustees will not benefit from the 10 per cent. threshold, as originally proposed by the Department of Trade and Industry in its consultation document. We decided that it would be inappropriate to include provisions relating to such trustees in the regulations before the Goode committee's review of pension law and its recommendations are published. No doubt we will return to the matter at a later date.
The hon. Gentleman raised a number of other matters that were only distantly related to the regulations, in particular takeover activity in the United Kingdom and dealing costs for small groups of shares. I do not think that it would be appropriate for me to reply to those matters now.
I commend the regulations to the House.
§ Question put and agreed to.
§
Resolved,
That the draft Disclosure of Interests in Shares (Amendment) Regulations 1993, which were laid before this House on 27th May, be approved.
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