Following the rapid growth of the Indonesian capital market industry within the past decade, the Financial Services Authority (Otoritas Jasa Keuangan, “OJK”) has issued a new regulation on affiliated transactions and conflict of interest regarding certain transactions, the OJK Regulation No.42/POJK.04/2020 (“POJK 42/2020”). This regulation will gradually revoke the well-known BAPEPAM-LK Regulation No. IX.E.1 regarding the same matter.
Although POJK 42/2020 has been issued on 1 July 2020, most of the provisions will be fully effective on 21 October 2020. At this time, the only provisions that have been made effective are Article 7 and 13, which are applicable for financial services companies under “certain conditions”. There is no parameter that can be used as a guidance to measure this situation and based on in POJK 42/2012, only OJK has the discretion to assess and determine whether a company is fall under this category of “certain conditions”.
Affiliated Transaction
Expansion of Scope
POJK 42/2020 has specifically expanded the definition and scope of Affiliated Transaction, to cover not only transactions that are directly conducted between company and its affiliated party, but also include other activities and transactions conducted in connection with the interest of affiliated party. To provide a clear example, the elucidation of POJK 42/2020 has expressively listed down some activities that are considered as affiliated transactions, as follows: (i) investment in other company, project or business, (ii) purchase, sale, transfer, use and exchange of assets or business segment, (iii) acquisition, disposal and/or use of services, (iv) assets rental, (v) borrowing of funds and its transfer, (vi) use of the public company’s assets or assets of the controlled company as securities for third party loan, and (vii) grant of corporate guarantee.
New Requirement: Internal Procedure
One of the notable highlights in POJK 42/2020 is the new requirement for public companies to create its internal procedure for affiliated transactions. Although this procedure is not specifically detailed in POJK 42/2020, it is expected to be in line with the applicable general business practices.
Exemption
While most of the exceptions provided by Regulation IX.E.I are still provided in POJK 42/2020, starting from 21 October 2020, POJK 42/2020 will remove special exception which allow public company to not report and disclose affiliated transaction that is considered as its main business activities, or its supporting business activities, or supporting business activities of company under its controlled. By removing the special exception, we believe OJK expects public companies in Indonesia to provide more disclosure on their affiliated transaction.
Conflict of Interest on Certain Transaction (Conflict of Interest Transaction)
Exact Definition of Conflict of Interest Transaction
To avoid loose interpretations of what is considered conflict of interest transactions, POJK 42/2020 is now providing specific definition of “conflict of interest transaction”. In its essence the definition is still adopting its literal understanding as transaction that has conflict of interest nature, but now also emphasis on the parties who conduct the transaction with the public company, that is elaborated as any party, either affiliated or non-affiliated party.
New Additional Documents for Disclosure:
POJK 42/2020 has now added a new requirement on the documents that are required to be submitted for the disclosure of conflict of interest transactions, among others, the pro forma of transaction’s effect towards the public company’s financial situation. This document must be prepared based on the financial report whilst using a limited review.
Expansion of Independent Shareholders’ control
In Regulation IX.E.1, control from the independent shareholders is required only for the conflict of interest transaction, whereby the transaction must be approved by independent shareholders in the general meeting. Starting from 21 October 2020, through POJK 42/2020, OJK will expand this control by requiring similar independent shareholders’ approval for affiliated transactions that meets the following criteria: (i) the value of the transaction is more than 50% of the public company’s equity, or more than 25% for public company with negative equity, (ii) the affiliated transaction which may result a disruption in the business continuity of public company, and/or (iii) conducting an affiliated transaction that is based on OJK’s consideration, it requires an approval from the independent shareholders.
Other Transactions
To strengthen protection for the stakeholder(s), POJK 42/2020 also requires other transactions that may disrupt the business continuity of the public company to be treated and conducted in line with the requirement for conflict of interest transaction. To make sure the correct interpretation of this requirement, elucidation of POJK 42/2020 also provides examples of the transactions that may be deemed as disrupting the company’s business continuity – among others are transactions that can decrease the company’s income to 80% or more, or transactions that could possibly make the company suffer loss in the current financial year. Although it is still necessary to seek further clarification from OJK on how they will interpret each respective situation, the benchmark set in the example is sufficient as preliminary guidelines for public companies to conduct their transaction starting from 21 October 2020 onwards.
In addition, the procedure and requirement in POJK 42/2020 is also relevant for the transaction conducted between public companies and investment managers who manages at least 20% shares of said public company in its portfolio.
Closing Notes
We believe POJK 42/2020 is issued by OJK to establish a new regime of a regulation that can strengthen the previous legal framework that has been established by Regulation IX.E.1. This new regulation is also prepared by OJK by taking into account various precedents, dynamic market needs, and international standards.
If there are any queries with regards to how this may affect your business, please contact us for further legal consultation.
This information does not, and is not intended to, constitute as legal advice; instead, all information, content, and materials are for general information only.
