Multi-Jurisdictional Guide 2012/13: Capital Markets - Part 3
20. Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?
An entity admitted as an ASX foreign exempt listing is not bound by most of the continuing obligations referred to in Question 19. However, it must:
- Comply with the rules of its primary stock exchange.
- Immediately provide to ASX in English all information that it is required to provide to its overseas exchange.
Foreign entities that have a full ASX listing must comply with all of the ASX Listing Rules in the same manner as an Australian company, subject to ASX's discretion to waive an individual company's compliance with an ASX Listing Rule. ASX occasionally exercises this waiver power for foreign companies to exempt them from compliance with particular ASX Listing Rules, where it is certain that the requirements of their overseas exchange are at least as stringent as those of ASX. For example, relief can be obtained from ASX in certain circumstances for foreign companies listed on ASX to file only the financial reports required by their home jurisdiction.
Issuers of CDIs are treated in the same manner as issuers of shares for these purposes.
21. What are the penalties for breaching the continuing obligations?
The ASX Listing Rules have the effect of a contract under seal between the ASX and the listed company. A breach of the ASX Listing Rules can result in suspension of a company's securities from trading and/or the company's removal from the official list of ASX. Under the Corporations Act, ASX or a third party can apply to a court for orders requiring the listed company to comply with the ASX Listing Rules. The obligations of continuous disclosure under the ASX Listing Rules have the force of law in Australia and civil and criminal sanctions can apply for failure to make timely disclosure to the market.
22. When can a company be de-listed?
The de-listing of an entity from ASX can be voluntary or compulsory. For voluntary de-listing, an entity can simply submit a request to ASX. However, ASX can impose conditions on the delisting, such as a requirement to obtain shareholder approval.
Alternatively, ASX can remove an entity if it is preventing a fair and well-informed market. For example, ASX can remove an entity for breaching the ASX Listing Rules or failing to pay its annual listing fee.
From January to November 2011, 115 companies were de-listed from the ASX, mostly arising from acquisitions, voluntary requests and failures to pay the annual fee.
MAIN DEBT CAPITAL MARKETS/EXCHANGES
23. What are the main debt securities markets/exchanges in your jurisdiction (including any exchange-regulated market or multi-lateral trading facility (MTF))? Outline the main market activity and deals in the past year.
Main debt markets/exchanges
The main market for corporate debt securities in Australia is the ASX (www.asx.com.au). The main market for government and other wholesale market debt securities is ASX Austraclear, which is a subsidiary of ASX.
Market activity and deals
The debt security market in Australia was reasonably stable in terms of volume during 2011. Significant transactions between January to November 2011 included:
- Kimberley Metals Limited with A$3.8 million (convertible note issue).
- Peet Limited with A$500 million (convertible note issue).
24. What are the main regulators and legislation that applies to the debt securities markets/exchanges in your jurisdiction?
There are two key regulators relating to ASX listed debt securities:
- ASX Limited.
The ASX Listing Rules set out the requirements for admission to ASX, regulate the conduct of listed companies and are enforced by ASX Limited. ASIC regulates offers of debt securities under the Corporations Act and associated matters such as market conduct, insider trading and advertisements. The responsibility for market supervision was also transferred from ASX to ASIC during 2010.
The Austraclear Regulations govern the clearing and settlement of wholesale market transactions in government and other wholesale debt securities.
LISTING DEBT SECURITIES
25. What are the main listing requirements for debt securities?
To obtain an ASX debt listing, ASX requires that the company be either a:
- Public company limited by shares.
- Government borrowing authority.
- Public authority.
- An entity approved by ASX that complies with certain other requirements (see below, Minimum size requirements, Trading record and accounts and Minimum denomination).
Foreign companies must register as a foreign company with ASIC and may be required to give ASX legal opinions on:
- The status of the notes under the Corporations Act.
- The company's recognition as a legal entity in Australia.
Most companies that issue debt securities to be traded on ASX already have an ASX listing for one or more classes of shares. Other companies that seek only a debt listing are usually special purpose entities that issue debt securities into the wholesale market only (for example, mortgage backed securities issuers).
Minimum size requirements
An entity seeking admission as an ASX debt listing must have at least one of the following:
- Net tangible assets of A$10 million.
- A guarantor with net tangible assets of A$10 million who unconditionally and irrevocably guarantees the debt securities.
- Debt securities with an investment grade rating by an approved rating agency.
Trading record and accounts
No minimum trading record is required. Unless the debt securities are investment grade, the issuer must provide ASX with either:
- Accounts for two full financial years.
- Accounts of its guarantor for such period, if it is relying on the second bullet point above (see above, Minimum size requirements).
The aggregate face value for the securities must be at least A$10 million.
STRUCTURING A DEBT SECURITIES ISSUE
26. What are the main types of debt securities issued in your jurisdiction?
The most common form of debt securities issued in the Australian debt capital market are:
- Bonds or notes. This is a debt instrument providing regular interest payments during the term of the bond, then returning the upfront investment at the fixed end date or maturity. These can be issued in a range of forms including fixed rate, floating rate and subordinated bonds.
- Medium term notes. These are very similar to bonds but a series of notes are issued under a debt issue programme platform.
- Hybrid debt securities. Combines debt and equity characteristics. Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date. At that date the holder has a number of options including converting the securities into the underlying share.
27.Are different structures used for debt securities issues to the public (retail issues) and issues to professional investors (wholesale issues)?
The method of issuing debt securities to retail investors is very similar to an offer for subscription of equity securities (see Questions 4 and 6).
An offer only to wholesale investors is a simpler process, not requiring the production of a prospectus. It is ordinarily made under a short-form information memorandum, which sets out matters including the terms of the debt securities, the structure of the programme and the identity of the transaction participants.
Wholesale market debt securities are cleared and settled through Austraclear and are not generally traded on ASX.
28. Are trust structures used for issues of debt securities in your jurisdiction? If not, what are the main ways of structuring issues of debt securities in the debt capital markets/ exchanges?
A trust structure can be used for issues of debt securities and is required for retail issues of debt securities.
ADVISERS: DEBT SECURITIES ISSUE
29. Outline the role of advisers used and main documents produced when issuing and listing debt securities.
The lead investment bank is primarily responsible for:
- Managing the debt issue process.
- Co-ordinating other banks in the syndicate (if any) and the entity's other advisers.
- Marketing the offering.
The issuer's law firm's role is to advise the company on the legal aspects of preparing for listing including matters such as:
- Carrying out the legal aspects of due diligence.
- Assisting the entity in the preparation and verification of the prospectus.
- Negotiating with the investment bank and trustee.
The investment bank also obtains separate legal advice.
On a retail offering, a trustee must be appointed by the issuer to act on behalf of, and represent, the debt security holders. They must exercise reasonable diligence to determine whether the issuer has sufficient funds to repay and whether there have been breaches of the terms of the debt security or the trust deed.
The auditor of an issuer in relation to debt securities must give the trustee a copy of any document that the auditor is required to give the issuer under the Corporations Act, the debt security or the trust deed. The auditor must also report any matters prejudicial to the interests of the holders of debt securities.
DEBT PROSPECTUS/MAIN OFFERING DOCUMENT
30. When is a prospectus (or other main offering document) required? What are the main publication/delivery requirements?
An entity must prepare a prospectus relating to any offer of debt securities for issue or sale to investors in Australia, unless a specific exemption applies (see Question 31).
Once prepared, the prospectus must be lodged with ASIC. However, ASIC does not pre-vet prospectuses before issue.
31. Are there any exemptions from the requirements for publication/delivery of a prospectus (or other main offering document)?
The exemptions referred to in Question 9 for equity securities also apply to debt securities. Further, there are two additional exemptions for debt securities, namely:
- An offer of debentures by an issuer who is a disclosing entity, to its existing debt security holders.
- An offer of debentures by an Australian Deposit Taking Institution or a body registered under the Life Insurance Act 1995.
However, ASIC introduced new relief in May 2010 to allow listed entities to offer vanilla corporate bonds to retail investors using a simplified form of prospectus with modified disclosure requirements.
32. What are the main content/disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?
The general test for the contents of a prospectus for debt securities is the same as for equity securities (see Question 10).
In particular, a debt securities prospectus should include:
- An accurate description of the nature of the debt securities
being offered, for example, a mortgage debenture, debenture or an
unsecured note or deposit, and their terms including:
- interest entitlements;
- maturity date;
- conversion rights (if any); and
- whether the offering is secured or unsecured.
- The company's assets and liabilities, including contingent liabilities.
- The company's most recent accounts, including, where possible, comparisons with its financial position in several immediately preceding years.
- The issue price of the debt securities and the amount sought to be raised by the issue.
- The charges granted by the issuer which rank in priority to or equally with any granted relating to the debt securities being offered.
- The purpose of the issue.
- Whether the issue is underwritten and, if so, by whom and the main terms and conditions of the underwriting agreement (in particular, the termination provisions).
- The debt-to-equity gearing ratio of the issuer, assuming that the total amount sought is raised.
- The "interest cover" provided by the issuer's current level of profitability.
- Whether it is proposed to have the debentures listed for trading on a stock exchange.
- The borrowing limitations imposed on the corporation and its guarantors, which are contained in the trust deed or elsewhere.
- Any special or unusual risks inherent in the proffered instruments.
However, ASIC introduced new relief in 2010 allowing more simplified requirements on offering vanilla corporate bonds (see Question 31).
33. How is the prospectus (or other main offering document) prepared? Who is responsible and/or may be liable for its contents?
A prospectus for debt securities is prepared and verified in essentially the same manner as a prospectus for equity securities (see Question 11, Preparation). Similarly, persons who are responsible and/or may be responsible for its contents are also essentially the same as in relation to a prospectus for equity securities (see Question 11, Liability).
TIMETABLE: DEBT SECURITIES ISSUE
34. What is a typical timetable for issuing and listing debt securities?
The timetable for the issue of debt securities can vary from a few weeks to several months depending on various factors, including whether the company is a first-time issuer, and the complexity of the terms and conditions.
The method of an initial issue of debt securities in a retail offering is very similar to the method of issuing equity. See Question 16 for the general steps in the process, although the process is usually shorter than that for an IPO.
TAX: DEBT SECURITIES ISSUE
35. What are the main tax issues when issuing and listing debt securities?
The principal Australian tax issues for an issue and listing of debt securities include the following:
- Debt or equity. It is important to determine whether the securities will be considered "debt interests" or "equity interests" for tax purposes. This will impact on the issuer's ability to either claim tax deductions for the interest or attach imputation credits to the return. It will also impact on the issuer's thin capitalisation position (potentially limiting the ability to claim interest deductions). Care must be taken with convertible securities and any securities issued with unusual terms, as they may be considered to be"equity" despite their legal form as "debt".
- Withholding tax. Withholding tax implications for the issuer and the security holders may also need to be considered, depending on their circumstances. Australian tax must generally be withheld from payments of interest and dividends to non-residents at a rate of 10% or 30%, respectively, unless an exemption is available under a relevant tax treaty. Exemptions from withholding tax may also be available for various publicly offered or syndicated debt interests.
- GST. The issue and listing of debt securities are not subject to GST (since they constitute financial supplies for GST purposes). However, consideration must be given as to whether the issuing entity is entitled to claim GST credits on its expenses associated with the transaction. Certain types of debt securities may constitute borrowings for GST purposes. In these circumstances, the issuer may be entitled to claim full GST credits on debt security expenses.
CLEARING AND SETTLEMENT OF DEBT SECURITIES
36. How are debt securities cleared and settled and what currency are debt securities typically issued in? Are there special considerations for holding, clearing and settling debt securities issued in foreign currencies?
Debt securities are ordinarily issued in Australian dollars. Retail debt securities that are traded on ASX are cleared and settled in the same manner as shares and other equity securities. Government and other wholesale market debt securities are cleared and settled through Austraclear.
CONTINUING OBLIGATIONS: DEBT SECURITIES
37. What are the main areas of continuing obligations applicable to companies with listed debt securities and the legislation that applies?
An entity with a debt listing on ASX must comply with certain limited obligations under the ASX Listing Rules relating to its debt securities, including the continuous disclosure obligations referred to in Question 19, and certain requirements relating to announcements of issues and certain document and financial reporting requirements including release of annual accounts to ASX.
38. Do the continuing obligations apply to foreign companies with listed debt securities?
These rules apply in the same manner for domestic and foreign issuers, unless the foreign issuer is already operating under a Foreign Exempt listing and issues debt securities on the back of that listing.
39. What are the penalties for breaching the continuing obligations?
The ASX Listing Rules have the effect of a contract under seal between the ASX and the listed company. A breach of the ASX Listing Rules can result in suspension of a company's securities from trading and/or removal of the company from the ASX official list. Under the Corporations Act, ASX or a third party can apply to a court for orders requiring the listed company to comply with the ASX Listing Rules. The obligations of continuous disclosure under the ASX Listing Rules have the force of law in Australia and civil and criminal sanctions can apply for failure to make timely disclosure to the market.
40. Are there any proposals for reform of both equity and debt capital markets/exchanges? Are these proposals likely to come into force and, if so, when?
Developments in the equity market structure
Following the transfer of market supervision, ASIC is now considering certain regulatory reforms to address developments in the equity markets. ASIC has identified several trends that the equity market is currently experiencing, including:
- An increase in market competitors and exchanges.
- Greater complexity of market supervision due to the new multi-market structure.
- Advancement in technology associated with trading, for example, high-speed trading, automated trading, data management, and multiple execution procedures and venues.
- Fragmentation of markets which leads to loss of information in the process of price discovery
ASIC's new proposals are directed towards addressing certain issues arising from the above trends and include:
- New controls to curb extreme price movements and to require transparent cancellation arrangements in response to the "flash crash" of markets.
- Enhanced controls for direct electronic access and algorithmic trading in response to the increasingly pervasive role of technology.
- Formal obligations on market participants to deliver best execution to clients.
- Minimum disclosure about order and trade information to promote efficient price formation on markets and reduce incentives for trading to shift to "dark pools".
- Consolidation of market data across all execution venues to ensure whole of market transparency.
- Market operator co-operation on trading halts and related matters.
- Better regulatory data on orders and trades to ensure ASIC's market supervision keeps pace with market developments.
These changes are expected to be enforced through the ASIC Market Integrity Rules.
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