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
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
Keuangans (OJK) willingness to enforce against securities
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
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
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. Its
pretty egregious, even by Indonesian
and 2012 restructuring
May 2009 PT Davomas
defaulted on its $238 million 11% guaranteed senior bonds due
2011. Following the Central Commercial Court Jakarta
District Courts 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.
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
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.
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.
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.
lack of notification was a possible breach of
Rule No. X.K.1,
which stipulates public companies disclose material information
no more than two days after the event.
loan to PT ASA also may have violated
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.
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
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
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
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.
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
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
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.
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
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.
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.
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
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
are waiting for the OJK to become involved, especially
considering the list of alleged irregularities over the course
of the 2012 restructuring.
new regulators 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.
the OJK has only been in power for three months and therefore
there is no precedent for its enforcement regime. But to
maintain Indonesias attractiveness to foreign investors
especially those who invest through the capital markets
it is necessary to begin prioritizing corporate
governance, starting with PT Davomas.
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