New BI Regulation on the Share Ownership of Commercial Banks
Long awaited by the banking industry and having gone through a lengthy process within Bank Indonesia ("BI") itself, where several share purchase transactions were put on hold by BI, BI has issued a new regulation on the ownership of commercial banks, as contained in BI Regulation No. 14/8/PBI/2012 regarding the Share Ownership of Commercial Banks on July 13, 2012 ("BI Reg 14/2012").
BI's main purpose behind the issuance of this regulation is to make certain that bank owners continue to maintain and implement policies of good corporate governance. In addition, the proposed ASEAN financial integration plan of 2020 will allow banks with certain qualifications to operate freely within ASEAN and may force Indonesian banks to step up their game. Therefore, BI considered it necessary to integrate share ownership percentages with bank soundness levels to incentivize investors to not just invest, but also to have an interest in maintaining the performance of the banks they own.
In general, there are a number of substantial provisions applied by the issuance of this regulation, which provides additional requirements that can either cause shareholders to maintain, increase or even decrease its share ownership percentages as determined by BI. With the issuance of BI Reg 14/2012, BI has stipulated the maximum percentage of share ownership based on the category of shareholders, of which a general overview is as follows:
- for financial institution shareholders, either in the form of a bank or a non-bank, the maximum share ownership is 40% of the bank's capital;
- for non financial institution shareholders, the maximum share ownership is 30%; and
- for individual shareholders of conventional commercial banks, the maximum share ownership is 20% of the bank's capital, while for individual shareholders in syariah banks, the maximum share ownership is 25%.
Additionally, BI provides that financial institutions in the form of banks may maintain a share ownership percentage exceeding 40% of the bank's capital, so long as it is approved by BI, subject to the fulfillment of certain requirements by such shareholder.
Furthermore, ownership of more than 40% by financial institutions in the form of a bank should at least fulfill the criteria that the bank has the ability to go public no later than 5 years after being owned by such financial institution, resulting in at least 20% of the bank'ss capital to be owned by the public.
BI also regulates banks owned by related parties, whereby shareholders having an affiliated relationship through ownership in the same bank or a relationship in the form of an affiliation of up to the second degree, and/or a relationship referred to as "acting in concert," are deemed by BI as one party. This would be applicable for family-owned banks.
The composition of share ownership within the affiliated parties deemed as a single party by BI will be required to follow the share ownership percentages based on the shareholders category as mentioned above, where the maximum ownership of a single party in one bank will be the maximum ownership percentage based on the shareholders category within that single party. All potential controlling shareholders that are foreign citizens or foreign legal entities are required to fulfill the following requirements: (i) be committed to support the economic development of Indonesia, (ii) foreign financial institution shareholders must obtain a recommendation letter from the relevant supervisory authority in its home country, and (iii) have the required minimum investment level of either 1, 2 or 3, depending on the form of its investment vehicle.
Of the summary provided above, it is noteworthy that BI Reg 14/2012 does not specifically limit the ownership of foreign shares in a bank since foreign parties can still own up to 99% share ownership in an Indonesian bank, to the extent it fulfills the requirements stipulated by BI in this regulation. It is important to note that BI Reg 14/2012 does not apply retroactively and will only apply to future share purchase transactions of Indonesian banks. All existing share ownership in place before July 13, 2012 will remain as is, subject to the bank's soundness level.
It is stipulated in BI Reg 14/2012 that until the end of December 2013, shareholders of certain banks will be required to adjust its share ownership percentage to the applicable maximum amount in a period of no more than 5 years as of January 1, 2014. Shareholders that manage to have their banks maintain the minimum required bank soundness level and/or good corporate governance level as of December 2013 are allowed to maintain their existing share ownership percentage above the allowed percentage stipulated in BI Reg 14/2012. However, adjustments are required to be made if that level plummets after three periodical valuations.
Failure to comply with the share ownership limitation provisions of this regulation will cause the shareholder's rights to be limited to the maximum percentage allowed by the regulation, specifically to its voting rights at a General Meeting of Shareholders and also for the payment of dividends. Notwithstanding all the rules of ownership as mentioned above, it remains possible for BI to approve a shareholder's request to own a percentage of shares in a bank over the required maximum percentage for a certain period. However, BI has the right to instruct any shareholder that does not fulfill the obligation to adjust the maximum ownership percentage by conducting a merger or consolidation.
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