Structured finance and securitisation in Indonesia: overview
A Q&A guide to structured finance and securitisation law in Indonesia.
This Q&A provides an overview of the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.
This Q&A is part of the structured finance and securitisation multi-jurisdictional guide. For a full list of contents visit www.practicallaw.com/securitisation-mjg.
Market and legal regime
How developed is the market and what notable transactions and new structures have emerged recently?
What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?
Is securitisation particularly concentrated in certain industry sectors?
Up to 2013 (from 2009), PT Bank Tabungan Negara (BTN), a government owned bank, marketed six publicly sold securitisations registered at the Jakarta Stock Exchange (BEJ), regarding housing loan receivables, up to IDR3.9 trillion (at the rate of US$1 equalling IDR10,445, equal to US$373,384,394.45).
In 2014, BTN aims to issue such securitisations in the amount of IDR1.5 trillion (at the current rate of US$1 equalling IDR 11,900, equal to US$126,050,420.17).
The Bank Indonesia (the former supervising authority for banks) issued Regulation 7/4/PBI/2005 dated 20 January 2005 on Prudential Principles in Carrying Out Asset Securitisation Activities for Commercial Banks (Bank Indonesia Regulation for Securitisation) which is still in effect. Since 1 January 2014, the authority supervising financial affairs (including banks, non-bank financial institutions such as insurance funds, and the capital market) is the Financial Services Authority (Otoritas Jasa Keuangan) (OJK). So far, no regulations on securitisations have been issued by the Financial Services Authority. The Bank Indonesia remains the authority to enact and execute monetary policies. This includes the authority to regulate and supervise offshore commercial loans, and covers securitisations where participation or debt certificates are sold offshore.
No regulations have been issued yet by the Financial Services Authority regarding securitisations. There is a draft Financial Services Authority regulation regarding housing loan receivables called KIK-EBA SP (Efek Beragun Asset Surat Partisipasi) (KIK-EBA Participation Certificates). This regulation will not change the structure of securitisations, except that the role of the investment manager will be replaced by the issuer of the EBA SP in securitisations by companies engaged in secondary housing loan finance activities (currently only carried out by PT Sarana Multigriya Finansial (PT SMF), a state owned company established to develop the secondary housing market).
Securitisation is particularly concentrated in the public housing industry. It developed due to the lack of long term financing from banks for the public housing project for the low income group of the population, which is sponsored by the government.
Following a change in the legal framework in 2009 (see Question 2), BTN has carried out a number of publicly marketed securitisations, in total for about IDR5.4 trillion. Prior to 2009, it was not possible to publicly market securitisations. The transactions, registered at the Indonesian Capital Market and Financial Institution Supervisory Agency (Bapepam) and Jakarta branch of the Indonesian Stock Exchange (Bursa Efek Indonesia) (BEI), covered portfolios of receivables payable under housing loans originated by BTN, worth more than IDR2 trillion. PT SMF acted as the arranger (see Question 2).
A number of private placement securitisation transactions were entered into before the Asian financial crisis of 1997.
What are the main laws governing securitisations?
What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?
The only existing regulation on securitisation is the KIK-EBA structure (see below), issued by the Financial Supervisory Agency (Bapepam) in 1997 and amended in 2009. The current authority in charge of overseeing securitisations and the capital market is the Financial Services Authority, which replaced the Financial Supervisory Agency in January 2014.
In 1997, the Financial Supervisory Agency issued a regulation on the Kontrak Investasi Kolektip – Efek Beragun Aset (KIK-EBA) structure, which is a quasi-securitisation arrangement modelled after the mutual fund (Reksa Dana) under Law No.8 of 1995 concerning the Capital Market (Capital Market Law).
The Reksa Dana is a collective investment structure covering a portfolio of securities (either equity securities or bonds, or a combination of both) whereby an investment manager (IM) selects and manages the portfolio. The Reksa Dana can be structured either as a limited liability company or as a collective investment contract. The collective investment contract was used as a model for the KIK-EBA regulation. In a Reksa Dana:
An IM and a custodian bank (CB) enter into an agreement to issue participation certificates, which are sold to investors.
The sale proceeds are used to pay for the portfolio of securities selected and managed by the IM.
Therefore, a KIK-EBA is not a legal entity in itself but rather a contract made between an IM (who manages the investment portfolio) and a CB (who provides custodial services). Although it is similar to the Reksa Dana structure, two differences should be noted:
In the KIK-EBA the portfolio comprises receivables that are issued by an originator (for example, a bank or a financial institution).
The portfolio of receivables owned by the originator in a securitisation is not subject to change, unlike the portfolio of securities in the Reksa Dana.
Therefore, the IM's services and the resulting fees appeared to be unnecessary. However, the Financial Supervisory Agency insisted on requiring an IM in securitisations if the underlying securities are to be publicly marketed. This requirement initially compromised the development of the securitisation market. Another difficulty with the KIK- EBA was the requirement that the KIK-EBA enter into a sale and purchase agreement in relation to the portfolio which, given that the KIK-EBA is a contract between the IM and CB and not a legal entity, is legally impossible.
In 2009, the Financial Supervisory Agency finally agreed to modify the KIK-EBA structure, following which
The IM representing the investors is considered to act as the buyer of the portfolio of receivables.
The CB represents the interests of the investors jointly under the Capital Market Law (and is by statute obliged to keep the assets of the investors separate from its own assets).
The IM is considered to act as the holder of the participation certificates in a securitisation. Therefore, unless investment certificates comprise debt certificates (and not participation certificates) no special purpose vehicle (SPV) is necessary for this purpose as under Indonesian law, the concept of undivided ownership interests in assets is recognised (see Question 4).
Following the economic crisis, the housing market encountered the problem of obtaining long term finance, with only short term banking finance being available. One of the government's programmes is to stimulate the construction of houses for the low income population. To facilitate the programme's funding, the government has established the SMF in 2009, whose main task is to activate the securitisation of receivables originating from housing loans. So far, eight such transactions have been arranged by the SMF (see Question 1).
No other legislation concerning securitisation was issued subsequently by the Financial Supervisory Agency, as it took the position that the KIK-EBA regulation is sufficient.
Since January, 2014 the Financial Services Authority regulates and oversees capital markets in Indonesia, based on Law No. 21 of 2011 on the Financial Services Authority (FSA Law).
Reasons for doing a securitisation
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy?
Risk retention requirements?
Implementation of the Basel III framework in your jurisdiction?
Usual reasons for securitisation
The reasons for doing a securitisation as stated in the Guide also apply in Indonesia. An additional reason for securitisations in the housing industry is the need to raise long term finance (see Question 2).
The most important aspect of an asset securitisation is that the sale of debts should be done as a true sale transaction. This problem does not arise under Indonesian law as the requirements of a transfer of ownership rights in an object (here, receivables) are statutorily defined. A sale purchase requires an agreement on the price and the object sold. Upon reaching agreement on these two requirements followed by a delivery of the object sold in the form of a cessie (a written instrument confirming the delivery of the account receivables sold by the seller to the buyer) ownership title by law passes to the buyer, the sale is completed and the true sale requirement is fulfilled. Reversion of ownership title back to the seller requires a new sale purchase agreement and a new cessie. Although the third party debtors must be notified of the transfer of the receivables, this requirement does not affect the validity of the transfer of the receivables to the joint owners of the KIK EBA certificate holders represented by the IM. Notification (by a court server) to thousands of account debtors is cumbersome and costly and the originators are often hesitant to notify the account debtors for this and other reasons. However, absence of notification does not invalidate the underlying sale and purchase agreement. The purpose of the notification requirement is simply to prevent the debtors from paying to the wrong party. If they continue paying the originator in the absence of notification, payments are considered valid and the corresponding portion of their debt is considered discharged. The practical solution is to designate the originator as the servicer to collect payments made by the account debtors. Where the originator acts as the servicer, it forwards the funds received from the third party debtors to the CB.
Non-compliance with the above notification requirement does not mean that the financial assets transferred must be:
Recorded in the books of the originator and retained on its balance sheet.
Counted towards its maximum reserves for granting credit (BMPK).
Nor does the failure to notify third party debtors mean that the ownership title in the receivables sold transfers back to the originator. A retransfer of the receivables to the originator/seller requires a new sale purchase agreement and a cessie.
Indonesian Accounting Standards (PSAKs) are issued by the Indonesian Accounting Standards Board of the Indonesian Institute of Accountants. Many of the older standards were developed with reference to US Generally Accepted Accounting Principles (GAAP) but newer standards are being developed based on the IFRS. Accountants are bound by law and have to respect the validity of the transfer of the receivables carried out by the originator, as described above.
There are no special national or supranational rules on capital adequacy. However, specific capital adequacy requirements may apply to specific business operations.
The special purpose vehicle (SPV)
Establishing the SPV
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How the SPV is usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
As joint ownership is a recognised concept, the KIK-EBA structure does not require the establishment of an SPV (see Question 2). However, if the investment certificates comprise debt certificates (and not participation certificates), an SPV would be required. The SPV must be a legal entity capable of:
Entering into a sale and purchase or other transfer agreement regarding the receivables.
Issuing the bonds secured by the portfolio of receivables.
Due to the requirement that the SPV must be a legal entity, a limited liability company must be incorporated under the Company Law (No. 40 of 2007).
In addition, SPVs have been established under a law that facilitates Islamic law (sharia) transactions. To date, no regulations exist specifically governing the establishment and ownership of an SPV in the context of securitisation transactions.
No specific regulations concerning the establishment of SPVs exist (see Question 4). The Bank Indonesia Regulation for Commercial Banks requires that the portfolio of housing receivables be sold to onshore parties. Therefore, banks are prohibited from selling the portfolio of such receivables to an offshore SPV. This means that the SPV must be established in Indonesia where the originator of housing loans is a bank.
Ensuring the SPV is insolvency remote
Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?
Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?
Ensuring the SPV is treated separately from the originator
Provided the portfolio has been validly sold and the ownership title has passed to the SPV, there is no risk that the courts can treat the assets of the SPV as those of the originator on the originator's insolvency.
The funds collected by a CB for the joint participation certificate holders are by statute considered separate from the assets of the CB. Therefore, a bankruptcy declaration of the CB does not include the funds collected by the CB from the third party debtors.
Issuing the securities
The decision of the issuer to sell the KIK-EBA certificates to certain private investors or to the public determines whether to issue the securities privately or publicly. No approval from the Financial Services Authority is required for privately sold participation or debt certificates and only reporting requirements apply.
A number of privately placed securitisations occurred before the 1997 Asian financial crisis (see Question 1). Private placement securitisations can be marketed to high net-worth investors and, therefore, do not reach the general public. From that viewpoint, privately placed securitisations are ill-suited for the housing industry.
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
Publicly listed securitisations, including of housing loan receivables issued by a bank, must be registered on the BEI. To date, no securitisations have been marketed publicly in another jurisdiction. Foreign exchange regulations and the Bank Indonesia's approval besides Financial Services Authority approval would need to be considered in those circumstances.
The following is required to apply for admission to trading on the BEI:
The IM must submit a written request to the BEI.
A preliminary agreement must be entered into by the issuer of the securities and the BEI and executed by the BEI.
In addition, publicly marketed securities require prior clearance of the Financial Services Authority and the Bank Indonesia. Financial Services Authority approval for registration is subject to the following:
Registration of the KIK-EBA contract with the BEI.
Payment of the registration fee and sales tax.
Filing of the following documents:
Registration Statement Form provided by the Financial Services Authority;
the KIK-EBA contract in the form of a notarial deed authorising the CB to act in the fiduciary capacity of the Wali Amanat representing the joint investors, and specifying the rights of the investors and the obligations of the CB;
prospectus (stamped and signed by the IM, CB and any underwriter(s));
preliminary agreement between the IM and BEI;
safekeeping agreement regarding the participation certificates between the IM and the central securities depository;
the KIK-EBA contract;
legal opinion and audit;
the KIK-EBA pro forma cash flow;
audited financial statement;
documents regarding the IM, such as, for example, a copy of the deed of incorporation approved by the Minister of Justice, the IM's financial statements, organisational structure and a copy of the IM licence.
documentation regarding the CB, including a copy of the deed of incorporation approved by the Minister of Justice, the CB's financial statements and the organisational structure.
the registration with the Financial Services Authority of the involved capital markets professionals. This covers notaries, legal consultants, accountants appraisers, and other professionals involved (if any).
Constituting the securities
In the publicly placed securitisations under the KIK-EBA regime, the securities take the form of participation certificates placed under the custody of the CB on terms and conditions specified in the KIK-EBA contract. This is a custodian arrangement, whereby the CB under the Capital Investment Law acts in a fiduciary capacity for and in the interests of the holders of the participation certificates, while assets held by the CB are segregated from the assets of the CB. The KIK-EBA contract also sets out the rights and obligations under the participation certificates, entitling the holders to a proportionate undivided share of the receivables forming the portfolio.
An SPV is only required if the investors' ownership is witnessed by debt certificates (see Question 4).
Transferring the receivables
Classes of receivables
The current regulations allow the following assets to be securitised:
Commercial paper receivables.
Credit card receivables.
Housing loan receivables and motor vehicle receivables.
Future receivables arising from existing agreements.
Securities guaranteed by the government of Indonesia.
Credit enhancement/cash flow receivables.
Other financial assets equal to and related to the above financial assets.
Securitisations of credit card receivables, motor vehicles receivables and housing loan receivables have taken place. Selling such receivables enables banks and other financial institutions to increase the profitability of their assets. The sale of these receivables enables obtaining of further finance, as well as improving the balance sheet.
Transferring the receivables from the originator to the SPV
The receivables are usually transferred by the originator to the IM under a sale and purchase agreement. Under the Indonesia Civil Code (ICC), a sale and purchase agreement becomes effective provided both the seller and the buyer have reached an agreement regarding the object to be sold and payment of the price. The transfer of the legal title is witnessed by a cessie agreement.
According to the principle that the security follows the debt (accessory principle), the security is by law transferred to the buyer once the assignment becomes effective, even if it is not recorded in the buyer's name. Re-registration of the security in the name of the IM or the CB as a practical matter is mostly not done for various reasons unless and until a payment default becomes likely.
Prohibitions or restrictions on transfer
Contractual restrictions on transferring receivables, including a negative pledge are enforceable.
There are no general legislative provisions that restrict the assignment of rights in receivables. However, data protection rules under Law No. 7 of 1992 on Banking (as amended by Law No. 10 of 1998) may be relevant. In particular, this law provides that any information relating to deposit customers and their deposits must be kept confidential by banks and affiliated parties. However, disclosure is permissible if made in the following circumstances:
For tax purposes.
Settlement of receivables due to the state receiver or auction agency.
Criminal court proceedings.
Civil court proceedings between banks and their customers.
Information exchange between banks.
On request from the deposit customer's legitimate heirs.
Avoiding the transfer being re-characterised
Can this risk be avoided or minimised?
Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?
Provided the legal conditions for a sale and purchase agreement set out under the ICC are satisfied, there is no risk that a sale and purchase agreement will be re-characterised as a loan with security (see Question 12). In this respect, the notion of a true sale is alien to Indonesian law. The Bank Indonesia Regulation for Commercial Banks that includes the requirements for a true sale is for accounting purposes only, with no consequences on the legality of the sale of the portfolio of receivables (see Question 3, Accounting practices). Therefore, a valid sale and purchase agreement cannot be annulled on the grounds that there has been no true sale.
Once a sale and purchase agreement has been entered into and validly executed by a cessie, it can only be ended by a termination agreement approved by all parties to the contract.
Ensuring the transfer cannot be unwound if the originator becomes insolvent
The originator, or a liquidator or other insolvency officer cannot unwind the transaction (see Question 16).
Establishing the applicable law
Provided a point of attachment exists with a foreign law (for example, where a party is subject to a foreign law or some other matter gives cause to the application of a foreign law), parties can opt for the application of that foreign law. However, if that choice violates Indonesian public order, Indonesian law will apply.
Security and risk
There are three types of securities available under Indonesian law:
Registered mortgages (Hak Tanggungan) (HT), taken over immovable property, including receivables.
Fiduciary transfers, available for movable property.
Pledges, also taken over movable property only.
Registered mortgages and fiduciary transfers are perfected by registration. To perfect a pledge, the actual control of the assets by the pledgee is required.
Joint ownership is a recognised concept and the KIK-EBA structure does not require the establishment of an SPV (see Question 4).
The trust concept whereby the trustee acts as the owner and the investors are the beneficiaries of the portfolio is not recognised under Indonesian law. However, under the Capital Market Law the role of the Wali Amanat is defined as guarding the interests of the bondholders (which, by analogical interpretation, includes participation certificate holders) (see Question 10). Based on the statutory task assigned to the Wali Amanat, he cannot disclaim responsibility and liability in acting in such capacity, by contrast to trustees in other jurisdictions.
Foreign trusts cannot render their services in Indonesia. Foreign trusts rendering their services offshore to offshore investors investing in Indonesia are recognised.
Based on the Bapepam KIK-EBA implementing regulations the following credit enhancement methods can be used, among others:
Subordination of one class of ABS to another class within the same KIK-EBA.
Letters of credit.
Bad debt reserves.
Guaranteed rates of return.
Guaranteed liquidity at the time of maturity.
Guaranteed tax payments.
Interest rate or foreign currency exchange rate swaps.
In the four securitisations carried out by the BTN in 2009/2010 (see Question 1), the following credit enhancement methods have been used:
Creating a reserve account. SMF has transferred funds into a reserve account to be used in the event of a shortfall for the payment of interest, tax and agreed fees.
Creating subordinated classes of security.
Clean-up call option. The option given to the service provider (who was the originator) to buy all of the receivables when the outstanding principal amount on the receivables goes down to 10% or less from the amount on the cut-off date.
Purchase undertaking by the SMF. The SMF undertook to purchase the class A certificates from its holders upon one of the listed events of default.
Risk management and liquidity support
The liquidity facility used in the KIK-EBA emanates from the reserve funds provided by the SMF as credit enhancer. Other than that, it may also come from the proceeds derived from the investment conducted by the IM into the type of investment as provided under the prospectus.
There are no significant issues that apply to the provision of liquidity support as set out in the Guide.
Cash flow in the structure
Distribution of funds
An SPV is not necessary in a KIK-EBA (see Question 4). Funds collected from the third party debtors by the originator in its capacity as servicer for the CB representing the joint investors are transferred to the CB who then distributes the funds to the holders of the participation certificates. Payment agents can be used. No foreign exchange is involved and there is no need to engage swap counterparties.
The role of the rating agencies
Standard & Poor's current credit rating for Indonesia stands at BB+. Moody's rating for Indonesia sovereign debt is Baa3. Fitch's credit rating for Indonesia is BBB-.
Factors that have an impact on this rating include the level of government borrowing, the interest paid on government debt and political factors.
Publicly marketed KIK-EBA securities require a rating by a registered rating agency. Domestic rating agencies exist. The use of the well known international rating agencies (for example, Standard & Poor's, Fitch Ratings) is not uncommon but they must be registered with the Financial Services Authority.
What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?
The association between the IM and the CB is considered a taxable entity taxed in the same manner as an incorporated entity and subject to standard corporate income tax rates. The investors are subject to 20% withholding tax. The tax is withheld by the CB and paid directly to the Tax Office. No sales tax is imposed on the sale of the portfolio based on a regulation of the Tax Office. Indonesia has no FATCA agreement with the US.
Recent developments affecting securitisations
Other securitisation structures
The Capital Market Law is currently under review for amendments. Amendments may include securitisation provisions. It is not predictable when this draft law may come into effect as there are many draft laws pending of a more urgent nature before the Indonesian Parliament. The Financial Services Authority has a draft regulation pending regarding the securitisation of housing loans, mainly directed at companies in the secondary housing market (see Question 1). The draft does not change the structure of the KIK-EBA securitisation.
Indonesian Financial Services Authority
Description.This website contains up-to-date regulations on the capital market, insurance, and financial institution regulations. It is published in Indonesian and English. It is an official and up to date website, maintained by the Financial Services Authority. It also links to other authorities' websites.
Mochtar Karuwin Komar (MKK)
Professional qualifications. Member of the Indonesian Advocate Association; authorised by the Bapepam to represent clients in capital markets transactions
Areas of practice. Civil; commercial; corporate; banking and capital market law.
Mochtar Karuwin Komar (MKK)
Professional qualifications. Indonesian Advocates Association
Areas of practice. Banking; finance, land law.