Client Alert: The Investment by The Financing Companies
In 2018, Otoritas Jasa Keuangan (“OJK”) issued OJK Regulation No. 35/POJK.05/2018 on the Organization of the Business Activities of Financing Companies (“POJK 35/2018”) to increase the role of financial companies, to improve prudential regulations, and to enhance consumer protection in the financial sector. Over time, the financing industry has faced an increment in complex finance activities. Moreover, the emergence of the Covid-19 situation has considerably impacted financing companies. A massive amount of financing restructurings for debtors imposes a decrease in revenue for finance companies, resulting in the inability to pay off their debts to creditors. Therefore, the financing industry needs an effective and efficient risk mitigation to fulfill prudential principles in handling various financial problems.
To create a healthier financial industry ecosystem, OJK issued OJK Regulation No. 7/POJK.05/2022 on the amendment of OJK Regulation No. 35/POJK.05/2018 on the Organization of the Business Activities of Financing Companies (“POJK 7/2022”). The provisions of POJK 7/2022 add regulations related to the investment of a financing company. POJK 7/2022 stipulates the prohibition for the financing companies from owning shares and/or any securities with underlying in the form of shares or guaranteed by shares for the following purposes:
- short-term investments;
- buying and selling;
- cash flow management; and/or
- equity participations other than in the context of developing the business activities of the financing company.
Furthermore, POJK 7/2022 also stipulates an exclusion of the above prohibition for the share ownership through direct investment as stipulated in Article 68 of POJK 35/2018. Article 68 of POJK 35/2018 regulates that a financing company is only allowed to conduct direct investment in the financial services sector and/or companies related to the activities. Thus, POJK 7/2022 allows the financing company to conduct short-term and/or long-term share investments but only limited to the scope of the financial services sector and/or companies related to the activities of the financing company.
Moreover, Article 68 of POJK 35/2018 does not apply to securities investments as securities and/or securities with underlying in the form of shares or guaranteed by shares not in a form of direct investments. Thus, there is no prohibition in the business sector for the financing company to conduct its securities investments in Indonesia. However, with POJK 7/2022, the financing company is only allowed to invest in securities in a long-term period and is prohibited from investing in securities in a short-term period.
Suppose the financing company has already owned shares and/or securities with underlying in the form of shares or guaranteed by shares before the promulgation of this OJK Regulation, the financing company must transfer the ownership of shares and/or securities with underlying in the form of shares or guaranteed by shares no later than one year since the promulgation of POJK 7/2022, which is 17 May 2023.
As for the sanction, POJK 7/2022 stipulates that a financing company that conducts the prohibited activities above will be subject to an administrative sanction in the form of a warning, a freeze of business activities, and revoked business licenses that will be given in stages. Besides the administrative sanctions, OJK also has the authority to limit certain business activities, to reduce the results of the risk level assessment, to cancel approvals, and to reassess the fit and proper for the main party of the financing companies.
Investments in shares or share-based securities typically provide high returns but also with higher risks. POJK 7/2022 should provide a measure for the financing companies to mitigate their risk in investment in securities by requiring the financing companies to invest in a longer investment horizon. It is expected that the risk of losses can be more measurable with the long-term investment.
By : Nabila Roselano