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Cablegate: Stalled Maybank Transaction Highlights Lack of Policy

VZCZCXRO8605
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1619/01 2390750
ZNR UUUUU ZZH
R 260750Z AUG 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 9893
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2413
RUEHBJ/AMEMBASSY BEIJING 5333
RUEHBY/AMEMBASSY CANBERRA 2951
RUEHUL/AMEMBASSY SEOUL 4846
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 001619

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA/MALACHY NUGENT
COMMERCE FOR 4430/KELLY
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
USTR WEISEL, EHLERS

E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: STALLED MAYBANK TRANSACTION HIGHLIGHTS LACK OF POLICY
COORDINATION

1. (SBU) Summary. The Indonesian Ministry of Finance's Capital
Markets Regulatory Agency (BAPEPAM) modified its takeover rules in
late June, generating unintended consequences for the regional
financial sector. The most visible is the stalled bid by the
Malayan Banking Corporation (Maybank) to acquire Bank Internasional
Indonesia (BII). The transaction would have allowed Singapore's
sovereign wealth fund, Temasek, to conform with Indonesia's single
presence policy (SPP), which prohibits a single entity from owning a
majority stake in more than one bank by 2010. While there are
prudential and market development rationale for both the SPP and the
tender offer rules, the implementation of these policies has
reinforced the view that financial sector regulations in Indonesia
are poorly coordinated and subject to frequent modification. These
developments undermine the Indonesian investment climate and
progress on ASEAN financial sector integration. End Summary.

Financial Sector Policies Remain Moving Target
--------------------------------------------- -

2. (SBU) In June, BAPEPAM issued new rules on the acquisition of
public companies. The new rules relax regulations for public
company acquisition by increasing the level of the purchase which
triggers a mandatory tender offer. Acquirers are required to make a
tender offer to all stockholders only if they are purchasing 50% or
more of the company's shares, or can be shown to have a direct or
indirect controlling interest in the firm. The previous trigger
level was 25%. The new rules also require the acquirer to ensure
that at least 20% of the company's shares are widely held within two
years of the acquisition. According to BAPEPAM Chairman Ahmad Fuad
Rahmany, the acquisition rules were changed to bring the regulations
in line with Indonesia's legal definition of control. Many
institutional investors opposed the new regulation as the new rules
may allow acquiring firms to take managerial control of a firm
without having to make offers to minority shareholders, diluting
minority shareholder protection. Market analysts have also
questioned the direction of the regulatory change, as the previous
rules were broadly in line with international standards.

Malaysian Regulators Block Maybank Transaction
--------------------------------------------- -
3. (SBU) The new takeover rules prompted Bank Negara Malaysian
(BNM), the Malaysian central bank, to block the previously approved
acquisition of BII by the (Malaysian) state-owned Maybank,
underscoring the impact of implementing regulatory changes without
careful planning or coordination. The Malaysian regulators blocked
the transaction over concerns that the requirement to sell as much
as 20% of the stock within two years could force Maybank to take
significant losses, particularly in light of the agreed price of 4.7
times BII's book value. The Malaysian Ringgit 480 million deposit
(US$145 million) that Maybank may forfeit by pulling out of the
transaction illustrates the level of concern the Malaysian
regulators have over the potential loss. [Note: While companies can
be taken private in Indonesia, the fact that Maybank engaged in a
bilateral agreement with Temasek to purchase Temasek's BII shares
prohibits Maybank from taking BII private, according to BAPEPAM.
End Note.]

4. (SBU) Maybank reportedly met with BAPEPAM on August 12 to discuss
easing the new rules in a move that could reverse BNM's decision.
BAPEPAM Chairman Fuad has been widely quoted as stating that BAPEPAM
will extend the time frame for compliance with the new regulations
under "adverse market conditions," such as a significant drop in a
firm's stock price or other capital market problems. Whether an
"adverse market" clause will be sufficient to prevent large
potential losses at Maybank is yet to be seen. However, the
market's perception that BNM's decision was based on second thoughts
about the pricing of the deal rather than Indonesia's regulatory
change will make it difficult for BAPEPAM to make a more significant
exception for Maybank. In a private conversion, BAPEPAM Chairman
Fuad put the onus on BNM, noting to the Embassy that BNM had the
power to relax Maybank's mark-to-market accounting requirements
related to the transaction if they were concerned about accounting
losses, suggesting that Indonesia had taken such action in the past.


JAKARTA 00001619 002 OF 002

Inconsistent Policies Undermine Investment,
Regional Integration
--------------------
5. (SBU) Regardless of the outcome of the Maybank transaction,
Indonesia's mixed regulatory signals continue to undermine the
integrity of Indonesia's regulatory environment and provide
disincentives to potential investors. The current owner of BII,
Singapore's sovereign wealth fund Temasek, is selling BII in an
effort to conform with another relatively recent financial sector
regulation, Bank Indonesia's (BI) single presence policy. The
single presence requirement prohibits a single entity from owning
25% or more shares of more than one Indonesian banking organization.
Temasek also owns Bank Danamon. Policy coordinated between BI and
BAPEPAM has been limited in the past, and it is unclear if BI was
consulted on the BAPEPAM policy change prior to its announcement.
If the Maybank deal fails, Temasek may be forced to merge BII and
Bank Danamon or sell BII to the next highest bidder (Bank of China)
to comply with the single presence policy. In addition, while
BAPEPAM's general reluctance to grant special treatment to Maybank
is a positive development from a regulatory standpoint, BAPEPAM
suggestion that Malaysia ease accounting rules to accommodate the
transaction raises concerns about Indonesia's own commitment to
prudential supervisory standards.

6. (SBU) The unintended consequences of the new takeover regulation
also highlight challenges to regional integration within ASEAN,
which the regional block hopes to complete by 2015. The Maybank
episode reinforces the market perception that national regulators in
ASEAN, in this case BNM, remain closely linked to the business
decisions of state-owned banks, rather than arms-length prudential
supervisors. The actions and reactions of the Indonesian and
Malaysian regulators in this situation also point to a very poor
level of communication and coordination among ASEAN authorities.

7. (U) This message was coordinated by Embassies Jakarta, Kuala
Lumpur, and Singapore.

HUME

© Scoop Media

 
 
 
 
 
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