The Indonesian Financial Service Authority (Otoritas Jasa Keuangan or “OJK”) recently issued new a regulation on rights issues, namely OJK Rule No. 32/POJK.04/2015 regarding Rights Issues (“OJK Rule No. 32”), which replaced Bapepam-LK Regulation No. IX.D.1 concerning Pre-Emptive Rights (“Regulation IX.D.1”).
Among other things, the new regulation provides for more flexibility to the timeline of a rights issue transaction and makes it clear that non-cash consideration may be used for subscription of shares in a rights issue. In addition, the new rules require more stringent information disclosure in rights issue. We have summarized the key changes introduced by OJK Rule No. 32 below.
Two of the key steps in a rights issue are (i) submitting a registration statement to the OJK, and (ii) obtaining shareholder approval. Under the Indonesian Capital Markets Law, rights issues are public offerings of securities required to be made pursuant to a registration statement declared effective by the OJK. As with IPOs, an issuer seeking to conduct a rights issue must submit a registration statement to the OJK in the prescribed form. In addition, the rights issue must be approved by the shareholders in an extraordinary general meeting (“EGM”) in accordance with the quorum and voting requirements under the provisions of the public company’s articles of association and the relevant OJK rules.
Previously pursuant to Regulation IX.D.1, before a public company could convene an EGM to approve a proposed rights issue, it was required to (i) submit a registration statement to the OJK at least 28 days prior to the EGM, and (ii) clear all of the OJK’s comments on the registration statement. Unless the OJK required otherwise, the registration statement became effective upon EGM approval of the rights issue. The initial submission of the registration statement was usually made concurrently with an announcement of the EGM, including material information regarding the proposed rights issue, in the Indonesian press. Due to these requirements, in rights issue transactions many public companies had to postpone their EGMs because they were unable to successfully address all of the OJK’s comments and queries on the registration statement by the scheduled EGM date.
Under OJK Rule No. 32, a public company which proposes to conduct a rights issue is required to obtain approval from its shareholders at an EGM prior to its initial submission of the proposed registration statement to the OJK. If there are any changes to the matters approved by the EGM, the company is required to convene another EGM to approve such changes. Under the new regulation, a public company has a period of 12 months after the EGM to obtain a declaration of effectiveness from the OJK, which provides a public company more flexibility on timing of the rights issue. Given the requirement for EGM approval for changes to the rights issue terms, a company should carefully consider all the matters in connection with a rights issue to avoid the need to hold multiple EGM.
Set out below a simplified indicative rights issue process under the new rules in OJK Rule No. 32:
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Issuing Shares for Consideration other than Cash
Unlike previously, under OJK Rule No. 32, a public company will now be allowed to issue shares for consideration other than cash, including issuing shares in return for property or assets a company needs in carrying out its business plans or for the expansion of its business or (e.g. in a takeover) shares in another company. OJK Rule No. 32 makes it clear that shares in another company can be used as consideration in a rights issue transaction. Regulation IX.D.1 was silent on this matter and in practice the OJK has not previously allowed issuance of shares for non-cash consideration. In addition, claims payable by the public company can also be used as consideration for shares issued in a rights issue transaction to the extent that such claims are recorded in the company’s latest audited financial statements. Though Regulation IX.D.1 was silent on this matter, the OJK had previously in practice allowed the use of loan principal borrowed by a public company as consideration for subscription of shares in a rights issue. Note that under the Indonesian Company Law, outstanding interest and penalty amounts may not be used as consideration for the subscription of shares.
If any non-cash consideration is used for the subscription of shares in a rights issue, the public company needs to submit additional documents to the OJK, including an appraisal report, a legal due diligence report and a legal opinion on the object comprising the consideration. If the consideration is shares in another company, the audited financial statements of such target company for the last two years (or since its establishment) are also required to be submitted to the OJK.
Increased Disclosure and Required Documents
Under Regulation IX.D.1, material information related to a rights issue was required to be disclosed no later than 28 days prior to the EGM, and any changes or additional information were required to be made available to the shareholders no later than the EGM. OJK Rule No. 32 requires more stringent information disclosure at different stages:
- When the company announces the EGM, it is required to disclose in one daily Indonesian newspaper with national circulation (or on IDX’s website) and on the company’s website certain key information about the proposed rights issue, such as (i) maximum amount of shares to be issued, (i) transaction schedule, (iii) impact of the capital raising, (iv) proposed use of proceeds, and (v) any non-cash consideration that may be used for share subscription;
- Simultaneously with the initial submission of the registration statement to the OJK, the company is required to disclose in one daily Indonesian newspaper of national circulation (or on IDX’s website) and on the company’s website more details of the proposed transaction, such as (i) important dates, (ii) terms of exercise and trading of rights, (iii) standby purchase arrangements, (iv) dilution, (v) use of proceeds and (vi) a summary of management’s discussion and analysis of financial condition and results of operations. OJK Rule No. 32 also requires disclosure of details of standby purchasers and the prospective controlling shareholder of the company (if any) and information on any non-cash consideration; and
- If any changes are made to or any additional information is included in the registration statement at the request of the OJK, the company is required to announce such information in one daily Indonesian newspaper with national circulation (or on IDX’s website) and on the company website no later than two business days after the effectiveness of the registration statement.
In relation to the pricing of the rights, at the first submission of the registration statement to OJK, it is permissible for the pricing of the rights to be expressed as a price range. The price is amended to a narrower range and ultimately a fixed price at a subsequent submission to OJK before the registration statement declared effective by OJK. The fixed price together with any other additional information and/or amendment (as the case may be) must be announced by the company no later than 2 business days after the declaration of effectiveness.
In addition, OJK Rule No. 32 also specifies further documents required to be submitted to OJK, such as statements of funds sufficiency from standby purchasers and substantial shareholders with relevant supporting evidence. This was not clearly specified in the previous regulation but was required to be submitted in practice.
OJK Rule No. 32 is intended to simplify the rights issue process and encourage listed companies in undertaking this type capital raising. However, it has yet to be seen to what extent the new rule will impact the rights issue transactions in practice.