Indonesia has emerged as a fertile breeding ground for tech startups over the last decade or more. Many of these have grown exponentially, with some now having valuations in excess of USD 1 billion (unicorns) and even USD 10 billion (decacorns).
However, only a small number have listed so far on the Indonesia Stock Exchange (IDX). This is unfortunate as the listing of a couple of decacorns or unicorns would significantly increase the local bourse’s market capitalization. The IDX’s Start-Up Development Unit once stated that the bourse’s market cap could potentially be boosted by some 8% if the six largest Indonesia unicorns were to list.
To encourage more tech companies to take out listings, the Indonesian Financial Services Authority (OJK) recently issued a new regulation on dual-class shares: Financial Services Authority Regulation Number 22/POJK.04/2021 (POJK 22). It introduces to Indonesia a concept long established on the New York Stock Exchange, and which recently gained traction in this region with the decisions of both the Hong Kong and Singapore exchanges in 2018 to permit dual-class shares. Household-name tech companies that rely on this share structure include Alphabet (Google), Meta (formerly Facebook) and Alibaba.
In this update, we will briefly describe the concept and its implementation in Indonesia, as prescribed by POJK 22.
What are dual-class shares?
In essence, dual-class shares are designed to confer weighted voting rights on holders of a particular type of share in order to help the holders retain control of the company. In practice, this means that a company will issue two different classes of share that confer different rights on their holders. POJK 22 facilitates the concept via the introduction of shares with multiple voting rights (SMVR). These are shares that confer more than one vote.
How will the SMVR concept work in practice?
Under POJK 22, only eligible companies are permitted to issue SMVRs during an initial public offering (IPO). To be eligible, the company must meet at least the following criteria:
- Focuses on harnessing technology to create innovative products that (i) promote productivity and economic development, and (ii) offer broad social benefits;
- has a shareholder that makes a significant contribution to the utilization of technology within the company;
- minimum total assets of IDR 2 trillion (approx. USD 140 million);
- has been operating for at least 3 years prior to submission of registration statement;
- 3-year compounded total asset growth of at least 20%;
- 3-year compounded total revenue growth of at least 30%;
- has not previously carried out an IPO.
The first group of shareholders to hold SMVR shares must be approved by a general meeting of shareholders (GMS) and be listed in the IPO prospectus. After the completion of the IPO, the parties eligible to hold SMVR shares are as follows:
- those stated in the prospectus as potential SMVR holders, or
- a director of the company who: (i) has made a significant contribution to the company’s development, and (ii) has been approved by independent shareholders at a GMS.
If the shareholders are legal entities, they must also meet the following requirements:
- be directly owned by SMVR shareholders, or potential SMVR shareholders, as stated in the prospectus, who no longer own SMVR shares in the company,
- have a director who has expertise appropriate to the company’s business, and
- if the entities are Indonesian, be engaged in management consultancy.
A company issuing SMVRs should note the following: (i) SMVRs have a maximum validity period, on the expiry of which they must be converted into ordinary shares; (ii) SMVR shareholders are prohibited from selling their SMVRs within two years after the effective date of the registration statement (lock-in period), and must first offer them to the other SMVR shareholders if they wish to sell them after the expiry of the lock-in period; and (iii) POJK 22 set outs permitted ratios of SMVRs to ordinary shares having regard to the percentage of SMVR shareholders in the company.
The introduction of dual-class shares may hopefully encourage Indonesian unicorns and decacorns to list on the IDX, while the issuance of SMVRs during an IPO should help to allay the concerns of founders and investors over potential loss of company control. Through the use of SMVRs, they may continue to retain control despite holding a lower percentage of shares compared with those in the hands of the investing public.