• Bank Indonesia Publishes New Ownership Rules In Relation To Indonesian Banks
  • August 9, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Background
    After much uncertainty over the last 12 months, the Indonesian central bank, Bank Indonesia, published on Wednesday 18 July 2012 a new regulation, Regulation No. 14/8/PBI/2012, limiting the ownership by a single shareholder or corporate group (whether domestic or foreign) of Indonesian banks (the New Bank Ownership Rules). According to various public statements made by Bank Indonesia over the last 12 months, the New Bank Ownership Rules are intended to: (i) promote good corporate governance within the Indonesian banking sector; (ii) financially strengthen Indonesian banks; and (iii) prevent excessive levels of influence over any Indonesian bank being exerted by any single shareholder.


    The New Bank Ownership Rules

    Ownership limits
    The New Bank Ownership Rules apply to both foreign and domestic shareholders and limit the ownership of an Indonesian bank as follows:

    a. a single bank or non-bank financial institution can hold up to 40 per cent of the issued share capital of an Indonesian bank;
    b. a single non-financial institution can hold up to 30 per cent of the issued share capital of an Indonesian bank; and
    c. individuals can hold up to 20 per cent of the issued share capital of an Indonesian bank. The limit is 25 per cent of the issued share capital for individual shareholders if the Indonesian bank is an Islamic bank.

    The New Bank Ownership Rules do not allow every non-bank financial institution to hold up to a 40 per cent stake in an Indonesian bank. Instead, the New Bank Ownership Rules provide that only those non-bank financial institutions that:

    a. are authorised under their constitutional documents to participate in a ‘long-term’ investment (which is undefined in the New Bank Ownership Rules); and
    b. are governed and supervised by a financial regulator/authority,

    are permitted to hold up to a 40 per cent stake in an Indonesian bank. A non-bank financial institution which fails to satisfy these two criteria will only be allowed to hold up to a 30 per cent stake in an Indonesian bank.

    The New Bank Ownership Rules do not define the terms ‘bank’, ‘non-bank financial institution’ or ‘non-financial institution’. However, the guidance notes to the New Bank Ownership Rules provide that the following:

    a. will constitute non-bank financial institutions: insurance companies, pension funds, or finance companies; and
    b. will not constitute non-bank financial institutions: a special purpose vehicle, fund management company or hedge fund.

    Based on the above, it is likely that Bank Indonesia would treat a sovereign wealth fund as a non-financial institution and will therefore limit its ownership of an Indonesian bank at 30 per cent.

    The New Bank Ownership Rules also prevent shareholders working in concert to exceed the ownership limits set out above.

    Exemptions
    Banks
    A listed bank (the Shareholder Bank) that has been passed as fit and proper by Bank Indonesia may be permitted to hold more than 40 per cent and up to 99 per cent of an Indonesian bank subject to receipt of approval from Bank Indonesia and provided that the Shareholder Bank meets the following criteria:

    a. it must be financially healthy;
    b. have a minimum capital adequacy ratio in accordance with its risk profile;
    c. have a tier 1 capital of at least 6 per cent;
    d. be recommended by the Shareholder Bank’s home regulator to acquire a stake in the Indonesian bank;
    e. have committed to purchase the Indonesian bank's debt that is convertible into equity in the Indonesian bank (the Convertible Debt);
    f. have committed to hold its stake in the Indonesian bank for a period of time as determined by Bank Indonesia; and
    g. have committed to support Indonesian economic development through the relevant Indonesian bank.

    However, the New Bank Ownership Rules include three provisions which limit the applicability of the above exemption:

    a. the New Bank Ownership Rules provide that any acquisition by a Bank Shareholder of more than 40 per cent of an Indonesian Bank must be made in two separate stages:

    (i) the Shareholder Bank must first acquire up to 40 per cent of the Indonesian Bank; and

    (ii) thereafter the Shareholder Bank can only increase its stake above 40 per cent: (1) after five years from the date on which Bank Indonesia approved the Shareholder Bank acquiring the relevant stake; and (2) provided that the Indonesian bank has maintained its level of financial strength and good corporate governance required under Indonesian law for at least three consecutive years within that five year review period.

    However, as noted below, Bank Indonesia has retained a general right to authorise (for a specific period of time) any shareholder to hold a stake in an Indonesian bank which is greater than that permitted by the New Bank Ownership Rules - Bank Indonesia may use this general right to authorise a Shareholder Bank to hold more than 40 per cent of an Indonesian Bank during the five year ‘review period’ and thus avoid the need for the two stage acquisition process outlined above;
    b. within five years from the date of the acquisition of the relevant stake in the Indonesian bank by the Shareholder Bank, the Indonesian bank must list its shares and have at least 20 per cent of its issued share capital held by the public; and
    c. the Indonesian bank is required to obtain all necessary approvals to issue Convertible Debt. The New Bank Ownership Rules do not explain: (i) what approvals will be required to issue the Convertible Debt; (ii) the procedure for obtaining such approvals; or (iii) the timing for obtaining such approvals. However, as noted above, the New Bank Ownership Rules do require the new Shareholder Bank to commit to purchase such Convertible Debt.

    Government

    The New Bank Ownership Rules do not apply to the ownership of an Indonesian bank by the central Government, the regional Government or the Indonesian Bank Restructuring Agency. Therefore, the existing four state-owned banks - Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Tabungan Negara (Persero) - will be exempted from the above ownership limits.

    Indonesian branches of foreign banks

    Similarly, branches of foreign banks will not be affected by the new rules as they are not considered to be Indonesian banks for the purposes of Indonesian regulations.

    Islamic banks

    Majority shareholders of Islamic banks that are created by the spin-off of a sharia unit by a non-Islamic bank will not be subject to the ownership limits set out in the New Bank Ownership Rules until December 2028.

    General exemption

    Bank Indonesia has retained a general right to authorise (for a specific period of time) any shareholder to hold a stake in an Indonesian bank which is greater than that permitted by the New Bank Ownership Rules. The New Bank Ownership Rules do not specify under what circumstances Bank Indonesia would grant such an exemption. However, the guidance notes to the New Bank Ownership Rules do provide that Bank Indonesia would, in deciding whether or not to grant the exemption, have regard to the stability of the Indonesian financial system and national economic development.

    Effective date
    The New Bank Ownership Rules take immediate effect.

    Existing majority shareholders
    On the face of it, the New Bank Ownership Rules do not require an existing shareholder that holds a stake in an Indonesian bank which is greater than that permitted under the New Bank Ownership Rules to divest its holding down to the permitted level.

    However, an existing shareholder of an Indonesian bank that today holds a stake which is greater than that permitted under the New Bank Ownership Rules will be required to divest its holding down to the level permitted under the New Bank Ownership Rules:

    a. by 1 January 2019 if the Indonesian bank fails to maintain its required level of financial soundness and good corporate governance for the annual review period up to December 2013;
    b. if the Indonesian bank fails to maintain its required level of financial soundness and good corporate governance for any consecutive three year period after the end of December 2013, in which case the divestment must be conducted no later than five years from the date of the last annual review period; or
    c. if the existing shareholder sells part of its stake in the Indonesian bank. The divestment must be conducted no later than five years from the date on which the existing shareholder sold part of its stake in the Indonesian bank.

    The New Bank Ownership Rules do not provide any guidance as to the terms and conditions (including price) of any such forced divestment.

    Additional new requirements applicable to foreign investors

    The New Bank Ownership Rules also provide additional requirements applicable to a foreign “controlling shareholder” (being any foreign shareholder that has more than 25 per cent of the Indonesian bank) (the Foreign Controlling Shareholder).

    In addition to being approved as ‘fit and proper’ by Bank Indonesia, a Foreign Controlling Shareholder must:

    a. commit to support Indonesian economic development through the Indonesian bank;
    b. obtain a recommendation from the financial supervisory regulator in its ‘home country’; and
    c. have the following investment rating:

    (i) for a foreign bank, one grade above the lowest investment rating;

    (ii) for a foreign non-bank financial institution, two grades above the lowest investment rating; and

    (iii) for a foreign non-financial institution, three grades above the lowest investment rating.

    The investment grading will be based on Fitch, Moody's or Standard & Poor and other rating agencies approved by Bank Indonesia.


    Implications

    New bank investors
    Whilst the New Bank Ownership Rules do allow for a Shareholder Bank to own more than 40 per cent of an Indonesian bank, there are two material obstacles to this, which may be of concern to any new bank investors looking to enter the Indonesian banking sector.

    First, the New Bank Ownership Rules require the Shareholder Bank to acquire its stake in two tranches (i.e. the Shareholder Bank must first acquire 40 per cent and then, five years later, the balance of its stake assuming certain levels of financial soundness and corporate governance are met by the Indonesian bank). This five year ‘review period’ presents a significant obstacle to new bank investors looking to take a majority stake in an Indonesian bank. However, as noted above, Bank Indonesia has retained a general right to authorise (for a specific period of time) any shareholder to hold a stake in an Indonesian bank which is greater than that permitted by the New Bank Ownership Rules - we will need to wait and see whether Bank Indonesia will use this general exemption to allow new bank investors to take a majority stake in an Indonesian bank during the five year ‘review period’.

    Secondly, within five years from the date of the acquisition of the Indonesian bank by the Shareholder Bank, the Indonesian bank must list its shares and have at least 20 per cent of its issued share capital held by the public.

    Existing institutional investors

    There are currently at least 13 foreign banks operating through subsidiaries or joint ventures in Indonesia. Over the last 12 months there had been a concern hanging over the Indonesian banking sector that Bank Indonesia would introduce new regulations that would force wide scale divestment by foreign shareholders of their shareholdings (or a significant portion of their shareholdings) in Indonesian banks. Fortunately, this concern does not appear to have materialised and the New Bank Ownership Rules will allow financially strong Indonesian banks with good corporate governance records to continue to be majority owned by their existing shareholders.

    However, the New Bank Ownership Rules do have one immediate area of concern for existing majority shareholders, which is the obligation on an existing shareholder of an Indonesian bank that today holds a stake which is greater than that permitted under the New Bank Ownership Rules to divest its ownership down to the permitted level if the existing shareholder sells part of its stake in the Indonesian bank. The divestment must be conducted no later than five years from the date on which the existing shareholder sold part of its stake in the Indonesian bank. The affect of this provision is that if an existing shareholder who today, for example, holds 99 per cent of an Indonesian bank sells 10 per cent of that holding, that shareholder will be required to sell down to 40 per cent within the next five years.

    This is a particular concern in the context of the existing divestment obligations in Indonesia which are set out in the Regulation of the Capital Market Supervisory Board No. KEP-264/BL/2011 and broadly require that:

    a. if, as a result of an acquisition, a new shareholder owns more than 80 per cent of a listed bank and is subsequently required to undertake a mandatory tender offer, the new shareholder must divest the shares that it acquired through the tender offer; and
    b. if, as a result of the implementation of a mandatory tender offer, a new shareholder owns more than 80 per cent of the shares of a listed bank, the new shareholder must divest shares so that 20 per cent is held by public shareholders, in each case within two years from completion of the mandatory tender offer.

    As a result of this, an existing shareholder who today complies with these existing divestment obligations (or indeed any of the divestment obligations under the New Bank Ownership Rules set out above, such as the requirement that the Indonesian bank must list its shares and have at least 20 per cent of its issued share capital held by the public) will in doing so need to sell down to 40 per cent within five years from the date of the relevant disposal.

    Existing non-financial institutional investors or individuals
    A number of Indonesia's banks are currently controlled by families or conglomerates that could be required to sell down their positions under the New Bank Ownership Rules if the Indonesian bank fails to maintain its required level of financial soundness and good corporate governance. This will, in our view, provide future acquisition opportunities in the Indonesian banking sector during the next five years.

    The above is simply a summary of some of the key issues resulting from the New Bank Ownership Rules and is not a substitute for legal advice.