Recent developments in the financial services sector have included technology disruption and increased financial and investment risks arising from developments in financial instruments, including digital assets.
These changes have driven the Indonesian government to prioritise regulatory reform of this sector in order to:
- increase efficiency in this sector through broadening financial products, expanding the market, strengthening risk mitigation, and increasing consumer protection;
- improve coordination and supervision among the various government agencies overseeing financial services industry; and
- strengthen the role of OJK, Indonesia's Financial Services Authority, in regulating and supervising the industry.
In respect of capital markets, a key focus of the reform has been increasing transparency through information disclosure and good governance practices.
On 12 January 2023, Law No. 8 of 1995 on Capital Markets (the Capital Markets Law) was amended and supplemented by Law No. 4 of 2023 on the Development and Strengthening of the Financial Services Sector (the Financial Omnibus Law).
We summarise here some of the notable changes under the Capital Markets Law as amended by the Financial Omnibus Law (the Amended Capital Markets Law) affecting Indonesia's capital market landscape.
Broader definition of securities
Under the Amended Capital Markets Law, "Securities" are defined more broadly as commercial papers or investment contracts, whether conventional, digital or in another form arising from technological developments, that grant the owner the right to obtain economic benefit, either directly or indirectly, from the issuer or other parties based on an agreement, or the derivative of securities which can be transferred or traded in the capital markets.
Given this broader definition, both carbon units used in carbon trading (which are to be further regulated by OJK) and crypto assets now fall within the category of securities. (For more information on Indonesia's 2021 carbon law, please see our article here).
Under the Financial Omnibus Law, regulatory and supervisory authority for trading commodities in the form of financial digital assets and securities (including crypto assets) will be transferred from the Commodity Futures Trading Regulatory Agency (Badan Pengawas Perdagangan Berjangka Komoditas) to OJK within two years after the enactment of the Financial Omnibus Law, with the relevant government regulation expected to be issued within six months of its enactment.
The broad definition of securities appears to be designed to capture both current and future capital market products that are introduced.
Clearer definition of affiliates
The Amended Capital Markets Law provides more detailed criteria for an "affiliate", which is defined as:
- a family relationship by marriage up to the second degree, horizontally or vertically, namely the relationship of a person with: (a) their spouse; (b) the parents of the spouse, and the spouses of their children; (c) grandparents of the spouse and the spouses of their grandchildren; (d) siblings of the spouse and their respective spouses; or (e) the spouse of the siblings of the person concerned;
- a family relationship by heredity up to the second degree, horizontally or vertically, namely the relationship of a person with their: (a) parents and children; (b) grandparents and grandchildren; and (c) siblings;
- relationship between a party and its employees, directors, or commissioners;
- relationship between two companies where one (or more) member of the board of directors, management (pengurus), board of commissioners, or supervisors (pengawas) is the same person;
- relationship between company and parties, either directly or indirectly, in any way, controlling or controlled by the company or parties concerned, in determining their respective management and/or policy;
- relationship between two companies that are controlled, either directly or indirectly, in any way, by the same party in determining their management and/or company policy; or
- relationship between a company and a "substantial shareholder", ie a party directly or indirectly owning at least 20 percent of the company's shares with voting rights.
The key changes in the definition of an "affiliate" are as follows:
- there is clarity on the family relationships by marriage and heredity under points (i) and (ii);
- point (iv) has been broadened to include companies with the same management or supervisors (previously it only covered directors and commissioners); and
- the meaning of control under points (v) and (vi) now expressly relates to determination of company management and policy (previously there was no such clarification).
Public and listed companies should now make assessments of affiliated party transactions in line with this revised definition. (Please also see our article here on OJK's 2020 regulation on affiliated party and conflict of interest transactions by public companies.)
Potential changes in criteria for public companies
A "public company" is now defined under the Amended Capital Markets Law as "a limited liability company with a number of shareholders and paid-up capital as further determined by the relevant OJK regulation."
The current OJK regulation (OJK Regulation No. 3/POJK.04/2021 on the Organisation of Activities in the Capital Markets Sector, or OJK Regulation 3/2021) still refers to the previous definition of a public company as a limited liability company with (i) at least 300 shareholders and paid-up capital of at least three billion Rupiah (approximately US$200,000) or (ii) other number of shareholders and amount of paid-up capital as stipulated by government regulation.
Thus, the new definition provides OJK with flexibility to set new criteria for a public company. Until OJK issues such a new regulation setting out new criteria for a public company, the definition of a "public company" will continue to refer to OJK Regulation 3/2021.
Accelerated timeline for public offering registration statement
Under the Amended Capital Markets Law, unless OJK comments on a public offering registration statement that has been submitted, or requires more information or documents, then the public offering registration statement must now be declared effective by OJK no later than 20 working days after submission of the complete registration statement (compared with 45 working days previously).
Single presence policy for securities companies
The Amended Capital Markets Law expressly includes a single presence policy for securities companies by prohibiting any parties from owning shares in or taking control of more than one securities company, directly or indirectly (excluding interests in securities companies owned by the Government of Indonesia). The Amended Capital Markets Law defines a securities company as a party conducting business activities as an underwriter, broker-dealer or investment manager.
This policy is intended to both prevent any potential conflict of interest issues at securities companies directly or indirectly owned by the same party, and enhance stability of the financial system.
The single presence policy must be complied with no later than three years after enactment of the Financial Omnibus Law.
New requirements on shareholding reporting
Under the Amended Capital Markets Law, the shareholding reporting obligations are now as follows:
- The directors and commissioners of an issuer or public company must report to OJK on their ownership, directly or indirectly, of voting rights over shares in the issuer or public company and any changes in that ownership.
- Any party that owns, directly or indirectly, at least five percent of voting rights over shares in the issuer or public company is required to report to OJK its ownership and any change in its ownership of shares in that issuer or public company.
- The reports referred to in points (1) and (2) must be submitted as soon as possible, and no later than five working days from acquiring ownership of voting rights over shares in the issuer or public company or any changes in that ownership.
- OJK may determine that the reporting period referred to in point (3) should be less than five working days from acquiring ownership of voting rights over shares in the issuer or public company or any changes in that ownership.
The Financial Omnibus Law clarifies that all implementing regulations of the Capital Markets Law and other laws will remain valid insofar as they do not conflict with the provisions of the new law. Consequently, at the time of writing, OJK Regulation No. 11/POJK.04/2017 on Reports on Ownership or Change in Ownership of Shares in Public Companies (OJK Regulation 11/2017) remains in effect insofar as it does not conflict with the Financial Omnibus Law. For more on OJK Regulation 11/2017, please see our article here.
The use of the phrase "voting rights over shares" replaces the previous concept of "effective shareholding percentage" under the Capital Markets Law and OJK Regulation 11/2017. In our reading, the intent may be to capture shareholders that own (directly or indirectly) multi-voting shares. The recent introduction of multiple voting rights in Indonesia is intended to encourage founder-led tech companies to hold IPOs on the Indonesian Stock Exchange (IDX) rather than overseas.
Under the revised provisions, a shareholder that has less than five percent of the total shares (effective shareholding percentage), but holds at least five percent of voting rights over shares through multi-voting shares, will become subject to the shareholding reporting obligation.
Considering that the Financial Omnibus Law was enacted to improve information disclosure and good governance rules (among other things), we interpret these changes as being intended to complement and adjust the provisions of OJK Regulation 11/2017 where they are inconsistent with the Financial Omnibus Law.
Accordingly, the shorter reporting period of five working days in which to submit the shareholding report directly to OJK should now apply, rather than 10 calendar days as was previously the case.
In short, compliance with shareholding reporting obligations is more nuanced in practice, with the assessment being made on a case-by-case basis.
Immediate reporting of material information or facts
The Amended Capital Markets Law requires an issuer or public company to submit a report on material information or facts to OJK and to publicise the report (on the websites of the issuer or public company and, if relevant, the IDX) as soon as possible.
This slightly contrasts with the previous rules under the Capital Markets Law and OJK Regulation No. 31/POJK.04/2015 on Disclosure of Material Information or Facts by Issuers or Public Companies (OJK Regulation 31/2015), under which companies were given two working days after the material information or facts occurred or became known. Indeed, the Amended Capital Markets Law clarifies that dynamic market developments may require faster sharing of information than is presently the case.
In summary, the report should be made as soon as possible after the relevant event occurs or becomes known, so as to strictly comply with the Financial Omnibus Law. We would therefore expect OJK to amend OJK Regulation 31/2015 soon in order to fully reflect the disclosure changes under the Amended Capital Markets Law.
Clearer insider trading restrictions for outsiders
The restrictions on insider dealing previously applied to an outsider that (a) attempted to obtain inside information through unlawful means, for example, by stealing the information or persuading or threatening an insider, or (b) received inside information that is subject to confidentiality or other restrictions.
These prohibitions do not apply to an outsider unless there is an unlawful attempt to obtain inside information, provided that the inside information is provided by the public company or issuer without any disclosure restrictions.
The Amended Capital Markets Law clarifies how to apply the provisions of the Capital Markets Law to insider trading prohibitions for outsiders. Under the revised provisions, insider trading prohibitions apply to any party that has inside information or that should know that the information they have is inside information, regardless whether the party has contravened any laws while holding that information.
Una via principle and disgorgement
The Amended Capital Markets Law introduces and expressly applies the una via principle (at OJK's discretion) to alleged capital market crimes. This principle allows OJK to impose administrative sanctions (in the form of fines) and/or written orders on any party committing capital market crimes, without first needing to undertake an investigation.
In addition to imposing administrative sanctions, OJK may also order any party committing a capital markets crime requiring them to, among other things, return (a) profits obtained and/or (b) losses illegally avoided as a result of their administrative violations or unlawful acts (ie disgorgement). The funds acquired from the disgorgement (disgorgement funds) may be used by OJK to compensate investors for their losses or to develop the capital markets industry.
While the concept of disgorgement and disgorgement funds is newly introduced in the Amended Capital Markets Law, disgorgement and disgorgement funds have recently been regulated by OJK Regulation 65/POJK.04/2020 on Return of Unlawful Profits and Compensation Funds for Investor Losses in the Capital Markets Sector, and OJK Circular Letter No. 17/SEOJK.04/2021 on the same topic. The inclusion of disgorgement provisions in the Amended Capital Markets Law is an indication of OJK's ongoing commitment to enhance consumer protection in the capital markets sector.
As the Financial Omnibus Law is still new, we will need to monitor how OJK interprets and implements the amended and new provisions, as well as any new regulations that OJK issues to implement it.
Companies are encouraged to consider how these changes might affect their present corporate structures, arrangements and offerings. That might cover securities/investment portfolios being offered or marketed in Indonesia, arrangements with affiliates, OJK registration processes, shareholding and business group structures at securities companies, indirect shareholdings in an issuer or public company by offshore or onshore entities, transactions being contemplated by an issuer or public company, and transactions involving issuer or public company securities, among other things.
Measures may need to be taken in order to comply with the new provisions contained in the Amended Capital Markets Law and the Financial Omnibus Law, both of which are already in full effect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.