Investment Limited Partnerships Bill, 1994: Committee and Final Stages.
Sections 1 and 2 agreed to.
SECTION 3.
I move amendment No. 1:
In page 4, line 23, after "partnership agreement" to insert "approved by the Bank under section 8 of this Act".
This amendment relates to the definition of "custodian". The bulk of my amendments are of a similar nature and arose as a result of the speed at which the Bill was put together. I expressed my regret to the House about the late circulation of the Bill. As a result there are a number of typographical errors in the Bill. Approximately 40 of the 42 amendments in my name relate to typographical errors.
Amendment agreed to.
Question proposed: "That section 3, as amended, stand part of the Bill".
This, the definition section, is to some extent the key section in the Bill. The word "property" is defined as "real or personal property of whatever kind (including securities) and wherever located". The Minister said that the property would have to be located overseas and that one could not use the tax advantages conferred by this Bill and section 25 of the Finance Act for domestic investments and to evade taxes. I do not understand, therefore, how the Minister can confidently say that the property will have to be located overseas.
The general partner will be personally liable and the limited partner will undertake to make a contribution. As I subsequently discovered, there will be restrictions on the withdrawal of that contribution by the limited partner. Will the Minister explain in layman's terms what the general and limited partners will be involved in and why one will have unlimited liability while the other will have no liability?
The word "property" in the Bill means real or personal property of whatever kind. Realistic examples are stocks, bonds, securities and conventional bricks and mortar. By its nature, the limited partnership financial animal is not permitted to deal in domestic property or domestic securities.
Perhaps I did not search closely enough, but I cannot see this set out in the Bill.
The Central Bank will oversee this new structure and insist that investments in conventional bricks and mortar property are not domestic but are outside the State.
The limited partner means a person who "has been admitted to an investment limited partnership in accordance with the partnership agreement and who shall, at the time of entering into such partnership, contribute or undertake to contribute a stated amount to the capital of the partnership and, except as provided by sections 6, 12, 20 and 38 of this Act, shall not be liable for the debts or obligations of the investment limited partnership beyond the amount so contributed or undertaken". This is a variation of limited liability. In a limited liability company one is liable to the extent of one's unpaid up capital while a limited partner is limited to the extent of one's investment in the partnership up to a stated amount.
In his reply to Second Stage the Minister said that the fund must be invested outside the State. He went on to say: "The Deputy referred to property and I want to make it clear that there is no question of these funds being invested in the State, they will be invested outside the State". Like Deputy Bruton, I have searched through the Bill to see where this is made clear. In the Bill property means "real or personal property of whatever kind (including securities) and wherever located". As I understand it, the term "wherever located" has only one definition. The Minister seems to be saying that it will be up to the Central Bank to be vigilant on this matter. I thought it might have related to some provision in section 25 of the Finance Act which teed-up this facility, but there is no provision in that section which excludes investment in the jurisdiction. I would be obliged if the Minister would again explain this material point.
This raises another point, that is, the value of an investment vehicle located in the International Financial Services Centre which is totally isolated from the capital markets. There is no organic relationship there. The merit of the existence of this vehicle ring-fenced in isolation in the IFSC does not seem to be of any particular moment and it is not something one can get excited about in terms of its economic or tax implications for the Exchequer.
It appears we will have to rely on the Central Bank to decide whether the very generous tax reliefs we are granting here will be confined to overseas activities. The Bill does not appear to give a direction to the Central Bank that this is what we want in principle. When a person is refused an application and makes an appeal to the court they will find that there is no provision in the legislation that this partnership should be confined to overseas investments. The court may say that the Central Bank has adopted an attitude in its regulations which was not set out in the Bill which spawned such a partnership, and the court may take the opposite view.
I am still not quite clear what this structure of a "limited partner" means or that of a "general partner". I understood that a "limited partner" had to be based overseas, although it does not say so in this section. Are they prospective investors in the funds? What exactly is this animal, what is it intended it will do and what will define it as being a desirable activity in the eyes of the Central Bank?
The provisions of this Bill apply exclusively to the International Financial Services Centre and to the SFADCo area.
Section 12 provides that it must have a registered office and operate under the aegis of the Central Bank. Limited partners are shareholders — the analogy would be a shareholder in a company — so that the phrase "limited partner" is equivalent to the phrase "shareholder", which is the terminology used in partnership law. The phrase "general partner" in the Bill is equivalent to "director". Therefore, instead of having shareholders and directors there are limited and general partners.
The Finance Act, which Deputy Rabbitte mentioned, indicates how the investment will be undertaken. I take the point about jurisdiction. The International Financial Services Centre and SFADCo, particularly the IFSC, are ring-fenced from an external point of view in that the companies operating there are not permitted to engage in domestic financial operations. All of them, whether involved in captive insurance, treasury management, security management and fund management, are required by previous Finance Acts to operate out of the State. In return for that export-type activity they are awarded a 10 per cent tax rate. Earlier Finance Acts set up the IFSC as being a 10 per cent tax area with all the companies there operating externally.
As I said on the last occasion, this Bill is just another item on the menu that the International Financial Services Centre is able to offer international investors, as well as those I just mentioned, captive insurance and so on. This additional facility is basically one of managing international funds as a business here, there is no other agenda. These are internationally available funds managed from the IFSC in Dublin and do not cost the taxpayer any money. While we do not get any money, we receive the fees from managing it and, more importantly, the 10 per cent corporation profits tax on the profits that flow through the centre. Of all the corporation profits tax now reaped by the State, well over 10 per cent emanates from this centre which means obviously, it is extremely attractive to those who manage funds internationally to manage them from an office in the IFSC. We do not have national access to or control over these funds. The Central Bank has control over the management company and the management company subscribes to the State by way of corporation profits tax and fees for management, in a small but growing way, in terms of jobs in the International Financial Services Centre.
While not wanting to labour the point I am still confused. Why is there no requirement that the investments must be overseas? From all the back-up material my understanding is that that is the intention. It appears that effectively we are giving the Central Bank the capacity to draw up the rules in relation to a very generous tax concession. Would it not be more sensible for the Bill to set out some of these restrictions so that we would know at the outset the circumstances in which these companies can be established and in which they can obtain the section 25 relief which, I understand, is triggered by the Central Bank acknowledging them? We need to know that before travelling too far along the road. I suppose our primary duty is to protect taxpayers and ensure that we are not unwittingly creating a vehicle that could result in abuse of a concession.
I understand what the Minister said but it really does not clarify the matter. Why is it not expressly stated that investments must be outside the jurisdiction, especially since property is defined in the Bill as "wherever located"? It seems that subsequently if a lawyer is asked to interpret this Act, in the absence of any express provision stating that the requirement is investment overseas, it must be an open question. I am curious to know why what the Minister himself described as a complex and technical Bill does not provide for a very basic requirement. I thought it related to section 25 of the Finance Act. The relevant subsection of the Finance Act, section 25 (2) states:
Subsection (1) (a) (i) shall not come into effect until such time as legislation governing the regulation of any class of limited partnerships by the Central Bank of Ireland is enacted and shall come into effect subject to such legislation and on such date as the Minister for Finance shall by order appoint.
The Minister said that the jurisdictional requirement probably relates to previous Finance Acts setting up the International Financial Services Centre but this subsection seems to say that the regulation of this class of partnership is enacted "and shall come into effect subject to such legislation". Therefore, it appears it is subject to this legislation, that this legislation determines the parameters of the investments concerned. I should like to hear the Minister clarify the position further.
On the question of limited and general partners, am I correct in understanding that the limited partner is not required to be from overseas, that he could be Irish or domiciled in this jurisdiction, but that the limited partner provides the funds? Are the general partners Irish? Does the Minister perceive the working of this investment partnership in the form of an international financier flying into Dublin, meeting people in the Shelbourne Hotel who have knowledge of the local scene, when the partnership is effectively set up, in all probability, comprised of somebody from overseas providing the funding, linking up to the local knowledge of domestic persons who again in all probability, would be the general partners but that there is no requirement that the general partners shall be Irish? Could they, too, be from a different jurisdiction?
In regard to the property position, in relation to the investment limited partnerships the law here does not stipulate that they have to be in the International Financial Services Centre but, if they are not, they would not be subjected to the 10 per cent corporation profits tax rate. If they want to set up a firm on Grafton Street, say, which is not in the financial services centre they can do so under the provisions of this legislation. It is possible to set up an investment limited partnership outside the financial services centre or outside the Shannon area but there are no tax concessions and there is no benefit to anybody. It is not envisaged that that will happen. If such partnerships are set up the Central Bank will subject them to much scrutiny under current regulations, because the bank plays a very strong regulatory hands-on role in the whole area of fund management. I do not envisage many companies taking that route; instead they will go to the International Financial Services Centre. The Finance Act, 1989, obliges the companies which operate in the financial services centre to invest only in external assets. That being the case companies who set up in the financial services centre under the provisions of this legislation are subject to the Finance Acts and must manage their funds externally.
The Deputy asked about the limited partnership. I am advised that under this legislation the limited partner, the shareholder, must be international funds. The general partner, on the other hand, is the director and as Deputy Rabbitte indicated must be Irish based. The external funds owned by the limited partners who are the shareholders is foreign money managed by the general partner, the director who is Irish. The general partners must be Irish and the limited partners, the shareholders, must not be Irish; that is the relationship we want to establish in the legislation. To manage non-Irish funds we wish to establish Irish limited partnerships in the centre and in the Shannon area under the management of an Irish general partner who will be the director. There is no cost to the State and no great risk involved. This is another item on the menu we can offer in the business of fund management for which we are beginning to build a reputation. I will have to find the exact reference in the Finance Act, 1989, for the Deputy, as I know he wants it confirmed that companies cannot invest in property in the State. All the companies in the financial services centre are managing funds overseas. Therefore, the legislation that deals with that area will also deal with this fund management exercise.
If the Minister says that the Finance Act, 1989, governs this, I am prepared to accept it but I presume we will see the reference before the day is out. In respect of the Minister's remarks just now that limited investment partnerships are confined to the IFSC or to Shannon he entered the caveat that they are not necessarily so confined and they can function in the economy outside subject to the normal tax regime and so on. Referring to the collective investment industry the Minister said on Second Stage that:
The industry does not primarily rely on the existence of the 10 per cent tax rate and requires minimal use of double taxation treaties.
If that is the case why would they want to go to the IFSC? In a later part of his Second Stage contribution the Minister pointed to the fact that this legislation is also a reform of the 1907 Limited Partnership Act. He referred specifically to:
Doubt over the precise extent of the liability of the limited partners in the event of a withdrawal of capital and the possibility that creditors could levy execution against limited partners for debts of the firm, notwithstanding the limit on their liability.
Perhaps it is theoretical but if investment limited partnerships were established outside of the area ring fenced, would the same vulnerability in the 1907 Act not apply? No change is proposed here to guarantee the precise extent of liability on partners in the event of withdrawal of capital and so on.
We need to clarify exactly what triggers the tax concessions. My understanding is that the tax concessions involved here are not primarily the 10 per cent relief. They are concessions on complete exemption from any tax on the investment income of the fund, from any stamp duties, from VAT on certain operations, from interest on capital gains tax and capital duty of 1 per cent on a limited partnership. My understanding is that simply locating in Shannon does not trigger all those concessions. These are extra concessions.
The Minister ought to refer to the sections of the Finance Acts which set out the precise conditions which trigger these concessions. Otherwise we are shovelling it off to the Central Bank and acting on faith that these concessions will be granted solely to activities that are net worthwhile gains for the Irish economy.
We are debating again the concept of how companies operate in the financial services centre. Approximately 200 companies subject to the legislation are set up in the financial services centre, employing approximately 2,000 people. The investment limited partnership company will be subject to the same rules and regulations as all the other companies there. The rules are not being changed.
They are getting extra tax concessions.
The rules are not being changed. Companies such as a captive insurance company, bond management or treasury management agencies are all governed by rules and regulations laid down by the Minister for Finance in the Financial Services Centre Act and in the Finance Acts going back over the last couple of years. The rules are clear. This model will have to adhere to the same rules; this Bill will allow such a fund to be managed from the centre.
Deputy Rabbitte referred to the figure of 10 per cent which I mentioned. We like to say — we probably picked this up from the IDA's marketing blurb — that companies do not come here to avail of the tax breaks, rather that they come because we have a skilled and well educated workforce, because we have a particular skill in fund management and trained executives and because they would be close to colleagues in the same centre. Obviously they come to avail of the tax breaks; the IDA promotes these but does not focus on them exclusively. One of the reasons for this is that the European Union constantly monitors us.
Apart from the figure of 10 per cent, can the Minister of State list the tax breaks they can avail of?
I do not have those details. All the companies located in the centre avail of the same tax breaks. It is my understanding that because it is an external fund, investment income is not taxable here. In other words, if a company invests billions of pounds internationally any investment income goes into the fund and is not taxable in this jurisdiction. It may however be taxable in the country in which the investment is made.
How does the corporation profits tax apply if investment income is not taxable?
It is payable by the management firm on fees.
That would be Mickey Mouse.
It is substantial; the rate is 10 per cent.
It would be minor when compared with the investment income.
If tax was payable on investment income the figure would be much bigger because hundreds of billions of pounds are managed by companies in the financial services centre. If we were talking about a figure of 10 per cent payable on this amount we would be talking about a substantial amount.
But we are not; we are talking about a figure of 10 per cent which is payable on the fees, not the investment income.
It is my understanding that corporation profits tax is charged on the profits which flow to the management company which earns its income by way of substantial fees for managing such funds.
What constitutes a management company in the case of an investment limited partnership?
There are parallel structures. On the one hand we have the limited partner, the shareholder, and on the other we have the general partner, the Irish firm or directors earning income from managing the fund. These fees are substantial. It is my understanding that corporation profits tax is charged on this income. That matter is being checked.
In presenting this Bill we did not set out to have a debate on the tax incentives currently on offer at the financial services centre and their effectiveness. We are certain of one thing: this will be another model and it will be subject to the same financial controls in terms of taxes payable, including stamp duty and VAT.
The working group recommended — I have seen its recommendations — that this limited partnership arrangement would apply in general but went on to state that it expected the Bill when enacted to be utilised primarily by non-Irish investors using the structure for collective fund managements thus creating employment in the financial services centre. That appears to be in conflict with what the Minister of State said. While he indicated that they could set up on Grafton Street he seemed to imply that they would still have to be foreign investors. The original recommendation seemed to envisage the involvement of Irish investors in limited partnerships.
The working group indicated that legislative changes would be necessary to provide the tax regime complementary to that in existence for collective investment undertakings and listed the exemptions granted under the Capital Gains Tax Act, 1975; under section 206 of the Finance Act, 1992 in respect of stamp duty; section 67 of the Finance Act, 1973 and the VAT Act, 1972. I do not know where the exemptions are set out either in this Bill or in the Finance Act and how they are restricted to certain activities, overseas investments managed by an Irish firm. Perhaps we are trying to clarify a matter which should be blindingly obvious but when I looked at these recommendations I thought section 25 would contain a complementary set of tax exemptions and would indicate precisely how they would be restricted to these investments. I do not see these in either legislation and that is the reason we may appear to be making a bit of a meal out of this at this stage. There is a need for clarity so that we will know what it is we are creating.
Section 39 (6) of the 1980 Finance Act inserted by section 30 of the 1987 Finance Act lists the exemptions granted to companies which operate in the financial services centre. I hope to have a copy of them before the debate concludes. These limited partnerships will be able to avail of exactly the same benefits — no other law is being made. We are making provision for the title of limited partnership the structure of which is well known internationally whereby we have a limited and general partner instead of shareholders and directors.
We will wait to see the appropriate section of the 1989 Finance Act.
Section 39 (6) of the 1980 Act lists the exemptions granted to firms which operate in the financial services centre. The 1989 Act deals with external operations.
The question has been asked as to which tax exemptions are triggered by participation in this kind of investment vehicle. On the last occasion I referred to the Paircéir report. As he will recall, unusually and untypically, the Minister of State said that he was only giving expression in legislation to the proposals of the working party which was chaired, presumably, by Mr. Séamus Paircéir. Unlike me, Deputy Bruton through his typical industry has had access to its report. Perhaps it is a comment on how seriously we take legislation and the role of the Opposition that when I asked to see it on the last occasion the Minister of State said he would see if this would be possible but in the nature of things it is convenient to forget this and enact legislation in the hope that no one will remember to raise the matter again.
The general view was, following the infamous "step aside" period in Irish politics that Mr. Paircéir had stepped aside and it will be news to all but those in the inner circles of the financial community that he is back in whatever capacity and so influential are his views on this subject that we have found it necessary to give them expression in legislation. I am sure this is wise and I am not questioning the inherent sagacity of Mr. Paircéir's recommendations but it appears from what Deputy Bruton said that there are tax advantages above and beyond the usual tax advantages afforded to other companies within the IFSC. Is it the case that some companies are afforded advantages in respect of capital gains tax, VAT, stamp duty and so on over and above those normally afforded to companies located in the IFSC?
I have given some thought to the question in respect of the Séamus Paircéir report and I will make the information available to the Deputy today, if possible I will place it in the Library in the next few days.
That was only by way of comment, my question related to taxes.
Without misleading the House it is my understanding that this partnership will avail of the list of exemptions from taxes paid by companies in the IFSC laid down in section 39 of the Finance Act, 1980. I have asked to be supplied with a copy of that section which I hope to receive shortly. Additional tax advantages are not afforded to particular companies.
Producing a list from the Finance Act, 1980, will not answer the questions. I hope this matter will be clarified before the Bill is passed. Are additional tax advantages afforded to this type of partnership which are not afforded to other companies or have all the Paircéir proposals not been taken on board? Regardless of which is the case, this area of the financial sector is not famous for its transparency. If it has been found unnecessary to implement some of the Paircéir proposals, so be it. I accept the Minister may be demonstrating some wariness because the matter has evolved into a wider area of discussion, but when the matter is transferrd to the Central Bank this House will not have a mechanism to pursue this question. It is one of the few occasions when we have an opportunity to ventilate this type of question.
In regard to the withdrawal of capital to which Deputy Bruton referred, section 20 provides for the return of capital to a limited partner — in effect to the shareholder — out of the investment limited partnership in the case of a dissolution of the partnership. The section provides that such money can be returned only if the general partner — the directors — is able to pay its debts after the return is made. In other words, the return can be made only to the extent that the debts of the directors, the management company, are met in full. Section 20 provides for the return of capital to the limited partner — the shareholder — in certain circumstances.
Deputy Rabbitte referred to a catastrophe such as insolvency. From the point of view of the Irish authorities, as the funds are externally owned the limited partners are liable to the extent to which they have invested. Any further losses would fall on the investor who, ultimately, is an international investor.
I am happy to proceed but, during the debate, I would like clarification on what triggers tax concessions, how they are controlled and who decides that concessions will apply.
Question put and agreed to.
SECTION 4.
I move amendment No. 2:
In page 5, subsection (2) line 22, to delete "1907" and substitute "1907,".
This amendment deals with a typographical error. I apologised earlier for the necessity to table 40 amendments dealing with typographical errors. I have tabled only two substantive amendments with which we will deal later.
Amendment agreed to.
I move amendment No. 3:
In page 5, subsection (3), line 27, to delete "its" and substitute "it"
Amendment agreed to.
Section 4, as amended, agreed to.
SECTION 5
I move amendment No. 4:
In page 6, subsection (1) (d), line 4, to delete "specify" and substitute "have specified".
Amendment agreed to.
, Carlow-Kilkenny): We now come to amendment No. 5. Amendments Nos. 6, 7 and 8 are cognate and Nos. 5 to 8, inclusive, may be taken together, by agreement.
I move amendment No. 5:
In page 6, subsection (3), line 21, before "partnership" to insert "investment limited".
Amendment agreed to.
I move amendment No. 6:
In page 6, subsection (3), line 24, before "partnership" to insert "investment limited".
Amendment agreed to.
I move amendment No. 7:
In page 6, subsection (3), line 25, before "partnership" to insert "investment limited".
Amendment agreed to.
I move amendment No. 8:
In page 6, subsection (4), line 27, before "partnership" to insert "investment limited".
Amendment agreed to.
Section 5, as amended, agreed to.
SECTION 6.
I move amendment No. 9:
In page 6, subsection (2), line 37, to delete "partners" and substitute "partners,".
Amendment agreed to.
I move amendment No. 10:
In page 6, subsection (4), line 51, to delete "following" and substitute "following,".
Amendment agreed to.
I move amendment No. 11:
In page 7, subsection (4) (a), line 1, to delete "for" and substitute "for,".
Amendment agreed to.
I move amendment No. 12:
In page 7, subsection (4) (a), line 1, to delete "of" and substitute "of,".
Amendment agreed to.
Section 6, as amended, agreed to.
SECTION 7.
Question proposed: "That section 7 stand part of the Bill."
The Central Bank is taking various powers relating to regulations on diversification, gearing and the type of property in which the investment partnership may invest. Are those regulations to ensure liquidity and prudence or are they measures to restrict access to tax relief?
Section 7 provides that the Central Bank may impose such conditions as it considers appropriate for the authorisation of an investment limited partnership. This section outlines certain matters on which the banks may impose conditions, including liquidity. The section enables the Central Bank to impose conditions for the supervision of the fund, including liquidity.
Will the Minister explain subsection 6 which states:
A company incorporated outside the State shall not be considered solely by reason of being a limited partner in an investment limited partnership as having established a place of business within the State within the meaning of Part XI of the Companies Act, 1963.
Subsection 6 ensures that the partnership does not become Irish established by purely combining with an existing investment limited partnership because such an establishment might have adverse implications for the limited partner. It ensures that the process of establishing an investment limited partnership, other than by way of combining, is followed.
Question put and agreed to.
SECTION 8.
I move amendment No. 13:
In page 9, subsection (4), line 16, to delete "(6)" and substitute "(5)".
Is it the case that subsection 5 now subsumes subsection 6?
The fifth line should be subject to subsection 5.
Amendment agreed to.
I move amendment No. 14.
In page 9, subsection (4) (e), line 34, to delete "them," and substitute "them".
Amendment agreed to.
Question proposed: "That section 8, as amended, stand part of the Bill."
Section 8 spells out some of the benefits, namely, the Central Bank can collect fees from those companies when authorised. What is the proposed fee? How will it vary according to different scales of investment management companies? How will the proceeds of such fees be applied? Will they generate net income over and above the cost of regulating such companies, will that be returned to the Exchequer and will it be a significant benefit? Under section 8 the Central Bank has the ability to refuse to authorise an investment limited partnership on the grounds that it is undesirable. What constitutes "undesirability" in this context? Do we know what we are asking the Central Bank to do in this respect?
The subsection provides that the Central Bank can refuse authorisation where the company name is found undesirable. This is an important provision as it gives authority to the Central Bank to refuse certification where it considers the name used may be misleading or could lead investors or others involved in the financial services industry to believe an investment partnership was something it was not. Applicants are given the right to appeal to the court against the decision of the Central Bank and it can refuse the application if it is concerned it is not strong enough for financial reasons.
I wish to refer to investment income, corporation tax and stamp duty. The fund does not pay tax but those who gain from it pay tax in their jurisdiction. International partners will, presumably, be liable for tax in the jurisdiction in which they reside. The fund is not liable for corporation tax on its investment income and, therefore, it is worth looking at the sums involved because the corporation tax on fees appears to be substantial. Regarding corporation tax, companies in the centre engaging in relevant trading operations, as defined by the Act, pay 10 per cent corporation tax. All those companies are exempt from capital duties, that is stamp duties. That is the up-to-date information on the pluses and minuses of the tax regime in the financial centre and I will come back to this if I get more data.
Regarding section 8 (4), what Central Bank fee income will be generated from authorising these activities? Is the Minister saying that the only tax concessions available to the investment limited partnerships are those under the 1980 Finance Bill to which he referred, which governs all activities in the financial services centre and in Shannon and that additional concessions are not being given to limited partnerships, apart from those available to other companies in the centre?
That is my understanding of the matter as confirmed to me. Tax advantages will not be available, apart from those that apply to the existing firms in the financial centre.
Section 8 (4) allows the Central Bank to charge a fee. I understand it does not currently propose to do that but it is permitted to under the legislation, subject to the Minister's agreement of the scale applied to the venture.
Question put and agreed to.
Section 9 agreed.
SECTION 10.
I move amendment No. 15:
In page 10, subsection (1), lines 32 and 33, after "agreement" to insert "the particulars filed by the investment limited partnership under section 8 (4) (e) and 8 (4) (f)".
Amendment agreed to.
Section 10, as amended, agreed to.
SECTION 11.
I move amendment No. 16:
In page 11, subsection (4), line 9, after "partnership" to insert "as a general partner".
Amendment agreed to.
Section 11, as amended, agreed to.
SECTION 12.
I move amendment No. 17:
In page 11, subsection (2), line 19, after " `comhpháirtíocht theoranta infheistíochta' " to insert "or the abbreviation `cti' ".
The amendment deals with a word change.
The amendment may be typographical but it may confuse the plebs with references and financial commentaries, including "CTI".
Amendment agreed to.
Section 12, as amended, agreed to.
Section 13 agreed.
SECTION 14.
I move amendment No. 18.
In page 12, subsection (2), line 7, after "Companies Acts" to insert ", 1963 to 1990".
Amendment agreed to.
Question proposed: "That section 14, as amended, stand part of the Bill".
Under section 14 (2), there is an exemption in respect of prospectuses published. Why are we giving this exemption?
The Companies Act lays down the items public companies must include in that prospectus, which is largely for domestic use. The partnerships in question are soliciting funds internationally and should not be tied to the Irish Companies Act form of prospectus. Again I stress that the Central Bank has wide-ranging powers of supervision and regulation in regard to this area.
Question put and agreed to.
SECTION 15.
Question proposed: "That section 15 stand part of the Bill."
Could we hear an explanation of the exemption here? I presume it relates to an accountancy statutory instrument.
The section permits the bank to exempt an investment limited partnership from the provision of Statutory Instrument 396 of 1993. This regulation implements Council Directive 96 05 EC. It extends the scope of the 1986 Act implementing the Fourth Directive on the 1992 group accounts regulations to certain types of unlimited companies and partnerships. There is an obligation under the European Communities regulations to implement Statutory Instrument 396. In exercising supervision and application mechanisms the Central Bank is permitted to determine to what extent it should apply by using the statutory instruments. There is a difference with regard to the definition in subsection (1) where the sole business of the investment limited partnership is the investment of its funds and property. The reason for the difference in the wording is that the definition used in this subsection is taken from the underlying Directive whereas that in section 5 (1) (a) is that agreed between the Central Bank and the financial services industry.
Am I to take it that there is an EC regulation from which we are proposing to exempt these companies and that this is being done because they are US companies with no interest in EU regulations?
We are giving the Central Bank the flexibility to apply the regulation as it sees fit.
Question put and agreed to.
SECTION 16.
I move amendment No. 19:
In page 13, subsection (6), line 17, to delete (2) and (3)" and substitute "(3) and (4)".
Amendment agreed to.
I move amendment No. 20:
In page 13, subsection (9), line 35, to delete "subsection" and substitute "subsections".
Amendment agreed to.
I move amendment No. 21:
In page 13, subsection (10), line 39, to delete "(5)" and substitute "(6)".
Amendment agreed.
Section 16, as amended, agreed to.
Sections 17 to 19, inclusive, agreed to.
SECTION 20.
Question proposed: "That section 20 stand part of the Bill."
This is the section which provides that an investor in these funds cannot withdraw its money unless it is satisfied that the company itself is liquid. Is that an unusual restriction? Does that mean that a shareholder cannot sell his shares without getting a bill of health from the directors of the company? Is this not imposing an onerous restriction?
The word being suggested to me is "prudential". It is to ensure that the general partner is allowed to certify that the investment company will be able to pay its debts in full before any payment can be made back to the limited partner, whom I have likened to a shareholder. The time involved is four months subsequent to payment. If the Deputy is asking if that applies to limited liability, there is no parallel as limited liability is a different mechanism where one is liable to the extent of one's unpaid-up share capital.
Subsection (2) provides that if the partnership fails within four months of a return of a contribution to a limited partner it must be repaid with interest. There is a saving for the limited partner in that the return takes place to discharge a liability incurred during the period in which it represented an asset of the investment limited partnership. The interest rate would be determined by the Minister for Enterprise and Employment.
Question put and agreed to.
Sections 21 to 23, inclusive, agreed to.
SECTION 24.
I move amendment No. 22:
In page 16, after line 51, to insert the following subsection:
"(3) A custodian who fails to comply with subsection (1) shall be guilty of an offence and shall indemnify any person who thereby suffers loss.".
This amendment is a substantive one. The section outlines the responsibility of the custodians. However, it is not exhaustive in that section 27 requires a custodian to supply information to the Central Bank as requested. Subsection (1) outlines six specific requirements that the custodian has to meet. It will be recalled that in section 8 (1) no single person may be both a general partner and a custodian. An item to note in subsection (1) (d), for example, is that the custodian is obligated to report to the limited partners each year on the conduct of the general partner in respect of the management of the investment limited partnership. This report will be contained in the annual report. Subsection (1) (f) is a general provision for use by the Central Bank as required.
Subsection (2) caters not only for the custodian but for the general partner and the auditor. It provides that an indemnity cannot be given where default, negligence etc., arises. This amendment is to create an offence and provide for a penalty. A custodian who fails to comply with subsection (1) shall be guilty of an offence and shall indemnify any person who thereby suffers loss.
May I ask the Minister what kind of human we are referring to here? Initially I thought "custodian" and "general partner" were the same but it appears they are not. The definition section states: "custodian means a person maintaining a place of business in the State, appointed pursuant to the partnership agreement and discharging its functions in accordance with section 5 (1) (c) hereof". It is clear that this is the person in whom the assets of the investment limited partnership shall be entrusted for safekeeping. This causes me to smile because "custodian" is used more in the area of family law and social legislation, or perhaps in the administration of prisons.
Are we talking about a bank or a person with an appropriate professional qualification? Who would discharge this person's fees for the performance of his duties while he is holding the money in safekeeping? I do not know what mechanism is open to the House at the end of a year's operation of the investment limited partnership. I would be very interested to see the net advantage to the State at the end of this procedure. We seem to have clarified the tax advantages involved and so on, but I would imagine that the custodian would take his share of the action too.
The limited partner is the person who provides the money, the general partner tells him how the Dublin scene functions and how to get around different matters but he has no money invested and the investment is vested in the custodian who must report to the Central Bank on the operation and performance of the investment partnership. I would like to hear the Minister's comments on this matter.
I, too, would like clarification on the role of these people. It seems the Minister is providing in this amendment for a custodian who is guilty of an offence and is exposed to losses suffered by people from his failure to comply with the regulations. How does that tally with the notion that it is the general partner who is personally liable? If the custodian fails to pick up on an activity of the general partner and report it, is it the case that the custodian becomes the person exposed?
Who would the custodians be? Would they be accountancy companies? Can the custodian and the general partner be one and the same person or can the custodian and the auditor be one and the same person? Will there be many persons engaged in the supervision of this practice? Under the Minister's amendment would the custodian become exposed to liability? Custodians are primarily Irish based and if the custodian fails to ensure certain matters about the activities of an overseas investment he would become liable to substantial suits. Is the Minister satisfied that custodians, who will be Irish based, are not being asked to take on excessive liability?
The word "custodian" is used internationally in these structures. Thankfully, on this occasion it is not an Irish invention. The word comes from financial legislation elsewhere.
In the old days psychiatric nurses were called custodians.
We will not include the word "psychiatric" in this legislation.
What Deputy Bruton is seeking to establish is whether the custodian in this case is likely to end up in a psychiatric hospital if somebody makes a bags of an investment in Hong Kong.
I am trying to be clear about this matter because it is, to use the cliché, a complex piece of financial engineering. There are three separate units required in an investment limited partnership: a limited partner who is a shareholder, a general partner which is the management company and a custodian who is the trustee. "Trustee" would probably be a better word, but in line with international legislation we are using the word "custodian".
Under my amendment the trustee would be liable for not fulfilling his statutory obligations which are laid down in section 5 (1) and section 24. The trustee could be a bank, an accountancy firm or any financial firm approved by the Central Bank and its job is to hold the owner's funds in trust. Deputies will be familiar with the trustee principle where the trustee does not own the money, and sometimes does not even manage it; the trustees holds the money in trust. In this case it is in custody and is not subject to strict trustee legislation. That is the role of the custodian and if they do not comply with section 24 (1) (a) to (g) they are liable for failing to fulfil their statutory obligations. If there is any loss arising from their failure to meet these requirements they must indemnify the person with whom they are dealing. It is not so much a loss of funds but a failure to meet these obligations.
The reason the third element is necessary is to ensure that a person is operating in the State who can answer for the bigger fund which is owned externally, to ensure a closer relationship between the Central Bank and the trustees. It is someone with whom the Central Bank could deal on a day to day basis. Three units are required in a partnership and they must be three different people or companies — the custodian could certainly be a company, probably a bank. We want to balance the powers between the three, the manager or person with the income, the owner of the fund or limited partnership and the trustee who would legally hold the money and report to the Central Bank on the operation. Fines of up to £500,000 are proposed plus a daily default fine and an indemnity.
Is the Minister's amendment an afterthought dreamt up since we last discussed this matter and would it expose the custodian to a very large liability for failing to ensure that the partnership income is applied in accordance with the regulations? If the general partner disappears with a bag of money would the custodian be left holding the baby? No doubt someone who defrauds the partnership would have failed in some of their obligations under section 24. Are we asking the Irish based custodian to take on a very substantial liability; is that reasonable or is it essential to the concept?
We need more clarification. Would a bank take on this responsibility? Is the Minister saying that the duty imposed on the custodian under the terms of this Bill is purely procedural and that the task of the custodian is to ensure that the procedure detailed in section 24 is complied with? The kind of person we are talking about is an international property developer who decides for whatever reason that he wishes to locate one of his investment vehicles at the International Financial Services Centre. He will do that in order to conduct his property business in Tokyo, Hong Kong or New York — presumably he will be subject to the law of the jurisdiction concerned — in a tax effective way and the advantage for him is that the management of the investment by the company located in the International Financial Services Centre is at optimum tax effective rates. However, should he team up with somebody who is Irish and who is called a general partner, he will be deemed to have effectively a management company, that is, if I understand the Minister correctly. In other words if we call the limited investment partnership a company, all of the shares are held by the limited partner, the general partner is the management company to whom would accrue fees and so on for administering the company but the custodian is a trustee effectively. Is that what the Minister is saying? If the general partner is Irish and must be Irish why can the Central Bank not deal with him? I am not sure what is the role of the custodian. Is the Minister saying that property developers — there are other words to describe some of them — being what they are and with the expectations in regard to property rates in Hong Kong after 1997, the custodian could not be liable for accidents that take place in the market-place but yet seems to be the person who must indemnify any personal loss incurred? The Minister must have some ideas: is it proposed that an Irish bank should take on this role presumably for a slice of the action, or is it the auditor who makes a report to the Central Bank annually who fills this role? I am not clear on the matter.
Deputy Bruton asked if the penalty clause was an afterthought, the answer is yes and that is why I have tabled an amendment at this stage. There is no point in having requirements that the custodian must meet if there is no penalty clause to ensure that the requirements are met. Although it is an afterthought, it is important that we have caught up with it.
The best way to describe a custodian is one who is somewhere between a trustee and a watchdog. There are seven requirements laid down for the custodian, for example under section 24 (1) (c) the custodian must:
ensure that an investment limited partnership's income is applied in accordance with this Act or regulations made hereunder, directions of the Bank or the partnership agreement;
Under paragraph (f), the custodian must:
ensure that contributions and withdrawals of contributions of partners' capital are effected in accordance with the partnership agreement and the Act;
The space between the custodian and the limited partner would usually be filled by a partnership agreement and between the three units one will find strong written legal agreement as to precisely who does what.
I see the custodian as a watchdog whose job is to ensure that the instructions of the general partner, that is the directors, are carried out unless they conflict with the Act as well as ensuring that the shareholders' money is applied in accordance with the Act or with the regulations made by the bank or under this Bill.
The Deputy asks a very sensible question. If one was starting with a clean sheet in these types of models one could make the argument that there is no need for a custodian, that one could control the limited partnership and the Central Bank could supervise both the limited partnership and the general partnership but experience has thrown up the requirement to have a third unit to act as a watchdog, as a trustee to be based here, to be responsible for ensuring that both the limited and the general partners comply with the legislation and that the fund is managed as it is meant to be managed. This will apply to each fund. In theory the Central Bank could do it directly but in practice if there was a large number of funds having a trustee based here who is legally responsible for the administration of the fund makes it easier for the Central Bank to control the entire operation.
I take the Deputy's point that one could argue that a custodian is not necessary, in the same way that one could argue that a trustee is not necessary in a club, that the treasurer or the committee could do the work — I know some clubs do not have trustees but most sensible clubs have them. One could argue that on the basis of day-to-day management one does not need them but their function is to be somewhat independent as they watch what is going on and to hold the asset for the owners without themselves being the owner.
The partnership agreement would have a fee structure and they would be paid by the limited partner. By and large they would receive fees from the limited partner.
Do they expect to be landed with this liability?
It is a well known intermediary role similar to that of any trustee. They do not have to take it on, it is a business opportunity. If they want to do it they do and they get their fee for it.
Would they know they are to be confronted with this amendment?
They know how it operates internationally and they know that these types of duties are imposed on them. The Deputy asked whether they know about this specific penalty but to my knowledge we have not had formal applications to the Central Bank yet so they may not be aware of what is proposed in regard to the specific penalty. Internationally they are used to penalties and to the concept of custodians so they would expect this and certainly as soon as they apply they will obviously receive a copy of these conditions. If they are unable to meet them they will not be authorised by the Central Bank. I do not envisage them having any difficulties with this. It is fairly standard practice to have this type of trustee/watchdog structure based in our jurisdiction responsible for ensuring that the regulations are adhered to.
Amendment agreed to.
Section 24, as amended, agreed to.
SECTION 25
Question proposed: "That section 25 stand part of the Bill".
While an amendment has been tabled in relation to a typographical error on page 18, line 43 of the Act, it is not on the Order Paper and requires to be drawn to the attention of the House. It involves replacing a small "a" with a capital "a".
This is a suitable point to invite the Minister to tell us how the Bill appeared in this fashion. There must be some explanation. It appeared out of the blue at a Whips' meeting. It then came before the House with an urgency that it must be enacted within days.
We are then given an amendment sheet with 41 amendments from the Minister which would indicate at best a sloppiness in drafting and, more probably, somebody riding whip on whoever was doing the drafting to meet some deadline for a reason I cannot readily recognise. I am curious about that. There must be an explanation. It is not typical of our public service that it would present us with a Bill in this manner. I am curious and suspicious by nature.
The Deputy would have made a wonderful teacher. First, the Paircéir report was received in December 1993. Second, we understand there has been a number of inquiries and possible investment partnerships which can be set up. That is our information from the industry. They are the reasons. The Bill is being rushed through the House because of the recess, we wanted to get this up and running so that it can be marketed during the summer. On the typographical errors, I can only leave that to the Deputy to speculate upon.
Perhaps it is opportune, with all our ambassadors in Orlando, that we would have this vehicle for them to sell there. As we are coming to the end of the debate I wish to raise a number of points in an omnibus fashion as we may not reach the sections.
Under section 30, the Central Bank is being given a role in replacing general partners and custodians in these companies if they prove incompetent. I am wondering whether the Central Bank, as a regulator, should have a role in trying to influence the success of these partnerships. That would seem to be going ahead of what a normal regulator would do in this area. If the bank wants to claim immunity, as it seems to be doing under section 30, and if it replaces a general partner or a custodian, it is taking on a substantive role in the operation of the company and cannot simply walk away from its liability. Will the Minister clarify that?
On section 40, a fine of £500,000 seems small compared to the scale of the investments that are being managed by these partnerships. Is the Minister satisfied that compared to other countries running these vehicles, we have sufficient penalties for fraudulent use of this vehicle or whatever else might happen?
Under section 44, we will have a report from the Central Bank annually. I hope the Minister will consider an amendment suggesting that the Central Bank would not report simply on administrative matters but also on the benefits or otherwise of our continuing to operate this sort of scheme, whether it is creating jobs, securing linkages in the economy, whether there is synergy, which seems to be the buzz word in the financial services centre as a result of its activity and whether it is generating free income and tax revenue for us. We would like to know a year from now whether this was a good day's work rather than simply knowing what the Central Bank was doing from day to day regulating it.
I gather these fines are an increase on those in existing legislation for this type of offence, following discussions with the Central Bank. There is provision for a term of imprisonment not exceeding 12 months or a fine. I take the Deputy's point about the amount of the fine but it is the largest fine to date in such legislation so it must be regarded as progress. The imprisonment option, rather than the fine, will hopefully frighten people.
Under section 44, the Central Bank will furnish an annual report to the Minister on specified matters and the Minister will lay the report before the House. Our amendment to section 44, which we have not yet reached, insists that it be a more general report that is presented to the House on the operation of the scheme. The Deputy is quite right; we backed off from being specific and asked for a more general report which I hope will result in a more qualitative judgment on the part of the Central Bank in regard to how the scheme operates.
The point about the Central Bank replacing custodians and partners seems rather unusual.
Section 30 empowers the bank to replace a general partner or a custodian with another person in circumstances specified by the section including incompetence, not being of sufficient good repute and contravening any provision of the Bill. It is a tough measure but it is necessary that the Central Bank be able to step in and replace a person.
That is more than a regulation.
It is tough but it is necessary.
The bank is taking responsibility then for——
The bank can replace the person but the person who comes in will assume the same responsibilities as the previous person and, obviously, will not take on the assignment unless they agree to that.
Notwithstanding the Minister's goodwill in the matter, I do not believe his amendment to section 44 deals with the point raised. As I understand it, the Central Bank is only required to report to the Minister on how the Bill is operating. There will be no qualitative assessment of the merits of the investment partnership vehicle. I can foresee a situation where it will not be possible for Members of this House to find out how it is functioning. We will get the usual reply that confidentiality obtains and that it is not possible to evaluate what economic merit, if any, derives from this type of instrument. It is all very well to have a number of additional plates in the International Financial Services Centre but whether it means anything in actual direct staffing is dubious. It will obviously result in some additional work for professional bodies in the city but I suspect that the corporation profits tax contribution in terms of fees will be minimal. As we are running out of time I ask the Minister to be more definite about the broad terms of his amendment.
I suggest an amendment to the Minister's amendment to include the words "to the benefit of the economy" after the word "Act" so that we would have a cost in benefit.
Acting Chairman
I am required to put the question.
In a general form of report, it could not avoid commenting on the benefit to the economy. I will certainly ensure that they are asked to do that rather than do it by way of amendment because I am not sure of the technical implications of that.
Acting Chairman
As it is now 1.30 p.m. I am required to put the following question in accordance with an order of the Dáil of this day: "That the amendments set down by the Minister for Enterprise and Employment and not disposed of are hereby made to the Bill, in respect of each of the sections undisposed of, other than section 44, that the section or, as appropriate, the section as amended, is hereby agreed to, that the Title is hereby agreed to, that the Bill, as amended, is accordingly reported to the House, that Fourth Stage is hereby completed and that the Bill is hereby passed".
Question put and agreed to.
Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.
