[Recorded by Electronic Apparatus]
Tuesday, June 13, 1995
.1535 
[English]
The Chairman: I call to order.
Colleagues, I want to remind you that we have a vote at 5:15 p.m., as everyone knows. We have no scheduled meeting beyond that. At around 4:30 p.m. or 4:45 p.m., I'll draw your attention to the time and see where we are. We could be done or we could be still on clause 7.
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Clauses 7 to 11 inclusive agreed to on division
The Chairman: Maybe we won't be here late.
Clauses 12 and 13 agreed to
On clause 14 - Loans, investments and guarantees
Mr. Schmidt (Okanagan Centre): You sure wanted to go to report early, didn't you? This is where we're going to add our definition.
The Chairman: I guess we're prepared to receive the following amendment to clause 14: That clause 14 be amended by striking out line 8 at page 7 and substituting the following therefor -
Mr. Schmidt: Which document are you working from?
The Chairman: I'm working from something that is being passed out to you right now.
Was that passed out to everybody? Oh, I'm sorry. Excuse me.
This is something like the carry-over from this morning, which is clause 14. We would add ``are to fill out or complete services available from complementary''. Then we go back to what the government had proposed at clause 2, page 1, services available from commercial financial institutions. So it's what was clause 2. That's what I understand.
I need somebody to move that.
Mr. Dennis J. Mills (Parliamentary Secretary to the Minister of Industry): I so move.
The Chairman: It's now open for question or discussion.
Mr. Mills: It was agreed to this morning, so it should carry.
The Chairman: That's right, but I don't want to push.
Amendment agreed to on division
[Translation]
Mr. Rocheleau (Trois-Rivières): I would like a recorded vote, Mr. Chairman.
The Chairman: Just wait a minute.
[English]
They want a recorded vote on this. Okay. We had better have a discussion about it before we record this.
Mr. Discepola, is there something you weren't quite sure about?
Mr. Discepola (Vaudreuil): Yes. On ``are to fill out'', is there a legal definition of ``filling out'', or is that better stated by ``are to enhance'', for example, or ``are to complete services''? I don't understand why the words ``fill out'' are there.
The Chairman: It's a dictionary definition.
Mr. Discepola: Since I've been a member of Parliament, I've been filling out.
The Chairman: If you want to define ``sexual orientation'' this afternoon....
Mr. Discepola: What is the definition then?
The Chairman: To ``fill out'' means to complete, I would say.
Mr. Discepola: To fill out or complete. Isn't that redundant then?
The Chairman: To complete something might be to complete something that was half filled out.
Mr. McClelland (Edmonton Southwest): Does it make sense in French?
The Chairman: I don't know.
Mr. Bayne, did you want to comment on that?
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Mr. Norman Bayne (Senior Counsel, Industry Canada): Yes. Probably ``complete'' and ``fill out'' are synonymous. The term ``fill out'' or ``complete'' was the dictionary definition. That's the reason.
The Chairman: I think we now have enough votes, Mr. Discepola.
Mr. McClelland, are you ready for the vote?
Mr. McClelland: Yes.
The Chairman: We're going to have a recorded vote.
Clause 14 as amended agreed to [See Minutes of Proceedings]
On clause 15 - Definitions
Mr. Schmidt: Paragraph 15(1)(d) says:
- 15.(1) The Bank may
- (d) exchange, lease, sell, assign, convey, or otherwise dispose of the loan, investment,
guarantee, agreement, security or security interest.
The Chairman: Mr. Lane.
Mr. Don Lane (Senior Vice-President, Corporate Affairs, Federal Business Development Bank): This section is really dealing with the issue of securitization where the bank may, for whatever circumstances, sell off a bundle of loans to a private investor. It's another way of funding the portfolio.
Mr. Schmidt: What happens to a loan that you cannot collect?
Mr. Lane: I have to get the specific section on write-offs. We write them off. After taking security, we would realize on security, we would pay back what we can out of the loan, and we'd write it off. It's no express power to write off loans. This section wasn't intended to cover the write-off activity.
Mr. Schmidt: Why wouldn't it? I think it can.
Mr. Lane: I think there's a previous section that deals with the disposal of property. It's clause 14, paragraph 14.(5)(b) in the previous section. This deals with the process of writing off a loan, to ``dispose or otherwise deal with the property.'' That's when we would be selling the security backing up a loan.
Mr. Schmidt: Yes, exactly. That deals specifically with the security behind a loan.
Mr. Lane: That's right.
Mr. Schmidt: That's in clause 14, paragraph 14.(5)(b).
I think clause 15, paragraph 15.(1)(d) does allow you to write off loans - ``convey or otherwise dispose of the loan''. You could sell it to someone -
Mr. Lane: Yes.
Mr. Schmidt: - or otherwise dispose. How else would you dispose, if not convey it to someone else or write it off?
Mr. Lane: We can sell a loan and with the loan will go the security interest behind that.
Mr. Schmidt: Yes, that's to convey.
Mr. Lane: But there are certain loans that are just not saleable and we have to write them off.
Mr. Schmidt: So, it is under this section. I just wanted to make sure that it is under this section.
Clause 15 agreed to on division
On clause 16 - Acquisition of loans
Mr. Schmidt: Under clause 15, paragraph 15.(1)(d), the bank can convey loans. Under clause 16 the bank can purchase loans and does this from other financial institutions. Can it buy portfolios of loans from businesses?
Mr. Lane: Right now we can't. This section is intended to allow the bank to purchase loans. We have been approached in the past by different agencies to buy their loans, and we couldn't buy a block of loans or we'd have to refinance each individual loan. One was a provincial lending agency that wanted to get rid of its loans portfolio.
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Mr. Schmidt: If I understand correctly, this means if a business had four or five loans elsewhere you'd want to consolidate them. Is that what you're doing?
Mr. Lane: We would do that if the owner wanted to dispose of those loans and wanted us to buy them. Again, it has principally been with other government agencies and one provincial lending agency. In the other case it was a department of government that wanted to rationalize its loan administration. It had some business loans and approached us to ask if we could buy those loans. Under the existing act we couldn't. We would have had to refinance each individual loan and do all the paperwork.
Mr. Schmidt: But this raises the other question. Earlier this morning we defined ``are to fill out or complete services available from commercial institutions.'' This is exactly the kind of thing other institutions do. They do buy loans from other businesses and other financial institutions. So in what way is this complementary? It's not. It's direction competition.
Mr. Lane: The bill, as presently drafted, would have to have a seller and a buyer.
Mr. Schmidt: Not in this kind of thing. Why should we be in the business of buying somebody else's loans? We have enough of our own.
Mr. Discepola: Do you want no competition?
Mr. McClelland: Just to clarify this, are we talking about the bank's ability to buy commercial loans or to assist a government department? For instance, if the Department of External Affairs lent some agency money for some purpose and wanted its money back but found it embarrassing to be in that business, it would want you to be embarrassed by being in that business.
Mr. Lane: There has to be a buyer and a seller; let's put it that way. We're certainly not going to buy loans at a loss. I think there has to be some competition.
Mr. Mills: But this is not to buy other crown loans.
Mr. Lane: It doesn't exclude them.
Mr. Schmidt: I thought that's what you said.
Mr. Lane: If a department wants to get out of the lending business and decides to rationalize with the FBDB, this would allow the bank to take over those loans, but not necessarily at face value. It would depend upon the quality of the portfolio.
Mr. Schmidt: This is a hypothetical question, but it would seem to me that this type of clause would allow the assumption of a shift away by EDC, for instance, to get into the export lending business and assume that under this bank.
Mr. Lane: No. We won't sell to EDC.
Mr. Schmidt: No. It would sell to you. You would buy its loans.
Mr. Lane: I don't see the advantage -
Mr. Schmidt: One of the purposes of the Federal Business Development Bank is to develop the export market and develop the industry and the exports. That's one of the things the minister stated more than once. That was the reason for changing the Federal Business Development Bank under the new act.
There are a whole bunch of them. There's the Farm Credit Corporation, the Canada Mortgage and Housing Corporation, the Canadian Commercial Corporation, and the Export Development Corporation. All of those have a lending component attached to them. There ought to be some kind of concerted effort on the part of government to put this together so there isn't competition, because right now there is competition between the departments, if nothing else. This would allow you to do that. Is that correct?
Mr. Lane: That is correct if those departments or agencies wanted to sell their loans to us and we wanted to buy them.
Mr. Schmidt: So the answer is yes. That's what I thought.
Mr. Mills: Why would we want to buy those loans?
Mr. Lane: I think this would all be part of government policy. We wouldn't go and buy -
A voice: For rationalization purposes, if you wanted to rationalize some programs.
Mr. Schmidt: I have a whole host of other kinds of questions, too. A question was asked at another meeting as to whether the bank could buy trust companies or instruments of that kind. At that point there wasn't a clear answer. We have an answer somewhere in all this paper that says no. It won't buy them.
Mr. Lane: No, we can't.
Mr. Mills: That's a clear answer.
.1555
Mr. Schmidt: Yes, exactly, and I just want to make sure that we don't come back now with a similar situation. I want it clear, because the legislation must be so clear that it doesn't lend itself to this equivocal kind of interpretation.
Mr. Lane: Again, the purpose was more in context of other government agencies wanting to rationalize their financing, and it would all be a matter of government policy for that to happen.
Mr. Schmidt: I agree, Mr. Chairman. I really appreciate the candour of the answers we're getting. I think there's nothing wrong with that sort of thing. It just raises some really interesting questions when you compare the kind of power in this clause with the powers of the minister under the new industry act, which gives to the minister the right to lend and give to any company, to rationalize, to terminate a company's business. All of that can be done under this particular clause. I want to get on record that this is the kind of power this act gives to the minister, and through the minister to the president of the bank.
The Chairman: Right.
Mr. Mills: Well, I would like to be on the record that for me the thought that this bill was being used for anything other than the intention that the minister has expressed publicly, and that is that we're going to be a complementary lending service to accelerate and support the small business gap that exists in the market in terms of capital, anything that goes against that is not, in my judgment, in the spirit of the bill. We've never had any discussion in committee or I've never been a part of any discussion that this was meant to be a consolation ground or a dumping ground for existing instruments of government that already have a stable of loans.
The Chairman: Okay, the question has been called. Are you ready for the question?
Clause 16 agreed to on division
Clause 17 agreed to on division
On clause 18 - Borrowing powers
The Chairman: Colleagues, I'm going to ask whether I can stand aside those issues on which we want to talk about some things. I'd like to get through....
Mr. McClelland: We're going fine.
The Chairman: Okay, but there's an amendment there, and there are a few more amendments to come.
Mr. Mills: They're easy amendments. I move that subclause 18(4) of Bill C-91 be amended by striking out line 21 on page 9 and substituting the following:
- tion for the purpose of reducing risk in the financial management of the
Mr. Mills: Yes.
The Chairman: So that's something that you previously had....
Mr. Mills: Subclause 18(4).
The Chairman: So you're adding ``for the purpose''.
Mr. Mills: It was on the advice of Mr. Schmidt that we've added this amendment.
The Chairman: So would you refer to it, Mr. Mills, as the Schmidt amendment? Can we get this going?
Mr. Mills: Yes, I want to make sure that we get it in the right place:
- The Bank may enter into any transaction for the purpose of reducing risk
Mr. Schmidt: Anything to reduce risk.
.1600
Amendment agreed to
Clause 18 as amended agreed to on division
Mr. Schmidt: It's carried on division because we might want to change the amendment.
A voice: We might want to put in an amendment later.
The Chairman: I can't imagine that.
I've been advised by the clerk that you can still put it in as another amendment, regardless of how we report it, because we're at first reading.
Is that why?
A voice: Because it is perfectly competent to change amendments that were made in committee at report stage.
The Chairman: Isn't that interesting. Would you like to go on record...?
The Clerk of the Committee (Mr. Bellemare): Mr. Chairman, there may be some confusion with the rule that says that the Speaker will normally not select a motion that was presented and ruled out of order or presented and defeated in committee. That is true, but a clause having been amended in committee, or even particular lines of it having been amended, doesn't create any obstacle at all to the amendment of that clause or those lines at the report stage.
Mr. Schmidt: That specific amendment can't come again.
The Clerk (Mr. Bellemare): If it has been defeated, then no.
The Chairman: Only if it has been defeated. In this case it would be approved, so you should really be voting for it unanimously.
Mr. Schmidt: Boy, that was a good move.
Mr. McClelland: I don't want to be embarrassed by the chairman, who would of course remember our voting in favour of something coming as an amendment and then say, ``But you voted for it.''
The Chairman: I'd never do that to you, Ian.
Clause 19 agreed to on division
On clause 20 - Agreements
[Translation]
Mr. Rocheleau: A recorded vote.
[English]
The Chairman: You want a recorded vote.
[Translation]
Mr. Rocheleau: Mr. Chairman, this is one of the most important points of the bill.
[English]
The Chairman: Okay, no problem. If you want it recorded, then we'll record it.
[Translation]
Mr. Rocheleau: Yes.
[English]
The Chairman: Mr. Rocheleau, do you want to advise me of which others you want? I can adopt another rule that will expedite it. Do you want clauses 20, 21, and 22 as recorded votes?
[Translation]
Mr. Rocheleau: Yes, I'd like a recorded vote for clauses 20, 21 and 22.
[English]
The Chairman: Clerk, can you help me here? I can ask that we just apply the vote from the first vote all the way through for those three votes. Can I not do that? I'm going to do it anyway.
He's nodding, so I can do it.
Clause 20 agreed to: yeas 5; nays 3
[Translation]
Mr. Rocheleau: With the unanimous consent of our Committee members, we could apply this vote to clauses 21 and 22.
[English]
The Chairman: I know, but I want to see if clauses 21 and 22 are going to carry. If they do, then we'll apply the vote as a recorded vote.
On clause 21 - Entrepreneurship programs
Mr. Philippe Ducharme (Legislative Counsel, Legislative Counsel Office): On clause 21, the French for ``entrepreneurship'' was mentioned. The Office de la langue française recommends both esprit d'entreprise and entreprenariat. So it's a decision of the committee.
The Chairman: Has everybody understood what Mr. Ducharme has said on the French-English business on entreprise? What is the preference?
Then you, Mr. Bayne, want to ask -
Mr. Bayne: On that issue, I would just let the committee members know that the term ``entrepreneurship'' has been used in legislation in the past. The translation in the past was esprit d'entreprise, as well.
The Chairman: What's the preference?
Mr. Discepola: Leave it as is.
[Translation]
The Chairman: Esprit d'entreprise.
Mr. Discepola: Yes.
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[English]
Mr. Bélanger (Ottawa - Vanier): Leave it as is.
The Chairman: Is that all right with you? What about people in Kelowna? What do you think they would prefer?
Mr. Schmidt: They really care a lot.
Clauses 21 and 22 agreed to on division [See Minutes of Proceedings]
The Chairman: By unanimous consent, I'd like to have those recorded exactly the way we recorded clause 20. Is that agreed?
Some hon. members: Agreed.
The Chairman: Okay. So clauses 21 and 22 should be considered recorded votes, exactly as clause 20.
Here goes the neighbourhood, clause 23.
On clause 23 - Authorized capital
Mr. Schmidt: We have something here about preferred shares.
The Chairman: Preferred shares, capital of the bank. I presumed when Mr. Mills had his answer he would come forward with it.
Mr. Mills: I'm just looking for the paper here.
The Chairman: You've been waiting for us to ask, have you, Mr. Mills?
Mr. Mills: Somebody's taken it.
I guess there was a view that we wouldn't have reached this point today.
The Chairman: You still don't have an answer?
Mr. Mills: No, we do not have an answer yet. This is an issue of real substance and the government is still weighing this issue, so I would ask the indulgence of the committee to give us a little more time. Maybe we could put this clause down and come back to it.
Clause 23 allowed to stand
The Chairman: So clause 23 is standing. We may be all done except for this.
Mr. Mills: The government feels the pressure of this committee. It knows that -
The Chairman: Come on, Mills, it doesn't work.
Mr. McClelland: It might have worked last year, but not this year.
On clause 24 - Rights of common shares
[Translation]
Mr. Rocheleau: I'd like to ask Mr. Mills a question about 22(c).
In your opinion, what is the practical implication of introducing the concept of subsidiaries, something that was quite absent from the previous legislation? What is the government's reason for proposing this concept?
Mr. Mills: It's a good question.
Mr. Rocheleau: Give us your best answer.
[English]
Mr. Mills: I don't have an answer for this. I will defer to the officials.
[Translation]
Mr. Leroux (Richmond - Wolfe): Since the government has relieved the pressure...
[English]
Mr. Mills: Mr. Rocheleau, maybe you have some ideas we haven't thought of yet, and if you'd like to expand on them, as to why this clause is here, it would be helpful to the rest of us on the committee. What is your concern?
[Translation]
Mr. Rocheleau: Without prejudging your answer, this gives us an indication of the scope of the bill and the extent to which the federal government could become involved in regional development if it were to establish subsidiaries throughout Canada without consulting the provinces, in a centralized and united Canada.
My comments may perhaps give you food for thought, Mr. Mills.
[English]
Mr. Mills: This would not be the pattern of this current government, because we have certainly not been centralizing, we have been decentralizing.
[Translation]
Mr. Leroux: It's a good answer.
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[English]
Mr. Mills: Excuse me, Mr. Chairman, I want to answer the technical side of this question for Mr. Rocheleau.
This is merely a flexibility clause that is not uncommon in bills like this, that if the bank is in a position where it needs for efficiency sake to -
[Translation]
Mr. Rocheleau: I would even say ``flexibility''.
[English]
Mr. Iftody (Provencher): This is called flexible federalism.
[Translation]
Mr. Bélanger: ``Subsidiary'' is defined in clause 2:
- Subsidiary has the same meaning as in subsection 83(6) of the Financial Administration Act. I
don't have it in front of me.
Mr. Bélanger: It means that the Bank will be able to do what the government can do.
[English]
Mr. Schmidt: That raises a lot of things.
The Chairman: Hold on. We've already voted on this. The question was a point of information. I allowed the question; I allowed the answer. Clause 24 is what we are dealing with, colleagues.
Mr. McClelland: Mr. Chairman, may I suggest that we come back to all of the aspects of the capitalization in a block and go on?
The Chairman: Is clause 24 part of that?
Mr. McClelland: Yes, it's all the share capital.
The Chairman: No, it talks about the rights of preferred shares though, too.
Let's stand aside clause 24 as well. Is that agreed? We're going to stand clause 24, not carry it.
[Translation]
Mr. Rocheleau: On division.
[English]
The Chairman: We'll come back to it.
Clause 24 allowed to stand
[Translation]
Mr. Rocheleau: Like 23. That's nice.
[English]
The Chairman: So clauses 23 and 24 stood aside, Mr. Clerk.
Clauses 25 and 26 agreed to on division
The Chairman: Clause 27 is on by-laws relating to shares.
Mr. Schmidt: Clause 27 has to be stood aside as well.
The Chairman: I agree that clause 27 should stand aside. Do you agree, Mr. Rocheleau?
Clause 27 allowed to stand
On clause 28 - Hybrid capital instruments
Mr. McClelland: I have a question. This section has to do with the hybrid capital shares. This is a crown corporation with 100% of the common shares to be held by the Government of Canada.
In previous testimony, the minister and others have said that the hybrid shares will be treated as an instrument that is arm's length from the government.
If for whatever reason the hybrid shares are not dividends or not paid on these hybrid shares, who will the note holders come to for payment?
Mr. Lane: There will be assets in the bank backing up some of these hybrid instruments. I don't think the market will buy totally unsecured hybrid instruments.
Mr. McClelland: Are they secured by the Crown or not?
Mr. Lane: It wouldn't have the guarantee of the Crown, but you have to recall that the bank will still have assets that it can use as security behind -
Mr. McClelland: If 100% of the common shares of the bank are held by the Crown -
Mr. Lane: That's right.
Mr. McClelland: - and these hybrid capital instruments are issued by the Crown, does that mean then that the Government of Canada, the people of Canada, will not make good on debt if there isn't enough capital left in the bank to realize...?
The bottom line is, if there's nothing left in the coffers of the bank, and I have a hybrid share and the bank can't pay me, who pays? Are the people of Canada on the hook for each share?
Mr. Lane: Legally they won't be on the hook; there may be some moral responsibility. However, I don't think we'll get there because the holders of the hybrid instruments will have priority over the Government of Canada.
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Look at the valuation of the bank. You have to go back to the balance sheet. You will see there is value in the bank through its assets. This is what the buyers of those hybrid instruments will be looking for.
So in terms of the solution, the holders of the common shares would have last call on whatever -
Mr. McClelland: Just to be clear then, the value of the hybrid capital may not exceed the break-up value of the assets of the bank.
Mr. Lane: I think this is what the buyers will be looking for.
Mr. McClelland: No, I'm not asking what the buyers might look for. The bottom line is that this is a crown corporation. The people who are going to be buying these shares are going to expect that the Crown will make good on them regardless of what the bank says. That's the point I'm making.
Mr. Lane: There will be no government guarantee on the hybrids.
Mr. Mills: That's what I said.
Mr. Lane: There may be moral responsibilities, but there's nothing legal. At least, that's what it says in the act. We cannot issue these hybrids with a government guarantee. It's clear.
Mr. McClelland: So let's say we sell a hybrid share to a widowed pensioner. She has all of her money in these hybrid shares. The bank has made some real dumb decisions, and has gone broke. The little widow comes over here and says to the Prime Minister that she has these shares in his bank. She asks whether he'll make good on them: yes or no?
Mr. Lane: Legally, he doesn't have to. There will be a political call at that time.
Mr. McClelland: Okay.
Mr. Lane: But again, the key is that, at the time the shares are being issued and sold in the market, the buyers will have to look at the aspect of what is backing up these shares. Yes, we can have disasters in which the full $3 billion is reduced to zero in value, but we're looking at real national disasters for that to happen.
Mr. McClelland: I don't want to be the harbinger of doom, but I guess what I'm trying to do is get someone from the bank or from the government to state unequivocally that because this is a 100% crown corporation with all of the common shares owned by the Crown, no matter how you package it, no matter how you slice it, the hybrid shares are guaranteed by the Government of Canada.
Mr. Lane: I don't think that was the intention; otherwise, they wouldn't have put that clause in specifically. If you were to buy shares, preferred shares or subordinate debentures, in the ABC Company, buyers would have to look at the company to see what value is there if -
Mr. McClelland: Will the shares certificates specifically state that these shares are not backed by the Government of Canada?
Mr. Lane: These hybrid instruments? Yes. It will have to. This is what is in the act.
Mr. McClelland: So on the share certificate itself it will clearly state that they're not backed by the people of Canada.
Mr. Lane: We would have to do that according to this act.
Mr. McClelland: Thank you. Then that's as far as I'm going to go here. Thank you, Mr. Chairman.
[Translation]
Mr. Rocheleau: We are going to vote against this clause and ask for a recorded vote, because it seems to us that this is one of the most important clauses of the bill. It changes the nature, the vocation and the mission of the new bank without stating it, contrary to what was done for the former Federal Business Development Bank.
The mission of the Federal Business Development Bank was to promote economic development through SMEs. From now on, we will have a commercial bank, because nothing in the act says that payment relating to hybrid instruments will not be based on the new bank's profits.
We consider this to be a fundamental clause which lacks transparency. That goes back to what I said this morning: It is not clear. We anticipate certain effects that are not clearly mentioned in the bill. The Bank's mission will change. That will be the effect of the bill.
We would like a recorded vote.
[English]
Mr. Mills: I think we should let Mr. Lane clarify this, because these hybrid shares are only going to get what the market will bear.
[Translation]
Mr. Lane: We will have to pay the hybrid instruments. For example, over the last six years, we have borrowed all of our funds to finance SMEs in Canada on the capital market.
What will change in the future, is that instead of borrowing the entire debt, we're going to mix the debt with the hybrid instruments in a proportion of 10 to 1 or 12 to 1, according to the criteria established in the act and the circumstances.
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The cost for the bank will be very marginal, because we're going to replace the debt that we have today with the hybrid instruments. We may pay roughly 0.2% or, at most, 0.5% out of 8% or 10% of the total funding. So it will be a slight addition. Yes, it is going to cost more, but overall, the impact on the portfolio will be very minimal.
Mr. Rocheleau: Given the circumstances, we believe that the payment of hybrid instruments will be based on profits and that will change the bank's vocation.
Mr. Lane: It will not be based on profits.
Mr. Rocheleau: We'll see!
[English]
Mr. Bélanger: If the bank's capital goes from $300 million to $1.5 billion, once that limit is reached there will be an extra $1.2 billion of federal money that can and will be used as a guarantee if it is a part of the bank's capital. Is that correct?
Mr. Lane: It depends on the capital. If it went from $300 million to $1.5 billion....
Mr. Bélanger: No.
Mr. Lane: You're asking whether or not we'll support that?
Mr. Bélanger: No, what will support that is an issuance of common shares to the federal treasury.
Mr. Lane: Yes.
Mr. Bélanger: That then becomes part of the bank's capital, so $1.2 billion is the limit of the additional risk to which the Crown would expose itself through this bill.
Mr. Lane: Over a number of years.
Mr. Bélanger: Over a number of years.
I'm sorry if I missed this, but how do you reconcile that with clause 19?
Mr. Lane: Plus the debt of the corporation. It is contingent liability.
Mr. Bélanger: Clause 19 is just -
Mr. Lane: Again, clause 19 is there principally for flexibility. If, for whatever reason, the government decides it doesn't want the bank to go to capital markets and borrow money for the next x days or whatever - it may prefer that the bank borrows money from the Consolidated Revenue Fund - it's for temporary-type measures.
Mr. Bélanger: I don't think I want to explore that one much further.
My final question is about these hybrids. My colleague refers to them as hybrid shares. To my mind, they are hybrid instruments. They're not to be shares, at least certainly not common shares. They'll be bonds, debentures with or without coupons, or things of that nature.
Mr. Lane: That's right.
Mr. Bélanger: Okay. Thank you.
Mr. Schmidt: The interesting part here is that these hybrid instruments become part of the equity of the bank, which is where the difficulty comes in. The capitalization of the bank, with the exception of the hybrid instruments, is owned completely by the Government of Canada. The only exception to that is the hybrid financial instrument. There is nothing in the act that precludes the hybrid financial instruments from being owned by the government as well.
Mr. Lane: That's right.
Mr. Schmidt: So the government could own all different kinds of capital instruments, but it can also go to non-government functions here.
Mr. Lane: That's right.
Mr. Schmidt: If it is an equity position, is this then a patient financial instrument? In other words, it stays there for whatever length of time. The only person who can liquidate a hybrid financial instrument is the issuer of that instrument. The holder of such an instrument doesn't have any claim on the money that has been put into the company. That's one way of defining it. That's the definition we got from the president of the bank when he was here last time. I'm not sure whether it's the definition that's actually be going to be one used because the term ``hybrid financial instrument'' is not defined anywhere in the act.
Mr. Lane: No, this is a market term. As Mr. Bolan mentioned last time, it has even found its way into the guidelines from OSFI.
As you know, the market is continually coming up with new terms. Five years from now we may be speaking about ``hybrid spelled backwards'', or something like that. But we are taking a lead from what OSFI's guidelines state. The typical hybrid instrument being used today by a number of financial institutions is something called perpetual debt.
So you'd issue -
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Mr. McClelland: You must know my wife and me.
Mr. Schmidt: That sounds like the federal government.
The Chairman: It sounds like MPs.
Mr. Lane: You go to the demand date and there's a coupon attached to it.
[Translation]
Mr. Rocheleau: Mr. Lane, you were telling me that the payment of hybrid instruments would not be based on profits. If this is the case, why not provide for the payment of those hybrid instruments in the act? Why do you not specify it?
Mr. Lane: Once again, it is to give more flexibility. Today, we are not thinking in terms of a return based on profits but who knows what will happen tomorrow? If the bank is profitable and if somebody wants to share in the profits, it will be up to the government of the day to decide whether it is possible. Everything must be approved by the governor in council on the recommendation of the Minister of Finance... Therefore, it is only to give more flexibility.
Mr. Rocheleau: Therefore, we cannot say that it won't be based upon profits. It opens the door. It is a confirmation of our thesis. It opens the door to payment eventually based on profits.
Mr. Leroux: It is a possibility. The mechanism is there so that it can be used when needed.
Mr. Lane: The objective of the bank is not to maximize profits as private corporations do. It is to support entrepreneurship in Canada. It will be therefore difficult to base returns on profits. Who will buy an instrument that is based on the profits of a Crown corporation? People would rather go for rated coupons.
Mr. Rocheleau: It's a change of mission, Mr. Chairman!
[English]
The Chairman: But isn't this a bit of reaction to the preferred share issue again? Being unable to sell shares, you've got to look for another mechanism.
Mr. Lane: To go to the market, yes.
The Chairman: So really, this is sort of like water finding its own level. You couldn't do something under the preferred share thing so, poof, you decide to try hybrid. Is that true?
Mr. Lane: That would be the only other vehicle we would have to source capital from other than the government. Otherwise, the government will be on the hook to support the bank for the duration of this act.
The Chairman: I take it that's a yes?
Mr. Lane: Yes.
Mr. Schmidt: Mr. Chairman, it really does beg the question because this is a charge on the banks doing business and it will have to be cost recovered. Therefore, whether we call it profit or not profit, the bank will still have to go into the marketplace to compete for the funds that are out there. Then the investors who are going to be buying these kinds of instruments are going to be looking at the return for their dollars in there. So there will probably be a fluctuating rate, and it will have to be added to the costs that you incur with the people with whom you do business.
Mr. Lane: As I mentioned to Mr. Rocheleau earlier, it will cost a little more than what we're paying for debt today. It will be substituting for borrowings.
Mr. Bélanger: Some of these hybrid instruments may be ones that have been referred to, I believe, by the minister and the president of the bank. I don't know the term used, but it is a loan made where the interest and capital is only payable three years down the road.
In the market, that would be seen as rather a novelty and a hybrid instrument.
I see the hybrid as a flexibility of developing instruments to match the needs of small businesses, not as something that a lot of banks would get into hock about. I like the notion of the bank - the small business bank, or whatever it's going to be called - being able to develop and test new instruments specifically for the needs of the small business sector. I think that's a great flexibility. And, yes, giving the bank that ability is a change for the better. That's essentially what I think is meant by hybrid instruments - to be able to experiment.
Now hopefully the managers picked by the Crown to run this bank will do so cautiously and prudently, but still with a bit of imagination. You've got to give the flexibility, and that's what this gives.
.1630
The Chairman: Okay, colleagues, I am in your hands. Shall clause 28 carry?
[Translation]
Mr. Leroux: A recorded vote, Mr. Chairman.
[English]
The Chairman: Okay, recorded vote.
Clause 28 agreed to: yeas 5; nays 4
Clause 29 agreed to: yeas 5; nays 4
On clause 30 - Limit on borrowings and guarantees
The Chairman: Where did you get this new guy over here? Is he your new strategist? Is this Mario Dumont's strategist? There used to be only two, when there was Parizeau and Mitterand, and now you've got Dumont, Mitterand, and Dumont.
[Translation]
Mr. Leroux: We make our own decisions. They do not come from on high.
[English]
The Chairman: Order, please.
Mr. McClelland.
Mr. McClelland: I beg the indulgence of the committee. We'd like to amend subclause 30(2), ``The Governor in Council may, by order, increase the factor of twelve to any factor that does not exceed fifteen'', to ``The Governor in Council may not increase'' or just to delete that clause.
The Chairman: Do you want to delete the clause totally or to reduce the factor?
Mr. McClelland: No, just to delete it.
The Chairman: You want to delete it totally.
Mr. McClelland: Yes.
Ms Bethel (Edmonton East): What's your rationale? I want to understand your rationale.
Mr. McClelland: It gives the cabinet the ability to change the capitalization from $15 billion to $20 billion or whatever overnight, just by saying it seemed like a good idea at the time.
Mr. Schmidt: I have another rationale for part of this, Mr. Chairman, if I may. This increase the Privy Council would have increases the lending power of the bank to more than the total lending power of the current Federal Business Development Bank. I don't think the Governor in Council should have that kind of power.
The Chairman: I'm inclined to agree with you.
Could I hear from officials?
Mr. Mills: I've discussed this with the officials, and they feel this is a point of view of the Reform Party we can live with.
The Chairman: All right. So clause 30 would be amended by Mr. Schmidt's deleting subclause 30(2)? That would be the amendment.
There are a mover and a seconder for that. Are you ready for the question on the amendment? Shall clause 30 as amended carry?
Mr. McClelland: Don't we have to vote on the amendment?
The Chairman: I said as amended.
Mr. McClelland: But we haven't voted on the amendment.
The Chairman: Oh, yes. Should the amendment to clause 30 carry? We're dealing with the amendment and the amendment is to remove subclause (2) from clause 30.
Amendment agreed to: yeas 6; nays 3
.1635
Clause 30 as amended agreed to
On clause 31 - Definitions
The Chairman: Mr. Mills, is there any word on the preference shares?
Mr. Mills: It's coming through. We should have it in about five minutes.
The Chairman: Is it coming by bird or by dog?
Mr. Mills: Part of the answer is here.
Mr. McClelland: Provided this can be further brought to bear on conflict of interest - I brought this up earlier - we are going to be presenting an amendment at report stage.
The Chairman: Do you want to fly it now and see if it might have some...? You don't have to put it on the table.
Mr. McClelland: The report that came back from the minister said that, yes, conflict of interest is a concern but, no, it doesn't have to go beyond disclosure.
My position is that the conflict of interest should go further than disclosure. The amendment should forbid the bank from doing business with anyone who is not at arm's length from the organization.
The Chairman: So you would change, as I understand your amendment, the definition of ``interested person''?
Mr. McClelland: It's so that ``interested persons'' may not do business with the bank. There are all kinds of other places with which ``interested persons'' could do business. They don't have to do it with the bank. It just doesn't seem right that ``interested persons'' should be able to have a commercial relationship with the bank. For instance, should any of us be able to enter into a contract with the bank?
Mr. Iftody: Are you saying, Ian, that an ``interested person'' shouldn't have any kind of a business account at all with the bank?
Mr. McClelland: That's exactly what I'm saying. If you worked for the FBDB, you and your wife should not have -
Mr. Iftody: Or your sister or your brother?
Mr. McClelland: Yes.
The Chairman: You can't add a sister or brother.
Mr. McClelland: Whatever the definition is of ``interested person'', I am saying that disclosure is not adequate; there should not be a commercial relationship.
Mr. Iftody: Ian, what if you took that to its conclusion? You're saying that somebody's brother or sister from the Royal Bank should not do business with that bank because in a loan instance there could be a conflict of interest. I think it's too sweeping, Ian. I see where you're going with it in terms of disclosure, but I think you're asking for too much. It's too sweeping.
Mr. McClelland: Okay, that's fine.
Ms Bethel: I was just going to say that it is much too Draconian. Certainly disclosure is good enough. It allows people to see if they believe there is to be a conflict or if it's all in order. I just think it's a terrible disadvantage to those who can and should perhaps be able to use the services of the bank, such as a sister or a brother. Disclosure should be good enough.
.1640
Mr. Bélanger: Mr. Chairman, I'd be interested in pursuing that line.
The current way an interested person is defined as the spouse, child, brother, sister, or parent of a director - if you were prepared to consider curtailing that to the spouse of a director, I might be more inclined to agree. The child of a director is just a little too Draconian, because child and parent might not have any dealings whatsoever. They may not even live in the same part of the country. Because a child's parent happens to be a director of the bank, he or she would be prohibited from doing any business. That's a little too Draconian.
Mr. McClelland: Well, it would be Draconian if there were no problem. But if there was a potential problem or the appearance of a conflict, it wouldn't be too Draconian.
If it is the will of the committee - we shouldn't get hung up on this, because there will be an opportunity. As I said, we're going to be putting forward an amendment on this. So we shouldn't get hung up and waste a lot of time on it.
The Chairman: But it's of a director. I think that's something important to recognize. It's of the directors. A maximum of 15 families potentially are affected, as I understand it.
Ms Bethel: What's usual for financial institutions?
Mr. Schmidt: Like this.
Ms Bethel: Is this the normal practice? If it's the normal practice, then -
Mr. Lane: This is normal practice.
The Chairman: Being what?
Mr. Lane: If there is an application from a director, or most likely a relative of a director, that application is not dealt with at the local branch. It has to be dealt with at the board. The board, in dealing with that, would have the director out of the room. You can be applying for a $25,000 loan and it has to go through the board of directors.
The Chairman: There seems to be a bit of a misunderstanding that a conflict of interest has been created here. I don't know if you're even talking about the right clause. He's at clause 31, on definitions.
Mr. McClelland: Maybe it's clause 32 we're talking about.
The Chairman: Yes, that's what I wondered.
Mr. Iftody.
Mr. Iftody: I was just trying to get a clarification from Ian, again, on what we were talking about.
Ian, are you supposing the interested person is just basically those fifteen directors, or are you saying that anyone, for example a manager of the bank in Vancouver - - his brother or sister would not be able to apply to the bank for a loan? Do you want to bring it that far?
Mr. McClelland: No. But in looking at this, the way it's set out, it seems to me a director of the bank, however many directors there might be, should certainly, as a condition of becoming a director, understand he or she and his or her relatives are interested people. Going out of the room doesn't mean anything.
The Chairman: They are. Go to clause 32.
Mr. McClelland: But my point is that we should go beyond disclosure.
The Chairman: To outright prohibition?
Mr. McClelland: Yes.
The Chairman: All right. He's putting us on notice that it will probably come after report stage anyway.
[Translation]
Mr. Rocheleau: I would have an inquiry for the government. It is already provided that the next of kin of directors will be considered as interested persons. What about the next of kin of the spouse of the director?
Mr. Lane: No, it is only the spouse as it is written.
Mr. Rocheleau: Have you thought of the opportunity to consider as interested persons the next of kin of the spouse of the director?
Mr. Lane: No, because we must draw the line somewhere. The line, is the spouse. It is enough.
Mr. Rocheleau: Is it enough?
Mr. Lane: Yes, it is enough.
.1645
[English]
Clause 31 agreed to: yeas 6; nays 4
Clauses 32 and 33 agreed to on division
On clause 34 - Exemption from taxes
Mr. McClelland: Is there any particular reason why this organization should not pay taxes?
The Chairman: It's an agent of the Crown.
Mr. McClelland: But it's in competition with the private sector, which does pay taxes.
The Chairman: Well, outlaw it, then.
Mr. McClelland: There is a precedent here. We have public utilities in Canada that do not pay taxes and private utilities in Canada that do pay taxes. We have apples and oranges. We have people competing with each other, but they're not competing from the same base.
Why would we set up a crown corporation to compete - I know, not to complement - in the financial services sector and then suggest to these people that they don't have to pay income tax?
The Chairman: Yes, Ms Bethel.
Ms Bethel: For me, it's really quite clear. Certainly they've paid property taxes - a grant in lieu of taxes. But keep in mind that this is not to make a profit. So what would they pay taxes on?
Mr. Discepola: What's the difference if they do make a profit? All you're doing is taking from one ministry and putting it into another. You're adding the extra overhead for nothing. It's more paperwork for nothing.
Mr. Bélanger: If I may go back, Mr. Chairman, the exposure of the Crown might even be reduced if it doesn't have to pay taxes because it keeps retained earnings. It can build capital that way without having the issuance of common shares. That would conquer what you're trying to accomplish.
The Chairman: Colleagues -
Mr. McClelland: That's fine.
Mr. Bélanger: Don't get hung up on it.
Clause 34 agreed to on division
On clause 35 - Ten-year review
The Chairman: Mr. Mills, you have an amendment to present.
Mr. Mills: Yes, we do. We propose that subclause 35(1) be amended by striking out line 29 on page 15 and substituting the following:
- "Five years after this Act comes into''
Mr. Mills: This was a proposal put forward by Mr. McClelland.
[Translation]
Mr. Leroux: Mr. Chairman, the witness cannot move -
[English]
The Chairman: He's the government witness.
[Translation]
Mr. Leroux: He wants to have his own proposal amended.
[English]
The Chairman: No, it's an amendment. Are you ready -
Mr. Mills: Mr. Chairman, this is an opposition amendment that we have acted on from the last meeting.
The Chairman: Yes. The chair has a question. Have you given any consideration to three years? Is three years too soon? Five years is fine? Okay.
Colleagues, are you ready for the amendment?
Amendment agreed to
Clause 35 as amended agreed to
On clause 36 - Privileged information
The Chairman: Does clause 36 carry?
[Translation]
Mr. Leroux: No, no. A recorded vote, Mr. Chairman.
.1650
[English]
The Chairman: A recorded vote has been requested on clause 36.
You're abstaining, Mr. Bélanger?
Mr. Bélanger: No, I just wanted to know what it is that I'm voting on.
The Chairman: I thought you said - Sorry, it's clause 36.
Clause 36 agreed to: yeas 6; nays 2
On clause 37 - Use of Bank's names or initials
The Chairman: Yes, Mr. Bayne.
Mr. Bayne: You have a problem with a number of sections from here to the end - numbers 37, 43, 44, 45, 47, 49 -
The Chairman: All on preference shares?
Mr. Bayne: No, all in relation to the name change.
Mr. Schmidt: So you set them all aside.
The Chairman: No, hold on. The name has changed according to a vote we took this morning, so that would then -
Mr. Bayne: Okay, then you have to make consequential changes to all these.
The Chairman: I'm looking for some direction, but I think we can just pass a resolution saying that all subsequent clauses in which the name needs to be changed shall reflect the committee's view earlier in the day when the name was changed. Would that work?
[Translation]
Mr. Leroux: No. On my sheet, I am going to carry over clause 1 to the very end of the proceedings. If we accept it, it will confirm the name change.
A Member: No, no!
[English]
The Chairman: No, not in clause 1.
[Translation]
Mr. Leroux: In clause 3 -
[English]
The Chairman: No, the name was changed. So by consent, I can make all the clauses that affect the name - It's just a clean-up motion, that by consent we all agree to consequential amendments. Thank you.
Clauses 37 to 39 inclusive agreed to on division
On clause 40 - Continuation of Federal Business Development Bank
The Chairman: Shall clause 40 carry on division?
An hon. member: Slow down.
[Translation]
Mr. Leroux: Clause 40 has been considered as having been adopted on division, Mr. Chairman.
[English]
The Chairman: I know, but the Reform Party has asked me to hold on.
Mr. McClelland: We've got a young ``Turkette'' here who said to make sure that one's on division because we've got a surprise for you.
Some hon. members: Oh, oh!
The Chairman: The Turkette said that?
Mr. Discepola: We've got a surprise for you. You ain't going to win.
The Chairman: Is it a big surprise or is it a little surprise?
Well colleagues, look -
Mr. McClelland: On division.
The Chairman: - I'm not trying to belabour this, but you've seen the government being very flexible here, so if there's something you want to put on the table -
Mr. McClelland: No, there isn't.
Clauses 40 to 44 inclusive agreed to on division
Clause 45 agreed to
Clauses 46 to 50 inclusive agreed to on division
Clause 51 agreed to
Clauses 52 and 53 agreed to on division
Schedule agreed to
The Chairman: Shall clause 1 carry?
[Translation]
Mr. Leroux: The clauses which have been stood -
[English]
The Chairman: First of all, we'll come back to the clauses we stood.
Mr. Schmidt: Let's review the clauses that are standing.
The Chairman: Clauses 23, 24 and 27. Clause 1 is not decided yet and we need some consequential amendments. There are clauses 23, 24, 27 and 1.
.1655
Mr. Bélanger.
Mr. Bélanger: Is clause 1 treated as a consequential?
The Chairman: Is it a consequential amendment?
Mr. Schmidt: We started at clause 2. We didn't do clause 1.
The Chairman: The clerk tells me the reason clause 1 changes is that it's part of the title, so we now have clauses 23, 24 and 27.
Mr. Bélanger: Given what's happened on other clauses, can clause 1 be treated as a consequential amendment? A consequential amendment will be made to clause 1 reflecting the change in the name of the bank, but clause 1 will still have to be adopted.
The Chairman: But we still have to adopt clause 1 on its own, because it's never been adopted.
Mr. Mills, we're in your court. You've got 12 minutes if you want to do it now. If not, we'll do it next year.
On clause 23 - Authorized capital
Mr. Mills: No, I think we should take a shot at discussing this with the committee.
We've heard from the minister and in spirit the minister is not against preferred shares being included in this bill. However, I want to be totally transparent here and tell you there are complex legal ramifications associated with this for the government. I want to be on the record with all of you as saying we will probably want to discuss this a little bit more among ourselves, and we might even want to discuss it a little more when it comes back to the next stage of this bill.
If the committee understands the caveat that this has to go back to the cabinet because of its complexity and ramifications with the Financial Administration Act, then I would like to put it forward for the committee to discuss. If the committee wants to take a shot at accepting it, we'll see where it goes from there.
The Chairman: Thank you, Mr. Mills. Clause 23 is now on the table. Do we agree? Who wants to take a stab at it?
Mr. Mills: Maybe we should have Mr. Lane give the layman's description of what we're trying to achieve here.
Mr. Lane: As clause 23 of Bill C-91 is currently written, the shares of the bank may be issued only to the government via the designated minister. The capital we see coming from the private sector would be issued through those hybrid instruments under clause 20.
The issue is whether the shares of the bank should be issued to persons outside of the government. If that's the case, there are two classes of shares that are allowed for under subclause 23(1): common shares and preferred shares. I think it's envisaged that the government alone will hold the common shares and voting rights will be with the common shares only, i.e. if preferred shares are issued, there are no voting rights attached to those preferred shares, and that's in one of the subsequent sections. That's the first demarcation. The question is, should preferred shares be issued to persons outside of the government?
Then we get back to some similar issues, except I think these issues have got a little more concern now along the lines Mr. McClelland had raised vis-à-vis the hybrids. If they are preferred shares and preferred shares have no voting power, is there still an obligation on the part of the bank to its preferred shareholders? For example, should the bank be going into high-technology, high-risk cases, which could compromise the profitability of the bank and therefore the value of those preferred shares?
Let's recall that in the event of preferred shares going to people other than those within government, we would now have three classes of persons lining up upon dissolution of the bank. First, the debtors would be paid because that debt is guaranteed by the government. Of the remaining assets in the corporation, I think the hybrid instrument holders would get first call and then, after them, the preferred shareholders. So the interests of the preferred shareholders are greater than those of the hybrid shareholders. Of course, the common shareholder, the government, would be last in line.
.1700
The issue is whether the shares of the bank - and we're speaking of shares now, not these hybrid instruments that could be in the form of debentures - should be issued to outsiders, outside the government. There's a certain right attached to being a shareholder
Mr. Mills: Excuse me, Mr. Chairman and Ian. Could you hold your questions? At the same time I'd like Norm to speak to this issue because he has a slightly different view on this and it's important that all members hear both sides of this debate.
Mr. Bayne: One of the problems we have here is that this will be the first instance in which a crown corporation has divided up its equity ownership between the public sector and the private sector. That gives us an area of concern in two respects.
Part X of the FAA applies to crown corporations that are wholly owned by the Crown. In order to get around the potential problem created by having preferred shares go to the public, you would then have to issue a deeming provision - and there's a consequential amendment here, as well - to deem the FBDB still to be under the provisions of the crown corporation sections of the FAA. That's sort of like calling an apple an orange. It doesn't change the nature; it's still going to be an apple.
Along with that, crown corporations have with them the ability of the minister to issue directives. Crown corporations are instruments of government policy and at certain times the minister will want a crown corporation to act in a certain fashion. If shareholdings are held other than by the Crown, this limits the ability of the minister then to exercise his directive power.
The reason for that is the board of directors will have to act in the best interests of all shareholders. So you have the potential down the road of a minister wanting to use the FBDB as an instrument of public policy and yet not being able to do so because he has to take cognizance of the interests of these preferred shareholders.
In the past, FBDB has been one of the crown corporations to which a directive has been issued in relationship to the Cominco investment. So a potential for a conflict situation does exist there between the minister's interests and the interests of these other shareholders.
Those are some of the concerns members should be aware of when they're embarking on this type of approach.
The other thought was that the ability of the bank to raise capital could be sufficiently handled by the hybrid debt instruments, and they have the advantage of flexibility and seeking the private investment without the resulting effects of the problems of an equity interest. That's the other side of that coin.
The Vice-Chairman (Mr. Mitchell): Three people have asked to speak. First is Mr. Bélanger.
Mr. Bélanger: I just want to make sure I understand what the debate is. Is it whether or not preferred shares could be sold to someone other than the government? Is that the issue?
Mr. Lane: Yes.
Mr. Bélanger: There's another factor you have to throw in here. According to clause 23, we're not talking about just any kind of preferred shares, but preferred shares without par value. So the only thing the bank would be exposed to would be the accumulated dividends.
Mr. Lane: That's right.
Mr. Bélanger: There's no par value. Preferred shares without par value are a rather rare instrument, are they not?
Mr. Lane: Yes.
Mr. Bélanger: They're certainly not common in the marketplace, because people won't buy them because they have no par value.
.1705
Mr. Bayne: The provision was drafted in this way because it was contemplated that these preferred shares through Bill C-91 would be issued to the government only as a means of making a non-budgetary investment in the corporation.
Mr. Bélanger: Or as a means of paying dividends to the government.
Mr. Bayne: That's right.
Mr. Bélanger: So you could issue one share that pays x million dollars of dividends, for instance.
Mr. Bayne: That's right.
Mr. Bélanger: We have to look carefully at exposing the public to preferred shares that don't have a par value. I'd think twice about that.
Mr. Discepola: I echo the same concern, for various reasons also. One is that if you want to retain the control by inviting the public, then you have all kinds of different scenarios: the question of responsibility to the public, and all types of shareholders enter the case.
I have a question as to why you would even want to. I know you brought it up before in committee, where you felt that people with RRSPs might like to invest in it, but it seems to me that if you're going to invest, then you're going to do so because you expect a return. The mandate of the bank lends itself to sort of breaking even. I don't see how it's going to make millions and millions of dollars in profit and then in turn issue dividends, whether they're on the preferred shares or the common shares. So why even bring this scenario?
To me, it was very clear from these two articles that all they were trying to do was allow the Minister of Finance to inject capital into the new structure or withdraw money through this simple mechanism, without having to go through all kinds of gyrations and exercises to do it. Once you introduce the public into it, you have another scenario that you have to look into, and I don't think we should be prepared to do that at this time.
Mr. Bélanger: That puts preferred income into RRSPs. There's no point.
Mr. McClelland: That begs the question that if these shares have so much downside risk to the public or to the bank associated with them, why have them at all?
Mr. Discepola: For the Minister of Finance to put the money into the bank. That's the $1.5 billion.
Mr. Bayne: The one reason it's there is for the non-budgetary investments that the Minister of Finance might want to make.
Mr. Schmidt: I want a clarification. Wouldn't the same apply to the common shares?
Mr. Bayne: Yes. The same would apply to the common shares.
Mr. Schmidt: So why have two classes of shares?
Mr. Bayne: Because the preferred shares will give a return on that investment, whereas the common shares don't.
Mr. Schmidt: Not necessarily.
Mr. McClelland: Mr. Chairman, may I come back to that?
So we have a parliamentary appropriation of $1 billion. Would it be conceivable, then, that the $1 billion would be attributed to the preferred shares and these would be issued to the Government of Canada in return for the $1 billion? Of course, the bank wouldn't have any debt; that would become equity.
Mr. Lane: I think if preferred shares are received through the government, they'll definitely be on terms different from those of the common shares. Given today's fiscal situation, I think they'll be looking for a dividend, and this is why we have the flexibility for preferred shares.
Mr. McClelland: I'm not sure I understand. Please bear with me.
Mr. Mills: Take your time.
Mr. McClelland: We have a facility whereby, as part of the financing, the capitalization of the bank, there is the provision for parliamentary appropriations.
Mr. Lane: That's right.
Mr. McClelland: Rather than the Minister of Finance writing a cheque for $1 billion and saying, ``Here you are'', and it's gone, they'll write a cheque, send a promissory note with it, and take back preferred shares for the $1 billion.
Mr. Lane: That's right.
Mr. McClelland: That means, then, that the Government of Canada has this as an asset and the bank also retains that as an asset.
Mr. Lane: It's capital.
Mr. Bayne: But it's still subject to the cap in subclause 23(1).
Mr. McClelland: It's still subject to the cap, but it doesn't show up in the government's books as a debt, because it shows up as an asset.
Mr. Lane: Yes. It will be an investment in the bank, so it will show up as an asset. That's right.
Mr. Bélanger: At no par value.
Mr. Lane: Most of the shares that are received on the market today are without par value.
Mr. Bélanger: No. Most of them are redeemable at par value of $25.
Mr. McClelland: They're not in a private company, so they -
Mr. Bélanger: Publicly traded companies. This would be a publicly traded company.
Mr. McClelland: Not necessarily. This is not going to be publicly traded. This is a private company, so these are shares in a private company. It's a big private company.
Mr. Bélanger: You brought it up in order to know whether or not you could put these in RRSPs.
Mr. McClelland: No, that was a totally different question.
Mr. Bélanger: Sorry.
Mr. Lane: The introduction of the preferred shares to other than the government basically introduces, again, another market. It's more flexibility, another market for obtaining capital.
.1710
Mr. McClelland: These preferred shares will not be traded anywhere except through the treasury. You're not going to get these on the Montreal exchange.
Mr. Lane: No. We won't be listed.
Mr. Mitchell: Maybe on the Vancouver exchange.
I have a concern about something expressed while I was in the chair and couldn't really respond to it.
If I understand it correctly, the financial capital structure you're suggesting for this new FBDB could be contrary to the Financial Administration Act in that you would have mixed private and public capital. Did I hear that correctly?
Mr. Bayne: If you were going to go ahead and create a preferred share structure that was available to the private sector, you would have to include certain provisions in clauses 27 and 23 to deem the FBDB to continue as a crown corporation, notwithstanding the issuance to the private sector.
Mr. Mitchell: Would the provisions of the Financial Administration Act allow us to do that?
Mr. Bayne: Yes. You can amend the Financial Administration Act through another act. There is nothing to prevent that.
Mr. Lane: This is the area where you get two different legal opinions as to whether it does or does not contravene the FAA.
Mr. Mitchell: Considering we're at first reading stage in this and we're supposed to be doing a thorough examination, I think it's incumbent upon this committee to get that advice. We have two different pieces of advice here. We should be doing some work to seek out the facts of this matter.
Mr. Mills: That was the purpose. As we mentioned this morning, this is a complex issue and the minister has been struggling with it, to be candid. The purpose of putting it out here today was to just demonstrate amongst ourselves its complexity. So we have a little bit of time over the next 48 hours to discuss it before we put the bill to bed.
The Chairman: Would it be appropriate to withdraw it?
Mr. Mills: No, I don't think we should withdraw it.
Mr. Discepola: What are some of the advantages of issuing shares to the public, and why are we pushing for it?
Mr. Mills: Flexibility.
I just wanted to respond to Mr. Mitchell and all members. We could deal with this at report stage, but between now and then we will get a more specific, detailed explanation to all members.
The Chairman: I don't want to rain on your parade here, Mr. Mills.
Mr. Mills: You're not raining on anybody's parade. This is a complex issue, as I stated.
The Chairman: I happen to know what Mr. Bélanger did in another life, and he is probably as competent to talk about this subject as anybody. The difficulty is when you hear two conflicting legal opinions -
Mr. McClelland: You know for sure you're with a lawyer.
The Chairman: - you know it's going to be a very expensive problem.
The House leaves on June 23, so I'm working backwards here, colleagues. I'm trying to be helpful. The minister has made it very clear we need to have most of this bill by virtue of the problem vis-à-vis the CAP.
Mr. Iftody: Sir, are you legal counsel for the Department of Industry?
Mr. Bayne: That's right.
Mr. Iftody: I would submit that if our legal counsel from the department has some concerns and is suggesting, if I'm hearing this correctly, that we would have to make an amendment to the FAA in order to -
Mr. Bayne: You have to deem the corporation to be continued as a crown corporation under the FAA, so in effect -
Mr. Iftody: So we would have to amend that act in order to perceive -
Mr. Bayne: The effect of that deeming provision is to amend the act with respect to this corporation.
The Chairman: Would we need to amend it then or not?
Mr. Bayne: It would be done as a provision of this bill.
The Chairman: But this bill can't amend that act.
Mr. Bayne: Yes, it can.
Mr. Lane: I don't think it would be an amendment; it would be more like a notwithstanding clause.
Mr. Bayne: Yes, notwithstanding the FAA, the FBDB would be deemed to be a crown corporation for all purposes.
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Mr. Iftody: I'd like to say this to Mr. Mills, as well. Given this doubt and uncertainty and the time considerations, I would request that we have some certainty in this and a written legal opinion provided to the members of this committee about that practice and whether in fact we're on some solid ground with this.
Mr. Mills: Could I ask a question, Mr. Chairman, to Mr. Lane.
With all the other hybrid instruments in the bill that have been approved to date to give flexibility to the bank, what special feature does this bring to the bill to make it better that cannot be accomplished by the other amendments we've made to the bill?
Mr. Lane: Again, it's another instrument that a bank can use to gain capital. As you know, the way financial markets work it depends upon the time and what's acceptable or not. It's just another instrument, that's all.
Mr. Mills: Is there some particular reason why some of us seem to have such affection for this sort of -
Mr. Lane: There is a school of thought that says there could be a wider number of Canadians involved in the work of the bank.
Mr. Mills: And how?
Mr. Lane: Through the buying of the preferred shares.
The Chairman: They're just trying to raise capital.
Mr. Lane: Yes, we're just trying to raise capital.
Mr. Mills: But a few minutes ago I thought we said the public wasn't going to be buying -
Mr. Schmidt: That's right; that's a key point.
Mr. Lane: Yes, but that's the issue: do you want the public, yes or no?
The Chairman: So we understand where he's coming from, the minister has made a policy decision. Is that Industry Canada's -
Mr. Mills: No, the minister has not made -
The Chairman: The government....
Mr. Mills: The government is trying to make it work so that all of our objectives and all the government's objectives could be met. As Mauril has said, it's a complex formula and it's a complex classification that we're talking about here.
The Chairman: Colleagues, I've just been advised that the vote has been postponed for one hour, so we might as well just carry on.
Mr. Mills: Did you want to say something, Mauril, on this point? I'm finished.
The Chairman: Mr. Schmidt is next on my list.
Mr. Schmidt: I'd like to raise one other aspect. It relates very closely to what Mr. Mills has just said, but it relates also to the power of the board with regard to preferred shares.
The board has the right to determine the capital structure to either increase or decrease the capital structure in terms of preferred shares. That's the only place the board has that power. It ties right in with this argument about whether it should go public or whether it shouldn't. The board then would have the full authority. If the decision was to go public, then how much capital would be raised that way and whether it should go public would be at the board's discretion.
Mr. Lane: There would be consequential amendments if preferred shares were allowed to be issued to the public. We'd have to restrict the board's power in terms of playing with the preferred share capital to get the consent of the existing holders. So if preferred shares were to be held by the public, there would have to be other amendments to the act to restrict the actions of the board vis-à-vis preferred share values.
Mr. Schmidt: Based on that then, Mr. Chairman, my suggestion would be that the provisions for preferred shares be deleted unless they go public - unless there's that privilege - because there's no advantage that I can see for the government holding both common and private shares. If the idea is to get ready for the government, you can declare a dividend as easily on common shares as you can on preferred shares.
Mr. Lane: If the government is the only holder of shares, yes.
Mr. Schmidt: Well, yes, exactly.
A voice: They own all the shares.
Mr. Schmidt: So why have two classes of shares if you only have one holder?
Mr. Lane: Again, I think, as the minister mentioned when he appeared before the committee, this is moving on the forefront of government organizations even in terms of just the hybrids being on the market.
Mr. Schmidt: Yes, but this is no hybrid. Preferreds have been around for...I was going to say a million years, but maybe not quite that long.
Mr. Lane: But not for crown corps. That's the difference.
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Mr. Schmidt: I would like you to explain.... I don't understand the advantage to the government of owning two classes of shares in its own corporation. What is the advantage to the government?
Mr. McClelland: Privatization.
Mr. Schmidt: Yes, that I can understand.
Mr. Lane: If the preferred shares were issued to other than the government, they could be different -
Mr. Schmidt: That's an ``if''. I didn't ask that question. I asked the question, what is the advantage to the government...? If the government wants to go private later, I can see all kinds of advantages. If this is really a way to prepare privatization of the bank eventually, then I can see a good reason. But if that isn't the reason, then why do you have it?
Mr. Lane: I'm sure that's not the reason.
Mr. Schmidt: Well, then, what is it?
Mr. Lane: It's to be able to collect different dividends on different types of capital they put into the corporation. They may take preferred shares with a rider that they get a dividend.
Mr. Schmidt: This strikes me as bureaucratic manipulation.
Mr. Lane: It's just different classes.
Mr. Bélanger: I've dealt in shares for...I know the business very well. I'm just trying to understand the relationships among certain clauses, and clause 23, which is the one we're looking at now, refers to paragraph 30(3)(d), which essentially says what the equity of the bank consists of, the equity being part of the capital, which cannot exceed $1.5 billion. Yet I'm just realizing here that in 30(3)(d) such proceeds of debt instruments, hybrid capital instruments.... So these could end up forming part of the bank's $1.5 billion capital and be part of the twelve times that debt.
Am I reading this correctly?
Mr. Lane: Yes.
Mr. Bélanger: But the initial concept was that none of the common shares or preferred shares were to be issued to anyone other than the Government of Canada.
Mr. Lane: That's right.
Mr. Bélanger: That makes sense. Opening it up -
Mr. Bayne: It's not really a question of different legal opinions. It's really a question of policy as to whether you want the nature of this corporation to change in this fashion. It'll have mixed ownership.
Mr. Bélanger: Then let me ask you, does this mean that, for instance, ACOA could buy preferred shares of the bank?
Mr. Lane: Through the minister.
Mr. Bélanger: Through the minister, to use them in their revolving funds, that type of thing. Is that part of the intent behind this?
Mr. Lane: No, I think the intent is.... To get back to Mr. Schmidt's question.... The bank will need capital to grow, and the source of that capital until the last few years has been the government. We're allowing common shares to be held by the government, and under this bill as drafted at present preferred shares. The difference with the common and the preferred is that it can allow the government to buy preferred with non-budgetary capital, and therefore we'd have to pay a return on investment.
Mr. Bélanger: I'm sorry, you have lost me there. I don't understand what you mean by that. I'm sorry I'm naïve, but what do you mean by that, ``non-budgetary capital''?
Mr. Lane: It will be seen as an investment on the government's books, as you referred to, as opposed to a write-off.
Mr. McClelland: Could the FBDB then buy ACOA's assets in exchange for preferred shares?
Mr. Lane: I guess there'd be a double transaction. We can buy assets, yes. That's the previous clause. Then the minister will reinvest...our minister, not the ACOA minister -
Mr. Bayne: The wording of subclauses 23(2) and 23(3) now limits that activity to the designated minister, which is the Minister of Industry, rather than the minister of ACOA or some other government agency.
Mr. McClelland: But all that comes under Industry anyway.
Mr. Bayne: No, separate departments.
Mr. Bélanger: All that is needed to change the designated minister for ACOA is an Order in Council.
Mr. Discepola: I think what we should try to do is isolate the two situations. First, we want the public to have access to any share structure, whether they're preferred or common, of the new mandate. The other one is that's the first decision we should be making, Mr. Chair, because if we want the public....
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First of all, we have a cap on the amount of capital that can be held by the new bank. It seems to me that if you're going to issue common shares, the interest there should raise more capital or as much capital as would be needed, and those two restrictions are not there.
The other concern I have is that if you're going to raise capital through common shares, for example, you are going to have to give them control on the selection of the board of directors, decisions on the boards, and so on, plus, more importantly, giving them a return.
So the fundamental question that we should be addressing first -
Mr. Mills: Excuse me, the common shares are owned by the government. The preferred shares -
Mr. Discepola: I realize that. What I'm saying is that the fundamental decision we should be determining first is, do we want the public having ownership of any of these shares? Once we decide that, we can address the secondary issues.
Mr. Mills: Well, there's no discussion of having the public own the shares.
Mr. Discepola: That's the whole debate right now. Should the public allow -
Mr. Mills: Not the common, the preferred.
Mr. Discepola: Well, my opinion is that they shouldn't be allowed either/or. We should keep it all strictly the government.
Mr. McClelland: Can I make a suggestion then that we formulate a motion that would have the effect of ensuring that all common and preferred shares must be held by the Crown? Then it doesn't matter how many are done or what they do.
Mr. Discepola: That's the way it's written now.
Mr. Bélanger: Can you show me the exact words?
Mr. Lane: It's subclause 23(2). Subclause 23(1) speaks of shares, and subclause 23(2) says:
- (2) The shares of the Bank may be issued only to the Designated Minister
- That's as it is presently drafted.
Mr. Mills: Okay, then could we pass it? This is a good discussion.
Clauses 23 and 24 agreed to on division
Clause 27 agreed to on division
Clause 1 as amended agreed to on division
The Chairman: Shall the title pass?
Some hon. members: Agreed.
Some hon. members: On division.
Bill C-91 as amended agreed to: yeas 4; nays 3
The Chairman: Shall the committee order a reprint for use at report stage? We need a working copy, I guess.
Mr. Mills: I have a question through you, Mr. Chairman, to the clerk. When would this bill be reported?
The Chairman: Thursday.
Mr. Mills: Thank you.
The Chairman: Or tomorrow - but it's impossible to be ready for tomorrow, so Thursday.
A working copy?
Some hon. members: Agreed.
Mr. Mills: First of all, I want to thank our officials from the Department of Industry and Mr. Bayne, and also Mr. Lane from the Federal Business Development Bank. I would like to thank all members of Parliament for once again assisting the government as we develop a whole new pathway for this crown corporation. Thank you.
The Chairman: Shall I report the bill as amended to the House?
Some hon. members: Agreed.
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The Chairman: The meeting is adjourned.