Imran Muntaz, Michael Cecio Bangun and Miriani Holungo of Imran Muntaz & Co. discuss the rules applicable to foreign ownership of domestic banking and financial institutions
The relevant provisions on acquisitions in Indonesia are regulated under the following provisions:
law number 40 of 2007 concerning limited liablity companies and its implementation regulation (government regulation number 27 of 1998 concerning mergers, consolidations and acquisitions of limited liability companies);
law number 5 of 1999 on the prohibition of monopolies and unfair business competition (the competition law) and its implementing regulations; and
any other specific industry regulations.
Regulatory requirements for acquisitions in the Indonesian banking industry are set by law number 7 of 1992 concerning banking as lastly amended by law number 10 of 1998 concerning banking, government regulation number 28 of 1999 on mergers, consolidations and acquisitions of banks (GR 28/1999), supplemented by a decree of the directorate of Bank Indonesia number 32/51/KEP/DIR/1999 regarding the requirements for the conduct of mergers, consolidations and acquisitions of Indonesian commercial banks (BI Decree 32/1999). According to GR 28/1999 and BI decree 32/1999, bank acquisitions may be carried out at the initiative of the bank (which needs approval from OJK), at the request of the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK), or the initiative of a temporary special agency created for the purpose of improving the banking system. Previously, Bank Indonesia had the authority to approve bank acquisitions but this has now been transferred to OJK as mandated under law number 21 of 2011 on the Financial Services Authority.
Requirements and procedures
Under GR 28/1999 and BI decree 32/1999, the acquisition of an Indonesian commercial bank will be conducted by way of a sale and purchase of shares, whether in whole or in part, directly or indirectly (ie through the stock exchange), resulting in a change of control at the target Indonesian commercial bank. Any foreign investor wishing to take over a commercial bank in Indonesia will need to take into account the target bank's interests, creditors, minority shareholder(s), employees, bank ownership rules, and public and fair business competition.
A foreign investor shall deliver notice of its intention to conduct the acquisition to the board of directors (BoD) of the target bank. The BoD and the investor will each prepare a proposed acquisition plan and obtain approval from both the boards of commissioners of the target bank and the investor or of any other relevant instances of investor (as may be required). Based on their proposed acquisition plans, the target bank's BoD and the foreign acquiring party will come up with a final acquisition plan that includes the information provided under the individual proposed plans.
Furthermore, the BoD of the target bank will need to have the plan approved at the general meeting of shareholders (GMS). The prevailing regulations also require the BoD of the target bank to announce the general lines of the acquisition plan to the public in at least two Indonesian national newspapers, no later than 30 days before the GMS. It will also need to announce the acquisition plan to its employees in writing, no later than 14 days prior to the GMS.
Upon obtaining approval from the GMS, the BoD of the target bank shall submit the result of the GMS along with documents for the purpose of the fit and proper test to OJK. The authority will then issue an acquisition permit outlining the relevant procedures and requirements – including but not limited to the result of the fit and proper test and the limits on shares ownership in the target bank – that the target bank and the acquirer have to fulfill.
Foreign ownership of Indonesian banks
With respect to bank ownership, OJK has issued new regulations for maximum ownership of Indonesian commercial and shariah banks. This is covered under OJK regulation number 56/2016 concerning the ownership of shares in banks, which revoked the previous regulation as provided under BI regulation number 14/8/PBI/2012 on the ownership of bank shares.
The new regulation has specified the limits on share ownership in banks. These will be determined by the categorisation of shareholders and affiliations among shareholders of the Indonesian bank. Under regulation 56/2016, share ownership for each category of shareholder is limited to the following:
Banks and non-bank financial institutions (ie insurers, pension funds or finance companies) which according to their AOA are allowed to participate in long-term portfolio investments, are regulated and supervised by the relevant financial services authority, may own up to 40% of the shares in the bank.
A non-bank financial institution which has not fulfilled the criteria specified above and a non-financial institution may own up to 30% of the shares in the bank.
Individuals may own up to 20% of the shares in an Indonesian commercial bank, and up to 25% of the shares in an Indonesian shariah bank.
Affiliation among shareholders will be determined based on a number of criteria. If there is an ownership relationship between shareholders; a familial relationship, up to a second degree level; and/or a cooperation or joint action between them to achieve a common goal of controlling the bank (acting in concert) with or without written agreement, then they will be treated as a single shareholder. Moreover, share ownership between the affiliated shareholders shall not exceed the limits set for an affiliated shareholder, with the highest limits based on the categorisations set out above. For example, a group of affiliated shareholders which comprises banking institutions, non-bank financial institutions and an individual may collectively own shares in the bank amounting to 40%. These provisions are applied equally to foreign and Indonesian shareholders.
However, there is an opportunity for the listed foreign bank to hold more than 40% of shares in the bank if it obtains approval from OJK and fulfils the following requirements (this opportunity is also applicable to Indonesian listed banks):
It has a level 1 or level 2 Bank Indonesia financial health rating (or an equivalent rating for foreign banks).
It has a minimum capital adequacy ratio in accordance with its risk profile.
It has tier 1 capital of at least six percent.
It has approval from the relevant financial service authority in its country of origin to acquire shares in the bank.
It has committed to purchase securities issued by the bank which are convertible into equity.
It has committed to hold its shares in the bank for a period of time as determined by OJK.
It has committed to support Indonesian economic development through the relevant bank.
In addition, a listed foreign bank with ownership above 40% in an Indonesian bank shall have to take the relevant bank public and achieve a 20% public ownership target within five years of obtaining OJK approval to hold such ownership.
Furthermore, regulation 56/2016 provides that any acquisition by a listed foreign bank of more than 40% of a bank shall be carried out in two separate stages. The listed foreign bank must acquire up to 40% in the bank, but can only increase its ownership above 40% in accordance with the limits approved by OJK, if it has maintained a level of financial strength and good corporate governance required under Indonesian law for at least three consecutive assessment periods within a five-year period.
Any shareholders that fail to comply with the limits on share ownership will be subject to restrictions on their voting rights during a GMS which will only be counted in accordance with the applicable limits on its share ownership. Their dividend payments will be postponed until they have made the relevant adjustment to comply with the limits on share ownership. OJK may also require any shareholders that fail to adjust to the relevant limits to retake the fit and proper test.
Foreign investors as controlling shareholders
In contrast with the limit set out in the limited liability company law, under BI regulation number 14/24/PBI/2012 on single ownership in Indonesian banks (single presence policy), a party is considered controlling shareholder if it directly owns 25% or more of the bank's shares, or if it owns less than 25% of the bank's shares, it can prove it has the power to control the bank, either directly or indirectly. Notwithstanding any other regulation, all foreign investors that become controlling shareholders in a bank should comply with these requirements:
i) They will commit to support Indonesia's economic development through the bank they have become controlling shareholder of.
ii) They will obtain a recommendation from the financial authority in their country of origin.
iii) Their investment has a credit rating.
The rating of the investment will be determined based on investor's type of business. For a foreign bank, the rating will need to rank at least one notch above the lowest investment grade. For foreign non-banking financial institutions, this will be two notches above the lowest investment grade. Finally, for foreign non-financial institutions, this will be three notches above the lowest investment grade. It should also be noted that a listed foreign bank that becomes the controlling shareholder in a listed Indonesian bank has to conduct a mandatory tender offer for the remaining shares of the target bank in accordance with Indonesian capital markets law.
In connection with the aforementioned controlling shareholder provisions, an investor shall also take into account the single presence policy and its implementing regulation under BI circulation letter number 15/2/DPNP dated February 4 2013 regarding single ownership in Indonesia Bank. Pursuant to the policy, any controlling shareholder of an Indonesian bank should be limited to owning only one bank.
The single presence policy will not apply to shareholders that control two different banks, if these banks conduct business according to different principles – for instance, a conventional commercial bank and one based on shariah principles – and controlling shareholders of two different banks, if one is a joint venture bank.
In the event a controlling shareholder purchases shares in another bank and this leads to them becoming a controlling shareholder of that second bank, then both banks shall comply with the single presence policy. Compliance can be achieved in the following ways: merging or consolidating the controlled banks; forming a holding company in the banking industry, or; forming the holding function. The second bank as the target bank of the controlling shareholders shall submit a single presence policy compliance plan to OJK during the acquisition process.
Other relevant provisions
Bank acquisitions in Indonesia must also conform with the competition law of 1999, including its implementing regulation, as specified under government regulation number 57 of 2010 concerning mergers or consolidations and share acquisitions which may cause a monopoly and unfair business competition. They also have to comply with requirements outlined by the Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan Usaha or KPPU) requirements as well as its regulation number 11 of 2010 regarding consultations on mergers or consolidations of business entities, and unfair business competition; and KPPU regulation number 13 of 2010 as lastly amended by KPPU regulation number 2 of 2013 regarding guidelines on mergers, consolidations of business entities and acquisitions of shares which may cause monopoly practices and unfair business competition.
Based on the competition law and its implementing regulations, the target company must notify and disclose the information regarding the acquisition transaction to KPPU, for an assessment of possible unfair business competition. In this matter should the foreign investor operate in the banking industry, the notification and disclosure shall be conducted if the value of the assets of the target bank exceeds IDR 20 trillion ($1.5 billion). If the investor is not a bank, the notification and disclosure will be conducted if the value of the assets exceeds IDR 2.5 trillion.
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Imran Muntaz Managing Partner Imran Muntaz is the founder and managing partner of Imran Muntaz & Co. (IMCO). Prior to establishing IMCO, he worked at two prominent law firms in Indonesia and has more than 17 years of experience in various areas of law, including capital markets & securities, corporate, commercial and M&A, banking & finance, energy & natural resources, real estate, IT & telecommunications, transportation, shipping & logistics and commercial disputes. Muntaz has represented clients ranging from multinationals and offshore companies to state-owned and local companies, including in cross-border transactions. Muntaz was shortlisted as managing partner of the year by the Asian Legal Business Awards, and IMCO has been recommended in the areas of capital market and securities, banking and finance, and M&A. |
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Michael Cecio Bangun Associate Michael Cecio Bangun is an associate at IMCO, and has been practising in the areas of corporate, commercial/M&A; banking & finance and capital markets. He started his practice in the areas of capital markets and M&A in a number of other Indonesian law firms. He is a graduate of the University of Indonesia. |
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Miriani Holungo Associate Miriani Holungo is an associate at IMCO and a graduate of the University of Indonesia. Prior to joining the firm, she worked in the corporate commercial and infrastructure practice in a Jakarta-based law firm. |