Indonesia - OJK Issues Draft Regulation On Foreign Shareholdings And Sharia Spin-Off Requirements.
Legal News & Analysis - Asia Pacific - Indonesia - Regulatory & Compliance
12 November, 2019
The Financial Services Authority ("OJK") has issued a draft regulation amending OJK Regulation No. 67 of 2016 on Licensing and Institution of Insurance Companies and Reinsurance Companies ("Reg 67"). The draft regulation is currently being disseminated by the OJK to get feedback from the public.
We have not received any confirmation on when the OJK will enact the regulation.
Several proposals in the draft regulation may help prepare for the sharia spin-off requirements from a corporate structure and operations perspective.
Clients are encouraged to provide feedback to the OJK if there are still unclear provisions in the draft regulation, particularly on the grandfathered percentage of the spun-off sharia insurance companies.
Key Proposed Amendments
The following are the key proposed amendments in the draft regulation: Foreign Shareholdings.
- Both direct and indirect foreign shareholdings must be included in the calculation of an insurance company's foreign shareholdings.
- If one of the insurance company's shareholders is a listed Indonesian company, the calculation of the indirect shareholding at that listed Indonesian company level will be done based on the cumulative foreign shareholdings in that listed Indonesian company based on the shareholding composition report issued by, or reported by, that listed Indonesian company to, the Indonesia Stock Exchange.
- Insurance companies' obligation to identify and report the insurance companies' foreign shareholdings to the OJK does not apply if the insurance company is a public company (perusahaan terbuka).
The above provisions provide clarity on things that were unclear in Government Regulation No. 14 of 2018 on Foreign Ownership in Insurance Companies.
- The methods of spin-off are as follows:
(a) establishing a newly licensed sharia company and transferring all of the sharia unit's insurance portfolio of the insurance company to that newly licensed sharia company
(b) transferring all of the sharia unit's insurance portfolio of the insurance company to another existing licensed sharia company
- The existing foreign shareholders in insurance companies that are subject to the sharia spin-off requirement are allowed to be shareholders in the spun-off sharia companies (please see item (a) above).
However, the draft regulation is silent on the maximum shareholdings of the foreign shareholders in the spun-off sharia companies. It is unclear whether a spun-off sharia company will have the same grandfathered percentage as the original insurance company, or if the foreign shareholding in the spun-off sharia company will be limited to 80%.
- The paid up capital of the spun-off sharia company must be at least IDR 50 billion. Reg 67 is silent on this.
- The equity of the spun-off sharia company must be at least IDR 25 billion. This is lower than the current threshold set out under Reg 67, i.e., IDR 50 billion. This provision suggests that the spun-off sharia company can carry forward some of the insurance company's negative retained earnings relating to the insurance company's sharia unit.
- On operations and personnel issues:
- The spun-off sharia insurance company is allowed to have a 'business support' cooperation agreement with the original insurance company. The business support scope mainly includes personnel support and administration support. The support can be provided by the insurance company for a maximum of three years after the date of the spun-off sharia insurance company's license.
The spun-off sharia insurance company is allowed to use the insurance company's actuary and insurance experts for a maximum of three years after the date of the spun-off sharia insurance company's license, based on the 'business support' cooperation agreement.
So the OJK acknowledges that a transition period is needed from an operations perspective.
- The OJK will not issue any new licenses to new sharia units within insurance companies or reinsurance companies after 17 October 2020.
- The OJK will revoke the license of the sharia unit of an insurance company if the insurance company fails to complete the spin-off requirements by 17 October 2024.
The above provisions provide further clarity on the sharia spin-off requirements currently regulated in the Insurance Law and Reg 67.