INDONESIA: An Introduction to Capital Markets

Indonesia: Capital Market Overview 

Introduction 

Indonesia, South East Asia’s largest economy, suffered tremendous blows in 2020, as did the rest of the world at the height of the COVID-19 pandemic. The Indonesia composite index reached a record low by the end of March 2020, evidence of the near instant devastation. The Indonesian capital market, in particular, suffered extreme market volatility with low to almost no activity. On the ground, most capital market transactions were cancelled or postponed, to indefinitely await “better times.”

While the rest of the world was busy wondering what the future would bring, remarkably, this unprecedented era did not deter, and in fact, partly propelled Indonesian lawmakers into ushering in a landmark era of regulatory reforms to attract global investors and to facilitate ease of doing business in Indonesia. One of the most groundbreaking reforms was the enactment of the revolutionary Law No. 11 of 2020 on Job Creation (“Job Creation Law”). This law introduced new systems for improving the investment and business ecosystem, adjusted some aspects of employment, and amended 78 regulations, to provide ease of doing business and business licensing, all in an effort to lure investors to Indonesia. The Job Creation Law also championed the importance of the creation of the first ever Indonesian sovereign wealth fund, the Indonesia Investment Authority (“INA”).

In keeping with the spirit of the Job Creation Law under the spirited leadership of the President of Indonesia and his Government, the Indonesian Stock Exchange (“IDX”) and Indonesian Financial Service Authority (“OJK”), likewise, issued a series of regulatory reforms to not only allay investors’ concerns and enhance the protection of companies, stakeholders, and the public, but also to set the scene for increasing foreign investment into the country at a time when most other countries’ economies were lying in tatters. This resulted in the Indonesian market making a positive comeback with the IDX seeing an increase of 42% in the total number of capital market investors in 2020 compared to 2019. It was not only a welcome sign to the citizens of Indonesia, but also undoubtedly showed a massive return of public confidence and investor appetite in the Indonesian capital market.

This overview shines a spotlight on some of the recent regulatory advances made in the domain of capital markets, all resulting in a better way of doing business in Indonesia. They all exemplify OJK’s efforts to continuously redefine and ultimately perfect its governance of the Indonesian capital market to be at par with, if not better than, well developed capital markets jurisdictions.

2020 regulations 

As a practical and emergency response to the COVID-19 pandemic, the OJK immediately issued OJK Regulation No. 16/POJK.04/2020 on electronic general meeting of shareholders and OJK Regulation No. 41/POJK.04/2020 on electronic IPO, to relax capital market activities and simplify submission processes. These regulations were received positively by companies and stakeholders, who were able to carry out corporate actions despite government imposed COVID-19 physical restrictions. Similarly, to allay investors’ concerns on the volatility of the market, the IDX issued IDX Announcement No. Peng-00085/BEI.POP/03-2021 which suspended short selling of securities for an indefinite period of time. OJK Regulation No. 7/POJK.04/2021 on the other hand declared the OJK’s authority to determine and implement certain policies to maintain the performance and stability of the Indonesian capital market until 31 March 2022. This includes, for example, the relaxation of timelines in submitting certain periodic and incidental reports.

The OJK also introduced fundamental reforms in key securities regulations to protect the interests of companies and the public. For instance, OJK Regulation No. 42/POJK.04/ (“POJK 42/2020”) was enacted to, amongst other things, broaden the coverage of what is classified as an “affiliated transaction” and “material transaction” that should be disclosed to the public while adding a higher financial ratio (i.e. quantitative criteria) as basis for the classification. POJK 42/2020 forces publicly listed companies to comply with more stringent disclosure requirements to ensure that material, affiliated and/or conflicting transactions are implemented in accordance with customary arms-length business practices.

Moving forward 

As the Indonesian capital market continues to gain stable ground, in February 2021, the OJK announced a major regulatory overhaul through the issuance of OJK Regulation No. 3/POJK.04/2021 on the implementation of capital market activities (“POJK 3/2021”). POJK 3/2021 is expansive, covering several sections and activities in the Indonesian capital market, such as the stock exchange, the clearing agencies, various types of securities businesses, securities companies, fund managers, rating agencies, share registrars, trusteeship agencies, supporting professionals, and rules on publicly listed companies. POJK 3/2021 also covers procedures for permits, approvals, registrations, and sanctions of the OJK.

We set out below some key highlights of POJK 3/2021.

Designation of controlling shareholder/s and expansion of liability of controlling shareholders, Board of Directors, and Board of Commissioners of a publicly listed company

Under POJK 3/2021, the OJK now requires the mandatory designation of controlling shareholder(s) for publicly listed companies and expands the threshold of liability by holding the controlling shareholder(s), Board of Directors and Board of Commissioners, liable for their wrongful actions that cause losses to the publicly listed company. The rationale for this is to ensure that the people responsible for taking decisions in a publicly listed company are held accountable for their actions and that would in turn discourage mismanagement and promote good governance in the company. However, it should be mentioned that, in practice, the mandatory designation of a publicly listed company’s “controlling shareholder” may raise issues, especially if the publicly listed company has no “controlling shareholder” or if there is an open issue as to who among the shareholders is the “controlling shareholder.” At any rate, this designation will only be relevant for the first registration statement to the OJK (i.e. required for new companies intending to conduct an IPO) or when there is any change of control in a publicly listed company. The designation of who is the controlling shareholder of a publicly listed company shares a similar objective with the requirement to disclose the beneficial owner (the ultimate individual person who has control of the company) under Presidential Regulation No 13 of 2008 for more identified accountability.

Going Private 

POJK 3/2021 also now provides more routes for a publicly listed company to become a private company. Currently, there are three triggers for when a publicly listed company can become a private company: (i) by initiative of a publicly listed company; (ii) by order of the OJK; and (iii) through an application lodged by the IDX. The first route is a clear option for the publicly listed company, while the other two can be viewed as “consequences” of not properly managing a publicly listed company and failing to comply with OJK rules and regulations or IDX-related decrees. These “consequences” deter non-compliance by publicly listed companies of the OJK and IDX rules while incentivizing those that are compliant.

POJK 3/2021 also introduced the concept of “shares buyback” as a mechanism for publicly listed companies to become private companies. This is a significant addition because, in the past, going private was only achieved by publicly listed companies through a voluntary tender offer.

One flaw of POJK 3/2021 is that it still does not provide for a “squeeze-out” mechanism which would allow the compulsory sale of the shares of certain minority shareholders. In the past, many publicly listed companies opting to go private encountered difficulties in contacting their minority shareholders and, therefore, failed to meet the minimum 50 shareholders requirement for changing its status from a publicly listed company to a private company. A clear “squeeze-out” mechanism would have addressed this issue.

Other important developments 

A final issue worth noting is OJK’s more open and receptive approach towards new, tech-enabled businesses or products. Several new startups have emerged and are licensed as either stock brokerages, fund managers, or mutual fund agents incorporating certain elements of robo-advisory. OJK has also started to run a sandbox on robo-advisory within its Digital Financial Innovation department. In December 2020, the OJK revised the crowdfunding regulation under OJK Regulation No. 57/POJK.04/2020. Under this new regulation, a licensed crowdfunding operator can offer both equity and debt securities to the public. This would allow micro or small-scale public offering of securitized loans and project financing. It is, however, still too early to assess the impact of these new initiatives.

All of these are in line with OJK’s vision to deepen the capital market outreach to become more retail, both on the issuer side and the investor side. Hopefully this will create a more robust environment for the market to flourish despite the challenges posed by COVID-19.

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About Makes & Partners 

Makes & Partners is “the best independent law firm in the capital markets space, often working on complex and often precedent-setting capital markets deals.” We have been consistently ranked by Chambers Asia-Pacific as a Band One capital markets law firm in Indonesia. Our managing and founding partner, Dr. Yozua Makes, and senior partner, Iwan Setiawan, are “pre-eminent lawyers in the field, with the gravitas, knowledge, and network to drive commercial outcomes” and are “recognised for their longstanding experience and Indonesian market connections”. Dr Yozua Makes is a member of the Supervisory Board of the Indonesia Investment Authority. For more information about our Firm, our practice areas, and team, please visit our website at https://www.makeslaw.com.