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KSP LEGAL UPDATES
Indonesia Financial Services Authority (OJK) Expands Scope of Significantly Fluctuating Market Condition for Share Buyback
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In facing significantly fluctuating market conditions due to the pandemic and crisis, OJK issued new regulations that are expected to further mitigate and reduce the impact of such significant market fluctuations. The regulation is OJK Regulation No. 13 of 2023 on Policy of Maintaining Capital Market Performance and Stability amid Significantly Fluctuating Market Conditions ("POJK 13/2023") which replaces OJK Regulation No. 02/POJK.04/2013 on Repurchase of Shares Issued by Issuers or Public Companies in A Market Condition Fluctuates Significantly ("POJK 02/2013").
The Scope of Significantly Fluctuating Market Conditions
In essence, these two regulations both stipulate share buybacks under certain conditions. However, POJK 13/2023 amends the provisions of POJK 2/2013, one of which is the scope of the "significantly fluctuating market," where POJK 2/2013 only covers them under the following circumstances:
a. combined stock prices index (IHSG/IDX Composite) in Stock Exchange cumulatively decreased by 15% (fifteen percent) or more for 3 consecutive exchange days; or
b. other conditions as may be determined by the OJK.
In POJK 13/2023, its scope has become more relevant circumstances with the current global condition, which are as follows:
a. the decline in most or all of the price of the listed Stocks in the Stocks Exchange or other Market Operator outside of Stock Exchange that is with such material nature occurs in sudden (crash), i.e. in 2020 the IHSG declined 5% in a day and -5.63% in 6 consecutive days;
b. Capital Market condition undergoing significant pressure, namely under the conditions:
1. stocks trading in Stock Exchange undergoes significant pressure due to deterioration in the domestic or global financial services sector;
2. assets under management have decreased and/or there has been a significant amount of redemptions; and/or
3. stock market trading bid-ask spreads have widened significantly;
c. regional and global economic condition that is undergoing pressure and slowdown that significantly results in, or potentially results in the stability of the Capital Market;
d. the occurrence of natural disaster or manmade disaster that impacts the stability pressure in the Capital Market, namely an event that threatens and disrupts people's lives and livelihoods caused by both natural factors and/or non-natural factors and human factors resulting in human casualties, environmental damage, property losses, psychological impact, disruption of the performance of industry players in the financial services sector, and/or affecting the economic conditions of the community;
e. redemption of shares or investment product participation units of such large and material nature that occurs in sudden (crash), the closure of Stocks trading for most of the investment product Stocks portfolio in the Stock Exchange, or the closure of the Stock Exchange where most of the investment product Stock portfolios are traded;
f. failure of trading system or transaction settlement that causes significantly fluctuating market (i.e technical issues in the trading system); and/or;
g. other conditions as may be determined by the OJK.
The expansion of this scope indicates that the shares buyback without GSM approval will be able to be conducted more flexibly in the upcoming events. This may have positive impacts to the public companies in facing conditions where the shares prices are unfavorable due to fluctuations. Aside from increasing the strength of the shares prices, the shares buyback that are facilitated easier without the approval of GSM may also be a risk mitigation measure that is more cost and time efficient.
Requirements for Shares Buyback Without GSM Approval
As for the requirements for shares buyback without the approval from GSM only face slight changes. The procedures and requirements are as follows:
a. OJK determines the significantly fluctuating market conditions.
b. Public Company conducts information disclosure to the OJK and Stock Exchange. The latest provision (POJK 13/2023) also requires that the public company conducts public announcements.
c. The shares buyback must be conducted no later than 3 months after the information disclosure is carried out.
d. The latest provision requires that the public company must report the result of shares buyback to the OJK.
e. The transfer of the shares obtained from shares buyback must be carried out no later than 30 days since the execution of the shares buyback, or since the end of the shares buyback period (3 months after information disclosure).
Transfer of Shares Resulting from Buyback
The requirement in letter (e) above is a general arrangement whereby shares resulting from a buyback cannot be owned continuously by the Company. This requirement has been accommodated in Law No. 40 Year 2007 on Limited Liability Companies, more precisely in Article 37 paragraph (4). It states that after 3 years, the buyback shares must be sold or withdrawn by way of capital reduction. Meanwhile, the share transfer provisions in POJK 13/2023 refer to POJK regarding the buyback of shares issued by public companies, namely POJK No. 30/POJK.04/2017 ("POJK 30/2017"). POJK 30/2017 also requires the transfer of buyback shares for a maximum of 2 years since the public company has controlled the shares for 3 years. According to Article 17 of POJK 30/2017, the transfer of these shares can be done by: 1) sale on the stock exchange or outside the stock exchange; 2) withdrawal by way of capital reduction; 3) implementation of share ownership by employees and/or directors and board of commissioners programs; 4) implementation of conversion of equity securities; and/or 5) other ways with OJK approval. In fluctuating conditions as stipulated in this POJK 13/2023, the period of control over the shares resulting from the buyback is only 30 days instead of years.
There are two reasons underlining the obligation to the transfer of shares resulting from buyback, namely as follows:
1) The buyback shares have lost its function because these shares do not have voting rights [Article 40 paragraph (1) LLC Law] nor the right to receive dividends [Article 40 paragraph (2) LLC Law].
2) This provision is aimed to accommodate the provision in Article 36 paragraph (1) of LLC Law that prohibits companies to issue shares with the intention of owning it itself.
Therefore, basically, the shares must be transferred so that they regain their function and so that they are not settled in the company’s control. In practice, share buybacks are often done to maintain the share price when it drops, so that it can then be sold again when the share price rises and increase profits for the company.
OJK’s Authority in Significantly Fluctuating Market Conditions
This latest provision has also given OJK the authority to make policies and/or regulations on the managing of significantly fluctuating market conditions, which are as follows:
a. giving orders to the Stock Exchange, Market Operator outside the Stock Exchange, Clearing and Guarantee Institution, and/or Depository and Settlement Institution in the form of regulatory adjustments to support the stability of the Capital Market without going through the procedures for drafting regulations as stipulated by the OJK;
b. the stipulation of relaxation policy on the fulfillment of provisions for the fulfillment of report submission obligations for financial service institutions in the Capital Market sector as well as relaxation policy on the implementation of corporate actions, Public Offerings, and report submission for Issuers or Public Companies in maintaining their business continuity and/or supporting Capital Market stability;
c. stipulation of relaxation policy on investment management and/or Investment Management Products in maintaining the stability of the Capital Market; and/or
d. stipulation of policies for other Capital Market industry actors required to support the stability of the Capital Market.
One of the implications of POJK 13/2023 is not only revoking the POJK 2/2013, but also revoking its derivative regulations. As such, SEOJK No. 3/SEOJK.04/2020 ("SEOJK 3/2020") which has been used by Public Companies to conduct share buybacks without GMS approval has been revoked and declared no longer valid. OJK itself has not yet determined significantly fluctuating market conditions since the issuance of POJK 13/2023, therefore for now public companies cannot return to implementing share buybacks without GMS approval which was previously made possible by SEOJK 3/2020.
Click DOWNLOAD PDF to read this KSP Legal Updates in Indonesian version
+62 21 2963 8070 or drop us an email at mail@ksplaw.co.id.
In facing significantly fluctuating market conditions due to the pandemic and crisis, OJK issued new regulations that are expected to further mitigate and reduce the impact of such significant market fluctuations. The regulation is OJK Regulation No. 13 of 2023 on Policy of Maintaining Capital Market Performance and Stability amid Significantly Fluctuating Market Conditions ("POJK 13/2023") which replaces OJK Regulation No. 02/POJK.04/2013 on Repurchase of Shares Issued by Issuers or Public Companies in A Market Condition Fluctuates Significantly ("POJK 02/2013").
The Scope of Significantly Fluctuating Market Conditions
In essence, these two regulations both stipulate share buybacks under certain conditions. However, POJK 13/2023 amends the provisions of POJK 2/2013, one of which is the scope of the "significantly fluctuating market," where POJK 2/2013 only covers them under the following circumstances:
a. combined stock prices index (IHSG/IDX Composite) in Stock Exchange cumulatively decreased by 15% (fifteen percent) or more for 3 consecutive exchange days; or
b. other conditions as may be determined by the OJK.
In POJK 13/2023, its scope has become more relevant circumstances with the current global condition, which are as follows:
a. the decline in most or all of the price of the listed Stocks in the Stocks Exchange or other Market Operator outside of Stock Exchange that is with such material nature occurs in sudden (crash), i.e. in 2020 the IHSG declined 5% in a day and -5.63% in 6 consecutive days;
b. Capital Market condition undergoing significant pressure, namely under the conditions:
1. stocks trading in Stock Exchange undergoes significant pressure due to deterioration in the domestic or global financial services sector;
2. assets under management have decreased and/or there has been a significant amount of redemptions; and/or
3. stock market trading bid-ask spreads have widened significantly;
c. regional and global economic condition that is undergoing pressure and slowdown that significantly results in, or potentially results in the stability of the Capital Market;
d. the occurrence of natural disaster or manmade disaster that impacts the stability pressure in the Capital Market, namely an event that threatens and disrupts people's lives and livelihoods caused by both natural factors and/or non-natural factors and human factors resulting in human casualties, environmental damage, property losses, psychological impact, disruption of the performance of industry players in the financial services sector, and/or affecting the economic conditions of the community;
e. redemption of shares or investment product participation units of such large and material nature that occurs in sudden (crash), the closure of Stocks trading for most of the investment product Stocks portfolio in the Stock Exchange, or the closure of the Stock Exchange where most of the investment product Stock portfolios are traded;
f. failure of trading system or transaction settlement that causes significantly fluctuating market (i.e technical issues in the trading system); and/or;
g. other conditions as may be determined by the OJK.
The expansion of this scope indicates that the shares buyback without GSM approval will be able to be conducted more flexibly in the upcoming events. This may have positive impacts to the public companies in facing conditions where the shares prices are unfavorable due to fluctuations. Aside from increasing the strength of the shares prices, the shares buyback that are facilitated easier without the approval of GSM may also be a risk mitigation measure that is more cost and time efficient.
Requirements for Shares Buyback Without GSM Approval
As for the requirements for shares buyback without the approval from GSM only face slight changes. The procedures and requirements are as follows:
a. OJK determines the significantly fluctuating market conditions.
b. Public Company conducts information disclosure to the OJK and Stock Exchange. The latest provision (POJK 13/2023) also requires that the public company conducts public announcements.
c. The shares buyback must be conducted no later than 3 months after the information disclosure is carried out.
d. The latest provision requires that the public company must report the result of shares buyback to the OJK.
e. The transfer of the shares obtained from shares buyback must be carried out no later than 30 days since the execution of the shares buyback, or since the end of the shares buyback period (3 months after information disclosure).
Transfer of Shares Resulting from Buyback
The requirement in letter (e) above is a general arrangement whereby shares resulting from a buyback cannot be owned continuously by the Company. This requirement has been accommodated in Law No. 40 Year 2007 on Limited Liability Companies, more precisely in Article 37 paragraph (4). It states that after 3 years, the buyback shares must be sold or withdrawn by way of capital reduction. Meanwhile, the share transfer provisions in POJK 13/2023 refer to POJK regarding the buyback of shares issued by public companies, namely POJK No. 30/POJK.04/2017 ("POJK 30/2017"). POJK 30/2017 also requires the transfer of buyback shares for a maximum of 2 years since the public company has controlled the shares for 3 years. According to Article 17 of POJK 30/2017, the transfer of these shares can be done by: 1) sale on the stock exchange or outside the stock exchange; 2) withdrawal by way of capital reduction; 3) implementation of share ownership by employees and/or directors and board of commissioners programs; 4) implementation of conversion of equity securities; and/or 5) other ways with OJK approval. In fluctuating conditions as stipulated in this POJK 13/2023, the period of control over the shares resulting from the buyback is only 30 days instead of years.
There are two reasons underlining the obligation to the transfer of shares resulting from buyback, namely as follows:
1) The buyback shares have lost its function because these shares do not have voting rights [Article 40 paragraph (1) LLC Law] nor the right to receive dividends [Article 40 paragraph (2) LLC Law].
2) This provision is aimed to accommodate the provision in Article 36 paragraph (1) of LLC Law that prohibits companies to issue shares with the intention of owning it itself.
Therefore, basically, the shares must be transferred so that they regain their function and so that they are not settled in the company’s control. In practice, share buybacks are often done to maintain the share price when it drops, so that it can then be sold again when the share price rises and increase profits for the company.
OJK’s Authority in Significantly Fluctuating Market Conditions
This latest provision has also given OJK the authority to make policies and/or regulations on the managing of significantly fluctuating market conditions, which are as follows:
a. giving orders to the Stock Exchange, Market Operator outside the Stock Exchange, Clearing and Guarantee Institution, and/or Depository and Settlement Institution in the form of regulatory adjustments to support the stability of the Capital Market without going through the procedures for drafting regulations as stipulated by the OJK;
b. the stipulation of relaxation policy on the fulfillment of provisions for the fulfillment of report submission obligations for financial service institutions in the Capital Market sector as well as relaxation policy on the implementation of corporate actions, Public Offerings, and report submission for Issuers or Public Companies in maintaining their business continuity and/or supporting Capital Market stability;
c. stipulation of relaxation policy on investment management and/or Investment Management Products in maintaining the stability of the Capital Market; and/or
d. stipulation of policies for other Capital Market industry actors required to support the stability of the Capital Market.
One of the implications of POJK 13/2023 is not only revoking the POJK 2/2013, but also revoking its derivative regulations. As such, SEOJK No. 3/SEOJK.04/2020 ("SEOJK 3/2020") which has been used by Public Companies to conduct share buybacks without GMS approval has been revoked and declared no longer valid. OJK itself has not yet determined significantly fluctuating market conditions since the issuance of POJK 13/2023, therefore for now public companies cannot return to implementing share buybacks without GMS approval which was previously made possible by SEOJK 3/2020.
Click DOWNLOAD PDF to read this KSP Legal Updates in Indonesian version
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