Commonwealth Numbered Regulations - Explanatory Statements

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TELSTRA CORPORATION (OWNERSHIP - INTERESTS IN SHARES) REGULATIONS 1997 NO.244

EXPLANATORY STATEMENT

Statutory Rules 1997 No. 244

Issued by the authority of the Minister for Communications and the Arts

Telstra Corporation Act 1991

Telstra Corporation (Ownership - Interests in Shares) Regulations

Section 42 of the Telstra Corporation Act 1991 (the Act) allows the Governor-General to make regulations prescribing matters that are required or permitted by this Act to be prescribed, or that are necessary or convenient to be prescribed, for carrying out or giving effect to the Act.

The Act imposes limits on the ownership of Telstra shares by foreign persons. The ownership rules are set out in Part 2A of the Act and in the Schedule to the Act.

Section 8BG in Division 4 of Part 2A of the Act specifies that an unacceptable foreign ownership situation exists if:

*       there is a group of foreign persons who hold in total a particular type of stake in Telstra of more than 11.6667% (or 35% of one third of the Commonwealth's shareholding); or

*       there is or are one or more foreign persons each of whom holds a particular type of stake in Telstra of more than 1.6667% (or 5% of one third of the Commonwealth's shareholding).

Paragraph 9(1)(d) of the Schedule provides that, for purposes of the ownership provisions, an interest of a prescribed kind in a share, being an interest held by such persons as are prescribed, must be disregarded. The regulations effectively provide for exemptions to be obtained from the foreign ownership provisions of the Act by allowing for certain interests in shares, and the holders of those interests, to be prescribed for purposes of paragraph 9(1)(d).

The Telstra Corporation (Ownership-Interests in Shares) Regulations provide for the following exemptions from the foreign ownership provisions.

*       Investment funds - trustees, managers etc.

- The Regulations effectively allow a foreign investment fund trustee, manager, etc, where less than 40% of the beneficial interest in the fund is held by foreign persons, to be treated as an Australian rather than as a foreign person (with similar provisions for statutory funds of life companies).

*       Agent

- The Regulations seek to ensure that interests in shares held by depositories, custodians and nominees are disregarded, so that:

:       if a foreign nominee holds Telstra shares(1) on behalf of an Australian investor, these shares are not counted as "foreign"(2); and

(1) For ease of reference, references to Telstra shares include instalment receipts and other securities conferring a beneficial interest in Telstra shares.

(2) For case of reference, shares or interests which form part of a foreign person's "stake" are referred to as "foreign".

:       the nominee issuing Telstra Interim American Depository Shares or American Depository Shares (the name of the security Telstra shares would trade under on the New York Stock Exchange) and any New York Stock Exchange clearing agency (and their custodians/nominees) do not breach the individual ownership limit.

*       Global coordinator.

-        The Regulations ensure that the global coordinators' interests when they purchase Telstra shares for allocation to applicants in the public offer (in the normal manner for a US underwriting) are disregarded. Also, if it is decided to include an over-allotment option as part of the Telstra offer, the regulations ensure that the foreign global co-ordinators do not have an interest in shares that they purchase in the secondary market to satisfy over allocations (or obligations undertaken to satisfy over allocations) in the event the over allotment option is not exercised. The exemption ceases to apply 90 days after the relevant purchase (or longer if the Secretary allows).

*       Broker.

-       The Regulations enable foreign brokers to buy and sell shares on their clients' instructions (in the ordinary course of business) without causing them to have an interest in those shares.

*       Indirect interest-holder.

-       The Regulations disregard an interest existing as a result of the interest-holder being a shareholder 'm a company other than Telstra which is not a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975.

*       Telstra employee.

-       The Regulations seek to ensure that all Telstra's Australian employees do not need to treat their employee share plan shares as "foreign" by reason of technical associations arising by operation of the Act in the event Telstra has one foreign employee.

*       Australian associate of a foreign person - no action in concert, etc.

-       The Regulations seek to ensure that an Australian person needs to be directly or indirectly controlled by a foreign person, acting in concert with a foreign person or accustomed or under an obligation to act in accordance with the wishes of a foreign person before an interest of the Australian person is treated as "foreign".

*       Associate of a foreign person - action in concert, etc.

-       The Regulations seek to disregard the interest of a person in Telstra, for the purposes of calculating another person's stake in Telstra, where the first person is not directly or indirectly controlled by, acting in concert with or accustomed or under an obligation to act in accordance with the wishes of the other person.

*       Australian associate of a foreign person - avoidance of double counting.

-       The Regulations seek to disregard an Australian's interest in Telstra shares, for the purposes of calculating the total interest of a group of foreign associates, to the extent that the Australian's interest would be counted more than once as part of the interests of the group of foreign associates.

Subsections 8BN (1) and (5) of the Act allow the Governor-General to make regulations requiring Telstra to provide information to the Minister about an ownership matter.

The Regulations require Telstra, if the Minister so directs, to provide written advice to the Minister in the event it believes the foreign ownership limits are breached, and to inform the Minister of various matters including the action being taken to remedy the breach. There is also a provision for the Minister to obtain other information about ownership matters from Telstra. If this regulation were not made, there is a risk that the Minister may not be informed of these matters in a timely manner.

Details of the Regulations appear in the Attachment.

The Regulations commenced on notification in the Gazette.

ATTACHMENT

PART 1 - PRELIMINARY

Regulation 1 - Citation

Regulation 1 provides for citation of the regulation as the Telstra Corporation (Ownership Interests in Shares) Regulations. The regulations will commence on Gazettal.

Regulation 2 - Object

Regulation 2 expresses the object of the regulations as to identify interests in shares that are to be disregarded in giving effect to certain of the ownership provisions of the Telstra Corporation Act 1991.

Regulation 3 - Interpretation

Regulation 3 defines terms used in the regulations. In particular, an investment fund is defined as a unit trust (but excluding a discretionary trust), a statutory fund of a life company within the meaning of the Life Insurance Act 1995, a superannuation entity or an exempt public superannuation scheme both within the meaning of the Superannuation Industry (Supervision) Act 1993. This definition is intended to cover the major forms of managed public investments.

Regulation 4 - Beneficial interest - investment funds

Regulation 4 explains the circumstances in which a person is taken for purposes of the Regulation 16 to hold a beneficial interest in the capital or income of an investment fund.

Regulation 5 - Beneficial interest held as loan security only

Regulation 5 provides that if a money lender holds a beneficial interest in an investment fund under a loan security that is enforced, the money lender is taken not to hold an interest in the fund for a period of 90 days after the security was enforced or such longer period a the Secretary allows.

PART 2 - FOREIGN-OWNERSHIP - DISREGARDED INTERESTS

Division 1 - Purpose

Regulation 6 - Purpose

Regulation 6 expresses the object of Part 2 as to prescribe a kind of interest (under paragraph 9(1)(d) of the Schedule to the Act) in a share that must be disregarded for the purposes of the ownership provisions.

Section 8BG of the Act states that an unacceptable foreign ownership situation exists in relation to Telstra if..

(a)       there is a group of foreign persons who hold a particular stake in Telstra of more than 11.6667% (or 35% of one third of the Commonwealth's shareholding), or

(b)       there is or are one or more foreign persons each of whom holds a particular type of stake in Telstra of more than 1.6667% (or 5% of one third of the Commonwealth's shareholding).

A stake of a particular type that a person holds is the aggregate of.

(a)       the direct control interest in Telstra of a type held by that person- and

(b)       the direct control interest in Telstra of the same type held by associates of that person.

The Act specifies 4 types of direct control interests in Telstra as the percentage of:

(a) paid-up capital of the company;

(b) voting power in the company;

(c) rights to distributions of capital or profits on a winding-up of the company; and

(d) rights to distributions of capital or profits other-wise than on winding-up of the company.

Regulation 7 - Interest in an investment fund - trustee, manager, etc.

Regulation 7 provides that a person's interest in a share is prescribed if:

*       the interest exists solely as a result of an action taken in relation to an investment fund either as a trustee or manager of an investment fund, or in administering a statutory fund within the meaning of the Life Insurance Act 1995, or because of a custodial responsibility in relation to the fund; and

*       the person is prescribed under subregulation 16(1).

Regulation 8 - Agent

Regulation 8 provides that a person's interest in a share is prescribed if the interest exists solely as a result of the person acting in a capacity as depository or custodian for, or nominee of, another person. This includes the depository for issue of Telstra Interim American Depository Shares or Telstra American Depository Shares.

Regulation 9 - Global coordinator

Regulation 9 provides that a person's interest in a share is prescribed if the interest arose solely as a result of certain actions taken by a global coordinator to the Telstra public share offer, or a related corporation, in connection with allocations made under the offer and before the end of 37 days after Telstra instalment receipts commence trading on the Australian Stock Exchange.

This only applies if the interest is disposed of by the person before the end of 90 days after its acquisition or longer if approved by the Secretary.

Regulation 10 - Broker

Regulation 10 provides that a person's interest in a share is prescribed if the interest exists solely as a result of an action taken by the person in the capacity as a broker in securities in the ordinary course of business and on the express instruction of a client.

Regulation 11 - Indirect interest-holder

Regulation 11 provides that a person's interest in a share is prescribed if the interest exists g solely as a result of the person being a shareholder in a company other than Telstra that is not a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975.

Regulation 12 - Telstra employee

Regulation 12 provides that a person's interest in a share is prescribed if the interest arose solely as a result of participation of a Telstra group employee in an employee share ownership plan provided that the person is not directly or indirectly controlled by a foreign person, does not act in concert with a foreign person and is not accustomed or under an obligation, formal or informal, to act in accordance with directions, instructions or wishes of a foreign person.

Regulation 13 - Australian associate of a foreign person - no action in concert, etc.

Regulation 13 provides that a person's interest in a share, although the person is an associate of a foreign person, is prescribed if the person:

*       is not directly or indirectly controlled a foreign person; and

*       does not act in concert with a foreign person; and

*       is not accustomed or under an obligation, formal or informal, to act in accordance with directions, instructions or wishes of a foreign person.

Regulation 14 - Australian associate of a foreign person - action in concert, etc.

Regulation 14 provides that a person's (the "primary interest-holder") interest in a share is prescribed if when, after being counted for the ownership provisions in determining the stake of the primary interestholder and any substantive foreign associate, it would also be counted, except for the operation of this regulation, in determining an irrelevant associate's stake.

A person is an irrelevant associate if:

*       the primary interest-holder is an associate of the person; and

*       the primary interest-holder is not directly or indirectly controlled by the person; and

*       the primary interest-holder does not act in concert with the person; and

*       the primary interest-holder is not accustomed or under an obligation, formal or informal, to act in accordance with directions, instructions or wishes of the person.

Regulation 15 - Australian associate of a foreign person - avoidance of double counting

Regulation 15 provides that a person's interest is prescribed when, after being counted once for the ownership provisions in determining the total of the stakes of a particular type that a group holds in Telstra, the interest could, except for the operation of this regulation, be counted more than once.

Division 3 - Prescribed interest holder

Regulation 16 - Investment fund - trustee, manager, etc.

Regulation 16 provides that a trustee, manager or custodian of an investment fund or life company administering a statutory fund is a prescribed person if the investment fund is a substantially Australian investment fund.

A substantially Australian investment fund means an investment fund that, in the reasonable opinion of the person, is a fund in which the beneficial interest held by persons who are foreign persons is less than 40% of the capital and 40% of income for distribution, or in the case of a life insurance company administering a statutory fund, not more than 40% of policyholder liabilities of the relevant statutory fund are owed to foreign persons.

Regulation 17 - Agent

Regulation 17 provides that the person mentioned in Regulation 8 is a prescribed person if that person does not hold a beneficial interest in the relevant share or have any authority to exercise the voting rights attached to the relevant share.

Regulation 18 - Global coordinator

Regulation 18 provides that the person mentioned in Regulation 9 is a prescribed person.

Regulation 19 - Broker

Regulation 19 provides that a person mentioned in Regulation 10 is a prescribed person if that person does not hold a beneficial interest in the relevant share or have any authority to exercise the voting rights attached to the relevant share.

Regulation 20 - Indirect interest-holder

Regulation 20 provides that the interest-holder mentioned in Regulation 11 is prescribed person.

Regulation 21 - Telstra employee

Regulation 21 provides that the person mentioned in Regulation 12 is a prescribed person if the person is not a foreign person.

Regulation 22 - Australian associate of a foreign person - no action in concert, etc.

Regulation 22 provides that the person mentioned in Regulation 13 is a prescribed person if the person is not a foreign person.

Regulation 23 - Associate of a foreign person - action in concert, etc.

Regulation 23 provides that the person mentioned in Regulation 14 is a prescribed person.

Regulation 24 - Australian associate of a foreign person - avoidance of double counting

Regulation 24 provides that the person mentioned in Regulation 15 is a prescribed person if the person is not a foreign person.

PART 3 - GIVING OF INFORMATION

Regulation 25 - Telstra to volunteer information to the Minister

Regulation 25 requires Telstra to provide written notice to the Minister at his direction if it believes that an unacceptable foreign ownership exists and other matters including the steps it intends to take to remedy the unacceptable foreign ownership limit if it does exist.

Regulation 26 - Minister may require Telstra to give information

Regulation 26 enables the Minister to require Telstra to provide written information about an ownership matter and that this information be provided within 14 days or within a time frame specified by the Minister.

REGULATION IMPACT STATEMENT

Telstra Corporation (Ownership - Interests in Shares) Regulations

Background

The Telstra Corporation Act 1991 specifies that an unacceptable foreign ownership situation exists if

(a)       there is a group of foreign persons who hold in total a particular type of stake in Telstra of more than 11.6667% (or 35% of one third of the Commonwealth's shareholding); or

(b)       there is or are one or more foreign persons each of whom holds a particular type of stake in Telstra of more than 1.6667% (or 5% of one third of the Commonwealth's shareholding).

A stake of a particular type that a person holds is the aggregate of:

(a)        the direct control interest in Telstra of that type held by that person; and

(b)       the direct control interest in Telstra of the same type held by associates of that person.

The Act specifies 4 types of direct control interests in Telstra as the percentage of:

(a)       paid-up capital of the company;

(b)       voting power of the company;

(c)       rights to distributions of capital or profits on a winding up of the company; and

(d)       rights to distributions of capital or profits otherwise than on winding-up of the company.

The Act defines a foreign person as a foreign citizen not normally resident in Australia or a company where one foreign citizen/company owns more than 15% or a number of foreign citizens/companies own more than 40% (with similar provisions regarding trust estates). The associate provisions are very wide and include, amongst other things, relatives of the person, an employee or employer of the person and a person who is an associate of a person who is an associate.

Issues

The regulations are designed to address a number of technical issues associated with the foreign ownership provisions in the Telstra Corporation Act 1991. These issues include:

*       ensuring that certain groups are not unintentionally caught by the foreign ownership provisions such as Telstra employees, nominee companies, stock brokers acting on clients' instructions in the ordinary course of business and foreign-owned fund managers of Australian sourced investment funds;

*       facilitating the administration of the foreign ownership limits such as refining the effect of the definition of a foreign associate; and

*       ensuring that relevant information about ownership matters is provided to the Minister.

Objectives

(a)       Foreign ownership provisions should not restrict investment by Australians who are not in a substantive sense "associated" with a foreign person.

The provisions in the Telstra Corporation Act 1991 defining a "foreign person" are wide, as is the definition of an associate of a foreign person, to ensure that all foreign persons are captured. However, this has the effect of creating a number of anomalies so that shares held by an Australian who technically has a foreign associate may need to be included in a foreign person's stake(1). This may restrict such Australian investors buying Telstra shares(2) within the constraint of the foreign ownership limits. Examples of Australian investors who could be prejudiced are Australians with overseas relatives and employees of Telstra if just one employee of Telstra is a foreign person.

(1)       For case of reference, shares or interests included in a foreign person's stake are referred to below as "foreign".

(2)        For ease of reference, Telstra "shares" include instalment receipts and other securities conferring a

beneficial interest in Telstra shares.

Other provisions of the Act restrict Australian investors having an indirect investment in Telstra shares through a unit trust or superannuation fund with a foreign fund manager or trustee. Many Australian funds with foreign trustees or managers would be constrained by the foreign ownership provisions in investing those funds in Telstra shares.

(b)       The foreign ownership provisions should ensure that the administrative arrangements are such that holders of Telstra shares can readily determine whether or not their shares should be treated as 'foreign " and information can be readily collected to determine the level of foreign ownership of Telstra.

The administration of the foreign ownership limits on Telstra requires gathering of information on whether shareholders' shares are "foreign" or not(3):

(3)        For case of reference, this is referred to below as shareholders' "residential status".

*       without undue compliance costs to market participants;

*       promptly; and

*       with sufficient accuracy to ascertain compliance with the foreign ownership limits.

It is proposed that the administration of the foreign ownership limits will be streamlined by the Australian Stock Exchange (ASX) modifying CHESS - the electronic settlement system for trading on the ASX - to allow the residential status of shareholders to be identified at the point the shares are registered in their names. This allows the identification of the residential status of shareholders through electronic means. The alternative administrative approach is a paper based system where notices are sent by shareholders to identify residential status.

The main advantage of the electronic system is that the information is available promptly whereas using a paper based system information on foreign ownership can be months out of date because many shareholders will fail to notify their residential status until after receipt of reminder(s). The introduction of the electronic system is expected to improve the administration of the foreign ownership limits for Telstra given that Telstra is expected to have a very large share registrar and Telstra shares are expected to be actively traded on a day to day basis by investors (with perhaps around $500 million worth of shares changing hand every month). However, the ASX, which is developing the electronic systems, requires that market participants can readily determine whether or not shares are "foreign" without undue compliance costs on market participants.

(c) The foreign ownership provisions should accommodate the sale process and trading in Telstra shares

The foreign ownership restrictions should, consistent with the existing underwriting exemption, disregard interests held by under-writers where shares and/or instalment receipts are acquired for on sale to allocatees, since this is the structure adopted in many international underwritings. The restrictions also should not prevent incorporating an over-allotment option as part of the Telstra offer structure if that is considered to be in the interests of the sale. Nor should foreign brokers be prevented from buying and selling Telstra shares on behalf of clients.

The Regulations and Alternative Options

The following describes each regulation, provides information on the rationale for each regulation and discusses alternative options.

Foreign managers/trustees of investment funds where foreign persons hold a beneficial interest in less than 40% of the capital and income of the find.

The definition of a foreign person in the Telstra Corporation Act 1991 means that shares held for many large Australian superannuation and investment funds would be classified as "foreign" because the manager/trustee is either partly or wholly owned by a foreign person. The regulation allows a foreign fund manager where less than 40% of the beneficial interest in the fund is held by foreign persons effectively to be treated as an Australian rather than as a foreigner (with similar provisions for statutory funds of life companies). This approach is consistent with the approach used in other Commonwealth sales including airports, the first sale of the Commonwealth Bank and Qantas. (In the case of the second and third sales of the Commonwealth Bank, there were no specific restrictions on foreign ownership.)

The only alternative option is not to make the regulation. However, this has the following implications.

*       Excluding foreign managers/trustees of Australian funds the opportunity effectively to be treated as an Australian investor may prevent many small Australian investors having an indirect shareholding in Telstra. For example, 325,000 retail investors have placed money in various funds managed by Bankers Trust Australia, 350,000 NSW public servants have invested funds with Axiom and National Mutual has over 1 million Australian investors. It will be much harder for these funds to obtain an allocation as part of the foreign component of the offer compared with the Australian component of the offer because they will be competing against a large number of very big foreign investors for a limited volume of stock (constrained by the foreign ownership limit).

*       Proceeds from the partial sale of Telstra would be much lower by excluding foreign managers of Australian funds from the domestic component of the offer. This reflects that an estimated 43% of the domestic institutional market (including 3 of the top 5 fund managers) would be classified as foreign persons as defined in the Telstra Corporation Act 1991. Removing such a large segment of the domestic institutional market from the Australian component of the Telstra offer could jeopardise the commercial success of the sale.

A depository, custodian or nominee holding an interest in shares on behalf of investors.

Depositories, custodians and nominees hold legal title to property for and at the direction of their beneficial owners. They have no substantive interest in the property but, because an interest in a share is defined in the Telstra Corporation Act 1991 to include any legal or equitable interest in the share (and various powers which nominees are likely to have such as exercising votes on behalf of beneficiaries), they may technically have an interest in Telstra shares held by them. The regulation seeks to disregard any interest in Telstra shares (or shares in another company) held in a capacity of a depository, custodian or nominee. This treatment is consistent with the Corporations Law where the definition of "relevant interest" excludes interests held by bare trustees.

The regulation seeks to achieve the following outcomes.

*       If a depository, nominee or custodian is a foreign person but holds shares on behalf of Australian investors, then the shares are not thereby counted as "foreign".

-        The alternative option is not to make the regulation. This may mean that many Australian investors (such as AMP) could have their shares classified as "foreign" in the event they hold shares in a name of a nominee who is a foreign person. If it is appropriate to ignore the interests of foreign owned trustees/managers of substantially Australian investment funds (see above), it is also appropriate to ignore the interests of a foreign owned nominee/custodian who holds shares on behalf of an Australian investor.

*       Any interest in Telstra shares held by the depository issuing the Telstra Interim American Depository Shares and American Depository Shares (ADS) - the name of the security Telstra shares would trade under on the New York Stock Exchange - and any New York Stock Exchange clearing agency (and their custodians/nominees) is disregarded for purposes of determining whether the individual foreign ownership limit is breached.

-        The alternative option is not to make the regulation. This may mean that the listing of Telstra shares on the New York Stock Exchange may not be possible because there could be no guarantee that the individual foreign ownership limit will not be breached by the ADS depository, or that Exchange's clearing agency. In terms of administration of the foreign ownership limit, all the beneficial owners of Telstra's Interim ADSs and ADSs are to be treated as foreign persons.

The foreign global coordinators if they buy Telstra shares to satisfy an allocation of shares.

The Act already disregards the interests of underwriters of a Telstra sale scheme, subject to conditions. and the regulation will ensure this applies where the underwriting is structured as a purchase for on-sale, as occurs in many international underwritings. Also, the Government is considering the possibility of including an over-allotment option as part of the Telstra offer. This would involve the global coordinators over-allotting shares at the close of the offer. If the transaction were to trade below the offer price in the aftermarket, the global coordinators can buy back shares in the secondary market to cover the over-allocation, during a period up to 30 days after the completion of the offer, or if the shares trade at a premium in the aftermarket, the vendor is required (under the over allotment option) to provide additional shares to cover the over-allocation.

Two of the global coordinators for the partial sale of Telstra are "foreign persons" (Credit Suisse First Boston and ABN AMRO Rothschild). This means that they may not be able to undertake purchases if constrained by the foreign ownership provisions. The regulation allows a limited window for unrestricted acquisitions by the global coordinators in the initial 37 day period (30 days plus 7 days for settlement of purchases), but only where the purchases are made to satisfy allocations or obligations undertaken to satisfy allocations. Any shares acquired will need to be disposed of within 90 days, or any longer period permitted by the Secretary.

Brokers acting in the ordinary course of business.

The regulation enables foreign brokers to buy and sell shares on behalf of clients (acting in the ordinary course of business) without causing them to have an interest in those shares.

The regulation addresses the possibility that a foreign broker may technically have an interest in a Telstra share (or in shares of another company) under the Telstra Corporation Act 1991 in carrying out a client's instruction to buy or sell a share. If such interests were not disregarded, foreign brokers may be excluded from dealing for their clients in Telstra shares because this may cause a breach of the foreign ownership limits. Ensuring that foreign brokers can trade in Telstra shares with confidence of not breaching the foreign ownership limits can only be addressed through regulation.

Interests held in companies except those regarded as foreign under the Foreign Acquisitions and Takeovers Act 1975.

The Telstra Corporation Act 1991 contains a "multiplier" provision. This provision says that if any foreign person has any interest in any company that owns Telstra shares (an upstream company), that foreign person has an interest in Telstra which is the multiple of the foreign person's percentage interest in the upstream company times the upstream company's percentage interest in Telstra. For example, if foreigners own 10% of BHP and BHP owned Telstra shares, foreigners would be considered as having an interest in 10% of these Telstra shares for determining the level of foreign ownership of Telstra. Moreover, this process not only occurs at one level above Telstra, but potentially at multiple levels (so if CSR owns shares in National Australia Bank which owns shares in BHP which owns shares in Telstra and CSR has foreign shareholders, a multiplied foreign interest in Telstra would result).

The regulation disregards an interest existing as a result of the interest-holder being a shareholder in a company other than Telstra that is not a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975. This regulation streamlines the administration of the foreign ownership limits that apply to Telstra because companies

routinely consider whether they are foreign for Foreign Acquisitions and Takeovers Act 1975 purposes.

The alternative option is not to make the regulation. However, this would make the administration of the foreign ownership limits very difficult, if not unworkable. This is because Telstra is not in a position to identify the foreign ownership of upstream companies. In any event, determining an approximate level of foreign ownership of any company is in practice difficult because institutional investors often hold shareholdings in the name of nominee companies and because the associate provisions in the legislation are very wide.

Telstra employees participating in Telstra's Employee Share Ownership Plan.

The definition of "associate" in the Telstra Corporation Act 1991 may mean that if one foreign person is a Telstra employee, all Telstra employees who buy Telstra shares under the company's Employee Share Ownership Plan could have their shares effectively treated as "foreign" because of their association with the foreign employee (which would require the foreign employee to count their shares in its "stake"). The regulation ensures that all employee share plan shares held by Telstra employees do not effectively become "foreign" if Telstra has one foreign employee. The regulation is framed to disregard only interests held by those Australian employees that do not have a substantive association with a foreign person.

The alternative option is not to make the regulation. This may mean that all employee share plan shares held by Telstra employees will need to be treated as "foreign" regardless of whether the holders are Australian for purposes of administering the foreign ownership limits. This is an unintended consequence of the Telstra Corporation Act 1991.

Australians in the event their associations with foreign persons are not substantive.

As noted above, the "associate" definition in the Telstra Corporation Act 1991 is so wide there is a risk that many Australians will be treated as an associate of a foreign person where there is no substantive control of the Australian by the foreign person. This could include Australians with relatives who are foreign persons.

The regulation seeks to ensure that an Australian person needs to be directly or indirectly controlled by a foreign person, acting in concert with a foreign person or accustomed or under an obligation to act in accordance with the wishes of a foreign person before the interest of the Australian person is effectively treated as "foreign". The effect of this regulation is to reduce unintended consequences of the wide associate provisions in the Act.

The alternative option is not to make the regulation. This not only means that the holdings of a large number of Australians, including many migrants, may be classified as "foreign", but the administrative systems for monitoring foreign ownership would most likely become unworkable because investors in Telstra shares would have to be asked an extensive set of questions to determine whether or not they are an associate of a foreign person. It is impractical to do this because Telstra is expected to have a very large share registry and be p actively traded by investors on a day to day basis (with perhaps around $500 million of Telstra's shares changing ownership every month). Moreover, there is a risk that the answers provided could be incorrect because the associate provisions are very complex. Such an outcome may mean that a reasonably accurate measurement of substantive foreign ownership levels may never be achieved.

Any other person once their interest has been counted to determine their own stake and the stake of any substantive foreign associates.

In the same way that shares held by an Australian who is not substantively associated with any technical foreign "associate" should not be counted in the foreign associate's stake, shares held by (i) an Australian who has a substantive foreign associate but is also non-substantively associated with a second foreign person, or by (ii) a foreign person who is not substantively associated with a second foreign person should not be counted in that second foreign person's stake. Because interests are disregarded only after they have been counted in the stake of the person m question and any substantive foreign associate, disregarding non-substantive associations should not affect aggregate foreign ownership levels (to any greater extent than the regulation discussed above), but might be important in determining individual foreign ownership levels. The regulation has been framed for the limited propose of determining the nonsubstantive associate's stake in Telstra.

The alternative of not making the regulation will make the administration of the foreign ownership limits much more problematic.

Double counting of the interests of foreign associates of an Australian.

Clause 11(3) of the Schedule to the Telstra Corporation Act 1991 may not adequately eliminate "double counting" of Telstra shares held by a number of associates (based on the same underlying shares), where a number of foreigners are associated with an Australian who holds the underlying shares. The regulation seeks to disregard an Australian's interest in Telstra shares, for the purposes of calculating the total interest of a group of foreign associates, to the extent that the Australian's interest would be counted more than once because part of the interests of the group of foreign associates. The regulation provides greater administrative certainty to determining the level of foreign ownership of Telstra shares because legal advice indicates that Clause 11 (3) of the Schedule to the Act may, on one view, not effectively eliminate double counting.

The alternative is not to make the regulation. The implication of this is that there could be double counting of an interest in Telstra shares flowing from foreigners being associates of an Australian.

Providing information on breaches in the' foreign ownership limits

Subsection 8BN(5) of the Telstra Corporation Act 1991 provides a power to make regulations requiring Telstra to provide information to the Minister on any ownership matter. The regulation requires Telstra, if the Minister so directs, to provide written advice to the Minister in the event it believes the foreign ownership limits are breached, and to inform the Minister of various matters including the action being taken to remedy the breach. There is also a provision for the Minister to obtain other information about ownership matters from, Telstra. If this regulation were not made, there is a risk that the Minister may not be informed of these matters sufficiently promptly.

Other Issues

Consultation

A wide ranging consultative process was undertaken in the drafting of the regulations with relevant parties. The consultative process focussed on determining the arrangements for administering the foreign ownership limits imposed on Telstra and ensuring that Telstra fulfils its obligations under the Telstra Corporation Act 1991. The organisations consulted were the:

*       Telstra Corporation Ltd;

*       Freehill Hollingdale & Page - the Commonwealth's lawyers for the partial sale of Telstra;

*       Mallesons Stephen Jaques - Telstra's lawyers for the partial sale of Telstra;

*       Coopers & Lybrand - the share registry for the partial sale of Telstra;

*       Australian Stock Exchange; and

*       ABN AMRO Rothschild, Credit Suisse First Boston and JB Were & Son - Joint Global Coordinators for the partial sale of Telstra.

These organisations strongly support the need for these regulations.

The Australian Government Solicitor, the Treasury Department, the Department of Communications and the Arts and the Office of Asset Sales were also consulted.

Review

The regulations do not include a provision indicating that they are to be reviewed some time in the future. The regulations will continue to apply as long as foreign ownership restrictions g apply to Telstra. The Government has no intention to review the policy of imposing foreign ownership restrictions on Telstra.

Administration of the Foreign Ownership Limits

The Telstra's Board is responsible for administering the foreign ownership limits.

However, the Government is considering using an instalment payment mechanism for the sale of the Commonwealth's one third shareholdings in Telstra. In these circumstances, investors will pay for the shares in two instalments, and will be issued a security known as an 'Instalment Receipt' to evidence their beneficial interest in the underlying share. The underlying shares are to be held by 'Telstra Instalment Receipt Trustee Limited' (the Trustee) until payment of the final instalment. This means that the Trustee will be responsible for administering the foreign ownership limits on behalf of Telstra's Board until payment of the final instalment.


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