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
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
The rule will not be retroactively applied. But Bank Indonesia
has announced that it will not approve the acquisition until
the rules are clarified.
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
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
. 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
Dawborn said that the motivation for the new rule was to limit
unsupervised bank controllers without expertise dominating
Both he and Hogarth agreed that the bank ownership restrictions
were unrelated to controversial laws in the energy and natural
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
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