Equity Participation Activities by Commercial Banks in Financial Services Companies
On 2 November 2022, the Financial Services Authority/Otoritas Jasa Keuangan (“OJK”) issued OJK Regulation No. 22 of 2022 regarding the Equity Participation Activities by the Commercial Banks (“POJK 22/2022”). The financial services industry, including banking, is affected by the vast development of information technology. As a result, a collaboration between banks and other financial companies in a digital ecosystem is needed, including through equity participation activities.
Under POJK 22/2022, OJK sets out that conventional banks are allowed to conduct equity participation only to financial services companies and, while for sharia banks, only to sharia financial services companies. Meanwhile, a bank’s sharia business units and a foreign bank’s branch office are prohibited from engaging in equity participation.
Banks may provide equity participation only to financial services companies that utilize information technology to produce financial products as their main business and/or a credit information management institution. The financial services companies must have obtained its operational licenses.
Banks are prohibited from (i) receiving equity participation from an investee or conducting equity participation to its shareholders, either directly or indirectly, and (ii) conducting equity participation which results in the bank having unlimited liability to the investee.
Banks may provide equity participation directly or through the capital market with the intention of long-term investment and not for shares trading. The total portfolio of equity participation by a bank is limited to 35% of the bank’s capital, which is the total equity participation of all investees, including the increase in equity participation and stock dividends. The increase of equity participation can be derived from accumulated profit and/or changes in exchange rates and/or changes in fair values in accordance with the financial accounting standards in Indonesia.
In the event that banks that have implemented consolidated risk management with their subsidiaries, the increase in equity participation derived from (i) accumulated profit and/or changes in exchange rates and/or changes in fair values, and (ii) equity participation originating from stock dividends at the subsidiary company are exempted from complying with the limitation above.
In the event that the investee is (i) an entity controlled by the bank in accordance with the financial accounting standards in Indonesia (“Subsidiary”) but the banks have not implemented risk management on a consolidated basis, or (ii) not a Subsidiary, any increase in equity participation originating from the profit accumulation in investee using the equity method is also exempted from complying with the limitation above, as long as it does not exceed one year from the end of the investee’s financial year.
If a bank exceeds the 35% limit for three consecutive months, it must submit an action plan addressing this matter to the OJK.
Application for the Equity Participation Permit
Prior to applying for the equity participation permit, banks are required to include the equity participation plan in the bank’s business plan, which contains at least the following information:
a. investee’s company name and field of business;
c. projection of equity participation; and
d. percentage of ownership, including control aspects.
When applying for the equity participation permit, banks must fulfill the following requirements:
a. minimum capital adequacy ratio according to risk profile;
b. a soundness level with a composite rating of one or two based on the assessment of the soundness of the bank for the last two consecutive periods; and
c. equity participation that must not interfere with the continuity of the bank’s business and must not significantly increase the bank’s risk profile.
Applications for permits to OJK are made online using OJK’s electronic system. OJK will provide its decision on the application no later than 14 business days after all of the requirements are fulfilled. Banks must implement the equity participation plan no later than six months after obtaining the permit from OJK.
Within five business days after the implementation of the equity participation, banks must submit a report on the realization of equity participation to OJK. The report shall include at least the following information:
a. investee profile
b. the effective date of implementation of equity participation; and
c. conformity of performance with the relevant equity participation permit.
By: Nabila Roselano