Léim ar aghaidh chuig an bpríomhábhar

Dáil Éireann díospóireacht -
Wednesday, 5 Jun 1985

Vol. 359 No. 3

Designated Investment Funds Bill, 1985: Second Stage.

I move: "That the Bill be now read a Second Time".

It is generally accepted that native Irish industry relies excessively on State aid and debt finance. This unhealthy trend was identified in the White Paper on industrial policy as one of the major obstacles to the growth and development of indigenous enterprise. The under-capitalisation of industry makes it ill-equipped to finance the development of new products and markets and thus ensure a strong self sustaining base for growth.

The extent of the problem is clearly demonstrated by the recent NESC report on financing the traded sectors. This report shows that from 1972 to 1982 bank borrowing by manufacturing industry increased in real terms by 6 per cent per annum while production volumes increased by only 3.5 per cent, just half as much. The report also showed that equity capital relative to total assets is much lower in Ireland than in, for example, the UK, Japan or the USA. Small industries are particularly vulnerable to over-reliance on borrowings. They are less capable of weathering the storm than larger well established enterprises, and in times of low profitability, reduced cash flow and high levels of real bank interest rates they are quite simply forced over the precipice. This is not to suggest that the larger industries are immune from the disease, as has been all too clearly demonstrated in recent years.

The reality and extent of the problem has also been recognised and acknowledged by Members of this House. The Oireachtas Joint Committee on Small Businesses stated in their first report on manufacturing industry that "finance is without doubt one of the major problem areas for small companies". In regard to equity finance in particular, the same report concluded that many small firms are under-capitalised when setting up and that because of low profitability and lack of any further equity investment this situation continues throughout the life of the company. Among the committee's recommendations it was stated that the encouragement of additional venture capital through the banks, other financial institutions and through private investors is required. My own views on this topic clearly parallel those of the Oireachtas Joint Committee.

If further evidence is required of the increasing imbalance of the debt equity ratio of Irish industry, I would suggest to Deputies that the problem is no more starkly evident than in the performance of the Irish Stock Exchange in recent years. The number of companies quoted on the exchange has been steadily declining over the past decade. Its activities in recent times have concentrated on trading in a small number of "blue chip" equities and oil share speculation. The Stock Exchange has become irrelevant to the financing needs of Irish industry generally. The market capitalisation of shares quoted on the exchange is under 10 per cent of the country's national output as compared with about 50 per cent in the UK and the US. The most recent statistics available to me show that only 21 of the 77 companies listed on the Stock Exchange are engaged in manufacturing. The unlisted securities market was launched in 1980 to encourage the entry of smaller high-growth companies to the Exchange. Its performance according to any criteria, and particularly when compared to its UK counterpart, has been most disappointing, to put it mildly. The failure of industry and, in particular, manufacturing industry, to utilise the facility of the USM is further testimony to the dearth of equity type capital in Ireland.

One of the cornerstones of this Government's progressive policy for industrial development, as outlined in the White Paper on this topic, is our commitment to encouraging a greater level of private sector investment in the productive sectors of the economy. Given the stark reality of the problems of financing Irish industry, our endeavours in this direction must take on an increasing and continuing importance and urgency.

The first step towards providing a cure however must focus on an analysis of the causes and symptoms of the disease. It would be very wrong to assume that the lack of equity capital in industry is due only to the failure on the part of the investment community to provide the finance. If the dramatic gearing — in other words, excess borrowing — problems of industry are to be rectified, entrepreneurs must become more receptive to the idea of outside investment and overcome their traditional reluctance to dilute their ownership and control in the firm regardless of consequences. Native small industry to a very large extent has been based on the model of the family business. It has usually been the case in such instances that family ownership is considered to be sacrosanct and investment by third parties regarded as an undesirable intrusion in the family's private affairs. Many small businessmen are quite happy to sacrifice the benefits both to themselves and the community, of expansion in favour of a quiet life with an acceptable level of income. This has often been motivated by a reluctance to accept the increased workload — and there is no doubt there is an increased workload — and responsibility to shareholders associated with third party investment.

These are all factors which affect the level of suitable opportunities for investors but which are not within the direct control of the Government. We can merely urge a change in attitude. However, I feel that the harsh realities of economic recession, and the fact that it is far better to own 50 per cent or 60 per cent of a successful business than 100 per cent of one which has failed, will ultimately bring about a reversal of these trends.

Certainly, the Government are committed to encouraging a greater acceptance of the need for equity financing. The emergence of a demand for equity among entrepreneurs is evolving, but it must be matched by a supply of finance from private and institutional investors. There has been a marked reluctance on the part of investors to put money into industry and this trend has been particularly noticeable in the last decade. Reasons for this reluctance are easily identified. It is certainly true that there has been a significant disincentive to productive investment by virtue of the more favourable tax treatment of other less risky forms of investment, such as investment in property and Government gilts.

The Government, in the White Paper, committed themselves to an examination of the tax code to see how the elimination of this bias in favour of riskless investments as against risky investments, might be achieved. The Finance Act of 1984 introduced a number of relevant measures such as the elimination of bond washing and the restriction of tax based financing, which encouraged borrowing by businesses. However, by far the most important and far reaching initiative introduced in the 1984 Finance Act was the incentive given to invest in industry by virtue of the business expansion scheme. The scheme provides that individuals who purchase new ordinary shares in unquoted manufacturing companies, namely, those eligible for the 10 per cent corporation tax scheme, or in companies providing internationally traded services should be able to write-off up to £25,000 per annum against their personal taxable income. I should say that the provision of income tax relief is subject to a number of qualifying criteria, but an illustration of the potential benefit is that an individual paying 60 per cent tax and who makes a qualifying investment of £25,000 will find that the net cost of that investment is only £10,000.

Before I go on to discuss this scheme in more detail and to outline why it gives rise to the need for the Bill currently before the House, I should like to dwell a little longer on some further aspects of the equity financing problems of Irish industry. I would beg the House's indulgence in this regard but the issues involved are of sufficient importance and have significant relevance to this legislation as to merit a comprehensive and open debate in this forum.

Many economists, investment managers and other interested commentators have argued that tax incentives such as those provided by the business expansion scheme will not remove one of the principal obstacles to productive investment, which is the lack of suitable, well planned and profitable project ideas in which to invest. This is a criticism one hears frequently when talking to those in the broadly defined banking community. In other words, there is, some say, too much money chasing too few projects. I do not accept this argument which hinges entirely on one's definition of a suitable project. The major difficulty facing most of the enterprises emerging under the IDA's Enterprise Development Programme is that of raising equity finance. The National Enterprise Agency have attracted significant numbers of projects, some of which have already been rejected by the private sector finance houses. My Department are approached almost daily by budding entrepreneurs inquiring about the availability of capital to finance new projects. There is no shortage of projects. Apart entirely from all of these are a large number of established businesses for whom refinancing would be a significant step towards both viability and profitability. What I am attempting to demonstrate is that there is a significant pool of new and established businesses offering opportunities for investment. The problem is that they are not deemed to have sufficient potential to justify the risk. I am informed that at least one private venture capital agency requires applicant companies to have a minimum of at least three years' profitable trading before investment is even contemplated. That criterion would not quality as venture capital in the United States of America. Indeed, one US businessman, who set up a business here with the aid of the business expansion scheme in a place which I visited recently, told me that the venture capital community here could be described as good merchant bankers rather than venture capitalists in the American sense of the term.

The application of this type of criterion narrows the field down quite considerably and leads to claims of "too few project ideas in which to invest". What is required in fact is change of attitude in regard to risk-taking and a lowering of the risk thresholds demanded by the institutional investors. The report of the Oireachtas Joint Committee on Small Businesses concurred with this viewpoint and concluded decisively that "there is an urgent national need which the market has failed to deliver on". I do not comment on the English used there.

I would like to state categorically however that my remarks are not intended as a criticism of the venture capital industry, which is still in an embryonic stage of its development in this country compared for instance, with the US model to which I was referring. It would serve no purpose, I suppose, if the industry were to fall flat on its face by virtue of a rash of ill-advised high risk investments. I am confident that risk thresholds will be lowered and high risk investment will be more readily accepted as the industry evolves and establishes a track record for itself. The Government can clearly contribute to this evolution process by the creation of an environment which is more conducive towards investment generally and through an integrated industrial development policy which will enhance the future profitability of Irish industry.

An essential prerequisite for the development of a healthy equity base in industry is the provision of the appropriate infrastructure through which the stocks and shares of industry can be traded. I commented earlier on the performance of the Stock Exchange and do not therefore propose to dwell on that subject. However the fact remains that the exchange is perceived by the young entrepreneur and the private investor as a rather formidable institution. Its failure to attract any significant new business from either quarter in the past decade is ample testimony to its stagnation. This is particularly damaging given that it is the only official market place for trading industrial shares. If we are serious about encouraging a greater level of private sector investment in industry, we must be prepared to provide the necessary mechanisms through which to channel the investment. In particular, mechanisms with which the private individual can more easily identify are essential.

My Department have only recently completed an important study in regard to the development of a more active market in the stocks and shares of small and medium sized industry. This study has concentrated on three main areas:

(i) the performance of the Stock Exchange in recent years;

(ii) the potential benefits of a properly regulated over-the-counter market such as exists in the UK; and

(iii) the desirability of amending company law to allow companies to buy back their own shares.

I referred to this report in my recent address to the annual general meeting of the Confederation of Irish Industry and in doing so provoked a considerable response. My Department were subsequently inundated with requests for copies of the report. I would like to say for the record, however, that this report was never intended for publication, but rather as a document for internal use within my Department. My reference to it was merely to indicate the seriousness with which my Department were taking this issue. Much of the detailed information contained in the report was provided by third parties on the basis that it would remain confidential. It would be dishonourable therefore not to respect the wishes of those whose co-operation was so vital in the preparation of the report.

Notwithstanding this constraint on publicity, the report is a valuable document and will greatly assist in the development of Government policy for the promotion of an active market in stocks and shares and the promotion of industrial investment generally. It provides important statistical analysis of the over-the-counter markets at present operating in the United Kingdom and the United States. I would like to see a similar market developing here as a means to tackling the poor capital structure of Irish industry. Indeed, I am heartened by some responses made to my Department in this area, even since the speech to the Confederation of Irish Industry.

It would be important however that such a market should develop in a properly regulated manner. This would be essential if investor confidence in the market is to be guaranteed. I would also stress that I would not view such a market as being in any way in competition with, or a substitute for, a thriving Stock Exchange. Indeed, I think a properly structured over-the-counter market could lead ultimately to a rejuvenation of the exchange by providing an interim market for the shares of small and medium sized industries and facilitating their development to a point where they might contemplate a full listing. Essentially, an over-the-counter market is an informal arrangement by which people can buy and sell shares that are not quoted or listed on the exchange. In a way, it is a private market in shares, as distinct from the public market, as is the exchange. There is a tendency to use jargon in this area on the assumption, which is often not correct, that people understand what you are talking about. They are afraid, for fear of showing their ignorance, to ask you what you mean. It is important to explain the difference therefore between the over-the-counter market, the unlisted securities market and the full exchange listed market. These are three separate types of institution, with a rising degree of disclosure requirements and a rising degree of complexities, but also a rising degree of access to funds — lesser funds being available the less onerous the requirements, and the more onerous the requirements the more funds being available.

In considering the report I will also be paying particular attention to the comments by the consultants in regard to allowing redemption of capital. I can assure the House that I will be considering the report as a whole as a matter of priority.

This whole area is of considerable importance to both the institutional investor as well as the private individual. This is particularly so in the context of the business expansion scheme. In order to qualify under the scheme, companies must not be quoted on a Stock Exchange. Stock exchange companies are excluded.

This is not a particularly restrictive provision as the vast bulk of industry, as I have already indicated, falls into this category of unquoted companies in any case. After a period of three years has elapsed, however, the companies may, if they so choose, seek a listing on the Stock Exchange. Given the performance to date of the Stock Exchange one could not predict with any confidence that the BES will lead to a significant increase in the level of activity on the exchange, but it may and I hope it does. In the absence of any alternative exit mechanism, people who have bought shares will want to get out; and, since they are not on the Stock Exchange where they can sell them, investors would be faced with the prospect of being locked into the shares and unable to realise their investment. I do not wish to give rise to false hopes of an overnight solution to this difficulty but I do wish to assure prospective investors that will exists to tackle the problem and tackle it effectively.

Obviously, we realise that the success of the business expansion scheme to some degree hinges on finding not only a means by which people can buy shares on a favourable basis but also, in due course, sell them on a favourable basis also.

I would not wish that the business expansion scheme be viewed as a panacea for all the ills I have outlined. The long term solution lies in the creation of an environment which is conducive to investment. This will involve tackling the various aspects of the problem on a systematic basis. I am confident however, that the scheme will have an important catalytic effect in terms of generating a significant flow of capital to the productive sectors of the economy and focusing attention on the benefits of equity investment. It is a significant incentive to the private individual to invest in industry.

An important aspect of the scheme which should not be overlooked is that the tax relief applies to qualifying investments by employees in their employer companies. I have for some time now been advocating the concept of employee shareholding. As Minister for Finance, I was instrumental in introducing tax concessions in the 1982 Finance Act to promote the concept in Irish industry. These tax concessions were made more attractive in the 1984 Finance Act and, I am glad to say, have resulted in increased interest in introducing approved profit sharing and employee shareholding scheme. The additional benefits resulting from the business expansion scheme increase the potential attractiveness of such schemes, but the employees will find this scheme of interest also.

I believe that the adoption of employee shareholding on a wide scale in Ireland would represent a radical change from our traditional thinking in the area of industrial relations — a change which would, in my opinion, greatly enhance our prospects for a profitable industrial base capable of competing successfully in world markets. As a small open-trading economy our competitive edge will be a key factor in ensuring the future employment prospects of our young population. If we are to ensure our industrial prosperity we must guard against becoming complacent or insular and the value of employee shareholding as a means to that end should not be underestimated. By having a stake in the business in which they work employees will have a greater commitment and incentive to ensure that their employer is efficient and profitable. They become more appreciative of the difficulties with which business must cope and develop a greater insight into the factors affecting the prospects for industry.

The framing of the business expansion scheme to extend eligibility to employees is therefore a critically important factor which improves the potential of the scheme to contribute to the equity base of Irish industry and broadens its effectiveness through the promotion of employee shareholding.

Thus far, I have concentrated on outlining the Government's perception of some of the important difficulties facing Irish industry. I have described key initiatives for tackling these problems. I have also attempted to underline the significance and potential of the business expansion scheme. Clearly, if the scheme is to achieve this potential it must be seen to be effective and workable.

Since it was first introduced in 1984 the scheme has faced much criticism from various interested parties who viewed it as much too complex and restrictive. One of the key difficulties relates to the establishment of investment funds. Under the scheme, an individual may make an investment directly in the company of his choice or, alternatively, he may invest in a fund which has been designated for the purpose of the scheme by the Revenue Commissioners. The legislation now before the House is designed to facilitate the establishment of these designated funds and at, the same time, complement the provision of the 1984 Finance Act in that regard.

The designated investment funds have a crucial role in determining the success or otherwise of the business expansion scheme. The experience of the UK scheme has shown that up to 90 per cent of total qualifying investments are made through such funds and we might expect a similar profile of BES investment in this country. Designated investment funds are a particularly attractive proposition to investors for two reasons. First, each participant has an interest in all of the investments made by the fund and so is able to obtain a fair spread of the risk associated with his investment. Secondly, by investing through a fund, the individual has access to the investment expertise of fund managers who identify and actively monitor the companies in which they invest.

Two such funds have been established to date. However, expectations of a greater level of activity in regard to this aspect of the BES have not been realised. The problem lies in the fact that designated investment funds as outlined in the terms of the Finance Act, 1984, come within the scope of existing unit trust legislation and, as a result, have certain constraints imposed on them. The purpose of this Bill, therefore, is to remove these designated investment funds from the scope of the Unit Trusts Act, 1972, and thus avoid a serious legislative anomaly.

Some understandable confusion may arise as to the precise differences between an investment fund and a normal unit trust. There are, in fact, fundamental differences between the two. In an investment fund each participant will own a particular share in a particular company. In a normal unit trust each participant owns a proportion of the total holding rather than owning a particular asset. Also, in an investment fund all subscriptions must be paid up by a specific date nominated by the manager, after which no further participants may join the fund. A unit trust scheme on the other hand is open-ended and a participant may join or leave at any time by buying or selling units of the scheme. Indeed, the Unit Trusts Act, 1972, requires the manager of a unit trust to buy units of the scheme from a participant on demand. This latter provision would be particularly inappropriate in respect of investment funds and indeed would place an intolerable burden on the fund manager.

The Unit Trusts Act, 1972, provides that unit trust schemes may register under the Act. The Act specifically provides, however, that unregistered unit trust schemes are prohibited from advertising. Therefore investment funds would be required to register under an Act, the provisions of which are wholly inappropriate for their purposes, in order to be able to advertise and invite subscriptions from the public. Essentially that is the nub of the problem this Bill is designed to solve. The two existing funds, to which I referred earlier under existing legislation are considered to be unregistered unit trusts which have chosen not to advertise and so remain within the law. It would, of course, be unreasonable to expect all prospective fund managers to operate within this constraint. If we do not have adequate participation it probably will be because of lack of advertising, leading to lack of knowledge.

In order to provide further clarification let me outline briefly how these funds will operate. Following designation by the Revenue Commissioners, each fund will advertise its existence and invite subscriptions directly from members of the public. It may specify a minimum or maximum subscription to be made by each individual as well as a total target size for the fund. The fund will also specify a closing date by which such subscriptions must be received. No investments may be made by the fund itself prior to the closing date, that is, until all subscriptions have been received. After the closing date the fund manager may make suitable investments in targeted companies on behalf of the participants in the fund. I feel it is important to note that the fund managers will be acting as a nominee of the participant who at all times will retain beneficial ownership of the shares purchased on his behalf. The subscription of each participant will be spread pro rata over all investments by the fund.

The main purpose of this Bill is achieved by section 2 which removes the designated investment funds from the scope of the Unit Trusts Act, 1972. The remaining sections of the Bill are designed to impose certain requirements on designated funds in the best interests of the investors.

The main aim has been to ensure that funds will provide the maximum possible information to prospective investors. Access to information such as that specified in section 5 of the Bill is essential if investors are to make an objective decision as to whether or not investment in a particular fund constitutes a good risk. It is worth noting that the prospectus must highlight the risk involved in investment in industry and advise all prospective investors to consult their accountant, stockbroker, bank manager or other professional adviser before proceeding.

I do not consider it necessary or appropriate to attempt to provide in this instance for more comprehensive investor safeguards. Ultimately, responsibility for assessing the bona fides of a particular fund will rest with the investor himself. Given the likely profile of these investors, that is those on a high income, and the range of information with which they will be provided, it is not unreasonable to conclude that the provisions of this Bill are more than adequate to protect their interests.

I consider it important that I draw the attention of the House to the provisions of section 6 which imposes certain obligations on fund managers in regard to investments in private companies. This section provides important safeguards from the point of view of the investor.

Of course, an investment under the business expansion scheme does not have to be channelled through a fund. In the past 12 months a number of direct investments in qualifying companies have taken place. I recognise, however, as I stated just a moment ago, that there has been considerable criticism of the scheme, much of which I regret to say has been ill-informed. However, I have at all times indicated my willingness to listen to constructive criticism and to consider suitable amendments to make the scheme more effective. I am pleased to say that the Government have accepted my recommendations for some key changes to the Finance Act which will provide a major impetus to the scheme.

First, close relatives who have up to now been excluded will in future be eligible for relief from income tax. Secondly, the statutory ceiling on fees which may be charged by investment fund managers will be removed, providing further incentive for the establishment of such funds. The time limit within which companies engaged in research and development must start trading is being extended in order to encourage investment in this type of activity. Finally, companies with less than wholly owned subsidiaries and those with certain foreign subsidiaries will in future qualify under the scheme.

These changes have been proposed on the basis of discussions which I and my Department have had with a wide range of interested parties in the investment community over the past 12 months. They will, I am certain, result in a much increased level of activity under the BES. Coupled with the measures proposed in the Bill now before the House, I am confident that we have the right recipe for a successful business expansion scheme.

I commend this Bill to the House.

I welcome the Bill, the need for which was expressed in the lack of support forthcoming for the proposal first initiated in the Finance Act of 1984 and in subsequent debates in 1984 and to date. It was clearly indicated to the Government that the need for this Bill was urgent and absolute if we were to get money invested in industry starved of equity.

I should emphasise that Fianna Fáil contend that the scheme, to be successful, requires imaginative legislation and a healthy business environment on both of which counts the Government and the Minister for Finance, in particular, have failed dismally. The Bill has been introduced in a very restrictive manner. The amendments put forward prove their point, points made when Finance Bills were being discussed. The Bill falls short of the necessary ingredients to make the incentive a success. Encouraging capital for investment, an appropriate economic climate and business confidence in the Government's running of the country are absolute prerequisites. Constant erosion of consumer spending leads to protraction in business life which, in turn, leads to lack of investment. Furthermore, Government policy in terms of company and capital taxation is not conducive to the stimulation of investment vital for our economy under this scheme now proposed.

One of the biggest drawbacks of the scheme has been the restrictive nature of the trades that qualify. Had Fianna Fáil's advice to the Minister been taken when he was introducing this legislation it would have been realised that being restrictive in the types of trades that would qualify would impede the success of the scheme. For instance, Fianna Fáil strongly recommended that companies in the building industry should qualify. Given the heavy capital requirement of agricultural enterprises that industry could have been incorporated to raise capital, and relief under the scheme would be of tremendous benefit to investors.

The fact that two funds only have been established in the last year is a measure of the Government's failure in this regard, with very few individual companies qualifying under the provisions of the scheme. Whatever the Minister may have said today, or the Government for that matter, that cannot be said to be a successful scheme. It is suggested that the application of the scheme be extended at least to the categories I have mentioned, other types of industry, and that there be a wider definition of service industries to be considered. Despite the encouragement from this side of the House in the matter of investment in industry, creating a climate in which people would have confidence to invest the provisions of the scheme remain too restrictive. I contend that the scheme requires investment in share capital to be kept for a minimum of five years. It is accepted that enterprises require long term capital. It must be borne in mind also that investors have an option of partial reimbursement of capital over a shorter period. Therefore, why has not this aspect of the scheme been considered and implemented? Where enterprises are successful most business people and professional advisers would recommend that those enterprises should be in a position to raise further finance from the public. Normally that is done through the unsecured listed market, private placing or going public. In the interest of investors I would recommend that a time limit of three years would be more appropriate. The scheme is inherently good for investors and investment in business. However, the continued narrow approach to it militates against its success. I have already said that its limited success to date is hardly worthy of note.

The amendments introduced are welcome in that their implementation will further develop investment funds that can be set up. However, I could content that the Minister for Finance is too restrictive in the terms applicable to the scheme. I would urge him through his colleague, the Minister for Industry, Trade, Commerce and Tourism, to broaden his horizons in order to speed up the use and development of the investment scheme.

I honestly believe that the Bill before the House does little to dismantle the intimidating barbed wire fence which surrounds the business development scheme encompassed in the 1984 Finance Act. Despite the fact that the Minister made considerable mention of that scheme it remains restrictive in its provisions. The provisions of this Bill remove designated funds from the scope of the provisions of the 1972 Unit Trust Act, imposing instead certain unacceptable controls.

The Minister has power to prescribe what a designated fund prospectus should contain. For example, it must say that an investor should consult an accountant, stockbroker, branch manager or a solicitor before investing in the fund. That is equivalent to the statutory health warning which must be printed on a packet of cigarettes. The Minister is merely introducing further constraints to a scheme which was already largely inoperable. The recent NESC report on the financing of the trade sector highlighted the high level of borrowings in industry which results in many firms operating at considerable risk. This is also reflected in the very high level of bad and doubtful debts being sustained by the banking industry. The primary requirement is to attract more equity funds into the manufacturing and business sector to fund future growth and output and increase employment. I have reservations that this Bill will achieve what we seek to achieve. The aim should be to encourage the greatest number of individuals possible to invest in industry through venture capital as designated by the Finance Bill, 1984 and by this Designated Investment Funds Bill. More risk investment of this nature will reduce the need for borrowing and increase the capacity of firms to support higher borrowing only if it is attractive to people with funds to invest.

The Minister should simplify the income tax procedure as this is most important for individual investors in designated funds. At present the PAYE taxpayer does not get relief until money he has paid into a designated fund is actually invested by the fund in a qualifying company. The Minister should pay some attention to that aspect. There is not a reason why an individual investor should not be given an amended certificate of tax free allowance as soon as possible after providing evidence of his investment to a designated fund.

I am pleased that the needs of industry starved of equity have been finally recognised by the Government and that an effort is being made to correct a major deficiency in the original proposals. I am glad that in this Bill the Government accepted the promptings of this side of the House during the budget debates of 1984 and 1985. I would welcome this Bill more if it removed some of the continuing restrictive elements so that we could give the fullest possible support for investment funds for industry. I hope this Bill will change the attitude of this Government who, by their policies, stifled investment in industry and undermined confidence. It is high time that an environment more conducive to investment and expansion in industry was created by the Government to establish sustainable employment. I hope that this Bill will receive the fullest support from the financial institutions and people with money to invest. That support will come only when an environment is created by the Government to encourage people to invest. We can no longer accept a situation where jobs are continually being lost in manufacturing industry. Over a four year period 28,000 jobs were lost. In relation to the support industries some progress was made in high technology and chemical plants but it has not been sufficient to take up the vast labour pool available. Perhaps at a later stage the Minister will address some of the continuing restrictions to investment under the designated trust funds. This Bill opens the door to investment and I welcome it. I can only wish that the door had been opened a little more because we need more investment capital to provide employment and to boost an economy that has been allowed to decline.

I largely welcome this Bill. There is no doubt that the Designated Investment Funds Bill is essential for the success of the business expansion scheme as outlined in the budget of 1984. The development by Government of the venture capital market is one of the planks of industrial strategy for the next decade set out in the Government's new White Paper on industrial policy. There is a vital need in Ireland for seed and venture capital and new internal initiatives generally. The Minister referred extensively to that aspect in his address. It appears that in the initial drafting of the business expansion scheme the draftsmen were perhaps a bit over zealous in ensuring that the scheme was not abused. A number of minor amendments to it as proposed here this morning will make an enormous difference and will make a good idea a very successful one. Despite the initial attractiveness it was quite clear that individuals would be very reluctant to take the risks associated with such investment of their own volition. It is essential therefore that legislation makes it attractive for fund managers to act as intermediaries so that the huge resources available can be channelled into the right kinds of investments. The first requirement, therefore, is to make it clear that the general unit trust legislation does not apply to the funds set up under this scheme. The controls of the unit trust legislation are so restrictive as to make it highly unlikely that anybody would take the risk of setting up a venture capital fund and subsequently finding it subject to unit trust legislation. That aspect has been very adequately dealt with today in section 2 of the Bill and I welcome it heartily.

Another criticism that was quite prevalent after the Minister's announcement of a business expansion scheme was that the 5 per cent limit on fees was too restrictive, especially compared to the 3.5 per cent which they generally could earn for, say, life assurance companies by simply introducing potential investment through a European policy. The 1.5 per cent extra allowed on the venture capital scheme could not possibly cover the vastly different expenses involved in such a scheme. It would require special advisers to assess projects in general and monitoring progress thereof. I am delighted that in the Finance Act, 1985, the limits for exercising this restriction were removed and there is now no limit at all, which is what many thought should have been the case all along.

I would like to refer to my budget speech of 6 February 1985 when I made reference to my concern about these aspects of the business expansion scheme that were preventing it from being extremely successful. I quote from the Official Report, column 1877, Volume 355:

Many companies have been under-capitalised since their establishment and because of low profitability and lack of further equity investment this state continues during the lifetime of the company. The venture capital Scheme announced in last year's budget has not perhaps been as successful as it should be, even though it is early days yet. The basic approach was correct but I ask the Minister to turn his attention to minor amendments that could turn a good idea into a very successful one. For instance, it is essential that it be made clear that the terms of the general unit trust legislation do not apply to funds set up under this scheme as they are so restrictive few people would take the risk. Also, the 5 per cent commission or limit on fees is too restrictive in view of the expenses involved in setting up, advising and monitoring progress of such schemes. I favour no limit being set and let the market forces dictate the appropriate level.

That aspect has been taken care of in this year's Finance Act.

There was a feeling that the legislation precluded fund promoters from taking shares in the companies into which they were channelling profits generally. This is not precluded under current legislation despite wide misconception in relation to this point. Under the Finance Act, 1984, section 27 (8) apparently fund managers will be allowed to take up to 30 per cent. Clarification of this would be in order because there is much criticism of this aspect which I understand is wrongly based.

There were problems also in relation to the fact that investors through no fault of their own found that after two or three years a company no longer qualified for relief and they could find themselves with the tax benefit clawed back and funds being locked into the company. There have been many requests for safeguards from this, and that should be taken care of. While it is quite understandable that there should be some restriction on disposal, the terms of the original Act were far too restrictive. When a company is doing well and needs to raise large amounts of capital, it is effectively precluded from doing so in order to protect the tax status of the original investment. A mechanism is required whereby companies should be allowed to go on the unlisted securities market if the need arises. This would also provide a very welcome market for the original investments and would add significantly to their attractiveness.

A further option which I would like to be considered has been referred to by the Minister and I think at the CII AGM this year, to allow companies to buy their own shares as in the US. This would also make investments more marketable. I am thinking of the model of the SBIC — small business investments corporations — which have been extremely successful in the US and of similar type schemes in Europe. Belgium particularly has a successful scheme.

I would like to make a passing reference at this point to the fact that the Oireachtas Joint Committee on Small Businesses considered the whole aspect of venture and risk capital. In their first report on the manufacturing industries generally, the committee made the point that many small firms are under-capitalised when setting up, and because of general low profitability and lack of any further equity investment that situation continues for the life of a company. The necessity of making relatively large repayments is a considerable strain on the resources of any company, particularly when profitability is low, as is the case when companies are setting up or where trading difficulties arise or exist. The Stock Exchange has tried to develop a market in unlisted stocks in recent years with little success and has concentrated on devising sophisticated schemes for its existing usually large companies rather than trying to make the exchange attractive for new small companies. A measure of its failure is that the Finance Act, 1984, proposed a scheme for relief for the investment and corporate trade.

As I have said, the business expansion scheme has been welcomed generally. The amendments being made here today in relation to the unit trust legislation and the amendments already in the Finance Bill of this year should make this scheme extremely successful. The availability of additional venture capital through the banks or other financial institutions and through private investors generally must be encouraged and is required urgently for small manufacturing companies in particular such as we are concerned with today.

A point which has been made many times and to which the Minister referred is that there is a general climate in Ireland, a belief that Irish company owners generally would rather be 100 per cent owners of unsuccessful companies than 40 per cent owners of successful companies. There is a difficulty here in changing people's attitudes in relation to ownership, particularly in the business world. It behoves us all, particularly the Minister and the Cabinet generally, to ensure that people appreciate the benefit of having a properly structured financial base in their company. Traditionally the debt equity ratio in Irish companies has been very bad and their base has been very unsound financially. The moment they hit a bad period or meet big repayments or have trading difficulties of any kind they topple. Historically they have done little about it. Perhaps a company or business has been handed down from father to son or, more rarely, from father to daughter or through the family throughout the years without any consideration of the financial structure of the company.

The last few years have taken their toll of such companies. The recession has meant that any company that had not a sound financial structure, a sound footing on a financial base, went to the wall with tragic consequences not only for the family concerned, the owners of the company, but for employment generally. Encouragement of young people into business, ensuring that our education system is not biased against the entrepreneur as it is at the moment and has been to date, ensuring that career guidance generally is not directed just at the safe pensionable job but rather more into the business arena and towards entrepreneurship, encouragement of properly calculated risks for our young people are what we should be about. It is not just the Minister, Deputy Bruton's Department who will have responsibility in this area, but a far broader ambit in the Cabinet. Education has a major role to play and in certain aspects we have very good examples of how we are broadening our views in relation to the business arena, particularly in relation to risk taking, at which traditionally as a nation we have not been very good.

While we are discussing this topic, I appeal that the Stock Exchange should assess its criteria for allowing small business stocks in the case of companies seeking to raise funds at a lower level than now prevails. We as a country and our financial institutions have failed to date to help small companies and to allow investment in small companies to be attracted to encourage this risk type investment. The Minister said that generally the tax system and schemes here have been biased against risk capital and risk taking. The scheme before us this morning and the original business expansion scheme as announced in the budget of 1984 are the Government's contribution to redressing the balance in this regard.

This Bill could also be regarded as investor protection legislation which it provides very adequately. One aspect concerns me slightly. The Minister referred to the highly attractive situation in allowing employee investment through the business expansion scheme or designated investment funds into the companies in which they are working. Reference was made to the fact that the investment protection aspect of this legislation was sufficient because, generally speaking, we were talking about people on high incomes, the assumption being that unless they were on high incomes they would have nothing left to invest when they had paid their way. I am not sure this will always hold, particularly in relation to attracting employees to invest in their own companies through these schemes. I should like some reassurance on that. I know many employees could be considered to be on high incomes but, without defining what we call high income in 1985——

I was not referring to the employee shareholding when I made that reference.

I thank the Minister for that assurance. I did not interpret it as clearly as that. I accept what the Minister says. They are not precluded from going through a fund particularly in a big company. There is a slightly grey area there. I believe in the encouragement of employee shareholding and profit sharing generally in companies. This is the path for the future, particularly in smaller companies. The more financial interest employees have in their own companies, the keener they are to see that the company is profitable and to understand the difficulties. Generally management and employee co-operation will be greater and the company will be the winner in the context of the appalling unemployment statistics at the moment.

I very much welcome the Bill. I endorse what the Minister said in commending the Bill to the House. There is an overall problem in relation to our attitudes. That goes back to what I said a few moments ago. We will have to ensure that people do not try to continue to be 100 per cent owners of unsuccessful companies rather than 40 per cent owners of thriving, successful companies. That is the nub of the problem. A change in that attitude will make this Bill successful and the business expansion scheme generally successful.

I congratulate the Minister on introducing this Bill. During the debate on the Finance Bill there was much criticism from the Opposition benches about the lack of equity in Irish business. They criticised the Government for being too restrictive in the 1984 and 1985 Finance Bills. This Bill goes a long way towards solving many of the problems which arose subsequent to the introduction of venture capital tax relief. This Bill is introduced at an opportune time. Conditions for investment could not be better. The progress made in reducing inflation since this Government took officer has been fantastic compared with the galloping rates which existed under previous Governments. With regard to venture capital and equity we have fallen behind our neighbours in Britain and on a world wide basis. The Minister outlined some of the problems. He was concerned about the Stock Exchange and that many people do not make full use of the Stock Exchange.

Too many agencies come into play where investment in industry is concerned. Many restrictions are placed on individuals investing due to the fact that we have a proliferation of agencies such as the IDA. It is time that voluntary bodies such as Chambers of Commerce came onto the scene again. Recently they were swamped by the activities of these agencies. This Bill will give scope to people on committees to take a more active part and perhaps become full managers and see that industries are established in their towns.

The main complaint launched by the Opposition is that the qualifying criteria which the Revenue Commissioners will examine are too restrictive. I do not see anything restrictive in the Cork Chamber of Commerce or the Ennis Chamber of Commerce having something more useful to do than signing certificates of origin for exported or imported goods. These committees are essential to Irish life. They brought in manufacturing industry from all over the world. In this Bill the Minister is giving them scope to take part again. I hope they will play an active role. In my constituency we have seen various examples of the better use of venture capital. We have seen major companies investing in small companies and taking a share in small companies who are supplying different products to the base in the major company. As a result the small companies have had a latitude which otherwise they would not have had. That has been seen in the industrial estate in Shannon. It will be further encouraged under this Bill.

Profit sharing and employee shareholding will provide greater confidence in the work place. If companies encourage proper employee shareholding especially in small companies the doubts which exist and the anxiety to maximise the take from companies will be reduced. Many employees believe that a manufacturing industry will last for a short period only and, as a consequence, they have not got the confidence to contribute to it. I commend the Minister on the way he has handled some of the problems which arise in Irish industry, and on bringing in this Bill. He has shown that he is aware of the current problems. Since he took office he has made a major contribution to progress in industry. This business expansion scheme is one of the means by which he has made a major contribution. I commend him on his work.

I should like to thank all Deputies who contributed to the debate for the welcome they have given to this Bill, and to thank Deputy Carey for the very kind remarks he made about me personally. I will go through the points made in a rather random way. Deputy Avril Doyle referred to the need to provide a means whereby companies could buy back their own shares which I referred to obliquely in my opening remarks. That is recommended in the consultancy unit report. In Britain they have provided legislation to do this. I understand it ran to 22 sections. It is fairly complicated piece of work. We are engaged in a fairly major overhaul of company law at the moment. I have already received Government approval for two substantial Bills, one of which is published, in respect of company accounts. I hope it will be possible to deal with this matter by a separate Bill or to incorporate it in one of those other Bills. While it is not essential for the initiation of this scheme it is useful for its continued successful operation.

Deputy Doyle is also correct in saying that section 27 (8) of the Finance Act, 1984, allows fund managers effectively to take options of up to 30 per cent in the fund they establish. Any misconceptions which there are in that regard, which are discouraging fund managers from setting up funds, can, I hope, by this publicity, be removed. I would also refer to what Deputy Carey said. I agree with him that this scheme gives bodies like the Chambers of Commerce an opportunity to do something positive about establishing or supporting the development of industry in their localities on a basis that is profitable to the individuals involved. Constructive conjunction of private gain and local patriotism can be achieved through this scheme. I hope to have a meeting in the near future with the Association of Chambers of Commerce in Ireland. I will urge them, in view of what Deputy Carey has said, to promote actively the use of this scheme in their own towns. I am aware of a very good example of this in the principal town of my constituency, Navan.

I would like to thank Deputy Lyons for the co-operative approach he adopted towards the Bill before us. He made a few criticisms of the business expansion scheme, many of which relate to the Finance Bill aspects of it. It is a fair to say that the vast majority of the criticisms that carry serious weight have already been met in the existing amendments to this year's Finance Act. There is always the danger — I am sure Deputy Lyons will agree with me on reflection — that if you go on looking for improvements and refinements in the scheme without actually making use of what is there it can readily become an excuse for inaction. With this Bill and with the amendments to the Finance Bill this year I believe we have made many improvements to the Bill and I do not believe Deputies in this House should encourage investors to hang back waiting for more improvements. Let us get on with it and get the scheme underway. I believe we have refined the scheme as is reasonable at the present time.

Deputy Lyons made another point which deserves some discussion. He suggested that the scheme should be extended to areas outside manufacturing and the internationally-traded services. He mentioned business and agriculture. I do not agree with the Deputy on this. We have to recognise that there is only a limited amount of money available for investment. It is not unlimited and you have to target it to some degree to the areas where you expect to get the most return. If you were to allow it to be used for investment in agriculture you could end up with the situation which happened in Britain that the business expansion scheme there was simply being used to finance land speculation, driving up the price of land. I do not believe that Deputy Lyons, no more than I, would want that to happen. That is the sort of danger you can have if you are too liberal with the scheme. Likewise, if you allow it to invest in the service industries all you might do is simply allow one publican to expand his pub using the business expansion scheme to take trade away from another publican. The total sum of business activity would not be increased. It would simply be used to divert trade from one part of the service sector in the economy to another. That is not something we would wish to finance through a tax relief. The reason we have chosen to confine it to manufacture and internationally-traded services is that both of them are internationally traded. If there is expansion it will be expansion into export markets potentially rather than at the expense of some existing alternative operation. That is a reasonable targeting and a reasonable use of the incentive. I believe it is generally recognised that the motor of economic growth in the country is still manufacturing and the internationally-traded services. The employment may not all come in manufacturing and internationally-traded services but the wealth to create the employment will be earned to a great degree by manufacturing and internationally-traded services. It is how we use the wealth, once we get it into the country through that means, that is the crucial determinant of our success in combating the employment problem.

Deputy Lyons was also concerned about the fact that the scheme did not allow people to get the tax relief until not only had the money been paid into the fund but that the fund had actually made an investment. This criticism has been expressed by others who have also said that the anxiety to get the tax relief might encourage people to make unduly speedy investments when they might be better off waiting. On the other hand, there is the danger that if your allow people to get the tax relief the money could sit there in the fund for quite a while and not be invested. There would not be a great urgency to get on with it, which is very important.

That would not be the individual's fault.

No, it could be the fund manager's fault. The individual would not be putting the fund manager under any pressure because he would have already got his tax relief. Admittedly he would not get any return on his investment until it was invested. While there could be some justification in what Deputy Lyons has said it is not a major problem with the scheme. However, I will take note of what the Deputy said and I will discuss it again with the Minister for Finance in due course. I believe that, generally speaking, with this Bill and the amendments to the Finance Bill we have put the business expansion scheme on a basis that should deserve the wholehearted support of the entire community in making this effort to extend the productive, as distinct from the unproductive, activity of our economy very largely. I thank the Deputies concerned for their co-operation.

Question put and agreed to.
Committee Stage ordered for Tuesday, 11 June 1985.
Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.