The Rudd Government will boost competition in business lending with important reforms to make it easier for businesses to borrow directly from retail investors and reduce their reliance on borrowing from banks.
The Government will also provide a substantial new tax incentive to promote personal saving, by encouraging Australians to consider savings products like corporate bonds as a way to diversify their investments.
Making it easier for businesses to borrow directly from retail investors
To boost business lending competition, the Australian Securities and Investments Commission (ASIC) will allow listed entities meeting appropriate criteria to issue bonds to retail investors using a simplified process, while maintaining a strong level of investor protection.
This will help develop a deep and liquid Australian corporate bond market, making it easier for Australian businesses to diversify their funding sources as an alternative to borrowing from the bank.
Over time, this is expected to put competitive pressure on bank lending rates to business, and also reduce the amount of wholesale funding which our banks are required to raise in international capital markets.
This reform is an important part of the Government's response to the report on Australia as a Financial Centre: Building on our Strengths of which this was a key recommendation.
Under the new streamlined process, issuers will be able to provide a shorter prospectus which clearly sets out all of the key information retail investors need to make an informed investment decision – without unnecessary detail which might otherwise confuse investors.
Key terms to be disclosed will include the terms of the offer and the ability of the bond issuer to meet its interest and repayment obligations.
For subsequent bond issues, businesses will then be able to easily supplement this initial 'base' prospectus with an update to investors setting out the terms of the new bond offer, plus any new information that investors will need to make an informed decision.
Combined with the existing continuous disclosure requirements which all listed companies are already subject to, this will provide a very robust level of protection for all retail investors.
The reforms will better align the disclosure requirements for retail corporate bond issues with the simplified process already allowed for equity issuance. This simplified process has been shown to provide a very high level of protection for investors, as well as reduce transaction costs for issuers.
Businesses will only be able to use the new streamlined process on the following strict conditions:
- The companies are listed and have a good continuous disclosure history – for example, they have not been suspended for more than five days over a period of 12 months;
- The bonds offered are simple, so-called 'vanilla' bonds offered to retail and wholesale investors at the same price; and
- The size of the bond offer is at least $50 million.
Disclosures will need to be made both in the prospectus and on an ongoing basis. This will help investors understand any credit, liquidity or other risks that might be involved.
The relevant information is contained in an ASIC Class Order. The class order will take effect on the day after it is registered on the Federal Register of Legislative Instruments. Interested parties can obtain a copy of the class order from www.asic.gov.au.
The Government expects that a wide range of businesses will benefit from these reforms, including those seeking to finance infrastructure projects through the issue of bonds. These measures are part of the Government's continued agenda to promote Australia as a leading financial centre.
Encouraging personal savings with a tax incentive for savings products including corporate bonds
The Government will also encourage personal savings by providing individuals with a 50 per cent tax discount on up to $1,000 of interest income earned by individuals on savings products including corporate bonds.
This significant discount for interest income, commencing 1 July 2011, will deliver a more attractive taxation regime for savings. This will help Australians bolster up their financial security as well as boost our national savings.
The new major tax incentive to save is part of the Rudd Government's plan to strengthen our economy so Australia can face the future with confidence.