After many heated debates among regulators and politicians on what was seen as unhealthy concentrated ownership of banks by groups of companies, particularly foreign groups of companies, Bank Indonesia as the country’s central bank and regulator of the industry has issued its Regulation No. 14/8/PBI/2012 regarding Ownership of Shares in Commercial Banks (the “Regulation”).
The Regulation basically sets up rules that restrict ownership of banks by individual shareholders either on an individual basis or a joint basis.
Prior to the issue of the Regulation, Bank Indonesia launched what is referred to as the Indonesian Banking Architecture, meant to be the blueprint for the Indonesian banking system. Under this blueprint, the system’s objectives are: (i) to create robust domestic banking structures; (ii) to create effective banking regulations and supervision systems; (iii) to create a strong and highly competitive banking industry; (iv) to build good corporate governance; (v) to provide efficient banking infrastructures; and (vi) to promote consumer empowerment and protection.
Among the Regulation’s main provisions are:
- Maximum ownership in a bank (“Bank”) on the basis of shareholders category:
- 40% of Bank’s capital, for shareholders in the category of bank and non-bank financial institutions;
- 30% of Bank’s capital, for shareholders in the category of nonfinancial legal entities;2
- 0% of Bank’s capital, for shareholders in the category of individual shareholders in conventional commercial banks; and 25% of Bank’s capital, for individual shareholders in Syariah commercial banks.
- Shareholders with up to 2nd tier familial relationship and/or acting-inconcert relationship are deemed as one party;
- Candidate controlling shareholders of foreign citizenship and/or legal entities domiciled overseas are obliged to obtain the recommendation of the respective authorities in the country of origin and must fulfill the ranking requirement stipulated in this Regulation; In addition, they must state their commitment to support the development of Indonesian economy;
- Bank financial institutions may own more than 40% of Bank’s capital with the prior approval of Bank Indonesia upon the fulfillment of all of the requirements;
- To qualify as a non bank financial institution (NBFI), non bank financial institutions must:
- have a charter of incorporation that allows it to invest in long term instruments;
- be supervised and regulated by the financial services authority.
NBFIs which do not meet the above criteria will be treated as a non financial institution legal entity, therefore may only own up to 30% (thirty percent) of Bank’s capital.
Having set the above 40% ownership general restriction, the Regulation also stipulates specific criteria for exceptions to this rule in its Article 6 – 10.
It is noteworthy that, unlike the expectation of many people when the discussions on bank ownership were ongoing a few years ago, the Regulation continues to give local and foreign investors equal treatment and is not imposing bank ownership restriction on foreign investors. In fact, the requirements for bank ownership that are tied to good governance, financial soundness and adequate capital issues put foreign investors at an advantage, as they are generally better equipped with these. The additional specific requirements for foreign shareholders are merely that they (i) have the required investment grade that shows their financial capability, (ii) show commitment in assisting in the development of Indonesian economy, and (iii) have a letter of recommendation from their home country’s financial regulator. Despite the ownership limitation rules, ownership of the shares of a bank beyond the limit is permitted provided that the target bank remains healthy and well-managed. This has the consequence that in the event that the target bank falls below the required GSG and health ratings stipulated by the Regulation, the shareholders with shares beyond the 40-30-20 limits will have to divest.
The required investment grade is stipulated as:
- one notch above the lowest investment grade for banks;
- two notches above the lowest investment grade for non-bank financial institutions;
- three notches above the lowest investment grade for non financial institutions.
Upon receiving Bank Indonesia’s approval, a candidate local or foreign investor bank (“Bank”) may take up more than forty percent ownership of an Indonesian bank provided that it, among others: (i) has a level one (1) or two (2) Bank Indonesia’s1 financial health rating or other equivalent rating for foreign banks; (ii) has adequate minimum capital that is comparable to its risk profile; (iii) maintains a six percent tier one capital; (iv) has the recommendation of the bank regulator in its home country (if the Bank is a foreign bank); (v) is a publicly owned bank; and (vi) has the commitment to own the Indonesian bank for a certain period of time. Following its acquisition of the bank, the Bank is obliged to float twenty percent of its shares to the public within five years after the acquisition, whereas the acquired bank is required to have Bank Indonesia’s approval for its issue of loans that are convertible to equities.
The equal treatment for foreign and local investors in the banking industry is also seen in other provisions of the Regulation. Foreign investors can now take up ownership in regional development banks (“Regional Bank”) – this ownership had, until the issue of the Regulation, been practically closed for foreign ownership. The Regulation allows foreign investors to own shares in a Regional Bank with financial health and GCG grades of 3, 4 and 5, which needs capital injection.2 The Regulation became effective on the day of its issue of 13 July 2012.