Commonwealth Numbered Regulations - Explanatory Statements

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BANKS (SHAREHOLDINGS) REGULATIONS (AMENDMENT) 1991 NO. 92

EXPLANATORY STATEMENT

STATUTORY RULES 1991 No. 92

ISSUED BY THE AUTHORITY OF THE TREASURER

BANKS (SHAREHOLDINGS) ACT 1972

BANKS (SHAREHOLDINGS) REGULATIONS (AMENDMENT)

Section 7 of the Banks (Shareholdings) Act 1972 (the Act) provides that regulations may be made for the purposes of the Act.

The Act prohibits bank-owned brokers acting as a principal (owning shares to facilitate the execution of share transactions in an efficient manner) and as an agent (buying and selling shares on behalf of clients) in the case of Commonwealth Bank of Australia (CBA) shares. This is because under subsection 10A(1) of the Act a banking entity, as defined in the Act, must not have an interest in any voting share of the CBA, and under subsection 8(4) and paragraph 8(6)(b) of the Act a bank-owned broker is deemed to be a 'bank entity', and is deemed to have an interest when acting as a principal and as an agent in CBA shares. A bank-owned broker has an interest in CBA shares when acting as principal because it owns the shares, and when acting as an agent because the client may default on a transaction leaving the broker holding the shares.

The Act also prohibits bank-owned brokers and insurers acting as an underwriter and a sub-underwriter in relation to the issue of shares under the CBA's first registered prospectus. Under subsection 8(4) of the Act, bank-owned brokers and insurers are not permitted to have an interest in CBA shares. This means that they are not permitted to act as underwriters or sub-underwriters in the issue of shares under the CBA's first registered prospectus because they are contracted to take up shares if the issue is under-subscribed.

Paragraph 8(9)(d) of the Act provides that the interest of a person in a share may be disregarded if it is a prescribed interest in a share of a person, or a class of persons, as may be prescribed by regulation. This provision provides the power to make the proposed regulations.

The new regulation 5 allows bank-owned brokers to act as a principal and an agent in CBA shares. Brokers are defined as members of the Australian Stock Exchange Limited and as a prescribed class of persons. Any interest a broker has as principal in the voting shares of the CBA is specified as a prescribed interest. The maximum limit on the number of CBA shares that a broker can own in acting as principal is set at 0.5 per cent of the aggregate of the nominal amounts of all voting shares in the CBA.

The new regulation 5 also specifies that any interest a broker has as an agent in the voting shares of the CBA is a prescribed interest. It sets a maximum limit of 5 per cent of the aggregate of the nominal amount of all voting shares of the CBA that a broker is permitted to have an interest in acting as an agent. This limit is also the maximum interest in CBA voting shares an individual person can own as specified in subsection 10A(3) of the Act. It means that in the case where a client defaults on an order for CBA shares for an amount greater than 0.5 per cent (the maximum limit a broker can own acting as principal), the bank-owned broker is required to immediately sell down to the 0.5 per cent limit.

The effect of this regulation is to enable bank owned brokers to trade in CBA shares as part of their normal day to day business. without the regulation, the majority of medium to large brokers operating in Australia would not be permitted to trade in CBA shares.

The new regulation 6 allows bank-owned brokers and insurers to act as underwriters or sub-underwriters, as defined in the regulation, in the issue of shares under the CBA's first registered prospectus. A broker is defined as a member of the Australian Stock Exchange Limited, while an insurer is defined as a body corporate authorised under the Insurance Act 1973 to carry on insurance business or registered under the Life Insurance Act 1945. This means that only those bank owned brokers and insurers operating in Australia become eligible to act as underwriters or sub-underwriters. Persons who are underwriters or sub-underwriters in relation to the issue of       shares by the CBA under its first registered prospectus and who are brokers and insurers are defined as a prescribed class of persons. The regulation specifies that any interest this class of persons has in the course of, or arising out of, underwriting of the CBA's issue is a prescribed interest.

The purpose of the new regulation 6 is to expand the pool of eligible institutions to act as underwriters and sub-underwriters to the issue of shares under the CBA's first registered prospectus. It may be necessary to draw on the institutions made eligible by the new regulation 6 to ensure that the issue of shares under the CBA's first registered prospectus is fully underwritten. It may also be necessary to draw on bank-owned brokers in particular to market the issue to the public as there are very few-medium to large non-bank-owned brokers operating in Australia.

The new regulation 6 ceases to have effect on 1 July 1992. This means that any bank owned broker or insurer that acquires CBA shares because the issue is under-subscribed, is required to sell these shares by 1 July 1992.

The regulations are made at this time with a view to the initial public offer of CBA shares being made in the middle of this year.


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