PT Davomas restructuring set to test OJK enforcement

Author: Ashley Lee | Published: 26 Feb 2013
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o Indonesian cocoa producer PT Davomas has allegedly breached various laws and regulations in Indonesia

o Former securities regulator Bapepam did not pursue enforcement actions against PT Davomas. Indonesia's securities enforcement regime has previously been notoriously underresourced

o Sources told IFLR that this is a test case for how active Indonesia's new securities regulator, the OJK, will be in pursuing securities law violations
o Although Indonesia is an investor favourite, corporate governance is a longstanding concern. The OJK's inaction might make it more difficult for foreign investors to become comfortable with the country's investment risk

Indonesian cocoa producer PT Davomas in the course of its restructuring may be a test case of new regulator Otoritas Jasa Keuangan’s (OJK) willingness to enforce against securities violations.

The OJK was established on January 1 2013 as a unified securities regulator that takes on the role of former securities regulator Bapepam-LK and some duties from bank regulator Bank Indonesia.

Many predicted that the OJK would have better resources than Bapepam. Bapepam was routinely criticised for its inactivity on the enforcement side. According to CG Watch 2012, a study done by CLSA Asia-Pacific Capital Markets in collaboration with the Asian Corporate Governance Association, “enforcement of securities regulations is so woeful as to render the discussion almost academic.”

Sources said that this is a chance for the OJK to prove its commitment to enforcing securities violations. “The PT Davomas case at this point is one of the most obvious and blatant frauds perpetrated in Indonesia,” a source said. “It’s pretty egregious, even by Indonesian standards.”

2009 and 2012 restructuring

In May 2009 PT Davomas defaulted on its $238 million 11% guaranteed senior bonds due 2011. Following the Central Commercial Court Jakarta District Court’s approval of a request for temporary suspension of payments (PKPU), shareholders agreed to a plan involving an exchange offer for the original bonds and a $33 million shareholder loan.

The shareholder loan was from majority owner Tse Kam Bui, who controls five BVI-registered companies that together hold a 51% stake in PT Davomas. The debt to the BVI companies was immediately repaid via a rights offering for those shareholders.

The original bonds exchanged for $119 million variable interest rate guaranteed secured bonds due 2014. The original bondholders took a 50% haircut, but retained security over the assets of PT Davomas and the BVI companies.

In March 2012, PT Davomas defaulted on its debt due 2014 with only IDR 88 million cash on hand. However, principal debt (under the restructured bonds) is IDR 1.24 trillion. In May the Commercial Court at Central Jakarta District Court approved a request for a PKPU in relation to PT Davomas.

In June the company reported its midterm financial statements, which reported new debt of IDR 2.87 trillion to PT Aneka Surya Agro (PT ASA), allegedly a supplier to PT Davomas. Although the debt represented more than four times equity, no other information about the transaction was given.

The lack of notification was a possible breach of Bapepam Rule No. X.K.1, which stipulates public companies disclose material information no more than two days after the event.

The loan to PT ASA also may have violated Bapepam Rule IX.E.2 regarding material transactions, which require full disclosure, a shareholders resolution and an independent appraisal report for transactions in excess of 50% book equity.

In the same month the Commercial Court at Central Jakarta District Court approved the Second Composition Plan, which was approved on votes from PT Aneka Surya Agro and related creditors.

  The Second Composition Plan provides for all of PT Davomas' debt to be converted into equity. it bound dissenting creditors, shareholders and regulatory bodies such as the OJK and the IDX, all of which breach standing Indonesian law. But implementation of the composition plan requires a majority vote from shareholders.

In September, bondholders exercised their security rights and appointed new directors to the BVI companies' boards. Davomas’ management cancelled the first general shareholders' meeting when the new directors arrived. Bapepam and IDX issued a written request for an explanation of the cancellation.

Davomas attempted to convene another meeting of shareholders in December so that they could approve the debt to equity conversion, which would disenfranchise PT Davomas' creditors. The meeting was also cancelled.

The IDX is still pursuing a clarification letter regarding why the Second General Meeting was cancelled as well as further details about the company's debt to PT ASA. Moreover it has fined PT Davomas IDR 150 million for failing to submit financial statements for the period ending 30 September 2012. It has been added to a watch list maintained by the IDX and monitored by the OJK.

In a further violation of securities law, PT Davomas called a chareholder meeting for March 11 after failing to gain permission from the OJK to hold the meeting due to its pending investigation.

It notified shareholders of the meeting on March 9, breaching Bapepam Rules IX.I.1 and IX.J.1, which require that the meeting agenda be submitted to the OJK seven days prior to the announcement, that there is 14 days notice before a meeting is called and than an annoucnement is made 14 days before the meeting. Therefore meetings must be called 35 days in advance.

Although the company claimed that the meeting was held on such short notice becuase of a court order, Indonesian law requires even meetings held by court order to comlpy with capital markets rules and regulations.


Enforcement proceedings have not yet begun regarding PT Davomas’ nondisclosure of its debt to PT ASA, its failure to inform bondholders of the PKPU proceedings or its cancellation of two shareholders’ meetings.

In a press statement, Lubis Ganie Surowidjojo Pak Kiki Gane said that his clients hope that their request to replace the directors of PT Davomas will be dealt with fairly and in accordance with Indonesian law.

Gane added that he hopes the applicable Indonesian government agencies (IDX and OJK) are able to fairly mediate and ensure this dispute does not create a negative image of Indonesia in the eyes of investors.

But securities regulators have been reluctant to enforce against fraudulent actions. According to the CLSA and ACGA study, formal investigations by Bapepam increased from 130 cases in 2010 to 178 cases in 2011, but only 63 cases were completed.

Although the IDX has been active in pursuing PT Davomas, its fines have so far been small. In July, the IDX issued a warning letter to PT Davomas for its failure to pay its debts and submit an audited financial report for 2011: its fine was  IDR 150 million ($15,500). The IDX fined PT Davomas the same amount for not submitting an audited report for 2012.

Sources are waiting for the OJK to become involved, especially considering the list of alleged irregularities over the course of the 2012 restructuring.

The new regulator’s actions in regard to PT Davomas are seen as a test case for whether it is an independent regulator and whether its approach to securities enforcement is more robust than that of Bapepam. A lack of action would be construed as a return to the status quo or worse.

However the OJK has only been in power for three months and therefore there is no precedent for its enforcement regime. But to maintain Indonesia’s attractiveness to foreign investors – especially those who invest through the capital markets – it is necessary to begin prioritizing corporate governance, starting with PT Davomas.

Related links:

Indonesia’s new regulator: what to expect

How to improve Indonesian corporate governance

Banks lobby for Indonesia Material Transaction rule change