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10/06/2020

Covid-19 in Indonesia: OJK Issues New Rules on Compulsory Consolidation in Banking Sector to Safeguard Financial System Stability

 

Following the issuance of emergency legislation that gives the state special powers to contain the economic fallout of Covid-19 (“Perppu 1/2020”),[1] the Indonesian Financial Services Authority (Otoritas Jasa Keuangan / “OJK”) recently issued Regulation No. 18/POJK.03/2020 (“POJK 18/2020”)[2] to provide a solid legal basis to require compulsory consolidation in the banking sector. The new regulation allows the OJK to issue a written directive (“Directive”) to a distressed bank, on the one hand, and a sound bank, on the other, requiring them to jointly engage in a restructuring process by way of merger, consolidation, acquisition, integration and/or conversion. Thus, two parties are involved in the process: a distressed bank and a sound bank (collectively the “Participating Parties”).

 

The OJK may issue a Directive to a bank

 

  1. that, in the view of the OJK, is facing liquidity issues that will affect its survival, or which is unable to withstand current or anticipated pressures; and/or
  2. in which the controlling shareholder is unable to strengthen the bank’s liquidity.

 

Consequently, such bank must prepare an action plan to implement the Directive, which should, at a  minimum, set out a timeline and schedule for the proposed merger, consolidation, acquisition and/or integration, as the case may be, up until the completion thereof. Should the bank fail to prepare a plan, both the bank and its Principal Parties (defined as controlling shareholders, directors and commissioners) will be subject to administrative sanctions in the form of written warnings and, ultimately, blacklisting as a prohibited party.

 

Restructuring Requirements

 

Upon preparing an action plan, the Participating Banks must implement the agreed merger, consolidation, acquisition and/or integration, as the case may be, in accordance with the provisions of the prevailing OJK rules on mergers, consolidations and acquisitions in the banking sector.[3] POJK 18/2020 exempts a bank that is subject to a written directive from mandatory public disclosure if it is a publicly listed company, and from single presence policy requirements, maximum shareholding restrictions and/or deadlines for the fulfilment of minimum core capital requirements.

 

The sound bank must accept the prescribed merger, consolidation, acquisition and/or integration. The valuation and conversion of a bank’s shares during the corporate restructuring process must be based on the agreement of the Participating Banks. Should no agreement be arrived at between the Participating Banks, the valuation and conversion of the bank’s shares must be based on a proper appraisal conducted by the bank accepting the merger, consolidation, acquisition and/or integration.

 

Sanctions

 

While Perppu 1/2020 establishes criminal sanctions of up to 4 years imprisonment and a minimum fine of IDR 10 billion (approx. USD 706 thousand per 4 June 2020) for any party that deliberately ignores, fails to fulfill/perform or hampers the implementation of an OJK Directive, POJK 18/2020 further provides for the imposition of administrative sanctions on the offending bank and/or its Principal Parties.

 

ABNR Commentary

 

With the Covid-19 pandemic posing potentially unprecedented economic challenges, the OJK now has an arsenal of powerful weapons at its disposal to ward of bank failures that could endanger the stability of the financial system. In reality, of course, such powers are not entirely new to the banking industry as prior to this the OJK already had the authority to instruct both systemic and non-systemic banks under close supervision to enter into mergers or consolidations with other banks.

 

However, it remains unclear how the OJK’s authority under POJK 18/2020 will be exercised in practice. For example, will a distressed bank be able to negotiate the particular type of restructuring (merger, consolidation, acquisition, or integration) to be applied to it or will this be determined solely by the OJK?

 

Further, it is unclear whether directives will be issued simultaneously to both Participating Banks. If they are issued simultaneously, we would expect that the preparation of an action plan could take 1-2 months depending on the size and complexity of each bank.

 

A sound bank that is on the receiving end of an OJK directive will need to take it very seriously, given the sanctions established by Perppu 1/2020 and POJK 18/2020. Further, the exemptions from mandatory public disclosure for listed banks may do little to offset the potentially onerous nature of a directive. Indeed, such exemptions might be counterproductive as to do avail of them could be detrimental to the bank’s stock price.

 

Given the lack of detail in POJK 18/2020, it is apparent that further explanations will be required in order to provide assurance and clarity to the banking industry.

 

Contact Us

 

Should you have any queries or require legal advice on how you can best protect your interests during this time of uncertainty, please

contact any of the persons below, call us on +6221-2505125, or email us at info@abnrlaw.com.

 

Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com)

Mr. Nafis Adwani (nadwani@abnrlaw.com)

Mr. Agus Ahadi Deradjat (aderadjat@abnrlaw.com)

 

 

[1] Government Regulation in Lieu of Law No. 1 of 2020 (Peraturan Pemerintah Pengganti Undang-Undang Nomor 1

Tahun 2020).

[2] Financial Services Authority Regulation No. 18/Pojk.03/2020  on Written Directives for the Handling of Distressed Banks (Peraturan Otoritas Jasa Keuangan Nomor 18/Pojk.03/2020 Tentang Perintah Tertulis untuk Penanganan Permasalahan Bank).

[3] Financial Services Authority Regulation No. 41/POJK.03/2019 (Peraturan Otoritas Jasa Keuangan No. 41/POJK.03/2019)  and Financial Services Authority Regulation No. 21/POJK.03/2019 (Peraturan Otoritas Jasa Keuangan No. 21/POJK.03/2019).

 

 

This edition of ABNR News and the contents hereof are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained herein. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.