New OJK Rules on Rights Issues and Prospectuses for Rights Issues

Legal Updates | New OJK Rules on Rights Issues and Prospectuses for Rights Issues

On 22nd December 2015, the Indonesian Financial Services Authority ("OJK") issued OJK Rule No. 32/POJK.04/2015 on Rights Issues ("New Rights Issue Rule") and OJK Rule No. 33/POJK.04/2015 on the Form and Content of a Prospectus for a Rights Issue ("New Rights Issue Prospectus Rule") (together, the "New Rules"). While the New Rules were issued on 22nd December 2015, they were only published on the OJK's website in early January 2016.

The New Rules replace and revoke Bapepam-LK Rule No. IX.D.1, as attached to Decision of the Chairman of Bapepam-LK No. Kep-26/PM/2003 on Preemptive Rights ("Previous Rights Issue Rule"), Bapepam-LK Rule No. IX.D.2, as attached to Decision of the Chairman of Bapepam-LK No. Kep-08/PM/2000 on Guidelines on the Form and Content of a Registration Statement for Preemptive Rights, and Bapepam-LK Rule No. IX.D.3, as attached to Decision of the Chairman of Bapepam-LK No. Kep-09/PM/2000 on Guidelines on the Form and Content of a Prospectus for Preemptive Rights ("Previous Rights Issue Prospectus Rule").

Although the New Rules became effective on 22nd December 2015, public companies that submitted agendas of their general meetings of shareholders on rights issues to OJK before that date will remain subject to the Previous Rights Issue Rule and the Previous Rights Issue Prospectus Rule.

What's New

There are some significant changes introduced by these New Rules:

The approval from the General Meeting of Shareholders ("GMS") must be obtained upfront, even before filing of the registration statement to OJK. The filing of the registration statement can be done later. The deadline to obtain an effective statement from OJK is 12 months after the approval of the GMS.

Unlike the Previous Rights Issue Rule, the New Rights Issue Rule now requires the company to obtain approval for the rights issue from a GMS before it submits a registration statement to OJK. The rights issue itself can be done later because the New Rights Issue Rule provides a 12-month deadline for the company to obtain an effective statement from OJK for the rights issue.

This change clearly would be of some benefit to the company, including the following:
1. The company will have more flexibility to determine the best timing for conducting a rights issue because the approval from its GMS has been obtained. When the time is right, the company can then file a registration statement to OJK.
2. While the company has to make a disclosure before the GMS, that disclosure is minimal. The information that must be disclosed before the GMS includes (i) the maximum number of shares to be issued; (ii) the estimated rights issue implementation period; (iii) an analysis of the effect of the capital increase on the financial conditions of the company and the shareholders; (iv) a general outline of the use of the rights issue proceeds; and (v) information on the forms of non-cash capital injection including information on the valuation report (if any). As the requirements are minimal, the company can provide relatively broad information including proposing a quite high number of shares to be issued in the rights issue. That way the company will have more flexibility to issue shares in the rights issue.
3. As the information to be disclosed before the GMS is quite broad and the GMS has approved the rights issue, the management of the company will have more flexibility to determine the final structure of the rights issue, including to determine who will be the standby buyer in the rights issue. In fact, it is also possible that the majority shareholder of the company would be willing to transfer its rights to another party and allow that other party to become the new controlling shareholder of the company (i.e., a backdoor listing).
However, this change also raises some issues, including the following:
1. This change will clearly lengthen the overall rights issue timetable. While in the past the process for convening a GMS to approve a rights issue could be done simultaneously with the filing to OJK, that is no longer the case. It could now take twice as long to conduct a rights issue because the company needs to wait for GMS approval before a registration statement can be filed to OJK.
2. The New Rights Issue Rule stipulates that approval from a GMS is still required if the proceeds will be used for a transaction that is deemed as a Material Transaction that requires GMS approval despite a detailed disclosure in the rights issue prospectus. So if the rights issue proceeds will be used by the company to, e.g., acquire another company, and that acquisition is considered a Material Transaction that requires approval from a GMS, the company either should propose the acquisition to be approved in the GMS that also approves the rights issue or it will have to convene another GMS after the GMS that approves the rights issue. Either way, this will either extend the overall timetable or become cumbersome (and perhaps costly) as the company will need to convene a second GMS.
3. The shareholders will have less feasibility with the rights issue process and its impact on them when they approve the rights issue in the GMS. Under the Previous Rights Issue Rule, as the GMS would only be held after the prospectus was finalized, the shareholders had a very clear picture of the benefits and impact of the rights issue on them. If they disagreed with the rights issue, they could vote no at the GMS. However, under the New Rights Issue Rule, they will only receive minimal information on the rights issue prior to the GMS. With very limited information such as that, the shareholders may not have sufficient information to make an informed decision on approving (or rejecting) the right issue in the GMS.
4. Because the GMS has already approved the rights issue, the shareholders may be forced to participate in the rights issue even though they may disagree with the terms of the rights issue to avoid dilution. The shareholders will be left with the option of participating in the rights issue or being diluted, even though they may disagree, e.g., with the discount of the new share price or with the standby buyer.
Non-cash capital injection (including share swap) is now specifically allowed.

The New Rights Issue Rule specifically allows non-cash capital injections in a rights issue. Therefore, if the proceeds of a rights issue will be used for, e.g., an acquisition of shares in another company and the seller of the target company will also subscribe in the rights issue, the seller can consider its shares in the target company as the consideration for the rights issue. This particular change is beneficial especially in a "backdoor listing" situation because now there is no need for the proposed new controlling shareholder (and seller of the company to be injected into the public company) to inject cash and create a funds flow.
The disclosure of an abridged prospectus and its amendment does not need to be done in a newspaper with national circulation. It can be done through the IDX website. However, whether it is disclosed in a newspaper or the IDX website, it must also be done through the company's website.

Under the Previous Rights Issue Rule, the abridged prospectus and its amendment needed to be published in a newspaper with national circulation. Under the New Rights Issue Rule, a publication in a newspaper is only an option. The company can choose to publish it either in a newspaper or through the IDX website. However, whatever option that the company chooses, it must publish the abridged prospectus through the company's website.

From the management perspective, this approach will be beneficial as it may save the cost of a newspaper ad. However, from the shareholders' perspective, this would mean that they need to always monitor the company's website or the IDX website as the announcement may not appear in a newspaper.
The deadline for responding to OJK comments is now 10 working days.

As usual, OJK may give comments on the registration statement documents. If OJK gives comments, the company needs to respond within 10 working days. Failure to meet this deadline would mean that the registration statement will become void, and the company will need to re-file all the documents again. This approach is similar to the registration statement for an IPO.
Historical performance of the company's shares for the past 12 months as well as information on the company's share suspension for the past 3 years must now be included in the prospectus.

If the shares to be issued in a rights issue are from the same class as the shares currently listed on the IDX (which in practice is mostly the case), the New Rights Issue Prospectus Rule now requires the prospectus to contain information on the historical performance of the company's shares for the 12 months prior to the submission of the registration statement to OJK. This includes information about the monthly highest price, the monthly lowest price, and the trading volume. In addition, the prospectus should also include information about any suspension of trading of the company's shares in the 3 years prior to the submission of the registration statement to OJK (or since the company is listed if it listed for less than 3 years).
The principal shareholder (pemegang saham utama) must now declare in the prospectus whether or not it will exercise its rights.

Under the Previous Rights Issue Prospectus Rule, there was no need to mention whether or not the existing shareholders (including the controlling shareholders) would subscribe in the rights issue. It only required the standby buyer (if any) to be named. However, under the New Rights Issue Prospectus Rule, it is now required for the principal shareholders (i.e. parties who, directly or indirectly, hold at least 20% of the company's shares) to declare whether or not they will exercise their rights in the rights issue and to name the party who will receive those rights if those rights will be transferred. Given the definition of "principal shareholders", this may be cumbersome both for the management and the principal shareholders themselves. For the management, this would mean that they need to get in touch with each of the principal shareholders to obtain their confirmation.

The New Rights Issue Prospectus Rule only mentions that this information must be disclosed in the rights issue prospectus. It is only logical that this information can be included in the prospectus once the terms of the rights issue are finalized (which means potentially at the last filing to OJK). But if OJK insists that this information must be included in the prospectus filed at the first filing, it will be very difficult for the principal shareholders to make a decision unless the terms of the rights issue are already final before the filing to OJK is made.
The prospectus must now contain more detailed information on the standby buyer or on the new controlling shareholder of the company.

The New Rights Issue Prospectus Rule now requires the prospectus to include much more detailed information on the standby buyer or the proposed new controlling shareholder (if any). This information includes the source of funds used to subscribe for the new shares as well as the beneficial owner of the new controlling shareholder. This requirement may be an issue if the standby buyer is an investment bank who will only purchase the new shares for its investors.

As can be seen above, there are quite significant changes introduced by the New Rules. The above are just some of them. As usual, we will need to see how the New Rules are implemented in practice and see if along the way there are some practical modifications/adjustments.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 14th January 2016

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