29 Sep 2023
Indonesia’s FSA Clarifies Powers in Market Emergencies, Reinstates Rule that Share Buybacks Require Shareholder Consent

With economic storm clouds once again on the horizon, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan / "OJK") has moved to clarify and broaden the circumstances in which it can take emergency action to dampen down significant turbulence in the capital markets. The new rules are set out in Regulation No. 13/2023 on Policies for Maintaining the Performance and Stability of Capital Markets under Highly Volatile Market Conditions ("Reg. 13/2023" or “the Regulation”),[1]  which entered into force on 20 July 2023.

1. Key Changes

The key changes brought about by Reg. 13/2023 may be summarized as follows:

From a macro perspective, it offers a broader and more concrete definition of "highly volatile market conditions" (also referred to below as an “Emergency”) compared to that provided by its antecedent, OJK Regulation No. 2/POJK.04/2013 (“Reg. 2/2013”, now revoked by Reg. 13/2023).[2] 

From the perspective of public companies, Reg. 13/2023 revokes the declaration of emergency that the OJK issued at the outset of the Covid-19 pandemic for the purpose of allowing public companies to speedily conduct share buybacks by dispensing with the need for shareholder consent (buybacks are seen by the OJK to be a useful way of shoring up share prices). Given that the declaration of emergency has now been revoked, a buyback by a public company can henceforth only be conducted with shareholder approval through the General Meeting of Shareholders (see discussion in Section 4 below).

2. What Constitutes an Emergency?

Under Reg. 2/2013, "highly volatile market conditions" are loosely defined as (i) a cumulative decline of 15% or more in the Indonesia Composite Index (IDX Composite) over 3 consecutive days, and (ii) such other circumstances as may be determined by the OJK.

In contrast, Reg. 13/2023 provides more concrete instances of what constitutes “highly volatile market conditions”:

1. a sudden decline in the price of all or most securities listed on the stock exchange or by other market operators that is so significant as to constitute a crash;
2. significant pressure in the capital markets;
3. regional or global economic conditions that cause economic pressure or a slowdown that results in, or has the potential to result in, a significant impact on the stability of capital markets;
4. a natural or manmade disaster that impacts the stability of the capital markets;
5. a sudden, large-scale sale of shares or redemption of investment product units (a crash), suspension of stock exchange trading in securities for a substantial portion of the investment product portfolio, or the closure of a stock exchange on which a substantial portion of the investment product portfolio is traded;
6. failure of trading or transaction settlement systems that causes significant market volatility; and/or
7. such other circumstances as may be determined by the OJK.

As to what amounts to a “crash" per paragraph a above, the Regulation offers an example from 2020, when the IDX Composite Index experienced a decline of more than 5% in a single day, and a cumulative decline of 5.63% over 6 consecutive days (no specific dates provided), leading to a drop of over 15% between the end of 2019 and 9 March 2020.

As for “significant pressure in the capital markets” per paragraph b above, examples given by Reg. 13/2023 include:

1. significant pressure on share prices as a result of problems in the domestic or global financial services sector
2. significant decline in or redemptions of assets under management; and/or
3. significant widening of the bid-ask spread for shares

3. OJK’s Role in an Emergency

Reg. 13/2023 clearly sets out OJK’s regulatory and policy-making authority when faced with an Emergency in the form of highly volatile market conditions. In such circumstances, the OJK is authorized to:

1. issue emergency instructions to the stock exchange, other market operators, clearing and guarantee institutions, and/or depository and settlement institutions to support the achievement of capital-market stability (thereby bypassing the usual regulatory drafting procedures).
2. relax the rules governing the reporting obligations of capital-market financial institutions, and those governing corporate actions, public offerings, and reporting for issuers and public companies (to maintain business continuity and support capital market stability);
3. relax the rules governing investment management and managed investment products (to maintain capital market stability); and/or
4. issue such other rules governing the activities of capital-market industry participants as may be required (to shore up capital market stability).

In determining whether an Emergency exists, the OJK may coordinate with other relevant authorities or bodies, including under the auspices of the Financial System Stability Committee (Komite Stabilitas Sistem Keuangan).

4. Share Buybacks in an Emergency

As with Reg. 2/2013, Reg. 13/2023 permits the buyback of shares by public companies without the need for shareholder approval in circumstances characterized by highly volatile market conditions, notwithstanding the provisions of the Capital Markets Law,[3] provided that buybacks are conducted in compliance with the Regulation. The key point here is that both Reg. 2/2013 and Reg. 13/2023 allow public companies to buy back their own shares without prior shareholder consent in situations where an Emergency has been declared by the OJK.

However, what is both new and significant for Indonesia’s public companies is that the Regulation revokes OJK Circular No. 3/SEOJK.04/2020,[4] dated 9 March 2020, which declared an Emergency under the provisions of Reg. 2/2013 at the outset of the Covid 19 pandemic, with the result that public companies were permitted to launch buybacks without prior shareholder approval. As this circular has been revoked and a new Emergency has not occurred or been declared by the OJK under Reg. 13/2023, what this means is that a public company may now only conduct a buyback with the consent of a shareholders’ general meeting (subject to transitional provisions that allow buyback processes that were underway at the time the Regulation came into force to be concluded).

Apart from this major substantive effect of Reg. 13/2023, there are also some procedural differences between Reg. 2/2013, Reg. 13/2023, as can be seen from the following comparison table:

Rules Governing Share Buybacks by Public Companies in Highly Volatile Market Conditions

ABNR Commentary

From the perspective of public companies, perhaps the most important change is that the issuance of Reg. 13/2023 and the revocation of OJK Circular No. 3/SEOJK.04/2020 mean that the normal rules on share buybacks by public companies have been reinstated:  a share buyback may only be conducted with the consent of the public company’s shareholders. This is something that will likely be welcomed by institutional investors, which are often averse to buybacks given the importance to them of regular income flows.

As regards the scope of "highly volatile market conditions,” the OJK’s broadening of the definition is aimed at providing greater certainty as to when action may be taken so as to protect the macro economy, financial system and investors from the consequences of serious market turbulence.

However, the new definition will make little difference in practice as all of the new grounds for declaring an Emergency under Reg. 13/2023 could also be availed of under the catch-all provision of Reg. 2/2013 (i.e., an Emergency could be declared in “such other circumstances as may be determined by the OJK”).

Nevertheless, the greater clarity provided by Reg. 13/2023 can only be welcomed as it offers better insights into the OJK’s general approaches and views as to what would warrant the declaring of an Emergency.