Indonesia: OJK now regulates private debt securities

In short

As of June 1, 2020, debt securities can no longer be offered freely, even privately, in Indonesia.

Under Indonesian Financial Services Authority (OJK) Rule No.30 / POJK.04 / 2019 on Issuance of Debt Securities and / or Sukuk Not Through Public Offering (Rule 30 of the OJK), which entered into force on 1 June 2020, issuers of debt securities (issuers) are required to:

• submit all transaction documents related to a private placement of debt securities to OJK no later than 30 calendar days before the issuance of the debt securities concerned
• meet certain requirements for private placement (e.g. clearing and settlement of securities must be done through the system managed by PT Kustodian Sentral Efek Indonesia (KSEI) and only securities brokers licensed by the OJK can participate in as organizing banks / private placement agents for issuance)

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From what we understand, OJK Rule 30 was issued primarily in response to complaints from Indonesian investors who have invested in private debt securities (especially medium term notes) issued by defaulting Indonesian issuers. . Initially, the OJK was not in a position to supervise these issues because they did not trigger a public offering requirement.

In view of various clarification requests and the recent implementation of OJK Rule 30, the OJK issued Clarification Letter No.S-161 / D.04 / 2020 on June 12, 2020 (Letter of clarification) to clarify the implementation of OJK Rule 30.

Key points to remember

Here are ten key questions you should know and consider about OJK Rule 30.

1. What are the requirements under the new rule?

Issuers will need to register the debt securities with the OJK, as well as comply with several requirements for the instrument itself.

A cover letter (for registration) and an information note will need to be submitted for registration to the OJK. Unlike a public offering, the registration does not need to be declared effective by the OJK. All transaction documents relating to a private placement of debt securities must be submitted to OJK no later than 30 calendar days prior to the issuance of the debt securities.

Under the rule, privately offered debt securities must be:

• made in non-certificate form and deposited with KSEI
• rated or guaranteed by a guarantee in an amount of at least 100% of the nominal value of the debt securities (if issued by a party that has not previously made a public offer or if issued by a non-public company)
• generally redeemable only from one year after the date of issue or distribution, except in certain circumstances
• transferable in transfer units of IDR 25 million or multiples thereof, and not held by more than 49 parties

2. Who can buy privately offered debt securities?

Debt securities can only be bought by Professional Investors.

OJK Rule 30 defines “professional investors” as parties who have the ability to purchase securities and to conduct a risk analysis of investing in such securities. All investors will be required to confirm to the Issuer that they qualify as “Professional Investors”.

3. Will Indonesian companies that issue debt securities to Indonesian investors be subject to this rule?

Yes, all Indonesian companies that issue debt securities through private placement are subject to this rule. Please note that “debt securities” cover a wide range of products, including bonds, notes, convertible bonds, exchangeable bonds and medium term notes.

The rule defines an “issuer” broadly as any “party that issues debt securities without going through a public offering” (ie a private placement). OJK Rule 30, Article 6 further requires that issuers be, inter alia, Indonesian legal entities. This rule in fact also encompasses supranational institutions (like the IMF) and collective investment contracts (which are essentially Indonesian mutual funds).

4. What about foreign issuers? Does this rule prevent foreign issuers from issuing debt securities to Indonesian investors?

Yes, the rule also applies to foreign issuers.

As noted in the responses to points one and two above, the rule itself does not distinguish between an Indonesian issuer and a foreign issuer, and the rule also defines an “issuer” broadly.

Additionally, under the Clarification Letter, the OJK clarifies that OJK Rule 30 will not apply to an issue of debt securities if they are:

• issued outside Indonesia and not through a public offering
• not available to Indonesian investors (including Indonesian citizens, Indonesian institutions or any other legal entity)

The above clarification does not distinguish between Indonesian issuers and foreign issuers.

Based on the above, unless the OJK formally clarifies this issue (for example, via another rule, clarification letter or FAQ), OJK rule 30 technically applies to issuers Indonesians and foreigners. The only exemptions are if they are offered abroad and not offered to Indonesian investors.

5. Can foreign issuers wishing to issue debt securities comply with this rule and register with the OJK?

Unfortunately no, unless the foreign issuers are supranational institutions (like the IMF).

Section 6 of OJK Rule 30 sets out specific requirements as to who can be an issuer and therefore register with the OJK. Unfortunately, it does not include foreign entities (except for supranational institutions like the IMF). Therefore, even if foreign issuers are willing to fulfill the requirements of OJK Rule 30 to issue debt securities in Indonesia, they will not be able to do so.

6. What are the impacts of this rule on issuance of global debt securities (eg, global bonds) by Indonesian companies?

Unlike before, Indonesian issuers must ensure that they are entitled to the exemptions provided by the letter of clarification when issuing global debt securities.

Under the clarification letter, for OJK Rule 30 not to apply, the only exemptions are that debt securities:

• must be issued outside of Indonesia and not through a public offering
• should not be offered to Indonesian investors

Indonesian issuers should ensure that their joint lead managers / placement agents meet the above requirements, do not offer such debt securities to Indonesia or to Indonesian investors, and do not accept any subscriptions from Indonesian investors. If the issuance is through a two-tier structure, the issuer, which is a foreign entity, will still have to meet these requirements as the rule applies to both Indonesian and foreign issuers.

7. If foreign parties cannot issue debt securities to Indonesian investors, how can Indonesian investors subscribe to foreign debt securities issues?

OJK Rule 30 does not prohibit Indonesian investors from investing abroad (including subscribing to foreign debt issues).

Neither OJK Rule 30 nor the Clarification Letter prohibits Indonesian investors from investing abroad (including subscribing to foreign debt issues). There is also no prohibition under other OJK rules for Indonesian investors to invest abroad. Therefore, after reviewing the provisions of the clarification letter, we believe that, from a practical point of view, OJK Rule 30 should not apply to foreign issuers that issue debt securities outside of Indonesia to Indonesian investors as long as no offer is made to Indonesian investors.

While it is particularly relevant to issuers, international investment banks and private banks should also take note of this approach when structuring the issuance of products that constitute debt securities to their Indonesian clients.

8. Does this rule apply to secondary broadcasts?

From a strict reading of the rule, no.

Since the rule only addresses issues relating to the “issuance” of debt securities by issuers, on a strict reading of the rule, the provisions of this rule should not be applicable to parties selling debt securities that have been issued by a third party issuer in the secondary market. Unless otherwise specified by OJK, parties that buy debt securities and then sell them to Indonesian investors should not have to comply with the requirements of this rule.

9. An issue of convertible bonds, exchangeable bonds, promissory notes or other debt securities to a specific Indonesian subscriber (for example, for payment in connection with a merger and transaction). acquisition or restructuring before the IPO) by an Indonesian issuer be subject to this rule?

Yes.

Such an emission should meet the requirements set out in point one above. The rule itself does not specifically provide for an exemption based on the form of the debt securities or the number of Indonesian subscribers (even if it is only a single subscriber).

10. What should I do if I want to carry out an internal restructuring involving Indonesian subscribers?

Do not issue debt securities. Use loan agreements.

Since this rule includes issuing debt securities, companies can choose to use loan agreements to obtain financing and then repay the loan by delivering stocks or other assets to the lender. Neither OJK Rule 30 nor the Clarification Letter specifies whether loan agreements can be settled or paid with certain shares. By way of example, to mimic the characteristics of convertible bonds, the loan agreement must specify that the repayment of the loan can be made either in cash or by the delivery of a certain number of shares. Therefore, an end goal similar to that of issuing conventional convertible debt securities would be achieved.

However, other aspects such as interest rates and foreign borrowing issues will also need to be considered, especially when the loan agreement is between related parties.