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International Bonds

Volume 979: debated on Tuesday 26 February 1980

The text on this page has been created from Hansard archive content, it may contain typographical errors.

'.—(1) Section 65 above shall not by virtue of section 67 above prohibit an individual from doing anything in relation to any debenture if—

  • (a) that thing is clone by him in good faith in connection with an international bond issue—
  • (i) not later than three months after the issue date, or,
  • (ii) in a case where the international bond issue is not proceeded with, before the date on which it is decided not to proceed with the issue,
  • and he is an issue manager for that issue or is an officer, employee or agent of an issue manager for that issue; or

    ( b) he is or was an issue manager for an international bond issue who is making a market in that debenture, or is an officer, employee or agent of such an issue manager, and that thing is done by him in good faith as a person making a market in that debenture or as an officer, employee or agent of such a person;

    and in either case the unpublished price sensitive information by virtue of which section 65 would but for this section apply in relation to that thing is information which he holds by virtue of his being (or having been) such an issue manager or an officer, employee or agent of such an issue manager, and is information which it would be reasonable to expect him to have obtained as an issue manager, or as such an officer, employee or agent.

    (2) In subsection (1) above—

    "international bond issue" means an issue of debentures of a company (the issuing company")—
  • (a) all of which are offered or to be offered by an off-market dealer to persons (whether principals or agents) whose ordinary business includes the buying or selling of debentures, and
  • (b) where the debentures are denominated in sterling, not less than 50 per cent. in nominal value of the debentures are so offered to persons who are neither citizens of the United Kingdom and Colonies nor companies incorporated or otherwise formed under the law of any part of the United Kingdom;
  • "issue date" means the date on which the first of these debentures is issued by the issuing company; and
    "issue manager" means—
  • (a) an off-market dealer acting as an agent of the issuing company for the purposes of an international bond issue; or
  • (b) where the issuing company issues or proposes to issue the debentures to an off-market dealer under an arrangement in pursuance of which he is to sell the debentures to other persons, that off-market dealer.'.—[Mr. Parkinson.]
  • Brought up, and read tile First time.

    With this it will be convenient to take Government amendment No. 317.

    I beg to move, That the clause be read a Second time.

    Like several clauses we have discussed this afternoon, this is a highly technical clause. Its objective is relatively simple. It is to seek to exclude from the operation of clause 67, the insider dealing clause certain activities carried on by those who manage the Eurobond market. The reason why we seek that exclusion is that by the very nature of the market those who deal and act as brokers also make the market. By the nature of their activity, insiders will be caught by clause 67 unless we seek to exclude them. It is an international market which is dealt in by professionals. The way in which the market operates ensures that the person making the market is the one broking the bonds. The clause has been drawn up to try to define Eurobonds, and to seek to provide defences for those who legitimately deal in them.

    I turn to the new clause and the definitions therein. The key definition is that of an international bond issue. While many recognise a Eurobond when they see one, it is especially difficult to define it. We approached the question from a rather unusual angle. We confined the definition to bonds that are to be offered to professional dealers—that is, persons, whether as principals or agents, whose ordinary business includes the buying or selling of debentures. That requirement applies in all cases.

    The bond must be denominated in foreign currency If it is denominated in sterling, at least half of the issue by value must be offered to persons, whether legal or natural, who are foreign. In the case of individuals, that means not citizens of the United Kingdom or colonies, and in the more usual case of companies incorporated or formed under the law of a country other than that of the United Kingdom.

    We have attempted to build into the definition a substantial international element to make up for the fact that we cannot directly define what is usually called a Eurobond. The other definitions of issue manager and issue date are, we believe, more straightforward.

    I turn to subsection (1). There are two separate defences. The first excludes from the operation of clause 67 anything done in relation to debentures by an issue manager or officer—or an employee or agent of such a manager—provided that it was done by him in good faith in connection with an international bond issue within three months of the issue date. That is intended to protect issue managers in allotting bonds while in possession of information about people's reaction to the original invitation and, also, where they make a market in the bond issue and take market positions in it, going long or short.

    There are two limitations. First, whatever is done must be done in good faith in connection with an international bond issue, so that if they had in mind some quite extraneous consideration the defence would not apply. Secondly, it is implicit in the defence that it should be limited in the sense that it relates to information about the issue of an international bond. It is better to make that explicit, and we have introduced a limit of three months after the issue date. By that time, the inside information that is linked to the issue manager's relationship with the issuing company will have lost its force.

    Obviously, there is an element of arbitrariness in selecting a specific period, but we think that it is desirable to put an explicit limit on the operation of the defence.

    The second defence protects the issue manager and his officers, employees and agents when, in addition to being the issue manager, they make a market in other bonds already in issue by the same company that is making the present issue, or some closely related company, for example, another company within the same group.

    4.45 pm

    The defence permits them to continue to deal in those other debentures, provided that they are making a market in the debentures and that they deal in good faith as a market maker. The defence permits an issue manager to continue to make a market subject to those limitations in cases where, as issue manager, he possesses "unpublished price sensitive information".

    The argument in favour is one of continuity in market making, as the alternative would be withdrawing from the market. That would create confusion and speculation that would damage the market. My arguments are the same as those which lead to the defence for other market makers—for example, jobbers—under clause 65(8)(c).

    Both defences are further limited in that the information that would otherwise preclude them from dealing must be information, first, which an individual holds by virtue of being an issue manager, officer, employee or agent of that manager, and, secondly, which it would be reasonable to expect him to have obtained in such a capacity. Therefore, as in the jobber's defence, the defence is limited in its scope.

    Amendment No. 317 provides a definition of market maker, which will, if the House accepts amendment No. 323, apply for the purposes of clause 67.

    I thank the Minister for his explanation and definition. At least we have the satisfaction of knowing that Eurobonds, in common with elephants, are difficult to define, but one knows what they are when one sees them.

    As the Minister said, this is a technical matter, and one that is better examined by looking at the cold print rather than by trying to understand what the Minister has said in detail from the Dispatch Box. In so far as the Minister has made that explanation, I think that it will be broadly accepted.

    I have two major criticisms of the new clause. The first is procedural and the second is substantive. In making the procedural criticism I adopt the remarks of my hon. Friend the Member for Hackney, Central (Mr. Davis) in relation to timing. In response to that, and in mitigation of the Government, the Minister said that these were technical matters which needed a complicated system of consultation. Those two considerations apply to virtually all the matters in the Bill and are not a sufficiently adequate answer.

    We know that the amendment, which is highly technical, was tabled on 20 February, at the last moment. It may be of considerable importance. In the light of the Minister's explanation, it is probably not of world-shaking importance. Clearly we have had insufficient time as an Opposition to appraise the matter and to make the relevant consultations among the affected bodies and among those who could be of assistance to us. As a result, we cannot carry out our job to scrutinise and to improve Government legislation. We cannot obtain in time properly considered responses. It is asking too much of an Opposition when contrasted with the veritable army of advisers available to the Minister.

    Hence the need for the other place. Their Lordships will not recognise the Bill that we shall eventually return to them. It is of a wholly different character from the minor Bill which left them in July last year.

    If, as the Minister said, a lengthy process of consultation is needed, our response is "Yes", but we must also point out that the new clause was tabled at the last minute. There is no need to rush it. Indeed, if there is a deadline, it is a self-imposed one. It is one which the Government have imposed themselves by having the legislative timetable dictate that it will be this week that we shall examine the Bill on Report.

    That raises general problems about criticisms of the procedure for examining Bills of this nature. By and large, this measure is non-controversial between the parties. However, the Committee would have been aided if at a pre-Committee stage we had been able to call expert evidence on 'patters such as this in order properly to make up our minds on the validity of the several proposals that have been made. One wonders whether this Government or any other Government will draw the lessons in terms of parliamentary procedure from the shambles of a procedure that we have had in regard to this Bill.

    As the Minister said, the substantive matter is highly technical. He said that it was in response to the consultative document of October last year. Therefore, there has been ample time for the affected bodies to make their views known in response to those who are active in the Eurobond market.

    The way in which the new clause has been drafted and the procedure that I have outlined necessarily make one ask how serious the Government are about the effectiveness of these insider provisions. We know that there have been false starts in respect of insider legislation. One occurred in 1973, and the general election of 1974 brought that legislative attempt to an end.

    Another occurred in 1978, and the general election of 1979 brought that to an end. One wonders whether what has emerged from the consultative document, and the Government's improvement on it, will be truly effective,

    I invite the Minister and the draftsmen to ask themselves whether they should have put themselves in the shoes of a judge who is trying to direct a jury in making up its mind in respect of the criminal provisions that have been set out. I shall try to illustrate some of the difficulties of a judge in explaining these matters to a jury because of the multiplicity of tests that have to be satisfied at one and the same time.

    Clause 65 is the governing clause in respect of the new clause. According to clause 65(1), the individual must be
    "knowingly connected with a company".
    There is no rebuttable presumption, for example, that he is so connected. He must have information
    "which—
    (a) he holds by virtue of being connected with the company;
    and other hurdles—
    "(b) it would be reasonable to expect a person so connected … not to disclose except for the proper performance of the functions attaching to that position; and
    (c) he knows"—
    that the information he holds—
    "is unpublished price sensitive information in relation to those securities".
    What is "unpublished price sensitive information"? We are told by the definitions in the interpretation clause, clause 69(2)(a), that "unpublished price sensitive information" is information
    "which—
  • (a) relates to specific matters relating or of concern (directly or indirectly) to that company, that is to say is not of a general nature relating or of concern to that company; and
  • (b) is not generally known to those persons who are accustomed or would be likely to deal in those securities."
  • The obstacles which the Government have erected continue clause after clause. Should it not be a necessary test for any draftsman in any provision that creates penal sanctions to seek to ask himself "Can a judge get across to a jury the nature of this crime?"

    I have tried to illustrate this point. Clearly, it is technical, but one accepts the possibilities contained in those clauses and the extra hurdles that have been set up by the new clause. One need not itemise them. This must be done in good faith, and the new clause goes on to reproduce what is contained in clause 65. In total, it appears that the possibility of a successful conviction in respect of these insider clauses is very remote indeed as a result of the obstacle course which the Government have provided for the prosecution.

    For that reason, one is bound to express some doubt as to whether the Government seriously want these provisions to be effective or whether they are saying that the whole purpose of this attempt to deal with insiders is essentially to be a deterrent and that they do not seriously expect a criminal prosecution to succeed for the reasons I have given. At least the new clause will be declaratory and will give an indication to people who are tempted that such action is viewed with sufficient official disfavour that it is brought within the ambit of criminal sanctions.

    By the new clause and the other insider clauses, the Government have imposed on the tempted insider not a straitjacket but a string vest, as one journalist has said. It is a string vest with so many holes that anyone so tempted is probably unlikely to be deterred.

    I should like to echo the grumble of the hon. Member for Swansea, East (Mr. Anderson) that a new clause of this complexity has been tabled so recently. It does not give hon. Members the opportunity to study the implications. It is really beyond the majority of us in the House, even those who take an active interest in company law, to be perfectly certain about the implications of this and similar clauses. However, my hon. Friend the Minister for Trade has taken a great deal of trouble and has said much that will repay close study. No doubt it will receive it. Even so, there are some general observations that one must make in considering a new clause of this kind.

    I am not qualified to make particular observations, but my general observation is that it seems that here we are acknowledging a failure of self-regulation in the management of companies. That is a point which is worthy of comment, although I do not want to dilate on it now. Something must be done because companies are failing to discipline themselves. The Department has decided on a change in company law. That is an important decision, because there are other ways in which problems such as the one dealt with in the new clause could be tackled. However, the Department has taken that decision. That is important, because company law is growing like Topsy. Virtually every day the Department seems to have a brainwave about ways in which the conduct of directors or managements of companies should be regulated more minutely than ever before.

    5 pm

    I am concerned about the weakness of the supervisory elements in the company law framework that exists in Britain. The supervisory elements in British company law are much weaker than those in America, Germany or other free enterprise societies with which we have to compete. I have constantly sought to draw attention to that deficiency. Should company law be allowed to become more minutely detailed and unenforceable, or, as I believe, should we look for some other way of cleaning up a fraudulent, inefficient or drowsy firm? I am not opposinfi the clause, which may be correct and necessary. I am simply making a warning sound to the Department. Deeper thought is needed as to the way in which we should tackle known problems.

    I cannot help but reflect that before Parliament decided to make auditing compulsory lion. Members must have been distressed by a series of unhappy stories from companies about fraud or incompetence. In due course, those problems were dealt with by introducing compulsory audits. Will the Minister indicate that this is a problem that must be dealt with by legislation? It cannot be dealt with in any other way.

    I shall deal briefly with all the points that have been raised.

    The hon. Member for Swansea, East (Mr. Anderson) opened the debate for the Opposition. Although we had the pleasure of listening to him from the Opposition Front Bench in Committee, this is the first time that I have heard him speak from the Front Bench in the House. I enjoy his remarks and I look forward to hearing many more from him from that Dispatch Box. However, I cannot accept what he said, although he said it charmingly.

    It is difficult for a party in Opposition to move at the speed at which Governments can move. Having sat on the Opposition Benches for some time, listening to the hon. Gentleman sounding masterly as he repeated those beautifully drawn-up briefs provided by civil servants, I am aware that one has to do a great deal of homework oneself and that that presents difficulties.

    This clause arose from representations by the Law Society. Unless the Law Society is a different body today from the body that it was a few months ago—I know that it is not—I am sure that whatever the Law Society said to the Government about its criticisms of the clause, it said equally to the Opposition.

    One of the problems that must have confronted the Law Society was the time scale. The problem confronting us was how we could equip ourselves to deal with these complicated matters. The Government should have realised on Wednesday night, when they were faced with this problem, that they should have deferred the Report stage for a week or so to enable all hon. Members to get to grips with these matters.

    The clause has been drafted to meet an objection that was raised by the Law Society as a result of its examination of the original Bill. However, that is an argument on which we shall never reach a satisfactory conclusion. As the hon. Member for Hackney, Central (Mr. Davis) knows, we delayed the Committee stage so that he could take advice. I accept the difficulties that he has mentioned, but I hope that he will not continue to refer to them, because that could delay matters.

    In order to put the record straight, may ir say that the Law Society mentioned to the Opposition the problem to which the Government have adverted. The difficulty arose over the way in which the Government dealt with it.

    It was because the Government recognised that problem that I devoted a good deal of time to it in my introduction to this new clause.

    The second part of the strictures of the hon. Member for Swansea. East was not valid. He talked about our approach to insider dealing. In this new clause we are excluding those people who deal in and make Eurobond markets from the provisions of the insider dealing clause. I listened with interest to his remarks about our approach to insider dealings, but we are making arrangements not to apply those provisions to this particular market.

    Nevertheless, a potential defendant would still have to bring himself within those exemptions.

    The difficulty is that the Eurobond market is an international market. It is quite capable of picking itself up and moving itself out of the country. Most of the market is made by telephone and Telex, and it is the dealers who make the principal part of the market. If we were to apply the insider dealing clauses, the market could easily leave Britain and we would lose. There is, therefore, some urgency in getting this legislation on to the statute book.

    The views of my hon. Friend the Member for Kensington (Sir B. Rhys Williams) are always studied with great interest, especially by Ministers. However, we have debated on a number of occasions whether we should make insider dealing a criminal offence. There is widespread agreement throughout the House that we should do so. I hope, therefore, that my hon. Friend will forgive me if I do not follow him into a discussion on whether we should approach the problem in that way. The decision has been taken, but we respect his view that there could have been another way of dealing with the matter.

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.