Under Government Regulation No. 29 of 1999 regarding the Acquisition of Shares of Commercial Banks (GR 29/1999), any single investor (including a foreign investor) may currently acquire up to 99 per cent of the shares of an Indonesian commercial bank. This high threshold was introduced in an effort to spur growth in the immediate aftermath of the 1997 Asian financial crisis. Under GR 29/1999, any investor who intends to acquire more than 25 per cent of the issued shares of an Indonesian commercial bank or otherwise exert control must obtain the prior approval of the regulator - Bank Indonesia (BI), the Indonesian central bank - and pass BI’s “fit and proper” test.
The Indonesian banking sector has over the last five to ten years been attractive for foreign investors (especially foreign banks), who see Indonesia as an important emerging market with strong GDP growth and a growing and increasingly sophisticated and wealthy middle class. This, combined with the high ownership threshold under GR 29/1999 and the introduction of the Single Presence Policy1 in 2006, which was intended to force consolidation of the banking industry, has resulted in numerous international banks and other foreign investors acquiring significant or controlling interests in the larger Indonesian banks2.
- Introduced by Bank Indonesia Regulation No. 8/16/PBI/2006 dated 5 October 2006.
- Based on Bank Indonesia’s statistics (as at March 2011), there are 122 commercial banks, the majority of which are very small. Of these, 10 are majority foreign-owned and 28 are foreign joint venture banks.
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Bank Indonesia proposal on ownership rules
BI announced in July 2011 a proposal to limit ownership by any single shareholder or corporate group (whether domestic or foreign) of commercial banks in Indonesia. The proposal is part of BI’s attempt to make the Indonesian banking sector more financially prudent and to prevent excessive levels of influence over any Indonesian bank being exerted by a single shareholder. The Indonesian banking sector has escaped relatively unscathed from the 2008/2009 global financial crisis largely due to the lack of exposure to the complex derivatives and other financial products which have caused such devastation with certain Western banks and there is a sentiment in certain sectors of Government and the Indonesian banking industry that Indonesian banks need to be shielded from the influence of international banks and their perceived risky investment practices. Such a move would also bring Indonesia’s bank ownership rules more in line with other ASEAN countries.
The BI proposal is currently at an early stage in the legislative process and details of the proposed permitted level of ownership by any single shareholder or corporate group have not yet been finalised. We understand that BI is keen to discourage any single investor or corporate group from acquiring control of any Indonesian bank and therefore, it might push for a limit of 50 per cent or less. But there are indications that certain politicians and business leaders recognise that such a move could negatively impact on the ability of the Indonesian banking sector to attract the foreign investment which is essential for the growth of the industry and that, as a result, the new limit could be 51 per cent. We understand that the draft amendment to GR 29/1999, which will introduce the new ownership limit, is being prepared by the Directorate of Banking Regulatory and Research of BI for inclusion in the National Legislation Program to be tabled before the House of Representatives. It is unclear when any new regulations will be debated by Parliament and, if approved and issued, when they will become effective. According to comments made by BI Governor, Darmin Nasution, the new regulations could come into effect as early as the fourth quarter of this year.
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Implications for existing investors holding majority stakes in Indonesian banks
We understand that the current BI proposal does not envisage any grandfathering provisions for investors who currently hold up to 99 per cent of Indonesian banks and that it actually requires such investors to divest down to the new limit. If this element of the proposal makes its way into the final regulations approved by Parliament, this could clearly have very significant implications for existing investors, although it should be noted that BI has indicated that affected investors would be given a significant period of time after the new regulations come into effect to comply with any divestment obligations.
Although it is currently unclear, it seems likely that the four state-owned banks - Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Tabungan Negara (Persero) - would be exempted from the new regulations. Similarly, branches of foreign banks will not be affected by the new ruling as they are not considered to be Indonesian banks for the purposes of Indonesian regulations.
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