BL611 Topic 8 Finance

1
BL611 Topic 8Finance

• Overheads
• Prepared by Chris Baker,
• School of Business, University of Ballarat, May
  2007

2
Sources of finance

• Internal (eg shares, retained earnings) vs
  external (eg loans, debentures, trade finance)
• What are the differences for the company and
  the third parties HRS para 17-120 table 17.1
  WBS Table 19.1

3
Disclosure when issuing new shares to the
public Ch 6D

• Interests being balanced
• Why were reforms made in 1999
• Types of disclosure that can be required
• Recent reforms reasons
• Corporations Amendment Regs 2005 (Ch 7)
• Corporate and Financial Services Review Proposals
  Paper 2006 leading to
• Corporations Legislation Amendment (Simpler
  Regulatory System) Bill 2007 (Ch 6D 7)
• Corporations Amendment draft Regs 2007

4
Overview of disclosure requirements

• Ch2M Periodic (director, financial, auditor)
• Ch6CA continuous (price sensitive)
• Ch6D fundraising (shares debentures)
  prospectus, offer information statement
• Ch7 financial services licensing and
  disclosure via Financial Services Guide,
  Statement of Advice, Product Disclosure Statement
• And check the Regulations AND the ASIC guidance
  documents..eg information sheets, policy
  statements, practice notes, guidelines, class
  orders (can you give examples?

5
Primary issues of shares and debentures (see
loans)

• Matters for directors to check first when issuing
  new shares HRS Fig 19.3
• S.704 what sections set out WHEN disclosure
  needed
• S.706 disclosure required unless exempted in
• S.708 (note 2007 Bill will widen meaning of
  professional and sophisticated investor)

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Ch 6D cont.

• S.705 summarises TYPE of disclosure documents
• S.717 summarises WHAT steps must be taken
• S.715A information in disclosure documents must
  be worded and presented in a clear, concise and
  effective manner

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Ch6D cont.

• Prospectus s.710 - 713
• General disclosure
• Specific disclosure
• Short form
• Lesser requirement for publicly listed coys
• Profile statement
• Offer Information Statement s.715

8
Reforms

• 2007 Bill reforms to Ch6D
• 6 measures to facilitate fundraising eg
• No prospectus needed for rights issues but still
  provide market with relevant information
• unlisted coys offering shares to employees
  reduced disclosure rules

9
Capital maintenance

• Restrictions apply when actions would reduce the
  amount of share capital available to creditors
  (on winding up) and shareholders (use capital for
  proper purpose) eg
• Payment of dividends
• Share capital reductions
• Share buy back
• Self acquisition of shares/financial assistance
  to do so (HIH)

10
Loan capital HRS ch 17

• Secured cf. unsecured
• Debentures security -public lends money to
  coy and coy undertakes to repay debt, with
  interest
• debenture holders can sell or use debentures as
  security
• secured by charge (mortgage, fixed or floating
  charge)
• Coy must appoint trustee and comply with Ch6D
  disclosure rules

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Loan capital cont.

• Charges security given by coy over some or all
  of assets in favour of creditor
• Fixed vs floating
• Charges entered on register to inform people
  dealing with coy creditor has rights to coys
  property establishes order of priority amongst
  charges
• Sellers sometimes use retention of title
  clauses as an alternative to security title on
  goods doesnt pass until goods paid for

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Ch 7 Financial Services Markets

• Financial Services reforms 2001 as result of
  Wallis Inquiry
• Objects s.760A
• Only licensing and disclosure re financial
  service providers looked at

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Three aspects to regulation

• When licence required ensure suitably qualified
• If personal advice given, must be suitable
• Disclosure rules to ensure information given
  about the adviser and the product so informed
  decisions made and ASIC can monitor

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Definitions

• Financial product
• General functional definition
• Specific inclusions (eg shares, debentures, some
  insurance)
• Specific exclusions (eg health insurance,
  reinsurance)
• Where is a
• Financial investment (invest in management
  scheme)
• Managing financial risk (insurance policy)
• Make non-cash payment (electronic payment)

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Definitions cont.

• Financial service eg
• Provide advice about financial product
• Sell/deal in financial product eg shares,
  insurance

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Licence needed

• If carry on business of financial service
• catches many eg banks, ins coys, stock brokers,
  financial planners
• Exemption relevant to accountants
• Financial and audit reports
• Taxation
• Establishing and operating super fund
• Self managed super fund
• Evidence accountants cross the line

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Licensee obligations

• S.912A eg in HRS p.446
• Ensure service carried out efficiently, honestly,
  fairly, comply with the law
• Manage conflicts of interest
• Train staff
• Risk management strategies
• Dispute resolution system compensate clients if
  ordered

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Suitable advice

• Must be given to retail client cf wholesale
  client (similar to professional/sophisticated
  investor in Ch 6D)- HRS p.448-9
• S.945A know your client rule must have
  reasonable basis for advice
• Determine relevant personal circumstances
• Make reasonable inquiries about them and products
• Consider these and give appropriate advice

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Disclosure

• Similar rationale to Ch 6D give enough
  information so client can make informed decision
  but coys concerned at cost
• Financial Services Guide contains general
  information about service provider give to
  retail clients before give services unless exempt
  eg
• Given at public forum (note 2007 Bill widens
  meaning)
• Investor satisfies licensee experienced and
  treat as wholesale client

20
FSG cont.

• Contents HRS p.447, s.942B/C
• Other exemptions eg s.941C eg when already have
  FSG dont need issue another one

21
Disclosure cont.

• Statement of Advice when give personal (cf.
  general) advice, must give SofA
• S.947B contents records advice
• 2007 Bill eg
• if no product recommended and no fee paid, only
  give Record of Advice if asked
• 15,000 threshold introduced for personal advice
  (except if re super, general ins) less than
  15,000 gives Record of Advice instead (not as
  comprehensive)

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Disclosure cont.

• Product Disclosure Statement
• Required for all products (except shares) offered
  to retail client (are some exemptions)
• At point of recommendation and at point of sale
  give sufficient information about product so can
  make informed decision
• 2005 Regs introduced short form option
• Contents HRS table 21.1
• Defective if contains misleading information,
  omits information civil criminal offences

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2007 Draft Regulation Reforms eg

• If information provided in SoA, doesnt need to
  be repeated in next SoA
• If client rejects product or advice, no FSG or
  SofA needed
• FSG can be combined with Ch6D doc, same as FSG
  and PDS can be combined
• Dont need to update FSG if information is not
  materially adverse, provided information provided
  where can access changes

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Disclosure cont. and Market Misconduct

• See HRS para 21-480- other disclosure
  requirements re financial products (other than
  securities)
• Market misconduct note practices in LG pt 5
  not examinable TP1 2007