How to improve Indonesian capital markets

Author: | Published: 24 Oct 2012
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Lawyers in Jakarta have revealed their wish list of market reforms that could invigorate the country's equity capital markets, if implemented.

Morgan Stanley's legal counsel and executive director Sok-Theng Cheng said market players believe the market could benefit from having price stabilisation rules which allow issuers to offer primary shares to satisfy over-allotment or ’green shoe’ option.

The current regulatory regime does not permit a primary green-shoe and enforces an 8 month lock-up period on shareholders for shares issued less than six months before a registration statement is submitted, which means that a secondary green-shoe is also often not available.

"It would be good for authorities to look at the proposed 2009 draft rules that have been put on hold," she said. "Allowing contractual freedom to provide for price stabilisation would be very helpful to support the after market of an initial public offering (IPO)."

Strict limitations on termination of IPOs for unforeseen market events are another unique constraint of the local market, she said. Local regulations prescribe very limited circumstances under which an IPO could be postponed or terminated after the effectiveness date of the registration statement, compared to international market practice where termination rights are much broader. "This causes a huge risk burden on local underwriters," she said.

PwC Indonesia's technical advisor Jasmin Maranan agreed the rules needed to be reconsidered. But she added that the country's IPO prospectuses also needed to evolve to something more in line with international standards.

"Indonesian prospectuses need to become more of a legal than a marketing document, with lawyers tasked with their drafting as is done in international markets. At present, the local underwriters prepare the local prospectus and invites the company (or its representatives), legal adviser and accountants to discussions as part of the due diligence process," she said.

Tips for Indonesiaco international issues
For those Indonesian companies wishing to attract foreign investors in an IPO, Cheng advised that the company in question need to have a good equity story and provide for sufficient liquidity.

"In order for an Indonesian company to market an international capital markets offering effectively, you need to have a compelling story to present to investors," she said. "Companies with good potential growth, and sectors with a low risk earning profile will do well, for example, a company that taps the growing middle class consumer base."

She said that domestic issuers should recognise the importance of having reputable and experienced sponsors and management on board.

"Management need to participate actively in road shows around the world, so it is vital that you have management in place that can present well to international investors," she said.

Maranan said that IPO aspirants should be market leaders and outperform competitors in almost all of the financial benchmarks such as debt to equity ratio, EPS growth, sales growth, ROE, profitability and EBITDA growth.

"In addition to the solid financial track record that a company should demonstrate, it should also possess sound corporate governance policies. International investors now place huge importance in companies' corporate governance structure, policies and procedures," she said. "A strong, credible and experienced management team will also help articulate your company's equity story better to foreign investors"

Cheng said companies need to sort out their corporate governance structures at a very early stage. "You must think about hiring and engaging the necessary number of suitably qualified and experienced independent directors and commissioners prior to listing and that takes time," she said.

Aspiring Indonesia listcos also need to put in place the corporate secretary, and hire an efficient investor relations team, in addition to having an effective responsible person to manage the listing process.

"For follow-on offerings, companies will need a good track record and also a sizeable float," she concluded.

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