Bank Indonesia last week proposed a cap on individual ownership in domestic banks, jeopardising DBSs acquisition of Bank Danamon. But Indonesia lawyers say DBS can still legally bypass the rules. Heres how
In April Singapores DBS bank proposed a $7.2 billion acquisition of a 67.4 percent stake in Indonesias Bank Danamon owned by Temasek, the Singapore governments investment company.
In a statement, DBS said it had planned to launch mandatory cash offer for the remaining Danamon shares, after the deal closed. It was hoped the acquisition would enable it to become a leading regional bank, and the fifth-largest bank in Indonesia.
But Bank Indonesias proposed rules capping individual ownership of local lenders jeopardised the transaction. The central banks deputy governor Halim Alamsyah said that the proposed rules include provisions that individuals or families will not be able to own more than 30 percent of lenders while financial institutions would be capped at 40 percent ownership.
The rule will not be retroactively applied. But Bank Indonesia has announced that it will not approve the acquisition until the rules are clarified.
Malaysian bank CIMB has predicted that DBS will not pursue the deal if the new rule is applied. With only a 40 percent stake, it will be difficult for DBS to inject the additional capital and liquidity that Danamon sorely needs, CIMB said.
Joel Hogarth, head of OMelveny & Myers Indonesia practice said a merger structure could still be used to bypass the new rule, however, dependent on the exact shareholdings and the overall economics.
It should be legally possible to merge the two, leave Temasek with 40 percent of the merged entity and sell the rest down, he said.
Nonetheless, sources have advised exercising caution when investing in Indonesia.
Investors have noted a trend in Indonesia towards restricting foreign investment, especially in the energy and natural resources sector.
David Dawborn, a Herbert Smith partner based in Indonesian firm Hiswara Bunjamin & Tandjung said that there was a precedent for regulatory interference in acquisitions of domestic lenders by foreign banks. In 2008 Malaysian bank Maybank was acquiring Bank Internasional Indonesia. But Indonesias bank takeover rules were changed towards the end of the deal.
Out of the blue, the Indonesian capital markets regulator implemented a rule that required 20 percent public ownership of public companies after a takeover, he said.
In this instance, however, Indonesia-based practitioners seemingly expected the policy shift. Hogarth said that Bank Indonesia had always wanted a 40 percent limit for more diversity within shareholding of domestic banks.
He emphasised that regulators were going out of their way to make the bank ownership rules foreign investment-friendly. The proposed regulations grandfather existing investments and do not discriminate between foreign and local investors.
Dawborn said that the motivation for the new rule was to limit unsupervised bank controllers without expertise dominating Indonesian banks.
Both he and Hogarth agreed that the bank ownership restrictions were unrelated to controversial laws in the energy and natural resources sector.
In February the Indonesian government issued restrictive laws requiring foreign investors who had majority stakes in companies with mining licenses to divest their stakes after 10 years of production. It was issued and enforced at short notice, frustrating foreign investors.
The policy change follows a Wall Street Journal editorial comparing Indonesias increasingly onerous regulatory regime to that of India. Foreign investors have pulled out of India because of slowing growth, bureaucratic red tape and retroactively applied laws, such as a new tax on already-completed mergers.
In a challenging global environment, Indonesia will suffer if it keeps attracting negative press about shock changes to the rules and retrospective impact on investors, Dawborn said. The government needs to be more creative in facilitating growth of investment in a competitive world rather than short-term restrictions undermining business.