Indonesia introduces new regulation to facilitate the transformation of foreign bank branches into subsidiaries and refine M&A in the banking sector
Partner, Ginting & Reksodiputro in association with Allen & Overy
Partner - ASEAN
Counsel, Ginting & Reksodiputro in association with Allen & Overy
Associate, Ginting & Reksodiputro in association with Allen & Overy
21 February 2020
The key change is the introduction of branch conversion and integration – mechanisms allowing foreign bank branches to become Indonesian banks.
The regulation also introduces procedural changes designed to ensure execution certainty of bank M&A transactions, including extending the OJK’s role in supervising bank M&A.
On 23 December 2019, the Indonesian Financial Services Authority (the OJK) issued Regulation No. 41/POJK.03/2019 (the New Bank M&A Rules), which revoked two decrees issued by its predecessor (Old BI Decrees), Bank Indonesia. This alert focuses on some of the key changes introduced by the New Bank M&A Rules.
Integration and Conversion of Foreign Bank Branch
For many years the OJK has been openly voicing its encouragement of the conversion by foreign banks of their Foreign Bank Branch Offices (Kantor Cabang Bank Luar Negeri) in Indonesia (Foreign Branch Offices) into Indonesian limited liability banks.
Prior to the introduction of the New Bank M&A Rules, there has been no dedicated regime that permits the simple conversion or integration of such Foreign Branch Offices. In practice, the principal way to effect such a conversion would be through the foreign bank (i) acquiring a licensed Indonesian limited liability bank (a Bank); and (ii) transferring the assets and/or liabilities of its Foreign Branch Office to that Bank.
To address this gap, the New Bank M&A Rules provide two new mechanisms that may be used to turn a Foreign Branch Office into a Bank, namely Integration and Conversion. These two concepts are described in greater detail below:
Integration involves the transfer of assets and/or liabilities of the Foreign Branch Office to an existing operating licensed conventional or sharia Bank and the revocation of the Foreign Branch Office licence at the end of the process (Integration).
Under the New Bank M&A Rules, Integration requires OJK approval and the prior public announcement of the Integration plan within two (2) business days after receiving clearance from the OJK and 30 days before the call of the General Meeting of Shareholders. This requirement aligns with the announcement for a Bank’s acquisition plan which will be discussed below. The creditors have the right to object to the Integration by notice to either the Bank and/or the Foreign Branch Office within 14 days after the announcement – an unsettled objection may stop the process of Integration.
The Foreign Branch Office and the Bank shall sign an Integration deed in notarial deed form within two (2) business days following the receipt of the OJK Integration approval. The Bank shall then submit the Integration deed along with the amendment of its articles of association to the Ministry of Law and Human Rights (MOLHR). The Integration approval shall be effective on the date of the MOLHR’s approval (in the case of an amendment that requires approval) or the date of receipt of notification to the MOLHR (for amendment that does not require approval or if there is no amendment to the articles). The Foreign Branch Office must apply and complete the revocation of its Foreign Branch Office licence within two (2) years of the effective date of the Integration approval.
The New Bank M&A Rules also introduce the concept of conversion of a Foreign Branch Office into a Bank which involves the establishment of a new Bank for the purpose of the conversion and revocation of a Foreign Branch Office licence (Conversion).
A Conversion plan must be published within two (2) business days after receiving the Principle Licence and creditors may file an objection within 14 days after such announcement. Similar to Integration, Conversion cannot be implemented until all creditors’ objections have been settled.
The Conversion process involves the submission of the following applications to the OJK:
- Application for a conversion licence (Conversion Licence);
- Application for a principle licence for the establishment of a limited liability company to conduct banking business (Principle Licence); and
- Application for a business licence for the limited liability company to operate as a bank (Business Licence).
The application for the Conversion Licence and the Principle Licence will have to be made concurrently. The application for the Business Licence will need to be submitted following the receipt of the Principle Licence and after the limited liability company has been established. The OJK shall approve the application for the Conversion Licence at the time it issues the Business Licence to the newly established Bank. Upon the issuance of the Business Licence, the foreign bank will own a licenced operating Bank and a (non-operating) Foreign Branch Office. The newly established bank must satisfy a minimum threshold of authorised capital, i.e. the total amount of business funds in the Foreign Branch Office capital component, calculated based on the previous Foreign Branch Office financial report before the submission of the Conversional Licence application.
When the Business Licence is issued, the Bank must commence its banking activities within 60 days and the Foreign Branch Office must revoke its Foreign Branch Office licence within two (2) years of such issue. Prior to the Bank conducting the banking activities, the Foreign Branch Office must transfer all of its assets and/or liabilities to the Bank by way of entering into minutes of transfer of assets and/or liabilities prepared in notarial deed form. Further, within that two-year period the Foreign Branch Office shall not be permitted to conduct any kind of banking activities with the exemption that it can only conduct settlement of such Foreign Branch Office’s liabilities and/or obligations that were not transferred to the newly established Bank (for example, creditor’s settlement).
Procedural Changes to the execution of bank M&A
The New Bank M&A Rules also amend some of the procedures for acquisitions, mergers and consolidations in the Banking sector. Among the key changes are:
- Earlier involvement of the OJK: The OJK will need to be updated on the progress of the draft of the M&A plan. In particular for an acquisition plan, OJK clearance is now required for the newspaper announcement of the M&A plan. In the past, the OJK would have only been made formally known about a proposed M&A deal after the public announcement when they receive the application for the fit and proper test. The OJK’s greater involvement establishes the requisite support to the transacting parties at an early stage of a transaction and provides a substantial degree of certainty for an efficient execution of a deal.
- Period of creditor objection: In line with Company Law, the time period to submit creditor objection is now 14 days after the announcement of the M&A Plan, whereas previously the deadline to submit creditor objection was seven (7) days before the call for a General Meeting of Shareholders. This clears up the inconsistency between the Company Law and the Old BI Decrees.
- Effect of creditor objection: Until settlement of any and all creditor objections has been reached, the relevant transaction may not be concluded. The New Bank M&A Rules impose a more specific requirement than Company Law by requiring the creditor’s settlement to be made in notarial deed form.
- Minority shareholders buyback right: The New Bank M&A Rules clarify that a shareholder’s objection cannot prevent the implementation of an M&A transaction, which was not the case with the Old BI Decrees. An objecting shareholder can only exercise their right to require the bank to repurchase their shares. This brings the New Bank M&A Rules more in line with the Company Law.
- Medium of announcement: Announcement of the M&A plan now needs to be made in one newspaper with national circulation and on the bank’s website, instead of only in two newspapers as required previously. As technology evolves, website posting can be seen as an appropriate method of disclosure as it provides broader, non-exclusionary access to the public.
- Timing for newspaper announcement: A merger plan will have to be published within two (2) business days after receiving the board of commissioners’ approval. As for the acquisition plan, the newspaper announcement will have to be made by no later than two (2) business days following receipt of the OJK clearance. There were no such stipulations under the previous regime. The introduction of timing for the newspaper announcement provides clearer timelines to the overall M&A timetables.
- Timing for announcement to employees: The Old BI Decrees allowed the announcement of the M&A to employees to be made 14 days before the General Meeting of Shareholders. The New Bank M&A Rules now require this announcement and the M&A plan to be published together 30 days before the call of the General Meeting of Shareholders. The change is consistent with the Company Law.
Other Key Changes
The New Bank M&A Rules also introduce the following associated key changes to the law:
- Single Largest Shareholder shall be a Controlling Shareholder: The New Bank M&A Rules expand change-of-control triggers. Under the previous regime, change of control was only triggered by a shares purchase of either 25% or more, or less than 25% but with the ability to directly or indirectly determine the Bank’s management and/or policies. The new rules widen the scope of the definition of change of control by adding a new event – the purchase of shares that results in the acquirer being the ‘single largest shareholder’ – that would trigger a change of control. Accordingly, such shares purchase shall be subject to change–of-control procedures including procedures for passing the fit and proper test.
- Sharia Trumps Conventional: The New Bank M&A Rules require that any merger or consolidation of a sharia bank with a conventional bank will result in a sharia bank. A sharia bank can acquire a conventional bank provided that the conventional bank is converted into a sharia bank.
The New Bank M&A Rules provide clear options for Foreign Branch Offices to become full-fledged Banks in Indonesia i.e. through Integration and Conversion. With respect to bank M&A, the new rules reduce uncertainties and inconsistencies and at the same time outlines more comprehensively the procedures for achieving greater certainty in the regulatory process relating to bank M&A. It is expected that the new regulatory framework will spur new M&A deals in the banking sector.
1Board of Directors of Bank Indonesia No. 32/50/KEP/DIR/1999 and Board of Directors of Bank Indonesia No. 32/51/KEP/DIR/1999.
2Prior to the promulgation of Law No.21 of 2011 on OJK, Bank Indonesia was the supervising authority of the banking sector.