The long anticipated new rules on limits to bank ownership in Indonesia have recently been published by the Indonesian central bank, Bank Indonesia (“New BI Rules”). The New BI Rules took effect on 13 July 2012.
As envisaged in our previous e-bulletin of 25 June 2012, the New BI Rules apply to all shareholders in banks and do not specifically target foreign shareholders. Instead, the key objective underpinning the New BI Rules is to strengthen the resilience of Indonesian banks by increasing the adherence to good corporate governance (“GCG”) principles. This is to be achieved by limiting the domination by one party in the ownership of any particular Indonesian bank. It is perceived that the domination by one party in the ownership of a bank is likely to put at risk the proper implementation of GCG principles in the operation of banks. In this regard, the New BI Rules are to be applauded for not discriminating against foreign investors in banks, unlike recent changes in regulations for other sectors in Indonesia. BI has approached the question of improving the financial health of banks maturely.
Speed Read – the Key Features
The nature of, and the relationship among, the relevant shareholder(s) will determine the level of permissible single party ownership, i.e.:
- A non-bank financial institution and (subject to the paragraph below) a bank, may own up to 40% of the shares in a bank;
- A non-financial institution legal entity may own up to 30% of the shares in a bank; and
- Individuals may own up to 20% of the shares in a bank (save in relation to a Syariah bank, where the limit is 25%) (“40-30-20 Rule”).
- Despite the 40-30-20 Rule, a shareholder which is a bank may own more than 40% of a bank provided that BI’s consent is obtained and certain criteria are satisfied, including that the acquiror bank has a Bank Health Rating (“Tingkat Kesehatan Bank”) of 1 or 2, or (in the case of foreign banks) such equivalent rating in its country of origin; is listed; satisfies the relevant Capital Adequacy Requirement consistent with its risk profile; has Tier 1 capital of at least 6%; and (in the case of a foreign bank) has obtained the recommendation of the banking regulator in its home country.
- Shareholders who currently own shares in a bank in excess of the 40-30-20 Rule are not indefinitely grandfathered but must take steps to meet the new Bank Health Rating requirements. In particular, they must comply with such rule by reference to a Bank Health Rating and/or GCG evaluation of the target bank as at 31 December 2013. If the target bank’s Bank Health Rating and/or GCG evaluation of the target bank as at 31 December 2013 is at 3, 4 or 5 (a rating of 1 being the best rating), the shareholders of such bank must comply with the 40-30-20 Rule within 5 years from 1 January 2014 (i.e. by 1 January 2019).
- BI’s pre-existing “single presence policy” – which allows (save for certain exemptions) a party to be a controlling shareholder of only one commercial bank at any one time and which requires, among other things, a shareholder controlling two banks to merge the two banks together – has been preserved for the time being under the New BI Rules. Despite this, since the publication of the New BI Rules, there have been further indications from BI in the press that it may in the future relax the application of the “single presence policy” in certain situations, particularly in order to encourage consolidation of smaller banks with weak GCG rating. This, however, currently remains unconfirmed in so far as the written rules are concerned.