ISSUE OF BONDS

Dominion, Volume 26, Issue 28, 27 October 1932, Page 3

ISSUE OF BONDS

Land Companies’ Finance ECONOMIST’S OPINION Investigation Urged Expressing the opinion that the operations of companies issuing bonds for land utilisation by means of afforestation, flax, tobacco and tung oil constituted a social problem of sufficient importance to warrant a Royal Commission and possible amendments to company law, Professor H. H. Belshaw, of Auckland, delivered an address to the 'Wellington branch of the Economic Society of Australia and New Zealand on Tuesday. The paper was prepared by Dr. Belshaw and Mr. F. B. Stephens, of the Auckland University College. Three mam types of companies, the speaker said, appeared to have developed. They were: (1) Private companies with no public issue of shares; (2) public share or joint stock companies; (3) public or private companies issuing “bonds” to the public. The first type was of small relative and absolute Importance, and appeared to be confined to afforestation. Some afforestation companies were of class (2) and appeared to be the dominant type in flax and tobacco cultivation. In this class there were practically no tung oil companies.

Companies coming under class (3) were described -by the Official Year Book as “a private company registered with a comparatively small capital, but of which the investing public do not become shareholders. The company contracts with each investor that in consideration of his paying the prescribed amount of cash it will convey to him at the end of the term a certain area of land duly planted according to a prescribed agreement. The interests of the investing public are watched over by trustees appointed by investors, and the lands concerned are conveyed by way of mortgage to the trustees until the time for conveyance to the investor arrives.” The above description, Dr. Belshaw added, was broadly correct, but some companies, including one of the largest, were public companies in which bondholders, as well as the general public, were invited to take shares. The profits of the parent company were normally made from planting operations, although they might be made in other ways. The bond-holders did not have any .direct control over the parent company, but had some rights over the area to be planted. So far as the bonds were concerned, there was no obligation to account for the money received. In some cases, provision regarding transfer of title was ambiguous. In the case of most companies issuing bonds, trustees had been appointed to safeguard the interests of the bond-holder. By the nature of the case the nomination of the bondholders’ trustees was in the first instance in the hands of the parent company. 1 ■' ' ' ‘ Facte About Promotion. An investigation of the records at the office of the Registrar of Companies revealed a number of facts in regard to promotion which afforded some cause for concern. The most important of these were:— (1) The prominence of brokers and landowners as company promoters; and the prominence of the same individuals or groups as promoters, directors, solicitors, or accountants in a number of different concerns. (2) The common policy of unloading assets at a greatly enhanced price on to new companies promoted by the directors of the existing companies disposing of the assets, (3) An inflation of capital. (4.) The enormous profits which might be made out of promotion, and which, appeared to give a return out of all proportion to services rendered. Dr. Belshaw gave examples of inflation of nominal capital and of high brokerage charges. Speaking of bondholders, Dr. Beishaw said that there was a strong inference that, in the main, the holders were inexperienced “small” people. Sales had been made, to a large extent, by door-to-door canvass. The term “bond” conveyed to the public mind a sense of special security which was lacking in companies of the type under discussion; for it, at any time, the continuance of operations ceased to be profitable, the parent company might cease to make expenditure on maintenance, and the only redress normally open to the bondholder would be the resumption of the areas. While the use of the term “bond” was perfectly legitimate, it tended to .convey a sense of security that was not warranted. Nor was the appointment of trustees in any way an effective safeguard. Their powers were limited to the terms of the trust deed drawn up by the parent company, and were not interested iu the equity of its provisions. The manner of their appointment was frequently such that bondholders could have little assurance that they would act iu the interests of the shareholders. Commission Suggested. The speaker said that he wished to make it clear that the criticisms made did not apply to all companies of the types discussed, and that when the financial methods adopted were both sound and beyond reproach such projects for large-scale land utilisation might provide a reasonable though speculative avenue for investment. While the dangers arising in connection, with companies of the types discussed might be clear enough, it was extremely difficult to suggest effective remedies, more especially as changes in the law which appeared to safeguard the investor might, in fact, weaken his position if the company promoter was clever enough. In conclusion, Dr. Belshaw stated that the authors of the paper felt that the problem was one of sufficient social importance to warrant the setting up of a Royal Commission with wide powers, which should make a thorough investigation into promotion, finance, and control, with a view to making appropriate amendments in the law relating to companies. Such a commission might well include a lawyer, au accountant, an economist, and possibly a broker and a business man. The publicity that would result from such an inquiry might, of itself, have, a salutary effect, at any rate for a period.