Seanad Éireann díospóireacht -
Wednesday, 10 Jul 1985

Vol. 108 No. 15

Designated Investment Funds Bill, 1985: Committee and Final Stages.

Sections 1 and 2 agreed to.

SECTION 3.

Question proposed: "That section 3 stand part of the Bill".

Mr. O'Leary

The House will recall that during my contribution on Second Stage I asked the Minister to give an explanation on a point arising on section 3. It appears that under section 3 the intention is that only a body corporate will be entitled to act as a trustee under the scheme. It says:

A person shall not be entitled to act as a trustee under the scheme by which a designated investment fund is established unless the person is a body corporate incorporated in, and has a place of business in, the State....

I have no objection to the Minister including a body corporate as one of those who would be entitled to act as a trustee but the Minister might indicate why it is that only a body corporate can act as a trustee.

Minister for Industry, Trade, Commerce and Tourism (Mr. J. Bruton)

This section is essentially designed to protect the interests of the investor. Under a trust arrangement the property is vested in a trustee who must handle it in the best interests of the investors according to the trustees. The trustees are key people. They are ultimately responsible if anything goes wrong. It is essential that they are sound financial concerns. As this provision is considered to be the best way possible of achieving the soundness required, it is easier to have information about the financial disasters of a corporate entity than it would be of an individual who is more free to dispose of assets or whose net assets position is not as determinable as that of a corporate entity.

Mr. O'Leary

I have looked at the remainder of the section which indicates that it is the Minister's intention to have that trustee with ready cash of £250,000 and the capacity to raise it to £500,000. The Minister goes further than that and says that it is only a body corporate with that kind of backing that can act as a trustee. Is this the first time that this was incorporated in any Irish legislation? There are many other examples of persons being involved in trade having to give a guarantee. Surely if an individual who was of suitable character — a body corporate has only the same character as its directors — and had pledged assets to the amount specified in subparagraph (a) that person would be in precisely the same position as a corporate body. I do not see why we should have become so enamoured of the idea of the body corporate that we should give them powers, responsibilities and duties which are not open to natural people.

I understand that it is necessary that they should be of good character. I also understand that they should be solvent and I have no real objection to any stipulation the Minister might like to make to ensure the solvency of any individual who might want to act as a trustee, but to insist that it should be a body corporate is, I think, a new departure and certainly a departure that I am not familiar with. I am not familiar with anything similar. It may well be that in unit trust legislation there is something similar but it is quite unusual and I would ask the Minister to have another look at it.

Mr. J. Bruton

The Senator put his finger on the reasons for this in his contribution. This provision is precisely the same as the one that applies to the unit trust legislation. One must be a body corporate to be a trustee under that legislation. We have incorporated that same provision here. It is not as unreasonable as Senator O'Leary makes it sound. You could get an individual into a situation that at the time they become a trustee they are solid financially but they might subsequently get married and their spouse might run up debts and what was a solid financial situation could become a very unsolid one, even though their character and their own personal conduct was perfect. A situation beyond his or her control could result in his or her being no long solid financially.

That cannot happen to a body corporate. A body corporate has to have a certain situation as far as its financial provisions are concerned and would have some control over how much money is paid up and retained therein. Its proceedings are more subject to accountability. One has to have accounts for a body corporate. An individual who had unlimited liability but also unlimited freedom to do or not do what they wish with their assets, is not required to keep accounts of their entire personal affairs in the same way as a corporate body are already required to keep accounts of their affairs.

If one were to contemplate doing what Senator O'Leary wants — I suppose there is no objection in theory to what he wants — we would have to devise a whole new set of practical controls to mirror those which can relatively easily be put in place in regard to corporate entities. That would be perhaps, to perfect this legislation but also to greatly delay it. The importance of this legislation, among other things, is the speed of entry into law. At the moment, as I am sure the Minister for State, Deputy Moynihan, has pointed out to Senators, one cannot advertise for funds under the conceptions in the business expansion scheme for a fund because of the non-passage of this legislation. If one were to devise the type of controls that Senator O'Leary is arguing for, one would need the summer recess to do it. We could not afford to lose the summer recess in terms of the operability of this legislation and the advertisements and so forth for funds that would undoubtedly occur once the legal barriers which this legislation removes have been removed.

Mr. O'Leary

The Minister need not have any fear. He will get his Bill tonight. There is no problem about that. No one in the House is so fundamentally opposed to the Bill that they will vote against it. If we are going to the barricades with the Minister, we will go the barricades on something other than the Designated Investment Funds Bill, 1985. We will pick an issue which might have more immediate interest than this measure.

The Minister will get the Bill but that does not remove from us the responsibility to try to ensure that the legislation is as good as it can be. Legislation is an on-going process. People often ask why do we bother with Committee Stage as it makes no difference. As far as I am concerned, legislation is an on-going process and what you say now might have an effect the next time legislation is being drafted. We have an example of that in the Combat Poverty Agency Bill where a campaign we have been running over a long period of time with regard to membership of the Houses of the Oireachtas is coming to fruition. I do not expect the Minister to say that he accepts it and will put down amendments on Report Stage. I do not know the circumstances in which it was put into the Unit Trust Bill, and I am sure the Minister does not know either.

I was not a Member of this House in 1972 and I had no responsibility in these matters, but it might have passed this House on the basis that the person who wanted to raise it was out for his tea when the section came up for discussion. These things happen. All we can do is raise the matters when they are appropriate and hope that those in authority will listen to us. It is appropriate that a body corporate should be capable of acting as a trustee. If the Minister had really listened to what I said he would have noticed what I said was: that if it was necessary to have a guarantee of £250,000 or £500,000 then as long as a person could be bonded for that amount of money, I do not see why he should not be capable of acting in these ways because a bond will last indefinitely. Quite a number of people involved in insurance act as insurance companies. That is what they do in Lloyds and they do it by being bonded. They are bonded for a particular sum of money.

As for the Minister's idea that bodies corporate cannot lose money, we have many examples of bodies corporate losing £1 million, £5 million and £90 million even from time to time and or even £200 million. They can lose money too. To be serious, when such a system is being considered again, some consideration should be given to encourage people or at least permit people to act as trustees, provided there are proper controls and provided the funding is right. I am certainly not suggesting that a person should not be adequately bonded or secured in some way. As the Minister said, this legislation is designed to protect the investor and that has my support. I ask the Minister to see that the appropriate people take this into account if and when the matter is being considered at a later time.

Mr. J. Bruton

I certainly have no intention of interfering with the Seanad's legislative role in making suggestions of this kind as Senator O'Leary seemed to think I was doing. My normal instinct in response to suggestions of the kind which have been raised by him would be to try to accommodate them by means of an amendment on Report Stage, notwithstanding the fact that that would involve returning to the Dáil to perfect the legislation. I would have no objection to doing that, but that is not practical at this stage. If I were to follow that course, we would not have this legislation until the autumn. However good the suggestion is, it is more important that we have the legislation.

However, I will have the suggestion made by Senator O'Leary further investigated. I have no objection to it in principle, except that I see practical difficulties in it. I am sure there would be practical difficulties in obtaining a bond of the size required. However, if it could be obtained, it is worth looking at. I can say, however, to the Senator that it is my advice that the existing provision has worked well in the case of the unit trust legislation and that there has not been, to my knowledge, any demand for an amendment along the lines suggested by the Senator in the context of the unit trust legislation. However, the Senator raises a point of principle which is not an unreasonable one and will be looked at.

Mr. Ellis

Section 3 states: "...is a body corporate incorporated in, and has a place of business in, the State..." Does "a place of business in the State" mean that they must own property, or is there a minimum place of business? A place of business could be anything from a caravan to the most expensive or the most valuable office block in Dublin. Are there set criteria with regard to the value of the premises which they might have?

Mr. J. Bruton

No. The reference to "a place of business" does not mean that the place of business itself confers any particular security. The security is conferred by subsection (a) of section 3. The reference to "a place of business" is simply made to make it clear that this corporate body would be subject to Irish company law by having a place of business within the State.

Mr. Ellis

Further to that, does that not mean that some outside entity could come in, set up a place of business, fulfil the criteria and be in operation for a short time and — as Senator O'Leary said earlier — possibly go out of business through no fault of their own by becoming involved in foolish schemes? It seems that "a place of business" should be specified accommodation.

Mr. J. Bruton

I do not see any great advantage in that. The likelihood of a fund going out of business, which this legislation is designed to prevent, is just as great or as little whether they have a large office block or a caravan as their place of business. It is the quality of their investments which determines whether they succeed or not. Provisions are already made for security in section 3(a). Security in a cash liquid kind would be available to meet the claims more readily than would be the case than if security were in the form of a building which might not easily be disposed of.

Mr. Ellis

With regard to the matter raised by Senator O'Leary concerning a bond, would the bond not be of greater benefit to the investors than the £250,000 in paid up cash? I feel that Senator O'Leary has a point here because while £250,000 might seem quite an amount of money, people could abuse it. As an added safeguard the Minister might examine the possibility of having a bond alongside it of the equivalent amount or possibly more?

Mr. J. Bruton

I would be prepared to look at that, but I am advised that in practice it would be very difficult to obtain a bond of that size and if you made that requirement in the legislation, it could render many of these funds stillborn. If there is any difficulty, it is something that one could certainly consider.

Mr. Ellis

The Minister conceded that it could possibly render it stillborn but, it is my opinion, the amount being sought is not sufficient to safeguard the investor.

Mr. J. Bruton

This security is considered to be reasonably adequate. Similar conditions have been prescribed in the unit trust legislation and have proved to be quite adequate there. I have no reason to believe that the figures specified are inadequate. Certainly, if you were to make it too severe these funds might not just get going.

I think we struck the right balance in this regard.

Mr. Ellis

Could the Minister tell us when was the Unit Trust Limited fixed?

Mr. J. Bruton

In 1972.

Mr. Ellis

If the figure of £250,000 was agreed as being the limit in 1972 and we are now in 1985, I feel I am justified in saying that the Minister should look at a bonding system to increase that £2 million.

Mr. J. Bruton

I do not know, but I think this is reasonable enough. It is a provision that already applies to the unit trust legislation. Admittedly, we could have brought in a higher limit. I suppose if you were to adjust the terms in the 1972 figure in inflation perhaps you would end up with a much higher figure than this. Possibly it would be twice as high. However, the figure is working reasonably well in the unit trust legislation. To be quite frank, our aim is to get more of these funds established. If we were able to avail of this to apply more severe paid-up requirements to designated funds than we were applying to unit trusts that would be seen as moving in the opposite direction to the one in which we wished to move. I have to say that Senator Ellis has made a reasonable point that these limits should not be allowed to just drift with inflation. One of the provisions that would, perhaps, be useful in legislation generally would be some system for automatically adjusting all cash limits in one Bill every year. In fact, the CPI would have a small bill if they did this every year. Perhaps that is getting a little bit less necessary now as the rate of inflation is reduced to below the European average. Senator Ellis's points may have had validity in the bad old days when inflation was much higher.

Mr. Ellis

Would the Minister not consider that there should be an upper limit to the amount of involvement which these groups should be allowed to have with regard to the amounts of money which they could handle? You can take it that there is £250,000 there. That could become very small in consideration of the total volume of money which one of those funds might be handling.

Mr. J. Bruton

The idea here is that under this fund as distinct from unit trust fund, you put in all the money and it must all go in on day one. It is in and that is it. It is closed up. The amount that is being sought must be specified in the prospectus, so anybody putting in the money knows, when he is putting it in, what the size of the fund is. People know that the fund is not going to be doubled or trebled. The figure specified in the prospectus can only go up to that figure. It cannot go up subsequently because all the money is locked in and the fund is closed once it goes in. If the Senator is worried about a situation where a fund would just grow, that would not be the case because of the nature of this fund as distinct from unit trusts.

Mr. Ellis

I understand the position that it is not going to be a roll-over situation. You could take it that you could have a fund proposed at £5 million as against an investment of £250,000.

Mr. O'Leary

I do not think we should be over-emphasising the amount of money that should be held in paid-up capital. Other than anybody actually defrauding somebody, there is very little risk of the fund getting into difficulty. The fund is just taking in somebody's money and investing it in another project. As I understand the legislation, the person who originally invests the money becomes the beneficial owner in due course of the actual shares. The fund really is only the pig in the middle. It is not actually dealing with money except in the very initial stages. All it is doing is holding a portfolio of shares. Even if these shares turn out to be worth nothing, as could happen if all the projects failed, the fund is not insolvent because it just does not arise. While it is obviously necessary that there would be some resource to draw on, and some minimum which would give the thing a respectable base from which to operate, the Minister's point with regard to the fact that it is a static fund rather than a growing fund like unit trusts is a valid point. In those circumstances the amounts mentioned are adequate at the moment.

Mr. Ellis

I can agree with what has been suggested by Senator O'Leary to the Minister. What I see here is that you could at a later stage have somebody who might be better up in this legislation than any of us in this House and who has watched this type of situation operate in other countries. I am referring especially to where you have a lot of this type of business on the American Stock Exchange, where you have small companies being launched and all this type of operation. There have been problems there with regard to some of them not being able to fulfil their commitments and where unscrupulous people have manipulated the situation. That was my reason for pushing for a bonding type system.

Mr. J. Bruton

I must say that I would not have much to add to what Senator O'Leary has said. He has explained that the fund is not one that itself would be holding money for a long period of time. It will not be trading itself in a manner that would enable the fund to run up liabilities. It will be facilitating investments by the individuals. I feel, therefore, that the concerns expressed by the Senator are adequately met.

Question put and agreed to.

Section 4 agreed to.

SECTION 5.

Question proposed: "That section 5 stand part of the Bill."

Mr. O'Leary

The idea of issuing, publishing or circulating certain documents relating to designated investment funds is a good one. This section has my general support. I am concerned about two aspects of the matter. I think the Minister might be held responsible for certain things which would happen if a person lost money. As I understand the procedure, it will be as follows. The designated investment fund will make an application to the Minister and will in due course have to submit to him a prospectus and all notices, brochures, etc. under subsection (1) of section 5.

An Leas-Chathaoirleach

Excuse me, Senator O'Leary. There is a vote on the Farm Tax Bill in the other House and I am sure the Minister would like to attend.

Sitting suspended at 7 p.m. and resumed at 7.15 p.m.

Professor Dooge

Just before we resume in regard to the question of the business of the House, it now appears that discussion on this Committee Stage will go beyond 7.30 p.m., possibly to 7.40 p.m. or 7.45 p.m. and I would ask the House to agree, and I hope that Senator Ellis does not mind this change, since it is in the direction of saying that if we go beyond 7.30 p.m. with Committee Stage and the remaining Stages of this Bill, that if we do not take up the motion on marriage breakdown but proceed immediately to the Adjournment Debate.

Mr. O'Leary

In regard to section 5 I was saying, before the Minister went out to do his duty — I know from the smile on his face that they won in the other House with a comfortable majority — that I have considerable problems with the section. It is nothing to do with the actual intention behind section 5 but the actual drafting of it that gives rise to difficulty. In a number of places the Minister lays down that certain things are to be in the statement or prospectus, and that is fair enough. He does it, for example, in subsection (4) (a), (b), (c), (d) and (e). However, when he comes to (f) there is a statement which is one which is not drafted in the Bill but is a statement which the Minister is satisfied is appropriate regarding the risk involved in investing in an unquoted company. The Minister will be making a value judgment there. He will be saying, "Is this an adequate warning or not?" It is possible for the Minister to make a mistake. It is possible for somebody to say, "The Minister did not warn me adequately with regard to this." If the Minister makes a mistake it is possible that somebody would have a cause of action against him in negligence. I will come later to what the Minister's answer to that might be. If you look at (vi) you get the same thing.

The prospectus must also contain a statement which the Minister considers sufficient regarding the voting rights, duties and disposals arriving by reason of the shares issued to a fund being held by such a nominee, and certain other matters. That is a value judgment again that the Minister is making. He is going to decide what kind of statement is adequate. If somebody loses his money afterwards he might be able to say the Minister, "Well, you did not do your job properly. I did not realise that they were the kind of voting rights that I was getting and I do not think you explained it adequately." In VII it says a statement which the Minister considers to be adequate regarding any agreement or arrangement made or proposed to be made by or on behalf of the trustee of or the person managing the scheme for the transfer of shares, and various other things like that which we will not go into, is again a value judgment by the Minister. In (ix) a statement which the Minister considers adequate regarding the nature of the investments it is intended to make through such fund together with any amount which is specified in the relevant scheme as being the maximum or minimum which may be invested through the fund in any individual investment. Again, there is a value judgment element involved in that. Number (x), which I will not go into, does exactly the same thing. Subsection (5) again has an opinion of the Minister as being a focal point of its core and centre.

Naturally one would expect the Minister to protect himself in some way against such an eventuality. I do not see where the Minister has adequately protected himself against the eventuality. First, I do not think he can protect himself fully against it. I do not see where he has even attempted to do so in the Bill. He is proposing that a statement should go in saying that no liability should attach to the Minister. But the Act does not provide that. That is just a statement that could go in. The very fact that a statement goes in to that effect does not mean that statement has effect. There is a further statement to be published in the papers that no right of release is given alone by reason of the Minister having given approval under the section.

There is nothing in the Bill which says that the Minister will not be responsible for any wrong decisions which he makes as a result of these opinions. In my opinion it is hardly even possible to draft such a section. I think if the Minister is negligent, no matter what the law says, the common law will override the statute law and the Minister will be held responsible. Leaving that aside for the moment, I do not see where the legislation adequately deals with that problem at all. I would be anxious for the Minister to indicate where it does.

Mr. J. Bruton

I suppose you find yourself sometimes having to pick your lawyer depending on the advice you want. In this particular instance, we sought advice on this very issue in the drafting of the legislation. We were advised by the advisers of the Government that the provision here contained is adequate in that the person acting under this representation will be doing so in the clear knowledge that the Minister is not liable and is stated not to be liable and that no cause of action would arise on the part of the person investing because of the fact that he would have accepted the option to make the investment under a prospectus which clearly indicated to him that he could not pursue the rest. I see Senator O'Leary shaking his head. I cannot enter into a legal argument with the Senator on the matter beyond saying that this is the advice we obtained. It was originally considered that we should put in an explicit disclaimer of liability as distinct from a requirement to include this in the prospectus.

Mr. O'Leary

Obviously the Minister has his own advice. No doubt it is very good advice. It appears to me that it is inadequate for this reason: nowhere does the legislation set out to relieve the Minister of any of his legal responsibilities.

Small print in a prospectus is really a very poor defence against negligence. If one buys a car one knows that there are warranties and restrictions on the warranties. Nobody takes the slightest notice of them when they come to court. They are just irrelevant. The man sitting on the bench takes a very practical viewpoint. Here we have a situation where you bought the car and you expected it to function correctly; it did not work and therefore you are entitled to be compensated. In a similar situation there is a very real risk that the Judiciary will take that very practical viewpoint. They will say: "Here is a man, irrespective of the disclaimer, who depended on a representation which was made to him by a Minister. That representation was made inaccurately or inadequately. As a result the Minister must pay."

Mr. J. Bruton

The Minister is not part of the contract.

Mr. O'Leary

The Minister has taken onto himself certain duties. One of the duties he has taken onto himself is to delimit the advice which the shareholder is going to get with regard to, for example, the risk he is taking. That is contained in section 5 (f) (i). That is probably the most serious one. The Minister is actually going to tell him what risk he is taking. The Minister will also — which is more serious — indicate to him what he considers to be adequate concerning the nature of the investment he is intending to make. In other words, if he wishes to invest in the manufacture of building materials, you will say to him that this is a very risky business or this is not a risky business.

Mr. J. Bruton

Will the Senator listen to me for a moment? The meaning of that — it is at the very bottom of page 4 of the Bill to which the Senator is referring — is not that the Minister would be required to say he is satisfied that the prospectus gives an adequate statement of the risks involved in investing in the type of activity in which it is proposed to invest, but simply that there are certain risks inherent in investing in an unquoted company and in the marketability of shares in an unquoted company, by virtue of the fact that it is an unquoted company but not by virtue of the activity or the nature of the objectives of the investment or anything of that kind. The Minister simply has to satisfy himself that a statement is included to say that if you invest in an unquoted company it is not as easy to sell the shares as if you invested in a quoted company. That is all. Once that is said in reasonably clear English, it does not matter what it is proposed to invest in. The Minister will have satisfied his obligations under that section.

Mr. O'Leary

I am well aware that the Minister is not going to advise the person that "the following is the situation." That is not going to happen. I understand that. The Minister is going to own the approved prospectus which contains a statement which he, the Minister, considers adequate to explain to people what the risks involved are.

If the Minister looks at Roman numeral IX at the bottom of page 5 he will see that he goes even further than that. The Minister will also have to approve a statement as to what is adequate regarding the nature of the investments it is intended to make through such fund together with any amount which is specified in the relevant scheme as being the maximum or minimum. There is no problem with that. In other words, if your fund is to invest in building materials you have to give an assessment as to whether that is a high risk or a low risk venture. If, on the other hand, you are going to invest in textiles, you will give a different assessment. I understand that is what it means. I am suggesting to the Minister a statement which the Minister considers adequate regarding the nature of the investment it is intended to make such as: "This fund intends to invest in manufacturing companies in the textile area. Fifty four per cent of them go out of business every year."

Mr. J. Bruton

No.

Mr. O'Leary

That is my interpretation of it; I do not know what the Minister's interpretation of it is.

Mr. J. Bruton

You would not have to say the second part. You would simply have to give an adequate statement of the nature of the investment in terms of the sector that it was proposed to invest in. The Minister would not have to approve an assessment on the riskiness or otherwise.

Mr. O'Leary

I think that the combination of (i) and (ix) together will impose a very serious obligation on the Minister. What I am getting around to is that the Minister is taking on to himself considerable power and that is grand. But you cannot buy power without accepting responsibility. That is it. If you accept power you have responsibility.

(Interruptions.)

Mr. O'Leary

Would Senator Killilea please be quiet until the matter on the Adjournment is raised — for the second day in succession now? What I am trying to emphasise is that I think the Minister is going to be at some risk. I may be wrong. There may be no risk, but in my assessment of the position, reading it from beginning to end, my first reaction when I read it was alarm bells: the Minister could be at risk here and I do not care who the Minister is. The Minister is inherently at risk because of the way the Bill is drafted. I have also made the point about liability.

The statement is to be included in the prospectus that the Minister has no liability. As far as the person who is reading that prospectus is concerned, there will be a statement that says the Minister has no liability. He does not know why the Minister should have liability. He does not realise that the Minister has approved the individual subsections of this statement. You might as well put in that the Ayatollah Khomeini has no liability. He will not understand that the Minister will have, if not drafted the prospectus, at least approved the prospectus and approved individual portions of the prospectus. It is dangerous from that point of view.

I have no other point to make about it. I just worry whether the Minister is the right person to be getting involved in this regulatory operation. That is what I am concerned about. Why not put it off to somebody else? Get the other fellows to do it. Why should the Minister be getting involved in it? That is important because what is happening here is that you have a non-specialist if you like, who is the Minister, getting involved in what will become a highly specialist area. I am concerned about it because if there is any risk whatsoever the prospectus will have to be drafted in such a way as to protect the Minister and nobody will ever invest in anything. If an official in the Department feels that he is under pressure to make sure that no Minister is ever caught, he will have such a negative prospectus that nobody would ever invest in the company. It is to try to avoid that that I am trying to help the Minister. No doubt the Minister is appreciative of that.

Mr. J. Bruton

I appreciate the Senator's solicitude in wishing to divest me of any needless work in this area and, being lazy by nature, I would be delighted that this chalice might pass to other lips. The situation here is that somebody authorised under statue has got to accept this responsibility. If that person is not the Minister it has to be some other body established under statute. If risks arise of the Minister being sued, so also will risks arise in respect of any other body that the statute might establish for the purpose. Ultimately the Minister will have to indemnify that body anyway against any such risks. So, the financial liability, if such is to be, would end up back here or in the Dáil, by one route or the other, either direct through the Minister or indirectly through the Minister having come through some other body that the Minister had to indemnify.

I can only say to the Senator — and I know that this is not a very convincing case to make — that the intention of the use of the word "nature" on top of page six, is that it should relate to the type of investments that are being made, that is investments in footwear, investments in textiles, but not any evaluative statement as to whether it is invested in good, viable footwear projects or bad, unviable footwear projects. The Minister is not, as is intended here, to make a value judgment as to whether the nature is good or the nature is bad. It is simply a descriptive statement rather than an evaluative one.

However, I would have to concede to the Senator that the word "nature" is open to many interpretations and I am sure there are many theologians who have written numerous books on that subject as well as lawyers. I have to revert to what I said originally, namely, that we have used the words we have used on the best drafting advice, that they are the right way of achieving what we want to achieve. If I were doing it myself I would have used other words. Unfortunately, the time is not available for us to check back on the matter between now and Report Stage, because we want to get the Bill through. I certainly would like to thank the Senator for giving us due warning about this matter and we will obviously be on our guard to take any steps that we can to protect ourselves against any positive action that might arise. It may well be that the Senator's fears are groundless. I am sure that is his hope as it is mine.

Mr. Ellis

I can understand Senator O'Leary's worry about the Minister and I feel that it is justified, but I wonder is the Minister aware of what happens in other countries where this type of fund is proposed? My information is that the brokerage firm who do this type of dealing become responsible rather than the Minister for that. If they mislead the public they are "hammered" to use the stock exchange phrase. Would it not be more beneficial to us and to the Minister if the lead institution were to become responsible rather than the Minister in this case. I can see Senator O'Leary's position. "The nature," as the Minister says, leaves very wide scope and I feel that the investors should be told the specific companies in which the moneys are to be invested and they should also be given notice prior to any further investment being made.

Mr. J. Bruton

Prior to the investments being made the specific companies will not be known and it would not be possible for them to be known. Otherwise, the whole thing would be much more rigid. People would put their money directly into those companies.

Mr. Ellis

For the Minister's information, what I mean is that before the fund would make any investment, the shareholders should be told the specific company in which it is being invested. We all understand that the money goes into the fund and stays in the fund, but I believe that before any investment is made from that fund the shareholders should be informed that it is going into company X, Y or Z. I am talking about after the money has already been invested in the original company.

Mr. J. Bruton

Then you would have all the decisions being made by the investment managers being second-guessed by the shareholders. You would never get to make the investments at all. Would you have to have unanimity or would a simple majority vote of the shareholders suffice? That would not be conducive to getting the money invested reasonably quickly because you would have to go through a whole consultative procedure possibly involving public discussion of some description. I am not so sure that is desirable. People are giving their money on the basis of a prospectus and on the basis, obviously, of a measure of trust in the judgment of the people to whom they are giving the money to invest it wisely. To introduce a sort of an elaborate procedure would "gum up" the works.

Mr. Ellis

I am not talking about an elaborate procedure but about a procedure where they would be given seven days to reply to a written query from the management team saying they proposed to invest £X of the fund in company Y. At that stage a notice would be sent out to the investors with a seven day period to reply. If they did not reply it would be taken that they were in agreement with whatever the management team did.

Mr. J. Bruton

Suppose one person replies and says that he does not like that company for some reason; he might not like the people involved in it for reasons that had nothing to do with the viability of the company. What would happen then? Would a meeting be called to have a vote on it?

Mr. Ellis

No. I do not think that there should be a meeting. There should be replies from the investors to the management team either for or against it. Those who do not reply would be taken as being for the investment being made by the management company.

Mr. J. Bruton

If each individual is going to have a view on each company in which the fund is to be invested, they will invest perhaps directly in the company in the first place. The whole notion of the fund is that money is put in the hands of an expert who invests. If you are to have a system of second-guessing on these investments, there is no point entrusting it to a fund management; you might as well do it yourself individually. This is the way the fund system works in the United Kingdom, although their guidelines are not specified in law. They are specified in the guidelines issued by the Revenue Commissioners or the Inland Revenue.

Mr. Ellis

If you follow on what the Minister said you will see that the guidelines in other countries are much different from what they are here. They are not governed by law, as the Minister has said, but by guidelines of the Inland Revenue in the United Kingdom. I think it is the same in the United States where tax write-offs for losses are allowed and a number of other incentives. In allowing people to reinvest other people's money, at least the original investors should know where their money is being reinvested and they should at least be notified that it is being reinvested.

Mr. J. Bruton

There is provision for subsequent information to be given to them on a regular basis as to where money is going. Any system where people could stop the lights, so to speak, would mean that fund managers would feel they could not operate effectively, that they were being second-guessed. I do not think that would work and if you were to institute a fund of that kind, it would be intrinsically a different fund from the one which this Bill is designed to establish and which the Irish investment community is expecting.

Mr. O'Leary

One of the things which we should bear in mind in considering these investment funds is that, of their nature, they are going to be investing in relatively small companies. What will happen is, for example, that 100 people will put £25,000 each into a fund and make up £2.5 million. This is going to be divided over quite a number of small companies. My experience is that it would not be practicable to have the details of that company prior to the investment circulated on a wide basis. Nobody would allow the details of their company to be circulated on a wide basis unless there was a chance that there would be an investment. It is different afterwards. For that reason it is important that there would be power given to the manager of a designated fund to actually make the investment. Therefore, I support the concept of the Bill.

Mr. Ellis

With regard to what Senator O'Leary has said, that information on all companies should be in the Companies Office.

Question put and agreed to.

Section 6 agreed to.

SECTION 7.

Question proposed: "That section 7 stand part of the Bill."

Mr. O'Leary

I appreciate the difficulty in the Galway area. On section 7, what is the effect on investors in respect of a withdrawal of an approval under section 5? I understand from the Minister that if I give an approval under section 5 for the publishing of a prospectus or a brochure and it is published and people invest and subsequently I find there is a mistake, what happens to the people who in the meantime have invested their money? Are they left in a position where they now invested money in an investment fund which cannot raise other money because of the withdrawal of the approval? I would like to have the Minister's views in that regard.

Mr. J. Bruton

Any withdrawal would have effect from that date forward and not retrospectively to investments made, and they would still stand but, no further investments would be made, presumably. A proportionate refund would be made of the balance of the funds.

Mr. O'Leary

Suppose it was proposed to raise £5 million in a fund and supposing a prospectus was issued and, say, £2 million was invested by, say, 100 people or whatever number and, before this sum was fully invested, there was a withdrawal of approval, what then would be the case?

Mr. J. Bruton

It would be invested in proportion in projects.

Mr. O'Leary

It has not been invested at all yet.

Mr. J. Bruton

It could be given back.

Mr. O'Leary

Would it be invested in projects? There could be circumstances where it would be invested onwards and could not be given back but there could be other circumstances in which it would not have been invested onwards. There should be a provision made for it to be given back in those circumstances.

Mr. J. Bruton

I wonder if the withdrawal of approval would, in fact, mean that the fund was no longer properly in possession of the funds. Common law practice would indicate that if one had funds in one's possession and one was not properly entitled to retain them, one would be obliged without any provision in this particular statute to refund them. This would be my understanding of the way that the law would work.

Mr. O'Leary

All I can say is that the Minister has ability because any man who could think of that at short notice is bound to have ability. There is logic in what the Minister says. It is also quite sensible that if there is withdrawal of an approval then in so far, as it is possible to do so, you restore everybody to the same position they were in before the situation ever happened. If this is possible it should be done.

Mr. J. Bruton

I think that is what common law would require to be done.

Mr. O'Leary

Yes. We are not passing common law. We are passing statute law.

Mr. J. Bruton

No, but that is the beauty of the common law system as distinct from the civil law system, as I am sure the Senator is well aware, that you do not have to put everything into an Act under our system. There is a certain corpus of law and custom which applies in the absence of the specific statutory provision.

Mr. O'Leary

I would ask the Minister to have a further look at this.

Mr. Ellis

Further to Senator O'Leary's query, what about any profits or any interest that might have been gained by the moneys while they were invested? What rate of interest would the fund be entitled to refund along with the capital involved once the approval had been withdrawn? Would it be taken that they would be expected to refund it at normal bank interest rates?

Mr. J. Bruton

I am not sure that I know the answer. My advice is that there would have to be a provision in the prospectus to govern what would be done with any interest that was earned in the period between the money being received and being invested in the normal way. Those provisions as to what would be done with the interest would apply in the case of the withdrawal of approval in the same way as they would apply in the normal business situation, namely, that they are merely retained for a time and subsequently invested as distinct from refunded and that the practice to be adopted in this situation would be specified in the prospectus and would apply in both situations. That is my advice.

Mr. Ellis

Can we take it that in the prospectus it will be proposed that these moneys, until such time as they are further invested, can only be invested with a recognised institution, namely, one of the four banks or a recognised banking institution in this country? While moneys would be in the process of being taken in under the legislation there is nothing to state where they must be invested. I feel it is a loophole which the Minister possibly could close by stating that the funds must be invested with a recognised institution in the case of lawyers who must invest their money with a recognised institution, I believe.

Mr. J. Bruton

I understand that an appropriate provision has already been made in the Finance Act which establishes the tax facility for business expansion schemes of this kind and that the matter is, in other words, already dealt with along the lines suggested by Senator Ellis. We anticipated Senator Ellis on this point.

Mr. Ellis

Could the Minister tell us in which section of the Finance Act it is covered?

Mr. J. Bruton

Section 27 (8) (c) says that pending investment in eligible shares any moneys subscribed for the purpose of the shares are to be placed on deposit in a separate account with a bank licensed to transact business in the State.

Question put and agreed to.

Section 8 agreed to.

SECTION 9.

Question proposed: "That section 9 stand part of the Bill".

Mr. Ellis

Expenses incurred by the Minister in the administration of the Act shall be to such an extent as may be sanctioned by the Minister for Finance, paid out of moneys provided by the Oireachtas. Should there not be a charge to those funds for the amount of departmental time that will be lost in processing the application?

Mr. J. Bruton

There is no provision for changing a fee but it is an excellent idea. Perhaps on some suitable future occasion we will take powers to charge some small fee for this. The best way of approaching it would be to see how the thing works and see how much it actually does cost to process applications. We will then be able to set a fee that will be appropriate after due experience. I must express my appreciation to Senator Ellis for his desire to assist the Exchequer.

Mr. Ellis

The only reason I state that is that nothing now is free. If it is only a television licence you apply for, you must pay for it. The cost to the State of processing one of those applications could be very considerable. If people are prepared to put up the sort of money involved they should be liable to pay some type of duty, such as a stamp duty, on this. While I might be assisting the Minister for Finance I feel that it is only fair that it should not be free, that there should be a charge. Many applications may be submitted which will never be further processed — that would be my fear unless there is a charge.

Mr. J. Bruton

I agree with the Senator.

Question put and agreed to.

Section 10 agreed to.

Title agreed to.

Bill reported without amendment, received for final consideration, and passed.

Mr. J. Bruton

May I say that on Committee Stage Senators made a number of very valuable suggestions which it was not possible for me to act on in the normal way because of constraints of time. However, I assure Senators that I will be considering these matters. I will write during the summer to the Senators who made the various points to indicate the results of our consideration and if that consideration indicates that legislative action should be taken the next suitable opportunity will be availed of.