Martin Mansergh (Tipperary South, Fianna Fail)

I thank the House for agreeing to discuss this Bill today at short notice.

The Bill represents an important step in the implementation of the Government's announcement on 11 February regarding the proposed recapitalisation of Allied Irish Banks and Bank of Ireland. It implements the Government's decision that the National Pensions Reserve Fund, NPRF, will play an important role in the recapitalisation programme. Across the world, the past 18 months have seen unprecedented turbulence and pressure on financial institutions, and banks in particular. Banks have had to compete strenuously for deposits and other forms of funding in a weakening economic environment.

The global recession has shown us all the pivotal role the financial system plays in supporting the economy. In turn, it has become clear to all that it is essential for Governments to take appropriate action to maintain the stability of the financial system. Governments across the developed world have intervened to assist banks which are seeking capital in difficult market conditions. Like many other European countries, Ireland moved to ensure the security and stability of its banking system. Throughout this process, our approach has been based on two basic principles. First, that the State will not let any systemically relevant financial institution fail and, second, that any State involvement in financial institutions will protect the interests of the taxpayer and have regard to legal implications and European requirements.

In view of the continuing turmoil in global financial markets, the Government initiated intensive discussions with Allied Irish Banks and Bank of Ireland with a view to securing the position of these two banks. The recapitalisation of Ireland's two main banks is a key element in the Government's overall strategy for addressing the current economic challenges. A banking system that can provide credit to sound businesses and personal borrowers is a fundamental requirement to maintain employment and output in the economy.

The Government has decided to provide €3.5 billion in core tier 1 capital to each of the banks which will boost their capital ratios. In return for the investment, the State will hold preference shares that will pay a fixed dividend of 8%. The banks can redeem the preference shares at par within the first five years, or at 125% thereafter. The Minister for Finance will also have the right to appoint 25% of the directors of each board and will also get 25% of the total ordinary voting rights in decisions on board appointments and change of control.

Warrants attached to the preference shares give the State the option to purchase 25% of the ordinary share capital of each bank in five years' time at predetermined prices. The recapitalisation will ensure the two main banks in Ireland are in a position to provide the necessary commercial credit facilities to their customers and to the economy in general. In line with this, the banks have given a commitment to increase lending capacity to small and medium-sized enterprises by 10% and to provide an additional 30% capacity for lending to first-time buyers this year. If the mortgage lending is not taken up, the extra capacity will be available to small and medium-sized enterprises. Statutory codes of practice on business lending and mortgage arrears have been finalised to ensure credit is extended in an appropriate manner. Of the €7 billion to be provided, €4 billion is to be funded from the current resources of the National Pensions Reserve Fund and €3 billion will come from the frontloading of the Exchequer contributions to the fund for 2009 and 2010. These investments will remain part of the fund and the return earned on them will accrue to the fund. The use of some of the resources of the National Pensions Reserve Fund to fund the bank recapitalisation programme strikes a prudent balance between the need to address an urgent economic priority and the need to continue to take account of long-term budgetary stability and the sustainability of our pensions system.

The current crisis has demonstrated the benefit, for a small open economy like Ireland, of maintaining a sovereign wealth fund such as the National Pensions Reserve Fund. It is vital, in relatively good times, to establish and add to a fund of that nature to prepare for the inevitable rainy day. If the fund had not been available to us, our current position would be even more difficult than it is. The existence of the fund gives the lie to the notion that at the height of the Celtic tiger, we were awash with revenue but it was squandered. The National Pensions Reserve Fund has enabled us to cope with the banking crisis without aggravating further our alarming budget deficit. The total amount of money to be invested — €3.5 billion in each of the two banks — was determined following detailed consultation with financial and property experts, consideration of likely trends in asset values and examination of various related stress scenarios. The State's investment will significantly strengthen the core tier 1 capital of the banks, bringing it in excess of regulatory limits. The State will obtain a direct return on its investment in specified terms. The banks have agreed a customer package containing a number of measures to improve lending in the economy, including statutory codes on business lending and mortgage arrears and a €100 million fund to support environmentally friendly investment in innovations in clean energy. The recapitalisation programme will strengthen Allied Irish Banks and Bank of Ireland as financial institutions central to the economic future of the country. The Government is in discussions with other relevant institutions about their capital positions. It will take whatever measures are judged necessary in that regard at the appropriate time.

As Senators are aware, the National Pensions Reserve Fund was established in 2001 with the aim of meeting as much as possible of the cost to the Exchequer of the social welfare and public service pensions that will be paid between 2025 and 2055. Under the National Pensions Reserve Fund Act 2000, the Minister for Finance is required to pay 1% of GNP into the fund every year. This Bill amends the 2000 Act to facilitate the recapitalisation of financial institutions. It amends the Act so that, in respect of credit institutions listed on a stock exchange, the Minister for Finance may, in the public interest and in particular circumstances specified in the Bill, direct the National Pensions Reserve Fund Commission to make investments in such institutions and to underwrite their share issues. The Minister may also give directions in relation to the holding, management and disposal of such directed investments. An investment in a listed credit institution made by the commission on foot of a direction from the Minister is referred to in the Bill as a "directed investment". That is what is meant when that term is used.

This Bill will enable the Minister to make additional payments into the fund for the purposes of a directed investment in a listed financial institution and to transfer into the fund a shareholding or other interest held by him or her. If the total payments or transfers made in any one year are greater than 1% of GNP, the excess will count towards the requirement to make annual contributions to the fund in future years. For example, the annual contribution from the Exchequer to the fund will amount to approximately €1.6 billion this year. This amount was provided for in the 2009 budget last October. The €3 billion contribution from the Exchequer to the cost of the recapitalisation of Allied Irish Banks and Bank of Ireland will comprise the €1.6 billion I have mentioned and an additional amount of €1.4 billion that will count towards the Exchequer contribution to the fund in 2010.

Perhaps the most notable of the other provisions in the Bill is the proposal to amend the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to provide for greater transparency in respect of trading in financial instruments. This provision will allow the Minister for Finance to make regulations requiring certain information relating to transactions in financial instruments to be disclosed to the Financial Regulator, the market or both. It is intended that this measure will provide for the introduction of regulations requiring the disclosure of contracts for difference.

I wish to discuss the provisions of the Bill in more detail. Sections 1 and 2 contain the standard provisions that are necessary to explain certain terms used in the Bill. Section 1 links the Act to the National Pensions Reserve Fund Act 2000 by defining the "Principal Act" as the National Pensions Reserve Fund Act 2000. Section 2 amends the principal Act by inserting definitions of a number of technical terms used in the Bill, such as a "Commission investment vehicle", a "directed investment", a "listed credit institution" and a "regulated market".

Section 3 of the Bill extends the functions of the National Pensions Reserve Fund Commission to enable it to manage directed investments. It amends the commission's functions to take account of investments to be made by the commission in accordance with directions from the Minister for Finance. It enables the commission to have regard to directed investments when determining the investment strategy for the National Pensions Reserve Fund. Under the National Pensions Reserve Fund Act 2000, the commission is precluded from investing in Irish Government securities. Section 3 also contains a technical provision to clarify that the reference in the principal Act to "Irish Government securities" means debt instruments issued by the Exchequer. With the exception of donations and bequests, the commission is currently allowed to accept contributions from the Central Fund only. This section amends the functions of the National Pensions Reserve Fund Commission to enable it to accept funds or assets for the benefit of the National Pensions Reserve Fund from sources other than the Central Fund, if so directed by the Minister. This technical provision is the counterpart of a provision in section 6 that will allow the Minister to transfer shareholdings and other assets into the fund.

Section 3 of the Bill also enables the National Pensions Reserve Fund Commission to advise the Minister for Finance at his or her request on a proposed directed investment. This will allow the commission to carry out the necessary due diligence on Allied Irish Banks and Bank of Ireland before the actual recapitalisation, for example. This section will also enable the commission to underwrite issues of securities. This measure is being included in the Bill, as an enabling provision, in case there is a need for the commission to underwrite a capital-raising issuance by a financial institution. This is not something we are proposing to do — we are merely taking the opportunity to include the provision on a contingency basis while we are amending the National Pensions Reserve Fund legislation.

This legislation also allows the National Pensions Reserve Fund Commission to form a company or other body corporate. This will allow the commission to establish special purpose investment vehicles where it is more efficient for the commission to invest through such a structure. The commission is currently precluded from controlling a company. Section 15 of the National Pensions Reserve Fund Act 2000 prohibits the commission from controlling a company or acquiring a shareholding of such size that the commission would be required to seek control of the company. This is appropriate given the purpose of the fund. The role of the commission is to invest for the optimum return, rather than to get involved in managing companies. It is necessary to lift this restriction in two instances, first, where the commission sets up a special purpose investment vehicle, as I have described; and second, where the commission is required to invest in a credit institution on foot of a direction from the Minister, in other words, when the commission is facilitating the State recapitalisation by investing in the banks.

I emphasise that the State does not intend to take control of the recapitalised financial institutions. The recapitalisation of Allied Irish Banks and Bank of Ireland is to be based on the State taking preference shares, rather than ordinary shares, in those institutions. However, if the fund were to underwrite a future share issuance by these institutions, it is possible that the fund's overall holding could constitute a controlling interest. This is not something we propose to do — we are merely providing for it in the Bill on a contingency basis. It is proposed that certain statutory provisions in company and takeover law should not apply where the commission is required to invest in a financial institution, as part of the recapitalisation programme, on foot of a direction in the public interest. The proposed provisions would ensure that investments by the NPRF in the financial institutions on the scale now envisaged would not be impeded by procedural delays.

Accordingly, section 5 of the Bill provides that certain provisions of competition and takeover law and section 7 of the Credit Institutions (Financial Support) Act 2008 do not apply in respect of an acquisition or proposed acquisition by the commission of an interest in a traded credit institution or a transfer into the fund of the Minister's interest in a listed credit institution, if the acquisition or transfer results from a directed investment.

Section 7 of the Credit Institutions (Financial Support) Act 2008 essentially provides that the Minister for Finance is to take over the role of the Competition Authority in relation to the merger or acquisition of a credit institution in the current banking crisis. That section will not apply where the Minister is directing the NPRF Commission to recapitalise the credit institutions, because it is not necessary in these circumstances. The section also provides that nothing done by the Minister, the commission or a commission investment vehicle for the purposes of a directed investment in a traded credit institution will constitute a reorganisation measure for the purposes of certain European Communities regulations. The Bill seeks to ensure that contracts previously entered into between recapitalised banks and third parties are uninterrupted, so as to permit the orderly continuation of the banks' operations, notwithstanding that shares in the bank have transferred to the commission.

Section 6 of the Bill amends section 18 of the principal Act in a number of respects. First, it amends section 18(2) of the principal Act by allowing the Minister to make the annual contribution of 1% of GNP in a lump sum or in instalments at any time during the year, rather than in equal quarterly instalments. The NPRF Act 2000 provides for a contribution from the Exchequer to the fund each year of an amount equal to 1% of GNP, to be paid in equal quarterly instalments. To allow more flexibility, we propose a technical provision so that the annual contribution need no longer be paid in equal quarterly instalments. This change would, for example, allow the Minister to pay the contribution in a single instalment early in the year, if funds were required in the context of bank recapitalisation.

Section 6 of the Bill also amends section 18(5) of the principal Act to include an enabling provision, which would allow the Minister to transfer into the fund a shareholding or other interest held by the Minister or his or her nominee, and to contribute to the fund by paying a sum into the fund. Section 6 provides that these transfers or contributions may be taken as satisfaction or part satisfaction, as the case may be, of the Minister's obligation under section 18(2) of the principal Act to make annual payments into the fund. If the total contribution exceeds the amount required to be paid into the fund in any one year, the excess shall be taken in satisfaction or part satisfaction of the amount required to be paid in any subsequent year.

Section 6 also provides that stamp duty shall not be chargeable on any instrument giving effect to a transfer by the Minister into the fund. Ownership of the fund is vested in the Minister, so there is no basis for stamp duty being payable, when the Minister is transferring a shareholding in his or her name to the commission for it to manage and invest on his or her behalf. Section 6 provides that any commission investment vehicle which may be established is owned by the Minister.

The NPRF Act 2000 provides that the NPRF Commission controls, and is responsible for the investment of the National Pensions Reserve Fund, subject to the level of risk involved being acceptable to the commission. This is effectively a commercial investment mandate. The concentration of significant investment in a particular sector or small number of institutions could be construed as contrary to this strictly commercial mandate. Accordingly, section 7 of the Bill amends section 19(1) of the principal Act to provide that the commission's strictly commercial investment mandate will not apply in the case of directed investments.

In the intervening years, there has been significant debate on the overall parameters, within which institutional and sovereign investors should be expected to invest the funds they manage on behalf of the ultimate owners of those funds. There have been considerable developments in thinking in this area, and the NPRF Commission has taken a number of initiatives to integrate environmental, social and governance considerations into its management of the fund. In light of this ongoing debate, and having regard to the experience of other countries with sovereign investment funds, it is the Minister's view that this matter requires further consideration. This subject is frequently debated in various international fora such as the OECD and ASEAN.

Given the sensitive and urgent nature of the legislation required to facilitate the recapitalisation of the financial institutions and the complexity in drawing up a responsible investment policy that will work in practice, it would not be appropriate at this time to include such a provision in this Bill. However, given the importance of the subject and in order to advance matters, the Minister is establishing an interdepartmental committee to examine the issues further. The group will report to the Minister within three months of its establishment, and will be open to receiving the views of interested parties.

Section 8 is the key section in the Bill, as far as recapitalising the credit institutions is concerned. The NPRF Commission will be the principal agent of the State in providing the additional investment needed to capitalise the financial institutions. This will require the NPRF Act 2000 to be amended to give the Minister for Finance the power to direct the commission to make, hold and dispose of investments in the financial institutions as necessary. Accordingly, section 8 of the Bill amends the principal Act so as to provide that the Minister, in the public interest, having consulted the Governor of the Central Bank and the regulatory authority, may, in specified circumstances, direct the commission to invest on specified terms and conditions in certain listed credit institutions and to underwrite or otherwise support the issue of securities in such listed credit institutions.

The section also enables the Minister to give a direction to the commission in relation to the holding, management and disposal of, and any voting rights attaching to, a directed investment on such terms and conditions as are specified in the direction. The exercise of these powers will be subject to the normal EU state aid approval process. This section also provides that the Minister, the commission, a commissioner, the manager of the fund and staff of the manager shall not be taken to be shadow directors within the meaning of section 27(1) of the Companies Act 1990 of a company or its subsidiary, in which the commission has made a directed investment.

Section 9 of the Bill amends the Taxes Consolidation Act 1997, TCA, to provide that the same exemptions from taxation that apply to the NPRF Commission shall apply to any "commission investment vehicle", as defined in section 2 of the Bill. It is logical, that if the commission has tax exemptions when investing in its own right, then it should have the same exemption when investing through an investment vehicle.

Section 10 of the Bill amends the European Communities (Markets in Financial Instruments) Regulations 2007, to clarify that the NPRF Commission and any commission investment vehicle which may be established, are not subject to the regulations. This is a technical provision. For the avoidance of doubt, it provides that the NPRF Commission and any commission investment vehicle are not to be regarded as investment intermediaries in their role of investing the fund on behalf of the Minister.

Section 11 amends the Securitisation (Proceeds of Certain Mortgages) Act 1995 to facilitate the winding-up of Ulysses Securitisation plc. This is a securitisation vehicle, which was established in 1995 to borrow for the Exchequer, using the cash flow from local authority mortgages to guarantee repayment of the bonds issued by Ulysses plc. The bonds issued by the company have been repaid and it is now proposed to wind up the company. The provision proposed in section 11 is a technical change to the legislation to facilitate the winding-up of the company and to provide that any remaining assets of the company on its winding-up will be transferred to the Minister for Finance or to such other body as he may direct. Regrettably, the winding up of Ulysses will not represent a major windfall for the Exchequer. Ulysses holds approximately €127 million in cash, but it is already borrowed by the Exchequer as ways and means borrowing, so that this amendment will not represent a real improvement in the fiscal arithmetic.

The Bill includes a provision amending the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to enable the Minister for Finance to make regulations requiring that certain information relating to transactions in financial instruments must be disclosed to the Financial Regulator or the market, or both.

Certain financial instruments can be used to acquire an economic interest in the shares of publicly listed companies without acquiring direct control over, or ownership of, such shares. Such financial instruments are increasingly used by investors to avoid disclosure of their economic interest in a company. As Senators will be aware, there has been particular controversy regarding the use of contracts for difference, CFDs, which, unlike share transactions, do not need to be reported to the market unless the contracts explicitly give a right to acquire, or give access to, voting rights.

The provisions in section 12 of the Bill would enable the Minister for Finance to make regulations to require all those who have entered into transactions in financial instruments to disclose certain information relating to those transactions to the Financial Regulator or the market or both. The provision covers all financial instruments to cater for possible future market developments but the intention is to make regulations covering CFDs in the first instance.

Section 13 contains a commencement provision which will apply to the whole Bill other than sections 3(d) and 3(e) which are needed urgently to facilitate the recapitalisation of the financial institutions. The commencement provision has been included as a courtesy to the European Commission which is still examining some of the provisions of the Bill, as is to be expected given that the main purpose of the Bill is to facilitate the recapitalisation of the two main banks.

The decision to recapitalise AIB and Bank of Ireland is a clear indication that the Government is fully prepared to stand behind the Irish banking system. The Government's comprehensive recapitalisation programme for our financial institutions will reinforce the stability of our financial system, increase confidence in the banking system in Ireland, and facilitate the banks involved in lending to the wider economy. I commend the Bill to the House.