The New Regulation on Shares Ownership in Indonesian Commercial Banks

29
Mar
2017

On 7 December 2016, the Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) issued its new Regulation No. 56/POJK.03/2016 regarding ownership of shares in Commercial Banks (“OJK Regulation 56/2016”),revoking Regulation No. 14/8/PBI/2012 (“BI Reg 14/8”) which was previously issued by Bank Indonesia. OJK Regulation 56/2016 provides a guideline that limits shares ownership of both conventional and sharia banks in Indonesia (“Banks”) and provides that OJK will be the supervisory body for all financial institutions instead of Bank Indonesia.

8 key changes brought about by OJK Regulation 56/2016:

Maximum shares ownership

OJK Regulation 56/2016 stipulates that the maximum shares ownership (“Ownership Limit”) of the Banks will be based on the category of and the relationship between the shareholders as follows:

  • shareholders in the form of banks and non-banks financial institutions, the maximum shares ownership is 40% of the bank’s capital
  • shareholders in the form of non-financial institutions legal entities[1], the maximum shareholding is 30% of the bank’s capital
  • shareholders in the form of an individual, the maximum shareholding percentage is 20% of the bank’s capital. In the case of shariah banks, the maximum is 25% of the bank’s capital.

Under OJK Regulation 56/2016, shareholders are considered as one party if they have an ownership relationship, have a family relationship up to the second degree and/or cooperate or act in concert to achieve a common goal. The total share ownership for such one party is limited to the maximum ownership limit of the category of such shareholders as one party and each shareholder must comply with the ownership limit set for it based on its category.

Exemptions to the Ownership Limit

The Ownership Limit does not apply to:

  • shares owned by the Indonesian central government or the Indonesian institutions which handle banks recovery;
  • regional governments that own shares in a Regional Development Bank;
  • financial institutions which intend to have shares ownership exceeding 40% of the bank’s capital. If they intend to do so, approval must be obtained from OJK and the following requirements must be fulfilled:
    1. rank 1 or 2 in the valuation for Bank Soundness,
    2. meet the Minimum Capital Adequacy Ratio according to set risk profile,
    3. have tier 1 capital of at least 6%,
    4. obtain recommendation from such bank financial institutions supervisory authority for offshore banking financial institutions,
    5. are banking financial institutions which are publicly listed,
    6. committed to fulfil the obligation to purchase notes convertible to shares issued by the Bank where they have the ownership,
    7. committed to own the Bank for a certain period of time, and
    8. committed to support the Indonesian economic development through the Bank where they have ownership.

Shareholders with ownership above 40%, who are granted the permission, will have to publicly list the Bank so that it reaches 20% of public ownership and obtain approval from OJK to issue debt equity instruments. The implementation of increasing the shares ownership above 40% of the Bank’s capital is further subject to Articles 8 to 9 of OJK Regulation 56/2016.

  • shareholders of sharia banks that acquired shares as results of spin-off, provided it must comply with the shares ownership rules by December 2028;
  • shares ownership of (i) Banks under recovery by the Deposit Insurance Agency (Lembaga Penjamin Simpanan or “LPS”), (ii) Banks in special supervision, and (iii) Banks in intensive supervision provided that the shareholders must adjust their ownership in accordance with the rules within 20 years for Banks in recovery with LPS and Banks in special supervision and 15 years for Banks under intensive supervision;
  • shares ownership in merged banks, subject to conditions governed under Article 12 of OJK Regulation 56/2016.

Additional requirements for foreign shareholders

OJK Regulation 56/2016 has additional requirements applicable to a foreign ‘controlling shareholder’, being any new foreign shareholder that holds more than 25% of the shares of an Indonesian Bank (“Foreign Controlling Shareholder”). In addition to being approved as ‘fit and proper’ by OJK, a Foreign Controlling Shareholder must commit to support Indonesian economic development through the Indonesian Bank and obtain a recommendation from the financial supervisory regulator in its home jurisdiction. It must also possess a certain level of investment rate as follows:

  • for a foreign bank, one notch above the lowest investment rank for shareholders;
  • for a foreign non-bank financial institution, two notches above the lowest investment rank for shareholders;
  • for a foreign non-financial institution, three notches above the lowest investment rank for shareholders.

It is worthy to note that in terms of limitations to foreign investment in the Banks, Government Regulation No. 29 Year 1999 concerning Shares Purchase of Commercial Banks (which remains valid until today) provides that the total of shares ownership of Banks by foreign individuals and foreign legal entities acquired through direct purchase or through Indonesian Stock Exchange is 99% of the number of shares of the Bank in question. This is also applicable for Indonesian sharia banks pursuant to Bank Indonesia regulation No. 11/3/PBI/2009 which was amended by regulation No. 15/13/PBI/2013 where the maximum limit of foreign ownership in Indonesian sharia bank is 99%.

Divestment obligations

Shareholders who own more shares than the prescribed limit must adjust their ownership within 5 years after the last assessment period or the sale of shares if:

  • their Banks suffer degradation in its level of soundness and/or governance to rank 3 or 4 or 5 in 3 consecutive periods; and
  • the shareholders voluntarily sell the shares (“Adjustment Obligation”).

Legal consequence for failure to comply

Shareholders who have failed to comply with the Adjustment Obligation may receive the following restrictions:

  • its quorum and decision-making rights will only be taken into account up to the maximum limit of share ownership as stipulated under OJK Regulation 56/2016
  • its dividend payment for the excess of shares owned will be delayed until the adjustment to the Ownership Limit is made.

Banks that are owned by shareholders which do not fulfill their Adjustment Obligation must: (i) record the relevant shareholder’s right up to the Ownership Limit; (ii) ensure that the use of voting right by the relevant shareholder and quorum calculation in a General Meeting of Shareholders up to the Ownership Limit; (iii) delay the payment of dividend for the excess of shares owned by the relevant shareholder until the Adjustment Obligation is fulfilled; and (iv) not grant or extend the fund provision facility period to the relevant shareholder, including its affiliates.

OJK, based on its consideration, may give approvals to the shareholders to own the Bank’s shares exceeding the Ownership Limit for a certain period of time. OJK, in administering these shareholders, also has the capacity to order the Banks to perform a merger or acquisition.

Other sanctions

Banks must prepare an action plan to adjust its shares ownership scheme. Such action plan must be approved by the General Meeting of Shareholder (“GMS”) and delivered to OJK for its approval no later than 4 months from when the obligation to adjust with the Ownership Limit arises. The action plan must at least include the adjustment plan to the Ownership Limit, stages of implementation, and its time duration.

OJK must receive this action plan within 10 working days from the realization of the action plan or according to the stages of the action plan itself. To OJK, this action plan is directed to the Department of Bank Supervision, Department of Sharia Banks or Regional Office of OJK in Jakarta, for Banks having its main office in Jakarta or Regional Office of OJK or other relevant OJK office, for Banks having its main office outside Jakarta.

Administrative sanctions may be imposed for failure to conform to the obligations above in the form of:

  • warning letters;
  • restrictions for opening a new branch office; and/or
  • suspension of certain business activities.

Furthermore, OJK may impose the retaking of fit and proper test to the Board of Commissioners and/or Board of Directors of such Bank.

Transitional provisions

Shareholders in Banks that had their financial-soundness/good governance levels assessed for the relevant position back in December 2013 are required to adjust to the relevant share-ownership cap by 1 January 2019. Meanwhile, shareholders in Banks which are intending to voluntarily sell their shares or which have ranked between 3 and 5 over 3 consecutive years during the period from 1 January 2014 until OJK Regulation 56/2016 came into force must adjust to the cap within 5 years of the last assessment period.

Single Presence Policy (“SPP”)

A separate but relevant point of discussion in light of this issue on shares ownership for Banks is the SPP as promulgated under Bank Indonesia Regulation No. 14/24/PBI/2012 concerning Single Ownership in Indonesian Banks (“BI Reg 14/24”). Under the SPP, a party may only become a Controlling Shareholder[2] in one Bank. However, a party may become a Controlling Shareholder in two banks if:

  • the two banks operate under different business principles (e.g., the conventional principle and the sharia principle); or
  • one of the banks is a joint venture bank – that is, a bank established jointly by a foreign and a local shareholder.

Controlling Shareholders of more than one Bank are obliged to restructure their ownership by:

  • conducting a merger or consolidation;
  • establishing a holding company; or
  • establishing a holding function.

For the first two of these restructuring options, the act must be implemented within one year of the entry into force of BI Reg 14/24. For the establishment of a holding function, the act must have been carried out within six months of the entry into force of BI Reg 14/24.

Controlling Shareholders that have failed to comply with the SPP are prohibited from executing controlling functions and from acquiring more than 10% from the bank’s total shares. The excess shares must be transferred to any party within one year after the period stipulated in Article 3 (3) of BI Reg 14/24. A controlling shareholder that fails to transfer excess shares will be prohibited from becoming a Controlling Shareholder in Indonesian Banks for 20 years.

If you have any questions or require any additional information, please contact Leoni Silitonga, Dinna Margaretha or the ZICO Law Partner you usually deal with.


This alert is for general information only and is not a substitute for legal advice.

[1] Non-banking financial institutions referred to in OJK Regulation 56/2016 are financial institutions that in their incorporations are permitted to take long-term investment participation and supervised by OJK. A non-banking financial institution that does not meet such requirements is considered a non-financial institution and therefore is only permitted to own a maximum of 30% of the bank’s capital.

[2] A “Controlling Shareholder” is defined as a party that controls 25% or more of the shares in the bank or, if it holds less than 25%, a party that has direct or indirect control over the bank.