26 June, 2012
Legal News & Analysis – Asia Pacific – Indonesia – Banking & Finance
Indonesia is widely recognised as having one of the most liberal regimes in the Asian region for foreign ownership of banks. Currently, a foreigner can own up to 99% of the shares in an Indonesian bank. This is, in part, a legacy of the Asian financial crisis of the late 1990s when ownership was opened up to help capitalise many of the banks at that time. In recent years there has been a growing move to put in place more controls on ownership of banks. The recent announced takeover by DBS Group Holdings (“DBS”) of PT Bank Danamon Indonesia Tbk (“Danamon”) has, however, brought the matter to a head, forcing Bank Indonesia’s (“BI”) hand in the hitherto inconclusive debate.
The new rules regarding the ownership of Banks in Indonesia are expected to be issued by BI by late June 2012. In the meantime, there has been widespread press reports and speculation regarding the basic elements of these new rules (the broad themes of which are summarised below). We will follow-up with another e-bulletin once the new rules are published.
DBS’ possible takeover of Danamon – a brief recap
As has been widely reported, DBS entered into a conditional sale and purchase agreement (“CSPA”) in early April 2012, at the Singapore level, with Fullerton Financial Holdings Pte. Limited (“FFS”) to acquire all of the shares held by FFS in Asia Financial (Indonesia) Pte. Ltd. (“AFI”), which currently holds shares in Danamon equal to approximately 67.37% of the total issued and paid up share capital of Danamon (“Proposed Transaction”). Assuming DBS and FFS are under different control, completion of the Proposed Transaction under the CSPA (which is subject to various conditions, including obtaining the necessary regulatory consents) will trigger a mandatory tender offer to be made by DBS to the remaining shareholders of Danamon (the “MTO”). For further details regarding Bapepam-LK’s MTO and BI rules, which are relevant in the context of the DBS / Danamon transaction, please click here.
The key regulatory approval required in respect of the Proposed Transaction (completion of which is necessary for the successful launch of the MTO), is BI’s approval for the change in controller of Danamon.
Since DBS’ announcement on 2 April 2012 of the Proposed Transaction, there has been a series of largely negative press reports in Indonesia in relation to the transaction. The general tenor of these reports centered around the dominance of foreign participants (including those from neighboring countries) in controlling banks in Indonesia, and the lack of reciprocity encountered by Indonesian banks seeking to expand to neighboring countries (e.g. Malaysia and Singapore). This culminated in a statement by the Governor of BI, towards the end of April 2012, that BI will not process the application (in relation to the Proposed Transaction) which has been submitted by DBS to BI, until BI has issued an intended new regulation regarding the ownership of banks in Indonesia.
Bank ownership limit – proposals
The expected new BI regulation, in relation to the permissible level of bank ownership in Indonesia, is scheduled to be issued by the end of June 2012, and there has been increased public discussion of it in recent weeks. While there has been no shortage of speculation in the press (fed, in part, by periodic statements to the press from BI officials), the exact content of the proposed new regulation remains uncertain.
Recent press reports suggest that thenew regulations may include the following features (but these remain unconfirmed by specific regulations and are speculative at this stage):
1. The new rules will apply to both domestic and foreign investors, and may affect not only foreign-owned banks but also banks which are currently ultimately controlled by Indonesian individuals or families, or other Indonesian owned legal entities.
2. The nature of the current controlling shareholder may determine the level of permissible ownership, i.e.:
(a) a non-bank financial institution may own up to 40% of the shares in the bank;
(b) a non-financial institution legal entity may own up to 30% of the shares in the bank; and
(c) individuals and/or families may own up to 20% of the shares in the bank (“40-30-20 Rule”).
3. It has also been suggested that for a new investor which is itself a bank, ownership above 50% may be allowed, as a bank will be truly ‘highly regulated’. Most recent statements suggest that even up to 90% ownership of a bank by a high quality bank may be allowed in appropriate cases.
4. BI will investigate the conditions of all banks over the next 18 months and apply a “good corporate governance” (GCG) rating to each bank to determine the level of permissible ownership (as set out above), i.e. if a bank has a GCG rating of 3 and above (1 being the best rating), its current controlling shareholder will be required to divest its stake to the relevant permitted level, if the bank fails to improve its GCG rating within a specified period of time. Details of the GCG rating system remain unclear.
5. Whether and how the regulation will be applied to existing owners (including foreign owners) remains very unclear. Possibilities include: unofficial suggestions that the new ownership limit will not be applied retrospectively (or at least in cases where the governance rating is sufficiently strong) or that there will be a long transition period (>10 years).
6. BI’s current “single presence policy” – which allows (save for certain exemptions) a party to be a controlling shareholder of one commercial bank only at any one time and which requires, among other things, a shareholder controlling two banks to merge the two banks together – may be amended such that the merger requirement will no longer apply.
7. The controlling shareholders of banks will be subject to a rating requirement. In particular, a controlling shareholder which is a:
(a) bank, must have a rating of at least BBB;
(b) non-bank financial institution, must have a rating of at least BBB+; and
(c) a non-financial institution legal entity, must have rating of at least A.
8. State-owned banks will be exempted from the new ownership limit rules.
Press commentary
These proposals raise a range of potential issues, the outcome of which currently remains highly uncertain. Recent commentary in the press includes the following key aspects:
1. Recent suggestions that a new foreign investor, which is itself a high quality bank, may be allowed to own more than 50% (and perhaps significantly higher) of the shares in an Indonesian bank, has revived speculation that BI may approve the DBS / Danamon transaction.
2. The new proposals may have a disproportionateimpact on smaller banks or family controlled banks, as they tend to have poorer GCG ratings, compared to larger banks (including large foreign owned banks). Hence, a strand of recent press commentary focuses on the possibility of the new rules resulting in even stronger foreign domination of the banking sector in Indonesia, as smaller or family controlled banks seek to sell to foreigners, having failed to improve their GCG rating.
3. Some state-owned banks, on the other hand, have welcomed the removal of the requirement to merge two banks who are under the common control of a single shareholder (“single presence rule”), as this may enable them to acquire smaller banks with weaker GCG ratings.
4. There continues to be calls for neighbouring countries (in particular, Malaysia and Singapore) to provide reciprocity in connection with Indonesian banks seeking to expand in those countries.
5. There continues to be doubts on how the 40-30-20 Rule (if it is implemented in the form currently suggested) will be applied with respect to parties who are buying shares in the relevant bank following any divestment by the current controlling shareholder. Will these buyers be limited to a minority stake? If so, will there be sufficient buyers who are willing to buy a minority stake?
6. It remains unclear how the new ownership limits will be applied if the bank in question undergoes a non pre-emptive issue of shares in favour of a shareholder which results in that shareholder exceeding the relevant ownership limit. There are suggestions that this is permissible, provided that the shareholding structure of the bank is corrected (to comply with the new ownership limits) within a specified period of time following such issue of shares.
7. It is also unclear how the new expected BI bank ownership regulation will sit alongside Government Regulation 29/1999 (which allows foreigners to own up to 99% of shares in Indonesian banks).
Preliminary observations
It is difficult at this stage to provide definitive commentary with any certainty given the fluid nature of the current public debate. Having said that, it seems to us that the current emerging picture is that the new rules are likely to be quite nuanced and seem unlikely to target foreign investors specifically, as the general philosophy appears to be guided by the principles of good corporate governance and the promotion of a healthy banking sector in Indonesia. It also seems more likely that majority ownership of Indonesian banks by foreign banks may be allowed in appropriate cases where good corporate governance principles are strictly applied. Until the new rules are issued by BI, the current uncertainties will continue to affect the implementation of bank target M&A transactions in Indonesia.
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