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25 January 2013
After heated debate 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, the country's central bank and industry regulator, issued the Regulation on Ownership of Shares in Commercial Banks (14/8/PBI/2012).
The regulation establishes rules that restrict ownership of banks by individual shareholders, on either an individual or joint basis.
Before the regulation was issued, Bank Indonesia launched the Indonesian Banking Architecture, intended as the blueprint for the Indonesian banking system. Under this blueprint, the system's objectives are to:
The regulation includes the following provisions:
In spite of the above 40% bank ownership limit, Articles 6 to 10 of the regulation stipulate specific criteria for exceptions to this rule.
Contrary to the expectations of many during the discussions on bank ownership a few years ago, the regulation continues to give local and foreign investors equal treatment and does not impose bank ownership restrictions on foreign investors. Rather, 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 requirements for foreign shareholders are merely that they:
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. If the target bank falls below the required good corporate governance (GCG) and health ratings stipulated by the regulation, the shareholders with shares beyond their respective limits must divest.
The required investment grades are as follows:
Upon receiving Bank Indonesia's approval, a candidate local or foreign investor bank may take up more than 40% ownership of an Indonesian bank, provided that, among other things, it:
Following its acquisition of the bank, the investor bank is obliged to float 20% of its shares to the public within five years of the acquisition, while the acquired bank must have Bank Indonesia's approval to issue loans that are convertible to equities.
The equal treatment of 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 – until the regulation was issued, such ownership had been practically prohibited. The regulation allows foreign investors to own shares in a regional bank with financial health and GCG grades of 3, 4 and 5, which requires capital injection.(2)
The regulation became effective on July 13 2012, the day of its issue.
(1) Assessment of the level of the financial health (ie, solvency) of a bank is regulated under the Bank Indonesia Regulation on Assessment of Commercial Banks' Solvency (13/1 /PBI/2011). Article 9 of the regulation defines Level 1 as indicative that the bank concerned is generally very solvent, thus enabling it to weather very significant negative effects of changes in the business condition and other external factors. It defines Level 2 as indicative that the condition of the bank is generally solvent, thereby allowing it to weather negative effects caused by business condition changes and other external factors.
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