Equity capital markets in Indonesia: regulatory overview
A Q&A guide to equity capital markets law in Indonesia. The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity Capital Markets Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.
Main equity markets/exchanges
Main equity markets/exchanges
The Indonesia Stock Exchange (IDX) (www.idx.co.id) is the sole surviving securities market in Indonesia following over 100 years of trading history in the country. The principal securities traded on the IDX are shares (including rights) and bonds. Some share options and futures trading is also carried on, but not a significant amount. To date, no foreign companies have sought a listing on the IDX despite the market regulator (Bapepam-LK) introducing rules in 1997 permitting the issuance of Indonesian Depositary Receipts by foreign companies considering a dual listing, or even an IPO in Indonesia. The capital market regulations make no provision for safe havens of the type established by Regulation S and Regulation S/Rule 144A under the US Securities Act of 1933 (whereby foreign issuers wishing to list do not have to register or provide a prospectus if offering securities solely to certain classes of investors), although discussions are currently ongoing as to the possibility of providing a similar exemption, not only for foreign issuers on the IDX, but also domestic issuers targeting their offerings solely at sophisticated investors.
Market activity and deals
Equity market. Indonesia has experienced continuing robust economic growth despite the downturn in Europe and the Jakarta Composite Index (JCI) reached an all-time high of 4,193.44 points in August 2011. Since then the JCI has retreated to trade in a range of between 3,900 and 4,000 at the start of March 2012. Overall, the JCI was up 2.84% at the end of 2011 compared with 2010. This compares favourably with declines of 16.21% for Singapore, 17.89% for Japan and 20.13% for Hong Kong.
Market capitalisation rose 8.54% to IDR3,524.48 trillion on 29 December 2011 from IDR3,247.10 trillion at the end of December 2010 (as at 1 February 2012, US$1 was about IDR8,952), with the average daily transaction value increasing by 3.36% to IDR4.96 trillion from a year earlier. The number of transactions each day in 2011 averaged 113,614, marking an increase of 7.40% from 2010, while the average daily share transaction volume amounted to IDR4.87 billion, a decline of 10.32% from IDR5.43 billion in 2010. This was in line with the overall increase in share prices.
The IDX listed a total of 25 new issuers in 2011, the highest number of initial public offerings (IPOs) in the last ten years. The most prominent of these were PT Garuda Indonesia (Persero) Tbk, PT Atlas Resources Tbk PT Megapolitan Developments Tbk, PT Martina Berto Tbk, and PT Greenwood Sejahtera.
A total of IDR62.309 trillion was raised from equity offerings in 2011, with:
IPOs accounting for IDR19.593 trillion.
Rights issuances accounting for IDR42.141 trillion.
Warrants accounting for IDR575 billion.
Corporate debt market. Trading on the corporate debt market rose to IDR126.31 trillion in 2011, marking an increase of 40% compared to 2010. The number of transactions rose 20% to 18,022 from 2010, while average transaction volume rose 41% from IDR364.02 billion each day in 2010 to IDR513.44 billion in 2011. A total of 46 corporate debt offerings were listed by the IDX in 2011, marking an increase of 31% from 35 issues in 2010, while total value rose 18% from 2010 to IDR45,957 trillion in 2011.
Prospects for 2012/2013
While the European debt crisis has not impinged directly on growth in Indonesia, investors have become increasingly jittery which led to the postponement of a number of planned equity and debt offerings in 2011 and early 2012. A new Bank of Indonesia policy imposing restrictions on foreign ownership of Indonesian financial institutions has also led to the derailment of a number of proposed transactions. However, overall 2011 was an outstanding year for the JCI and this trend is set to continue in the short-term, with analysts predicting gains of about 15% this year, barring external shocks.
Medium-term prospects depend on continuing growth in China, a resolution to the Eurozone debt crisis, and the overall geopolitical climate, with oil prices being a particular concern at the present time. Prospects will also be influenced by a looming presidential election in 2014. As President Susilo Bambang Yudhoyono is ineligible to stand for a third term, a bad-tempered race to succeed him is possible.
The capital markets are regulated by the Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK) (www.bapepam- LK.go.id). The following are self-governing bodies:
Since the enactment of the Capital Markets Act (No. 8 of 1995) scripless trading has been used (that is, electronic trading where physical share certificates do not change hands). To facilitate this, the KSEI was established. Despite Indonesia being a civil law jurisdiction that generally does not recognise the distinction between legal and beneficial ownership, the Capital Markets Act does acknowledge such a separation. An investor holds its securities beneficially in a security account maintained by the KSEI through the investor's custodian, with the KSEI acting as the legal owner of the securities. In the case of equity, the KSEI acts as global custodian and is recorded in the register of members of the relevant issuer. Investors also maintain a cash account into which payments related to their securities are made (such as dividend distributions, coupon payments or payments related to the sale of securities).
The key pieces of legislation are:
Capital Markets Act.
Bapepam-LK rules and regulations (Bapepam-LK Rules).
IDX rules on listing, trading, and membership requirements.
The IDX maintains two boards; the main board and the development board. In order to secure a listing on either the main or development board, the listing company must have:
A registration statement that has been declared effective by Bapepam-LK.
At least 30% of its supervisory board consist of independent members.
At least one non-affiliated director.
A corporate secretary.
Established an audit committee (or must do so within six months of listing).
Shares with a par value of at least IDR100 per share.
Directors and supervisory board members who are of good character and reputation, and qualified to hold corporate office.
There are also additional requirements, which differ depending on whether a listing on the main or development board is sought:
The company must have engaged in its core business:
for at least 36 consecutive months as of the date of application for a listing on the main board; or
for at least 12 consecutive months for a listing on the development board.
The company must satisfy certain financial reporting requirements (see below, Trading record and accounts).
Minimum size requirements
To list on the main board, a company must have at least 1,000 shareholders, and a minimum of 500 shareholders to list on the development board.
Trading record and accounts
Main board. A company must show audited financial statements for at least the last three fiscal years, provided that those for the last two fiscal years and the latest interim audited financial statements (if any) have received unqualified opinion (that is, they have been certified by an auditor registered with Bapepam-LK as being free of material misstatements and represented fairly in accordance with Indonesian Accounting Standards). The company must have net tangible assets of IDR100 billion according to the most recent auditor's report.
Development board. A company must show audited financial statements for at least the last year, and the latest interim audited financial statements (if any), all of which must have received unqualified opinions. The company must be able to show net tangible assets of IDR5 billion according to the most recent auditor's report.
Shares in public hands
Main board. At least 100 million shares or 35% of paid-up capital (whichever is the lesser) must be held by minority shareholders of the listing company after the public offering for a minimum period of five days before the application for listing.
Development board. At least 50 million shares or 35% of paid-up capital (whichever is the lesser) must be held by minority shareholders.
Most IPOs in Indonesia are aimed at wholesale or institutional investors.
In addition to straightforward IPOs, initial offerings are frequently packaged together with offerings by shareholders under Rule IX.A.12 (Bapepam-LK Rules), or with international offerings made in accordance with Reg. S or Reg. S/Rule 144A under the US Securities Act of 1933.
For an IPO, the listing company first submits a listing application using the prescribed form to the IDX and pays an application fee of IDR15 million. The application must be accompanied by, among other things:
The company's deed of establishment/articles of incorporation.
Information on things such as:
the company structure;
directors and supervisors' backgrounds;
the company's finances and prospects;
proposed number of shares to be offered and use of proceeds;
A legal opinion.
An independent appraiser's report.
Additional information is required for companies operating in specific sectors, such as mining.
After submitting the application, the company must then make a presentation on its plans to the IDX. Based on this a decision will be made as to whether the application should be accepted or rejected. An applicant must be notified within ten trading days from receipt of the completed application by the IDX.
The next step is the signing of a preliminary listing agreement by the company and the IDX.
A registration statement is submitted to Bapepam-LK although there is no time frame stipulated in which to do this. After the registration statement submitted to Bapepam-LK is declared effective (see Question 9), the company must submit a number of documents to the IDX, including evidence of the registration statement's effectiveness, copies of the prospectus, and a declaration stating the company's willingness to abide by capital market and IDX rules and regulations.
When all of these requirements have been fulfilled, approval for listing must be given by the IDX in five days.
The IDX must announce the listing at least one trading day before the commencement of trading in the company's shares.
Indonesian capital market rules establish a "one-size fits all" regime, and make no distinction between non-reporting issuers, unseasoned issuers, seasoned issuers, and well-known seasoned issuers.
The same procedures apply for a foreign company as for an Indonesian company, provided the foreign company is not listed on another exchange. Should a foreign company seek a listing on the IDX, then it would be by way of Indonesian Depositary Receipts. There are currently no foreign companies or depositary receipts listed on the IDX although there are two US dollar-denominated bonds listed (see Question 1).
Advisers: equity offering
The legal adviser plays a pivotal role in an IPO. They will conduct legal due diligence then decide whether the transaction can proceed or whether it must be cancelled due to legal difficulties, as well as doing "housekeeping work", such as ensuring that all the requirements of company law have been fulfilled, and changing the company's capital structure so as to comply with listing requirements.
Generally, the legal advisor must confirm the legality of the transaction through the delivery of an opinion, failing which, the parties to the transaction will not agree to proceed.
The legal adviser identifies any issues that could prejudice public shareholders, while during the drafting of the prospectus, they will review the documents and provide comments to ensure that the information they contain is accurate and not misleading. The legal adviser also negotiates and drafts agreements related to the IPO, for example, the underwriting agreement, international co-ordination agreement, and agreement with the Share Registrar.
In addition, key roles are played in the process by accountants, tax consultants, registrars, PR consultants and underwriters. In general, such roles closely correspond to those played by their counterparts in the US and other leading jurisdictions.
The principal documents produced during an equity offering are as follows:
Underwriting agreement. See Question 17.
Application form for listing. See Question 8.
Preliminary listing agreement. See Question 8.
Registration statement. This is the document by which the company seeks approval from Bapepam-LK for the offering. The company and all related parties are liable for the accuracy and comprehensiveness of the information contained in the registration statement and its supporting documents, which consist of:
the legal due diligence report;
Preliminary prospectus. See Question 10.
Statement of effectiveness. This is a statement from Bapepam-LK signaling that the company's registration statement is now effective (see Question 8).
Final prospectus. See Question 10.
Equity prospectus/main offering document
A prospectus is required for every equity offering, except for a private placement (see Question 11), and is submitted to Bapepam-LK as part of the registration statement. After Bapepam-LK issues the pre-effective statement, the company must publish an abridged prospectus in at least one nationally circulating Indonesian language daily newspaper, no later than two working days after the statement is issued. If the company wishes to conduct a public expose (a public briefing on the firm and its prospectus with a view to encouraging public interest in purchasing shares during the offering), it then distributes a preliminary prospectus. The abridged and preliminary prospectuses set out information regarding the company and the offering (except for the offering price) and are used for bookbuilding purposes (see Question 16).
Following the statement of effectiveness from Bapepam-LK, the company will then issue the final prospectus. This supersedes the abridged and preliminary prospectuses, and includes detailed information on the number of shares to be offered, the offering price, and underwriting commitments.
Prospectuses are normally distributed by the underwriters.
A prospectus must provide:
Information on the offering.
Information on the company and its subsidiaries, including information on the:
capital structure and shareholding composition;
composition of the board of directors and board of supervisors;
material agreements binding on the company and its subsidiaries;
related party transactions; and
litigation involving the company and its subsidiaries.
Information on the company's business and future prospects.
Management discussion and analysis based on the company's financial statements for the last three years prepared in accordance with Indonesian Accounting Standards.
A summary of the financial highlights and shareholders' equity.
Details of the company's dividend policy.
Details of the mechanism for subscribing to the shares being offered.
The prospectus is prepared by the lead underwriter who will invite the company (or its representatives), legal adviser and accountant to discussions as part of the due diligence process. The lead underwriter then prepares the prospectus based on responses from the company to the questions posed, other information supplied by the company and input and comments from the legal advisers and accountants.
Bapepam-LK has been encouraging the responsibility for drafting the prospectus to be handed over to lawyers to make prospectuses a more legal rather than marketing document. It is expected that lawyers will assume the lead role in writing prospectuses within the next five years.
Marketing equity offerings
Marketing is mainly carried out through bookbuilding, and the number of retail investors participating in Indonesian IPOs is generally very small, taking on average between 10% and 20% of offered equity.
There has been discussion among market players, retail investors generally and the regulatory authorities as to how to increase the level of participation of retail investors, such as through mandatory minimum allocations for retail investors, to encourage broader participation and thereby improve market liquidity. However, underwriter confidence in retail participation continues to be quite low.
Research reports are regulated under Rule IX.A. 9 (Bapepam-LK Rules). While this Rule does not prohibit the promotion of securities, including through research reports, it does set out clear guidance as to what is allowed and what is not. It is prohibited to:
Provide inaccurate or misleading information.
Fail to disclose material facts.
Provide a false or misleading picture so an unsophisticated investor may be persuaded to believe that the securities discussed in the report are a suitable investment instrument even though in reality the investor lacks the capacity to bear inherent risks.
Give a buy or sell recommendation without stating the date of the recommendation, market price of the security on the date of recommendation, the party making the recommendation and information on whether such party has an interest in the securities.
Fail to state that interested parties should read the offering documents before making any purchases (on a public offering).
Violations of these prohibitions give rise to both civil and criminal liability under the Capital Markets Act.
There are no specific regulations in place governing how the bookbuilding process should be carried out. However, the issuer and underwriter can only commence bookbuilding after Bapepam-LK has confirmed that the preliminary prospectus can be issued (Rule IX.A.2, Bapepam-LK Rules). As the Rule requires a company to submit its final offering price and number of shares no later than 21 working days after the bookbuilding statement is issued, it appears that the maximum period allowed for bookbuilding is 21 working days.
Retail allocations in Indonesia are normally minimal as the retail market is less cost-effective for underwriters.
Underwriting: equity offering
As Indonesia is a civil law jurisdiction, the underwriting agreement is made in the form of notarial deed before the filing of the registration statement. At this stage, the underwriting commitment is still conditional on the occurrence of a number of events, including an agreement on the price of the offered securities (which has yet to be determined). This provides an easy exit for both issuer and underwriters if agreement cannot be reached as pricing is a highly subjective matter.
The agreement can be amended should Bapepam-LK, following its review of the registration statement, require an amendment. After the completion of bookbuilding and as soon as the underwriter and issuer agree on the price of the securities, the underwriting agreement is amended for the last time. By this stage, both the issuer and underwriter will have a very limited window should they wish to leave the deal. In practice, it is common to find underwriters attempting to widen the window for possible exit by setting broad conditions for the effectiveness of the underwriting commitment, including favorable market conditions, breach of underwriting agreement, material change relating to the issuer, and so on.
Bapepam-LK only permits termination or postponement of the offering up to the end of the offering period, and in the case of events of force majeure (where the event has a significant impact on the issuer's business), in the form of (Rule IX.A.2, Bapepam-LK Rules):
A 10% drop in the composite index over three consecutive days.
Natural disaster, war or riot, labour strike or fire.
Other events that have a significant impact on the issuer's business, as determined by Bapepam-LK.
Underwriting fees are charged on a percentage basis, with the typical fee in an equity offering being 2.5%, and 0.5% in the case of a bond offering.
Timetable: equity offerings
For purposes of clarity, we will use the IPO process to explain the timetable for a typical equity offering in Indonesia as there is little difference between equity offerings except in terms of documentation nomenclature.
An IPO commences with a presentation of the prospective issuer's plans to the IDX. This is followed by the preparation of the prospectus and agreements related to the public offering, such as a securities underwriting agreement, and agreements with the stock exchange, stock custodian and stock administration bureau. The registration statement is submitted to Bapepam-LK, and is assessed by the regulator over a maximum period of 20 working days, during which time requests for further information and clarification can be made to the issuer. After this 20-day period, if everything proceeds as planned, Bapepam-LK will grant permission to the issuer to publish the preliminary prospectus. The company must then publish the preliminary prospectus within two working days, and must give proof of publication to Bapepam-LK within two working days of publication.
Bookbuilding commences immediately after the publication of the preliminary prospectus, and continues for a minimum of seven working days and a maximum of 21. The next stage is the issuance of the statement of effectiveness by Bapepam-LK, after which a maximum of one working day is allowed for any last minute corrections or additions to the preliminary prospectus.
The public offering period must commence no more than two working days after the statement of effectiveness by Bapepam-LK, and runs for between one and three working days. After the end of the public offering period, allotment of the securities must take place within two working days at the maximum, followed by the distribution of the securities or refunds, as the case may be, within another two working days at the maximum.
Finally, listing must take place not more than one working day after the distribution of the securities.
Pursuant to Article 94 of the Capital Markets Act, Rule No. XI.B.1 (Bapepam-LK Rules) permits an underwriter or broker during the public offering period to offer to purchase, or purchase, securities for the purpose of maintaining their market price, subject to the following conditions:
The stabilisation price cannot differ from the official public offering price.
Stabilisation must continue throughout the offering period and cannot be extended beyond that period.
The possibility of stabilisation measures being taken must be disclosed in the prospectus.
An underwriter or broker selling or purchasing the securities during the stabilisation period for the benefit of a third party must ensure that the third party has received, or has had the opportunity to read, a written statement to the effect that stabilisation purchases will be, are being, or have been made.
Regarding the role of the stabilisation agent during the stabilisation period, Bapepam-LK has ruled in previous IPO deals that stabilisation can only be carried out through purchases on the secondary market.
The lead underwriter must give notice to Bapepam-LK of certain minimum information, including:
How the stabilisation process was carried out.
When the stabilisation process began and ended.
The number of shares purchased during each intervention.
The total number of shares purchased during the stabilisation period.
Tax: equity issues
Listing of equity securities provides a significant capital gains tax advantage for shareholders. Transfers of non-listed shares attract capital gains tax at standard rates (the maximum rates being 30% for an individual taxpayer and 25% for a corporate taxpayer), based on the difference between the acquisition cost of the securities and the transaction value.
However, listed securities are not subject to capital gains tax, instead attracting a flat rate tax of 0.1% of the sales value. For founders of a company, a one-time tax of 0.5% is also charged.
There has been an ongoing problem of interpretation regarding the 0.1% flat rate tax on private placements and share purchase agreements (SPAs) entered into before listing because the tax only applies to transactions on the IDX. Therefore, the revenue department has insisted on applying the full rate of tax to private placements and shares acquired under SPAs entered into before listing.
An issuer is under a continuing obligation to disclose to the public material information and facts that have the potential to affect its share price.
Material information and facts must also be notified to Bapepam-LK or the IDX (depending on the circumstances) through one of three types of report:
Incidental reports. These are used to notify various corporate actions, such as mergers, acquisitions, distribution of a dividend, and so on, and must be filed no later than two business days after the occurrence of the material information or fact.
Periodic reports. These are used to provide financial information in the form of audited and interim financial statements.
Annual reports. The annual report must be submitted no more than four months after the close of the company's books for the year in question. The report consists of a summary of material financial data, a general analysis of the company's operations and prospects, audited financial statements and a management report.
The issuer is responsible for the veracity and accuracy of information disclosed to the public, and any breaches of this duty are punishable by administrative fines and criminal sanctions under the Capital Markets Act.
An issuer must disclose material information on transactions involving related parties and conflicts of interest (Bapepam-LK Rules). A related-party transaction is a transaction between an issuer or controlled company and an affiliate or an affiliate of the majority shareholder, a director or a member of the supervisory board. Such a transaction requires an independent appraisal as to the reasonableness of the transaction and must be disclosed to the public and Bapepam-LK no later than two business days after the date of the transaction. There is an exception to the obligation to notify where the transaction is between the issuer and a wholly owned subsidiary or where it forms part of the principal business operations of the company or is conducted in support of the principal business operations of the company.
Subject to a number of exceptions, an issuer must also disclose transactions involving a conflict of interest. These transactions must be approved by the independent shareholders at an extraordinary general meeting. An independent shareholder is a shareholder who does not have a conflict of interest in respect of the transaction.
A material transaction is a transaction whose value amounts to 20% or more of the company's equity. If the value of the transaction is between 20% and 50% of the company's equity, it will only require disclosure to the public and Bapepam-LK within two business days of the date of signing of the transaction agreement, and the submission of a certificate of reasonableness from an appraiser. Should the transaction be worth more than 50% of the company's equity, it will require shareholder approval.
Except for conflict of interest transactions that require the attendance and approval of independent shareholders at the shareholders' general meeting, there are no voting restrictions imposed by Indonesian law. The precise voting mechanisms for specific classes of corporate action are set out in the Indonesian Companies Act (No. 40 of 2007).
The same requirements would apply to foreign companies as apply to Indonesian public companies. However, there are currently no foreign companies or depositary receipts listed on the IDX (see Question 1).
Market abuse and insider dealing
The rules governing de-listing are set out in IDX Rule No. 1-I, which envisages two types of de-listing:
Voluntary, that is, at the request of the company concerned.
Forced, where the company is de-listed by the IDX to protect the interest of shareholders of the de-listed company.
For a voluntary de-listing, the company must have been listed for a minimum of five years, the de-listing must be approved by an extraordinary general meeting of shareholders (Rapat Umum Pemegang Saham Luar Biasa) (GMS) and the shares of those who voted against the de-listing must be purchased by the company or a third party designated by the company.
In order to de-list, the company should submit a de-listing plan to the IDX providing the following information:
Reasons for the de-listing.
The intended purchasers of any shares that are to be sold by shareholders.
Estimated purchase price of such shares.
Preliminary disclosure to the public must then be made in at least one nationally circulating daily newspaper at the same time as the announcement of the GMS, and a report submitted to the IDX. Should the GMS approve the de-listing, the company must detail the share buyback procedures in at least one nationally circulating daily newspaper.
The company then submits a de-listing application, share buyback report and legal opinion by independent counsel confirming that the buyback process has been completed in compliance with the prevailing laws and regulations. The IDX then suspends trading in the company's shares, and the de-listing becomes effective after the company has fulfilled its obligations to the IDX (including financial and reporting obligations). In practice, Bapepam-LK requires a voluntary de-listing to be approved by independent shareholders.
Under IDX Rule No. 1-I, the IDX can de-list a public company if either of the following conditions is satisfied:
The company has experienced a condition or event, whether financial or legal, that has a significant and direct adverse influence on the continuity of the company's business or its status as a public company, and the company is unable to show any indication that it will be able to overcome the difficulties it faces.
As a result of a suspension on the regular or cash market, the company's shares have been traded solely on the negotiable market for at least the preceding 24 months.
If either of these situations occurs, the IDX first holds a hearing with the company in question. Should the IDX decide that it has no other choice but to de-list the company, it will then inform the company of its decision, along with the de-listing schedule. If deemed necessary, the IDX can suspend the company's shares for five trading days, after which they can be traded on the negotiable market for 20 trading days before the effective date of de-listing, which occurs on the date stated in the de-listing resolution issued by the IDX.
A company's de-listing does not necessarily mean that it is no longer a public company. As long as it continues to have at least 300 shareholders, it will continue to be subject to the requirements of the Capital Markets Act.
Five companies either de-listed voluntarily or were forcibly de-listed by the IDX in 2011 (PT New Century Development, PT Aqua Golden Mississippi, PT Dynaplast, PT Anta Express Tour and Travel Service, and PT Alfa Retailindo), The IDX also issued a recent warning that it was considering forcibly de-listing eight companies in the near future for failure to improve their finances or due to irregularities and non-compliance.
Bapepam-LK is one of the most active Indonesian governmental institutions and regularly updates and reviews its rules, regulations and policies. In doing so, Bapepam-LK always consults with practitioners, issuers, investors and the public at large. There have been quite a number of amendments to the Bapepam-LK Rules in recent years to ease compliance with the regulatory framework, and this trend is likely to continue.
Bapepam-LK is currently seeking submissions from practitioners and interested parties on proposed amendments to tighten up the rules governing the articles of incorporation of prospective issuers and public companies, the disclosure of material information and facts, reports on the use of proceeds of equity offerings, the ratings assigned to debt securities, and so on. However, no major reforms are in the pipeline at the present time.