17 May 2024
Indonesian FSA Closes off Public Company Reporting Loopholes by Requiring Disclosure of Shareholder Voting Rights and Share Encumbrances

The Indonesian Financial Services Authority (Otoritas Jasa Keuangan / “OJK”) has issued a new regulation on the reporting of shareholdings and the encumbering of shares in public companies.  OJK Regulation No. 4 of 2024 (“Reg. 4” or the “New Regulation”),[1] which comes into effect on 28 August 2024, replaces the previous regulation on the same topics, OJK Regulation No. 11/POJK.04/2017 (“Reg. 11/2017”).[2]

Reg. 4, which has been issued to give effect to the public-company shareholder reporting provisions set out in Law No. 4 of 2023 on the Development and Strengthening of the Financial Sector,[3]  comes into force on 28 August 2024, six months after its issuance.

The key features of the New Regulation are:

1. It shifts the reporting focus away from total number of shares held to the total number of voting rights that accrue to the shareholder.
2. It obligates the reporting of encumbered shares.

Below are the key points of Reg. 4 and its impact on the regulatory framework.

A. Basis of reporting

Unlike Reg. 11/2017, which based its public-company shareholding reporting requirements solely on the number of shares held, the New Regulation focuses on the total voting rights that accrue to a shareholder. This is a welcome development, given new capital market rules in Indonesia that permit public companies to establish distinct share classes, with the shares of each class carrying different voting rights to those of other classes (Saham dengan Hak Suara Multipel). In such a situation, the precise number of individual shares held does not reflect a shareholder’s level of control over the company. Rather, it is the extent of the voting rights that attach to each of those shares that matters. It is this reality that has now been addressed by Reg. 4, as explained further below.

B. Reporting parties

Those required to submit reports (the “Required Parties”) are generally the same as under Reg. 11/2017:

1. A director or commissioner of a public company who possesses direct or indirect voting rights in the company;
2. Any party that directly or indirectly holds at least 5% of total voting rights, and is able to exercise control over the company.

Required Parties are also obliged to report to the OJK should their percentage voting rights fall below 5%. If a Required Party is an organized group (e.g., a group of shareholders acting in concert), the reporting obligation rests on the group member that is designated for this purpose by the group.

Required Parties are exempt from reporting obligations if a change in share ownership occurs due to:

1. A corporate action involving a capital increase with or without pre-emptive rights (i.e., a rights issue or private placement); or
2. A corporate action carried out by the company in the absence of a transaction conducted by the shareholder (such as where the company buys back shares from a particular shareholder, resulting in a change in the percentage voting rights of other shareholdings).

C. Reportable Changes

Reg. 4 introduces a new approach as regards shareholding changes that are subject to reporting. Unlike Reg. 11/2017, where the reporting obligation was triggered by any change of 0.5% in a shareholder’s share of paid-up capital, the reporting requirement under the New Regulation kicks in when there is any change of one percentage point in a shareholder’s share of voting rights, rounded down to the nearest percentage point.

Examples:

1. A change in a shareholder’s percentage share of voting rights from 5.1% to 6.2% is deemed to be a change from 5% to 6%.
2. A change in a shareholder’s percentage share of voting rights from 8.1% to 7.9% is deemed to be a change from 8% to 7%.

However, a change from 6.1% to 6.99% would not be reportable as, due to rounding down, no change will be deemed to have taken place.

D. Reporting of Encumbered Shares

Reg. 4 closes a longstanding loophole in Indonesian capital markets law by requiring the encumbering of shares to now be reported. Under the previous rules, if shares that were pledged as security were liquidated by the lender upon the borrower’s default, this could significantly change the ownership structure of the company unbeknownst to both the regulator and the other shareholders.

Thus, the New Regulation requires a shareholder to report within five business days after the signing of the security documents:

1. any encumbrance, whether involving one or more transactions, of shares that account for at least 5% of the voting rights in the company; and
2. any change in the percentage of voting rights affected by encumbrance, with the change being expressed in percentage form, rounded down to the nearest percentage point.

E. Disclosable Information

Reg. 4 introduces a number of new disclosure requirements in addition to those mandated by Reg. 11/2017. These include details such as the nature of the transaction, share class, information on controllers, and details of organized groups (if applicable).

For reports on the encumbering of shares, the following information needs to be disclosed:

1. Shareholder particulars
2. Name of the company
3. Number and percentage of the shareholder’s shares that are encumbered
4. Quantum of loan secured by the encumbrance
5. Type of transaction or event causing a change in the particulars of encumbered shares
6. Relevant agreement date and duration
7. Any affiliated party relationship between the security grantor and grantee.

F. Electronic Reporting

Reg. 4 makes provision for the introduction of full electronic reporting in the future. When this happens, the window for reporting will be reduced to 3 business days, compared with 5 business days at present.

ABNR Commentary

The changes introduced by Reg. 4 are long overdue, given that they are fundamental to ensuring transparency and good governance in public companies. Indeed, it is difficult to understand why it has taken so long to enact them, given that the draft regulation has been in circulation since March 2022. The permitting of distinct classes of shares with differential voting rights has rendered obsolete the old reporting system that was based on total share ownership alone. Now, what is most important is the voting rights that attach to shares, rather than the number of shares held. This is that matters when it comes to how businesses are owned and controlled. It is thus encouraging to see this reality being recognized.

In addition, also to be welcomed is the new requirement that encumbered shares be reported to OJK, thereby closing off a significant loophole in Indonesian company law (previously there was no such requirement). Further, the change in the reporting threshold from any change of 0.5% of a shareholder’s share of paid-up capital to a voting-rights-based approach should help reduce the reporting burden.

By partners Mr. Ayik Candrawulan Gunadi (agunadi@abnrlaw.com) and Ms. Chandrawati Dewi (cdewi@abnrlaw.com), and senior associate Mr. Novario Hutagalung (nhutagalung@abnrlaw.com).

This ABNR News and its contents 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 in this legal update. 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.