Telcos and other infrastructure companies could be forced to increase their level of disclosure to investors if ASIC has its way.
In a new discussion paper, Infrastructure entities: Improving disclosure for retail investors, the financial regulator canvasses the idea of mandating a benchmark-based disclosure model for infrastructure entities, against which they must report.
The benchmark would focus on corporate structure and management, funding, assumptions in models and sensitivity analysis of those assumptions, valuation, distribution, withdrawal and diversification, and would benefit retail investors via improved and more consistent disclosure, ASIC says.
“Infrastructure entities typically have complex characteristics and risks that retail investors need to understand fully in order to make informed investment decisions,” the paper reads. “Initiatives for improving disclosure may now be appropriate, given the need for new investment in infrastructure in Australia.”
According to ASIC the need for greater disclosure is being driven by a number of factors including a steady increase in privately funded investments in infrastructure assets over the last decade.
Some $770 billion of critical infrastructure investment, of which more than half will be private sector-drive, is anticipated in Australia over the next decade, the regulator says.
In addition, the global financial crisis has highlighted some key issues and risks associated with infrastructure entities such as the use of complex financial engineering to enhance short-term returns.
Management fee structures that result in inflated fees, excessive growth in capital requirements, inflated asset prices and a high volume of asset transactions between sponsor entities have also been flagged.
Further, arrangements that make it difficult to remove management, lead to a lack of independence of directors and management and to related party conflicts, and misunderstanding by investors of key assumptions in models and expert reports and the lack of independence of experts have also been identified as ongoing issues.
“We believe improving the quality of disclosure by infrastructure entities will enhance investor confidence,” the report reads. “Investors will have better and more consistent information to understand the characteristics of infrastructure entities and the risks associated with them, particularly as there is an increasing tendency for infrastructure to be privately funded and for infrastructure entities to be unlisted vehicles.”
Comments on the consultation paper can be submitted until 30 June, while an ASIC regulatory guide will be released in September.