The Indonesian Capital Market Supervisory Board (“Bapepam”) has issued a draft regulation proposing new restrictions on the sale of foreign investment instruments (“Offshore Products”) (the “Regulation”).


 This regulation, if issued in its current form, would have implications for how both domestic and foreign sellers of Offshore Products conduct the marketing and sale of such products in Indonesia. Greater care will now need to be taken by offshore parties selling/offering securities into Indonesia as the Regulation expressly provides that the “parties that may undertake the ‘Sale of Offshore Products’ are Banks and Securities Companies. Minerba.

As a result, amongst other consequences, only licensed Banks in Indonesia (“Banks”) and Indonesian Securities Companies (“Securities Companies”) will be permitted to sell Offshore Products in Indonesia. Banks are defined as commercial banks registered as selling agents of mutual funds and Securities Companies as Securities Companies licensed as Securities Brokers in Indonesia. The “Sale of Offshore Products” is broadly defined to expressly include offering, advertising, distributing brochures, seminars, and offering Offshore Products through electronic and printed media. As explained below, the Regulation would also restrict the retail parties in Indonesia to whom Offshore Products could be sold.

With this new Regulation, foreign parties that have marketed Offshore Products through visits to Indonesia would have to take extra care not to undertake any of the prohibited activities, in particular sales to retail parties. The Regulation does not, however, prohibit the offshore sale of Offshore Products to Indonesians. The Regulation is in fact silent as to whether offshore foreign entities may directly sell Offshore Products to Indonesian investors. It does, however contain the general statement that the parties who may undertake the Sale of Offshore Products are Banks and Securities Companies.

Of further concern is that the Regulation would provide for possible penalties and criminal sanctions for breaches of the new rules, both for those breaching the restrictions and those who cause a breach, although the details and scope of such penalties are not set out in the Regulation.

The overall impact of the Regulation, if issued in its current form and enforced strictly, would be that the Sale of Offshore Products (as described above) in Indonesia could only be undertaken by licensed Indonesian Banks and Securities Companies in compliance with the requirements of the Regulation and that foreign parties selling Offshore Products to Indonesians should only do so outside Indonesia. Courtesy visits to Indonesian retail clients in Indonesia related to the same should become no more than relationship meetings.

Other Noteworthy Features of the draft Regulation

Following is a summary of some of the salient aspects of the Regulation.

  1. The stated purpose of the Regulation is to implement supervision and control of the sale of Offshore Products and to protect consumers from risks arising from the purchase of such products. Many Indonesian consumers experienced losses on instruments issued by Lehman Brothers (and other similarly affected issuers) and the regulator has been under pressure to take actions to protect consumers. The purpose of the Regulation therefore appears to be to limit and control the distribution and sale of Offshore Products to Indonesians in the retail market. The Regulation itself is, however, expressed in general terms and does not refer to intended application limited to the retail market. It remains to be seen whether Bapepam-LK would attempt to restrict distribution and sales of Offshore Products to more sophisticated corporations and financial institutions in Indonesia.
  1. As is the case with most Indonesian laws and regulations, definitions are central in understanding the potential scope and impact of the Regulation. Under the definition of “Offshore Products” and “Securities” applicable to the Regulation, the new rule would capture most types of financial instruments. “Offshore Products” are defined as “securities issued by (i) a foreign individual, or foreign legal entity, and/or (ii) Indonesian individual, or Indonesian legal entity, where a substantial part of the underlying securities are issued by a foreign individual or foreign legal entity”. The Indonesian Capital Markets Law defines “Securities” broadly as “promissory notes, commercial papers, shares, bonds, debentures, collective investment agreement participation units, long-term securities agreements and any derivatives of securities”. As such, the concept of securities under Indonesian law covers most types of equity and debt securities and derivatives. Derivatives include derivatives having an equity or debt nature (such as options and warrants).
  1. The Regulation further requires that all Offshore Products offered or sold by a Bank or Securities Company must have all necessary licences and approvals from the relevant authority in the country of origin and be duly registered, or have obtained a statement from the relevant authority in the country of origin confirming valid legal status.
  1. Offshore Products offered by Banks and Securities Companies must also be registered with Bapepam. To register an Offshore Product, the relevant licensed Bank or Securities Companies must submit an application to Bapepam in the prescribed form set out in the Regulation.
  1. The Regulation further requires that licensed Banks and Securities Companies could only offer Offshore Products to (i) Mutual Funds, (ii) Loss Insurance Companies, (iii) Life Insurance Companies, (iv) Reinsurance Company, and (v) Pension Funds, subject always to compliance with prevailing capital markets, banking and insurance and pension fund regulations. This would appear to mean that individual retail customers may not purchase Offshore Products from Banks and Securities Companies in Indonesia which is in line with the apparent policy behind the Regulation. Recent media reports suggest that Bapepam may include such a prohibition expressly in a revised draft of the Regulation. It appears however, that the Regulation in its current form does not capture the direct offshore sale of Offshore Products by foreign entities to Indonesian customers as the express requirements under the Regulation only covers the sale of Offshore Products by Banks and Securities Companies. Accordingly, as the draft Regulation currently stands, it appears that retail customers would still be able purchase Offshore Products from foreign parties offshore and as long as the relevant individual retail customer purchases such product directly from the offshore offering party. As noted above, it is unclear from the text whether sales of such products to more sophisticated corporations will be subject to the rule.
  1. All existing agreements for the purchase of Offshore Products by a Bank or Securities Company prior to the enactment of the Regulation would be grandfathered and remain valid and binding on the contracting parties although the Regulation requires that any extension to such contracts must comply with the requirements under the Regulation.

It has also been reported that Bank Indonesia may also issue a regulation concerning the sale of Offshore Products to improve customer protection and to increase awareness of prudential principles in purchasing Offshore Products with commensurate supervision over Banks selling Offshore Products although the timing of the issue of any such BI regulation is unclear.