Monday, September 07, 2009

On Why the Negative List Should Stay Away from Publicly Listed Companies

Let me start this article by explaining the basic concept of the Negative List. It is a regulation issued by the President of the Republic of Indonesia stipulating the area of business which are opened (with certain requirements) or closed to foreign investment in Indonesia. The main reason for Indonesia in having this Negative List is to close or limit any foreign investments in industries which: (i) are being prohibited in Indonesia, such as gambling; (ii) are being considered as strategic for the interest of Indonesia; and (iii) are being reserved for small to mid scale business players.

In short, except for point (i), the Negative List can be considered as a protection mechanism imposed by the Government of Indonesia. Is it good? I must admit that I'm not a huge supporter of the Negative List, as I don't believe that restriction of ownership would be effective to protect the what so called interest of the people of Indonesia.

Up until today, it is generally assumed that the Negative List is not applicable for publicly listed companies. The Negative List is not quite clear on this issue, but at least Law No. 25/2007 on Capital Investment ("Investment Law") states that the provisions of the Investment Law are not applicable for any indirect or portfolio investments, whereas the majority of Indonesian legal scholars interpret that indirect or portfolio investments refer to investment in the capital market, i.e. in publicly listed companies. Therefore, as a logical consequence of this interpretation, the Negative List (in its capacity as one of the implementing regulations of the Investment Law) should not be applicable to publicly listed companies.

However, recently I've heard a shocking news, i.e. there are some discussions within Government officials that the Negative List will be revised in order to cover publicly listed companies. If such plan is executed, foreign investment limitations will also be applied to publicly listed companies. Clearly, I oppose this plan and my reasons shall be further discussed below.


First of all, how can the Government limits foreign ownership in the shares of publicly listed companies? Those shares are listed on the Indonesia Stock Exchange and are effectively being traded (at least most of them). Some of the most active shares are even being traded by each second. While it is possible to control the sale of shares in an Initial Public Offering, it is almost impossible, if not entirely impossible, for someone to control or limit parties in purchasing the shares of a publicly listed company in the secondary market, unless such purchase is considered as a change of control, i.e. takeover.

Even if it is somehow possible to limit the foreign ownership in the secondary market, any attempt to maintain such limitation would be mostly inefficient since it will require a great monitoring mechanism. Under the current technology, such mechanism would be very costly. You want to supervise all transactions and then impose a system which will limit the purchase of shares by foreigners if certain thresholds have been satisfied? And then you want the monitoring system to operate on per second basis? I say, tough luck.

A possible restriction mechanism that can be applied is by limiting the amount of shares that can be offered to the public. However, this is not recommended because such restriction may negatively affect the liquidity of the shares of such company and as a result of which, the public may suffer unnecessary losses.

Second, an attempt to limit foreign investments in the capital market might cause a turbulence within the capital market. I understand that some people might regard this risk as a theoretical risk rather than an actual risk, but I wouldn't be too confident if I were them. Like or not, in most of the time, capital market is driven by fear and greed. Announcing to the public that foreign investment limitations will be applied to publicly listed companies is a very good way to cause unnecessary fear within market players. And believe me, the imaginations are unlimited, foreign investors may think that the market condition is not conducive anymore, some of them will think that their investments will be reduced or they will be forced to divest their shares, etc. In any case, it wouldn't be good for most of the time!

Third, with respect to foreign investments, most Indonesian regulations do not differentiate the ultimate ownership of foreign entities who made investment in Indonesia, i.e. whether the ultimate owners of such foreign entities are truly foreigners or Indonesians. You may be aware that many Indonesian business entities use foreign companies as their investment vehicle in the capital market, which is mainly done for tax purposes.

As a result of the above policy, any investment made by foreign entities in Indonesia will be considered as foreign investments regardless of the ultimate ownership of such entities. Applying this limitation to publicly listed companies would be counterproductive because it may also jeopardize the interest of Indonesians who made their investments through foreign entities.

In addition, as stated above, is having an ownership restriction would be an effective way to protect the interest of the Indonesian people? By all means, capital investment, whether made by foreign or domestic entities should be good for the development. If we want to have the full benefit of such investment, forget about the ownership, or at least put it as the last issue to be considered. The most important issue that we need to achieve through foreign investments is how we can actually "force" those foreign investors to transfer their knowledge to their Indonesian counterparts and how these foreign investments will contribute to the greater good of the society, i.e. creating job opportunities and establishing infrastructure for stronger industry in Indonesia. Shares ownership would be useless if the Indonesian counterparts are not capable to conduct the business as they will end up as puppets of the foreign investors. Surely, this is not something that we want.

Now, if the Government insists that this new regulation will be applied, I will suggest that: (i) the limitation will only be applied to publicly listed companies established after the enactment of such regulation, so all publicly listed companies prior to the enactment will be exempted and their shares are free from any foreign ownership limitations; (ii) the limitation (if any) should only be applied to foreign investors who clearly control the relevant publicly listed companies (under the current Bapepam-LK regulation, a party will be deemed as a controller of a publicly listed company if it owns at least 50% of the shares of such company).

My advice to the Government, stop trying to make politically correct acts, you won the election with a considerable support from the voters, so please focus on making the best policy available rather than trying to look like a populist government which is a shame.

1 comments:

Tarsis Thursday, October 08, 2009 6:52:00 AM  

Hi Pram, couldnt agree more with you. Government should not focus regulating who is the owner of the entity but to the behaviour of such entity. Policy should be adopted regulating how the entity behave to serve wider national interest. Very nice blog btw!

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