After a lengthy consultation process last year,1 ASIC has released a further consultation paper and draft regulatory guide, seeking feedback on its revised proposal for increased disclosure to retail investors by infrastructure entities.
In Consultation Paper 154,2 ASIC has retained its proposed benchmark-based disclosure model for infrastructure entities, most notably the requirement for infrastructure entities to disclose against a prescribed set of benchmarks on an ‘if not, why not’ basis. This must be accompanied by certain additional specific disclosures, which are described in the new consultation paper as ‘disclosure principles’.
The main points of difference between last year’s Consultation Paper 134 and the new Consultation Paper 154 relate to the definition of ‘infrastructure entity’ and the scope and content of the proposed benchmarks and disclosure principles (which are less prescriptive and have been modified to address comments raised in the consultation process).
Who is now affected?
ASIC has retained its focus on both listed and unlisted vehicles which operate or invest in ‘infrastructure assets’. ‘Infrastructure assets’ are defined as ‘the physical plant, property or equipment of roads, railways, ports, airports and other transport facilities, telecommunications facilities, gas or electricity generation and transmission, water supply and sewerage, hospitals, education, public housing and recreational facilities’. This definition is broadly the same as that which was contained in Consultation Paper 134.3 However, ASIC is proposing to revise the definition of ‘infrastructure entity’ by adopting one of two options.
ASIC’s preferred option is to define ‘infrastructure entity’ as:
a listed or unlisted registered managed investment scheme, company or stapled structure investment that has been offered to retail investors on the basis that its primary strategy or investment mandate is to invest in any of:
- infrastructure assets
- the right to operate infrastructure assets, or
- other entities which, either directly or indirectly, primarily invest in infrastructure assets.
However, ASIC has also requested feedback on an alternative definition (which is more closely based on ASIC’s previous definition of ‘infrastructure entity’), which is as follows:
An infrastructure entity is a listed or unlisted registered managed investment scheme, company or stapled structure investment that has been offered to retail investors on the basis that at least 70% of the value of its non-cash assets may derive from:
- infrastructure assets or the right to operate infrastructure assets, and/or
- investments in equity accounted unlisted entities which invest either directly or indirectly in infrastructure assets.
How have the proposed disclosure requirements changed?
In response to submissions received in relation to Consultation Paper 134, ASIC has modified the scope and content of the proposed benchmarks and disclosure principles. There are now nine categories of proposed benchmarks (as opposed to seven), but the material which is required to be disclosed against those benchmarks is now more limited and less prescriptive than was originally proposed under Consultation Paper 134. The proposed revised benchmarks can be summarised as follows:
- Benchmark 1 (corporate structure and management) – addresses whether the infrastructure entity’s corporate governance policies and practices comply with ASX Listing Rules Guidance Note 9A Corporate Governance—ASX Corporate Governance Council—Revised Corporate Governance Principles and Recommendations (GN 9A). This benchmark applies irrespective of whether the entity is listed on the ASX or not.
- Benchmark 2 (remuneration of management) – addresses whether incentive-based remuneration paid to management is derived from the infrastructure entity’s performance.
- Benchmark 3 (classes of units and shares) – addresses whether all units or shares of the infrastructure entity are fully paid and have the same rights.
- Benchmark 4 (substantial related party transactions) – addresses whether the infrastructure entity has complied with ASX Listing Rule 10.1 for substantial related party transactions. This benchmark applies only to unlisted infrastructure entities (on the basis that listed entities are already bound by the Listing Rules).
- Benchmark 5 (cash flow forecast) – addresses whether the entity has prepared, and had approved by its directors, a 12-month cash flow forecast for the entity (reviewed in accordance with auditing standards) and an internal unaudited cash flow forecast for the remaining life of each significant asset.
- Benchmark 6 (base-case financial model) – addresses whether an agreed-upon procedures check has been performed on the infrastructure entity’s base-case financial model and whether any material issues identified have been rectified.
- Benchmark 7 (performance and forecast) – this benchmark applies to operating assets and addresses whether performance for the first two years of operation equals or exceeds the original disclosed forecasts.
- Benchmark 8 (distributions) – this benchmark applies only to infrastructure entities that are unit trusts and addresses whether distributions will be paid from scheme borrowings.
- Benchmark 9 (updating the unit price) – this benchmark applies only to unlisted infrastructure entities that are unit trusts and addresses whether the infrastructure entity has, after finalising a new valuation for an infrastructure asset, reviewed and updated the unit price before issuing or redeeming units.
Specific disclosure principles (which are also required to be disclosed against (albeit not in an ‘if not, why not’ basis)) are also proposed. They cover similar topics to the additional disclosure guidance which ASIC previously proposed, however in many instances the required content is more limited and more conceptual in nature.
When, where and how is the prescribed information required to be disclosed?
It is proposed that infrastructure entities disclose against the benchmarks and apply the disclosure principles in all offer documents dated on or after 1 January 2012. In instances where an offer document is dated before 1 January 2012, it is proposed that infrastructure entities must, by the first day of their next financial year that begins on or after 1 January 2012, update the offer document by providing a new or supplementary offer document that includes disclosure against the benchmarks and the disclosure principles.
ASIC indicates that any new or supplementary offer document should contain:
- a summary in table form, within the first 15 pages of the document, setting out the infrastructure entity’s disclosure against the benchmarks (that is, stating whether the benchmark is met and providing an explanation if it is not met), and
- disclosures against the disclosure principles, which should appear as soon as practicable after the benchmark summary table.
Further, ASIC proposes that any such disclosures should be updated in ongoing disclosures as material changes occur (and at least on an annual basis if no updates are required under ongoing disclosure obligations). ASIC acknowledges that where appropriate to do so, infrastructure entities may be able to make such updates to disclosure on their website.
What is the proposed timetable for submissions?
ASIC is seeking comments on its proposals by 6 May 2011, with a view to finalising and releasing a regulatory guide in the third quarter of 2011.