Investment funds in Indonesia: regulatory overview

A Q&A guide to investment funds law in Indonesia.

This Q&A is part of the global guide to investment funds. It provides a high level overview of investment funds in Indonesia, looking at both retail funds and hedge funds. Areas covered include a market overview, legislation and regulation, marketing, managers and operators, restrictions and requirements, tax and upcoming reform.

To compare answers across multiple jurisdictions, visit the Investment Funds Country Q&A tool. For a full list of jurisdictional Q&As visit www.practicallaw.com/investmentfunds-guide.

Tony Budidjaja and Jono Yeo, Budidjaja & Associates
Contents

Retail funds

1. What is the structure of the retail funds market? What have been the main trends over the last year?

A mutual fund (Reksa Dana) is an investment vehicle that is made up of a pool of funds collected from investors for the purpose of investing in various investment instruments (Law No. 8 of 1995 on Capital Markets). Generally, there are two different types of mutual funds that are recognised:

  • Mutual funds in the form of a corporation (Corporate Mutual Fund).

  • Mutual funds in the form of a collective investment contract (Kontrak Investasi Kolektif) (KIK) (KIK Mutual Fund).

Open-ended retail funds

An open-ended mutual fund is defined as a mutual fund that allows re-purchase or an offer to re-purchase from investors in shares or participation units up to the amount of capital or the total number of issued shares or participation units. The investment manager of a mutual fund must purchase shares or participation units sold by its investors according to the net asset value (NAV) of each participation unit at that time. In other words, an open-ended mutual fund continuously issues and redeems the ownership of shares or participation units.

An open-ended mutual fund can be organised in the form of either a corporation or a KIK. The open-ended mutual fund market is well-developed and active. From March 2015, the statistic, prepared by the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK), showed that there are around 967 mutual funds with the total NAV worth approximately IDR266 trillion.

Closed-ended retail funds

A closed-ended mutual fund means a mutual fund cannot redeem its shares that have been sold to its investors. Generally, its investors can only buy and sell shares of mutual funds in the secondary market on exchanges where the shares of the mutual fund in question are listed. This type of mutual fund can only be applied by a mutual fund in the form of a corporation.

PT BDNI Reksadana was the first closed mutual fund established in Indonesia. Even though the legal infrastructure of a closed-ended mutual fund is still present, a closed-ended mutual fund no longer exists in Indonesia.

Regulatory framework and bodies

2. What are the key statutes, regulations and rules that govern retail funds? Which regulatory bodies regulate retail funds?

Open-ended retail funds

Regulatory framework. Mutual funds are primarily regulated by Law No. 8 of 1995 regarding Capital Markets, which prescribes:

  • General provisions on mutual funds, among other types of mutual funds.

  • General requirements for obtaining licensing on mutual funds.

  • Management of mutual funds.

  • Prohibited actions conducted by mutual funds.

The following are some key regulations on mutual funds in Indonesia:

  • Bapepam Rule No. IX.C.4 on Registration Statement for a Public Offering of an Investment Fund in the form of a Corporation.

  • Bapepam-LK Rule No. IX.C.5 on Registration Statement for a Public Offering of an Investment Fund in the form of a Collective Investment Contract.

  • Bapepam Rule No. IX.C.6 on Form and Content of a Prospectus for a Public Offering of an Investment Fund.

  • Bapepam Rule No. IV.A.1 on Application Procedures for Obtaining a Business License as a Corporate Investment Fund.

  • Bapepam Rule No. IV.A.2 on Guidelines for Articles of Association of a Corporate Investment Fund.

  • Bapepam Rule No. IV.A.3 on Management Guidelines of a Corporate Investment Fund.

  • Bapepam Rule No. IV.A.4 on Guidelines of Management Contracts of a Corporate Investment Fund.

  • Bapepam Rule No. IV.A.5 on Guidelines of Custodian Contracts of Corporate Investment Fund’s Assets.

  • Bapepam-LK Rule No. IV.B.1 on Guidelines for the Management of Investment Fund in the form of Collective Investment Contracts.

  • Bapepam-LK Rule No. IV.B.2 on Guidelines for Contract of Investment Fund in the form of the Collective Investment Contracts.

  • Bapepam-LK Rule No. IV.B.3 on Exchange Traded Fund.

  • Bapepam Rule No. X.D.1 on Mutual Fund Reporting.

Regulatory bodies. The following regulatory bodies are applicable:

  • The Indonesia Financial Services Authority (Otoritas Jasa Keuangan) (OJK).

  • The Indonesia Stock Exchange (Bursa Efek Indonesia) (IDX).

Closed-ended retail funds

Regulatory framework. See above, Open-ended retails funds: Regulatory framework.

Regulatory bodies. See above, Open-ended retails funds: Regulatory bodies.

 
3. Do retail funds themselves have to be authorised or licensed?

Open-ended retail funds

KIK mutual fund. The creation of a collective investment contract (KIK) mutual fund is subject to obtaining an effective statement from the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK). An investment manager must provide the following documents to the OJK to obtain an effective statement from the OJK:

  • Registration statement.

  • Collective investment contract between the investment manager and the custodian bank.

  • Prospectus.

  • Mutual fund selling agent agreement (if any).

  • Marketing and operational mutual fund plan.

An investment manager must also submit the following additional documents if the participation units that are issued by the KIK mutual fund will be traded in the Indonesian Stock Exchange (Bursa Efek Indonesia) (IDX):

  • Agreement between the investment manager and the sponsor (if the creation of the mutual fund involves the sponsor).

  • Agreement between the investment manager and the participating dealer.

  • Pre-listing agreement between the investment manager and the IDX.

  • Custodian agreement between the investment manager and the Indonesian Central Securities Depository.

Corporate mutual fund. The establishment of corporate mutual fund requires obtaining an effective statement from the OJK. To be granted an effective statement, the board of directors of a corporate mutual fund must submit the following documents to the OJK:

  • Registration statement.

  • Time schedule for issuance.

  • Final draft of prospectus.

  • Share specimen.

  • Form samples of securities purchase order and securities registration.

  • Securities printing contract.

  • Underwriting agreement between issuer and underwriter (if any).

  • Selling agent agreement between underwriter and the selling agents (if any).

  • Pre-listing agreement between the issuer and the IDX (if any).

  • Agreement between the issuer and a Securities Administration Bureau (if any).

  • Legal due diligence report, as well as legal opinion in respect of issuance of mutual fund issued by an independent legal consultant.

  • An audited financial statement of the issuer.

  • Other supporting documents, such as the issuer's tax identity number card and information of the board of directors of the issuer.

Closed-ended retail funds

The same rules and procedures apply for open-ended mutual funds (see above, Open-ended retail funds).

Marketing

4. Who can market retail funds?

Open-ended retail funds

Mutual fund securities can only be marketed and sold by the investment manager of the mutual fund in question or qualified securities selling agents that have been registered at the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK). The parties that can be registered as a securities selling agent are:

  • A securities company that has obtained a business license from the OJK for conducting business activities as an underwriter or broker dealer.

  • A commercial bank that has been registered at the OJK as a selling agent for mutual fund securities.

  • A securities company that has obtained a broker dealer business licence from the OJK and has been established specifically for marketing mutual fund securities.

Securities selling agents must enter into a co-operation agreement with an investment manager that manages the mutual fund. Mutual fund material advertisement prepared by securities selling agents or investment managers must be reported to the OJK no later than two days after it has been advertised, and must comply with Bapepam Rule IV.D.1 on the Guidelines on Mutual Fund Advertisement.

Closed-ended retail funds

The rules for marketing closed-ended mutual funds are the same for open-ended funds (see above, Open-ended retail funds).

 
5. To whom can retail funds be marketed?

Open-ended retail funds

Once a registration statement of a mutual fund has been declared effective by the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK), the mutual fund can be marketed and sold to the public.

Closed-ended retail funds.

See above, Open-ended retail funds.

Managers and operators

6. What are the key requirements that apply to managers or operators of retail funds?

Open-ended retail funds

The management of a mutual fund can only be operated by an investment manager that has obtained a business license from the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK). Any foreign investment manager is prohibited from acting as an investment manager for local mutual funds.

An investment manager must be in the form of a limited liability company. The following requirements must be satisfied to obtain a business licence from the OJK:

  • Its controller and shareholder must meet the requirements of integrity and financial soundness (Bapepam-LK Rule No. V.A.3 on Licensing Procedures for a Securities Company Conducting Business as an Investment Manager).

  • Must have at least two directors and two commissioners.

  • All its directors and commissioners must fulfil the requirements of integrity, competency and expertise in capital market.

  • All its directors must have individual licences to act as the securities companies' representatives and at least one of them must have an individual licence to act as an investment manager representative.

  • All its directors must be domiciled in Indonesia.

  • All its commissioners are prohibited from simultaneously holding positions as a commissioner in other securities companies.

  • It must have a working unit or official that carries out the functions of an investment manager.

Closed-ended retail funds.

See above, Open-ended retail funds.

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?

Open-ended retail funds

To protect the interest of the investors, Law No. 8 of 1995 on Capital Markets and its implementing regulations lay down the following provisions:

  • Assets of a mutual fund are held and maintained by a custodian bank for and on behalf of the mutual fund.

  • Assets of a mutual fund are separated from the assets and liabilities of the investment manager and the relevant custodian bank.

  • A mutual fund is prohibited from borrowing or lending money.

  • A mutual fund is prohibited from buying shares or participation units of other mutual funds.

  • A custodian bank must not be affiliated with an investment manager of the mutual fund in question.

  • In the event that the investment manager or bank custodian is declared bankrupt or insolvent, the mutual fund's assets cannot constitute part of the investment manager or custodian bank's assets.

Closed-ended retail funds.

See above, Open-ended retail funds.

Legal fund vehicles

8. What are the main legal vehicles used to set up a retail fund and what are the key advantages and disadvantages of using these structures?

Open-ended retail funds

Legal vehicles. A mutual fund can be organised through the following structures:

  • A mere contractual arrangement with no legal personality (KIK Mutual Fund). This is established by executing a collective investment contract by and between an investment manager and a custodian bank. Participants' interests in a mutual fund are known as participation units.

  • A limited liability company (LLC) with legal personality (corporate mutual fund).

Advantages. Setting up a KIK mutual fund is simpler, quicker and cheaper than a corporate mutual fund. It provides better legal protection for investors by placing mutual fund's assets as a bankruptcy remote.

Disadvantages. The investors of a KIK mutual fund have no control over the management and investment decisions.

Closed-ended retail funds

Legal vehicles. A closed-ended mutual fund can only be organised in the form of a corporate mutual fund.

Advantages. See above, Open-ended retail funds.

Disadvantages. See above, Open-ended retail funds.

Investment and borrowing restrictions

9. What are the investment and borrowing restrictions on retail funds?

Open-ended retail funds

Under the Bapepam-LK Rule IV.B.1, the investment and borrowing restrictions on a KIK Mutual Fund (Kontrak Investasi Kolektif) are described below.

The investment manager must determine the mutual fund securities portfolio with the following conditions:

  • At least 85% of the net asset value (NAV) of a mutual fund must be invested in securities portfolio issued, offered or traded in Indonesia in accordance with prevailing laws and regulations in Indonesia, or debt securities traded overseas, but issued by:

    • the government;

    • an Indonesian issuer or a public company, as defined in the Law No. 8 of 1995 on Capital Markets (Capital Markets Law);

    • a foreign legal entity whose majority (or all) of its shares are owned directly or indirectly by an Indonesian issuer or a public company, as defined in the Capital Market Law and the foreign legal entity is specifically established to raise the fund from overseas for the interest of an issuer or a public company in Indonesia; or

    • a foreign legal entity whose majority (or all) of its shares are owned directly or indirectly by an Indonesia state-owned enterprise.

  • Maximum of 15% of the NAV of a mutual fund is invested in securities traded on a foreign stock exchange, where its information can be accessed from Indonesia through mass media or the internet.

A mutual fund can only engage in the buying or selling of:

  • Securities sold through public offering or traded on a domestic or foreign stock exchange.

  • Debt securities, such as a commercial paper, which is rated by a rating agency as well as government debt securities or debt securities issued by an international institution where the government serves as one of its members.

  • Asset backed securities (ABS) offered through a public offering and rated by a rating agency.

  • Domestic money market instruments with less than one year's maturity comprising of a Certificate of the Bank of Indonesia, money market commercial paper, promissory notes, and certificates of deposit, either in Rupiah or foreign currencies.

  • Domestic commercial paper with less than three years' maturity and is rated by a rating agency.

An investment manager is prohibited from engaging in actions that may cause a KIK mutual fund to:

  • Invest in securities traded on foreign stock exchanges, where their information cannot be accessed from Indonesia through mass media or the internet.

  • Invest in securities issued by one Indonesian legal entity or foreign legal entity that is traded on a foreign stock exchange that has more than 5% of paid in capital of the entity or more than 10% of the NAV of a mutual fund at any time.

  • Invest in equity securities issued by a listed company on the Indonesian Stock Exchange (Bursa Efek Indonesia) (IDX) that has more than 5% of paid in capital of the company.

  • Invest in securities issued by one party of more than 10% of the NAV of a mutual fund at any time. The securities include commercial papers issued by banks. This restriction does not apply to:

    • certificates of the Bank of Indonesia;

    • securities issued by the government; and

    • securities issued by an international financing institution where the government serves as one of its members.

  • Hedge on securities traded in a foreign stock exchange for more than the purchase value of the securities.

  • Invest in an ABS with more than 10% of the NAV of a mutual fund, in which each ABS is no more than 5% of the NAV of a mutual fund.

  • Invest in non-public offering securities or securities that are not listed on the IDX, except for:

    • securities that are rated by a rating agency;

    • money market securities, namely debt securities with less than one year maturity; and

    • securities issued by the government or international financing institution where the government is one of its members.

  • Invest in a securities portfolio issued by an affiliated party to an investment manager, with more than 20% of the NAV of a mutual fund, unless the affiliation is a result of government ownership or capital participation.

  • Invest in securities issued by the participation unit holders or its affiliated party based on a commitment agreement between an investment manager and participation unit holders or affiliated party of the participation unit holders.

  • Be involved in any activity other than securities investment, reinvestment or trading.

  • Be involved in short selling.

  • Be involved in margin transaction.

  • Issue bond or credit securities.

  • Be involved in any type of loans, except for short term loans related to transaction settlement, and the loans are no more than 10% of the mutual fund portfolio value at the time of purchase.

  • Purchase securities that are being offered in a public offering, if:

    • the underwriter of the public offering is one legal union with an investment manager; or

    • the underwriter of the public offering is an affiliated party of an investment manager, unless such affiliation is a result of government ownership or capital participation.

  • Be involved in any joint transaction or profit-sharing contract with an investment manager or its affiliation.

  • Purchase ABS that are being offered in a public offering, if:

    • its ABS mutual fund and KIK mutual fund are managed by the same investment manager;

    • the public offering is performed by an affiliated party of an investment manager, unless the affiliated relationship is a result of government ownership or capital participation; and/or

    • an investment manager of a mutual fund is affiliated to the initial creditor of the ABS, unless the affiliated relationship is a result of government ownership or capital participation.

Based on the Bapepam Rule IV.A.3, the investment and borrowing restrictions on a corporate mutual fund are set out below.

A corporate mutual fund can only engage in buying and selling:

  • Securities offered through a public offering or listed at a foreign or domestic exchange.

  • Money market instruments that have a maturity of less than one year, such as certificates of the Bank of Indonesia, certificates of money market, promissory notes, certificates of deposit and bonds issued by the government.

  • Commercial papers that have a maturity of less than three years and have been rated by a securities rating company.

An investment manager is prohibited from causing a mutual fund:

  • To purchase foreign exchange listed securities, where their information cannot be accessed through mass media or the internet.

  • To purchase foreign exchange listed securities, where their information can be accessed through mass media or the internet worth more than 15% of the NAV of a mutual fund.

  • To purchase equity securities issued by a corporation and listed on the IDX worth more than 5% of paid in capital of the corporation.

  • To purchase securities issued by a corporation worth than 10% of the NAV of a mutual fund at any time. This restriction includes the purchase of commercial papers that are not categorised as certificates of the Bank of Indonesia issued by the bank and obligations issued by the government.

  • To sell shares of an open-ended mutual fund to any investor worth more than 2% of the paid in capital, except for an investment manager of the open-ended investment fund itself.

  • To purchase ABS worth more than 10% of the NAV of a mutual fund. Each type of ABS cannot exceed 5% of the NAV of the mutual fund.

  • To purchase securities not issued through a public offering or not listed at an exchange, except for money market securities, bonds issued by the government.

  • To purchase securities issued by a party affiliated with an investment manager or unit holder worth more than 20% of the NAV, except for an affiliation caused by government capital placement.

  • To be involved in any activities other than investing, re-investing, or trading of securities.

  • To be involved in short selling.

  • To purchase securities on margin.

  • To issue bonds or credit securities.

  • To be involved in any type of loans, except short term loans relating to the settlement of transactions. The loans cannot exceed 10% of the value of the mutual fund portfolio at the time of purchase.

  • To purchase any securities underwritten by its investment manager.

  • To enter into a joint transaction or profit-sharing contract with an investment manager or with an affiliated person of an investment manager.

  • To pay a dividend from any source other than profits.

  • To purchase ABS that its investment manager is also the investment manager of the mutual fund or a person affiliated with the initial creditor of the ABS.

  • To purchase ABS not listed on a domestic exchange in Indonesia.

Closed-ended retail funds

See above, Open-ended retails funds: Regulatory bodies.

 
10. Can the manager or operator place any restrictions on the issue and redemption of interests in retail funds?

Open-ended retail funds

A mutual fund management contract can stipulate the conditions that allow an investment manager to reject the redemption. Under the Bapepam Rule IV.A.3 and the Bapepam-LK Rule IV.B.1, an investment manager can instruct a custodian bank to postpone the redemption (repurchase), if the following conditions occur:

  • On the Indonesian Stock Exchange (Bursa Efek Indonesia) (IDX) where the majority of the mutual fund portfolios traded is closed.

  • Stocks trading on the majority of the mutual fund portfolio in the exchange is stopped.

  • Emergency situation (or force majeure).

  • Other things specified in the mutual fund management contract following the IDX approval.

Closed-ended retail funds

Closed-ended retail funds are subject to the same restrictions as open-ended retail funds (see above, Open-ended retail funds).

 
11. Are there any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties?

Open-ended retail funds

There is no statutory restriction on investors or unit holders to transfer or assign their interests to a third party. An open-ended mutual fund must redeem or repurchase these funds from its investors or unit holders, unless the prevailing laws and regulations determine otherwise.

Closed-ended retail funds

Shareholders or investors of a closed-ended mutual fund can transfer or assign to a third party through a stock exchange. Therefore, the transfer or assignment is subject to the relevant stock exchange rules. However, there is no obligation for a closed-ended mutual fund to redeem or repurchase these funds from shareholders or investors.

Reporting requirements

12. What are the general periodic reporting requirements for retail funds?

Open-ended retail funds

Investors. A custodian bank must provide a report to its investors with the following procedures:

  • No later than the 12th day of the next month, if in the previous month, there was a mutation of the investors' funds.

  • No later than 12 January that reflects the position of account on 31 December.

The report must contain at least the:

  • Name, address, title of account and account number of the investors.

  • Total of their shares or participation units.

  • Date and net asset value (NAV) on each of the transactions.

  • Date of distribution of dividends.

  • Details of owned portfolios.

  • Details of income tax status.

Regulators. A custodian bank of an open-ended mutual fund must provide a report to the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) that shows the financial position of each mutual fund with the following forms:

  • Appendix 1 of Form Number X.D.1-1, Appendix 2 of Form Number X.D.1-2, Appendix 3 of Form Number X.D.1-3 and Appendix 4 of Form Number X.D.1-4, which must be submitted every day at the latest by 10.00 am local time following day.

  • Appendix 5 of Form Number X.D.1-5 and Appendix 6 of Form Number X.D.1-6, which must be submitted at the end of every month and at the latest on the fifth day of the relevant month.

An investment manager must also:

  • Prepare the procedures and ensure that all monies received from the shareholders or investors must be submitted to a custodian bank at the latest on the end of that trading day.

  • Determine fair market value of the securities in portfolio every trading day and submit to a custodian bank immediately.

  • Provide a report on the collection of mutual fund's assets to the OJK and announce to the public at the latest 60 business days after the registration statement has become effective (except for capital protected mutual funds, capital guaranteed mutual funds, and index mutual funds with a limited public offering that must announce to the public at the latest 90 business days after the registration statement has become effective).

  • Submit an annual financial report of the mutual fund to the OJK at the latest at the end of third month.

Closed-ended retail funds

Investors. See above, Open-ended retail funds.

Regulators. See above, Open-ended retail funds.

Tax treatment

13. What is the tax treatment for retail funds?

Open-ended retail funds

Funds. A KIK Mutual Fund is treated as a corporate taxpayer, but the KIK mutual fund itself is not considered the object of tax. However, the income or revenue generated by the KIK mutual fund is subject to the applicable income tax.

Resident investors. Distribution of income made by mutual funds to resident investors is exempted from tax by virtue of the Income Tax Law. Proceeds from the redemption of the investors' shares in the funds are also exempted from tax. These are excluded from the recipient income tax calculations. However, expenses incurred by the recipient related to this income are not deductible for fiscal purposes.

The government has supported the growth and development of mutual funds by discounting the withholding tax rate of 5% extended to 2020 before increasing to 10% from 2021 onwards.

Non-resident investors. Distribution income made by a mutual fund to non-resident investors is exempted from tax. This also applies to the proceeds of redemption of the investors' shares in the fund.

Closed-ended retail funds

Funds. See above, Open-ended retail funds.

Resident investors. See above, Open-ended retail funds.

Non-resident investors. See above, Open-ended retail funds.

Quasi-retail funds

14. Is there a market for quasi-retail funds in your jurisdiction?

There is currently no market for quasi-retail funds.

Reform

15. What proposals (if any) are there for the reform of retail fund regulation?

There are several regulatory reforms proposed that will affect mutual funds:

  • The draft of Indonesia Financial Service Authority's (Otoritas Jasa Keuangan) (OJK) Regulation on the Issuance of Sharia Mutual Fund, which introduces Sharia mutual funds that are structured in accordance with the principles of Sharia.

  • The draft of OJK Regulation on KIK Mutual Fund that revises and improves the previous Rule No. IV.B.1, No. IV.B.2 and Rule No. IX.C.5 to give the flexibility for an investment manager that manages the mutual funds.

  • The draft of OJK Regulation on the Guidelines of an Investment Manager's Conduct that revises and improves the previous Rule No. V.G.1 on Prohibited Investment Manager's Conduct and Rule No. V.G.3 on Record Keeping for Decision Making by an Investment Manager in order to give better protection for investors.

 

Hedge funds

16. What is the structure of the hedge funds market? What have been the main trends over the last year?

At present, the law does not have specific regulations on hedge funds. However, the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) is currently drafting a regulation on hedge funds that is due to be released soon.

Therefore, the following questions discuss instead the Collective Investment Contract in Limited Participation Investment Fund (CICLP) (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas), which is also known as a private equity fund (PEF).

The main trends over the last year include:

  • Private equity funds in the form of CICLP is an investment vehicle that is used to collect funds from professional investors to be invested by investment manager in a real-sector based securities portfolio. Real sector based-activities securities are defined as activities either directly or indirectly related to the production of goods. Services provisions in the real sector include, but are not limited to, the production of goods or working capital from these activities.

  • In December 2014, the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) issued a new Regulation No. 37/POJK.04/2014 on Collective Investment Contract in Limited Participation Fund (OJK Regulation No. 37/2014) to further tighten the underlying asset of this PEF's product. Under the new Regulation, CICLP can only be issued on the basis of the real sector assets portfolio. This policy replaces the rules of the game under Bapepam-LK No. IV.C.5, which allows the investment manager to invest in a portfolio of securities, without requiring an explanation on the criteria of the portfolio of securities. The new rules also require a monitoring agent, namely an investment committee, to oversee the use and receipt of funds to comply with the CICLP. The existence of this monitoring agent was not regulated in the previous rules.

  • Additionally, the initial net asset value (NAV) of each participation unit of CICLP has been changed from IDR5 billion per unit to IDR1,000 per unit. Meanwhile, the initial NAV of each participation unit of a private equity fund denominated in foreign currency must be US$1 or EUR1. Also, the provisions for the ownership of participation units of the investment manager are also increasingly tight. The investment manager must have CICLP participation units at least five million participation units of investment with funds under management of up to IDR500 billion. Whereas, for the funds under management of more than IDR500 billion and up to IDR1 trillion, the investment manager must have a minimum ten million participation investment units, and if the value of funds is more than IDR1 trillion, the investment manager must have at least 15 million participation units. Under the previous Rule, regardless of the value of funds under management, the investment manager was only required to have one unit of investment. With this rule, the CICLP is more focused on the real sector in order to help the country boost a sector that is recently growing.

Regulatory framework and bodies

17. What are the key statutes and regulations that govern hedge funds in your jurisdiction? Which regulatory bodies regulate Private Equity Fund?

Regulatory framework

Generally, a Collective Investment Contract in Limited Participation Investment Fund (CICLP) (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas) is regulated under mutual funds regulations except where it is specifically regulated under OJK Regulation No. 37/2014. Also see Question 2.

Regulatory bodies

The Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) (see Question 2).

 
18. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice?

Risk

To manage risk, an investment manager must have at least one investment expert with Chartered Financial Analyst Certification and an individual licence as an investment manager representative (wakil manager investasi) that has at least five years of experience managing portfolio of assets.

Under OJK Regulation No. 37/POJK.04/2014, an investment manager must convey the information describing the structure of the product and any investment risk that can arise in the disclosure document and must manage the Collective Investment Contract in Limited Participation Investment Fund (CICLP) (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas) in good faith and full responsibility.

Valuation and pricing

The investment manager determines the fair market value of the securities in the portfolio and subsequently submits it to the custodian bank on a quarterly basis.

Systems and controls

Except for some general laws and regulations listed above, there are no specific laws, regulations or rules in this regard.

Insider dealing and market abuse

The main regulation is Law No. 8 of 1995 regarding Capital Markets. Any company or individual that violates relevant provisions can be subject to sanction by the relevant authorities.

Transparency

The investment managers and custodian bank must submit several reports to the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) and participants. The reports from the investment manager include a:

  • Report of material fact.

  • Report on the use of proceeds.

  • Report on investment or divestment in real sector.

  • Report on the result of the conduct of the general meeting of participants.

  • Financial statement.

Meanwhile, the reports from the custodian bank include a:

  • Report of material fact.

  • Balance sheet of the hedge fund.

  • Summary of hedge fund portfolio.

Money laundering

The main regulation concerning money laundering that private equity funds can be subject to is Law No. 8 of 2010 regarding the Prevention and Eradication of the Criminal Act of Money Laundering. Any company or individual that violates relevant provisions may be subject to sanctions by the relevant authorities and even face a criminal charge.

Short selling

Previously an investment manager was prohibited from being involved in any short selling. Under the current regulation, this prohibition no longer exists.

Marketing

19. Who can market hedge funds?

Only the investment manager that has already obtained a business licence from the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) can market Collective Investment Contract in Limited Participation Investment Fund (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas) (CICLP). According to the Minister of Finance Regulation No. 153/PMK/.010/2010 on Capital Structure and Ownership of Securities Companies, the investment manager must be in the form of a limited liability company established under the law. Meanwhile, the maximum foreign ownership of the investment manager is up to 99%. There is not any difference for the marketing requirement of a local investment manager or foreign-owned investment manager.

 
20. To whom can hedge funds be marketed?

Funds can only be marketed to no more than 50 professional investors and is prohibited from being offered through a public offering. OJK Regulation No. 37/2014 does not define what a professional investor is. However, in the previous Regulation, Rule No. IV.C.5 on Private Equity Fund, a professional investor is an investor that has the ability to purchase participation units and to perform risk analysis on the private equity fund. There is no distinction between local and foreign professional investors.

Investment restrictions

21. Are there any restrictions on local investors investing in a hedge fund?

Assets portfolio

22. Who holds the portfolio of assets? What regulations are in place for its protection?

Requirements

23. What are the key disclosure or filing requirements (if any) that must be completed by the hedge funds?

Under OJK Regulation No. 37/POJK.04/2014, the key filing requirements that must be completed in registering the private equity fund to the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) include:

  • Agreements related to private equity fund.

  • Security documents in the name of the private equity fund.

  • Legal due diligence report and legal opinion prepared by capital market legal consultant.

  • Summary of the target company's financial statement for the last three years.

  • Information Memorandum of the target company.

 
24. What are the key requirements that apply to managers or operators of hedge funds?

An investment manager of private equity funds must meet several requirements, including:

  • Where he has an investment fund of Collective Investment Contract in Limited Participation Investment Fund (CICLP) (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas) of up to IDR500 billion its participation unit must be at least 5 million.

  • Where he has investment fund of CICLP between IDR500 billion and IDR1 trillion, its participation unit must be at least 10 million.

  • Where he has an investment fund of CICLP of more than IDR1 trillion, its participation unit must be at least 15 million.

  • That he must employ at least one investment expert, evidenced by a certificate of Chartered Financial Analyst, or licensed as the representative of an investment manager with at least five years experience in investment funds.

  • He must have an investment committee.

Legal fund vehicles and structures

25. What are the main legal vehicles used to set up a private Equity Fund and what are the key advantages and disadvantages of using these structures?

A private equity fund is a contractual arrangement with no legal personality. It is established by executing a collective investment contract by and between an investment manager and a custodian bank.

Participants' interest in a private equity fund is known as participation units.

Advantages. See Question 8.

Disadvantages. See Question 8.

Tax treatment

26. What is the tax treatment for Private Equity Fund (CICLP)?

Funds

Generally, the tax treatment in retail funds discussed above applies to Collective Investment Contract in Limited Participation Investment Fund (CICLP) (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas). See Question 12.

Resident investors

See Question 12.

Non-resident investors

See Question 12.

Restrictions

27. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties?

Redemption of interest

The participants cannot redeem their units unless a Collective Investment Contract in Limited Participation Investment Fund (CICLP) (Reksa Dana Berbentuk Kontrak Investasi Kolektif Penyertaan Terbatas) is liquidated first due to the conditions mentioned in Article 46 of the OJK Regulation No. 37/2014, which are:

  • It is ordered by the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) in accordance with regulation and the Capital Markets legislation.

  • The investment manager and custodian bank has agreed to dissolve the CICLP with prior consent from all holders of participant units.

  • CICLP does not invest in the target company within a period of six months from date the CICLP listed in the OJK.

Transfer to third parties

Transfer to third parties is generally permitted, as long as the transfer does not meet public offering criteria and the new participant meets the requirement of 5 million participation units or is equal to IDR5 billion.

Reform

28. What (if any) proposals are there for the reform of Private Equity Funds?

In 2015, the Indonesia Financial Service Authority (Otoritas Jasa Keuangan) (OJK) is expected to discuss and issue regulations on:

  • Pricing errors.

  • Mutual funds based on offshore securities.

  • Private equity funds.

  • The amendment of Capital Market Supervisory Agency and Financial Institution (Bapepam-LK) Regulation No. V.G.1 regarding Prohibited Actions for Investment Managers.

 

Online resources

Otoritas Jasa Keuangan (OJK)

W www.ojk.go.id/en

Description. This is the Financial Services Authority's (Otoritas Jasa Keuangan) (OJK) website. The OJK can regulate and supervise aspects of banking, capital markets, insurance and other financial services. Any translations are for guidance only.



Contributor profiles

Tony Budidjaja, Principal

Budidjaja & Associates

T +62-21-520 1600
F +62-21-520 1700
E tony@budidjaja.id
W www.budidjaja.id

Professional qualifications. Indonesia, lawyer, 2000; Indonesia, Capital Market Legal Accountant; Indonesia, Tax Court Attorney

Areas of practice. Commercial dispute resolution; bankruptcy and corporate restructuring; competition and anti-monopoly; investigation and compliance; international trade and custom; insurance and re-insurance; banking; finance; capital markets; tax.

Non-professional qualifications. LL.M in International Business Law, University of Leiden, the Netherlands; BA in Business Law, University of Tarumanagara, Indonesia

Recent transactions

  • Advising client, a US-based private equity specialist on several financing deals in Indonesia.
  • Advising a client, an Indonesia mining contractor company, on restructuring its loans from several banks.

Languages. Indonesian, English

Professional associations/memberships.

  • Asia Pacific Forum for International Arbitration (AFIA).
  • Chartered Institute of Arbitrators (CIArb).
  • Indonesian Advocates Association (PERADI).
  • Indonesian Maritime Law Association (IMLA).
  • Indonesian Mediation Centre (BAMI).
  • Indonesian Mediators Association (AMINDO).
  • International Bar Association (IBA).
  • International Chamber of Commerce (ICC).
  • ICC Indonesia - Co-Chair of Commission on Arbitration & Commercial Law.
  • Kuala Lumpur Regional Centre for Arbitration (KLRCA).
  • Law Association for Asia and the Pacific (LAWASIA).

Publications.

  • Indonesian contributor for the International Commercial Arbitration in Asia published by Juris Publishing (2013).
  • Corporate Governance: Jurisdictional Comparisons published by Thomson Reuters (2013).
  • The Asia-Pacific Arbitration Review published by Global Arbitration Review (2014, 2015, 2016).
  • Governance and Director's Duties in Indonesia published by Practical Law-Thomson Reuters (2015).

Jono Yeo, Senior Associate

Budidjaja & Associates

T +62-21-520 1600
F +62-21-520 1700
E jono@budidjaja.id
W www.budidjaja.id

Professional qualifications. Indonesia, advocate, 2010; Indonesia, qualified Trustee in Bankruptcy and Receiver, 2010

Areas of practice. Mergers and acquisitions; foreign direct investment; joint ventures; capital markets; banking and finance.

Recent transactions

  • Advising clients on mergers and acquisitions issues.
  • Advising clients on the establishment of foreign investment companies in Indonesia.

Languages. Indonesian, English

Professional associations/memberships. Indonesia Advocates Association; Indonesian Association of Trustees in Bankruptcy and Administrators.


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