Indonesia’s Financial Services Authority (OJK) has granted business licenses to four venture capital firms operating in the country, and these include PT Nusa Makmur Ventura, PT Reliance Venture Capital, PT Cakrabuana Ventura Indonesia and PT Corpus Prima Ventura.
The development came after the regulator intensified its monitoring of the foreign capital inflow into startup companies and incubators.
The announcement on the granting of licenses, signed by the OJK’s Chief Executive for Non-Bank Financial Industry Supervision Firdaus Djaelani in mid-December, was made public on Friday (January 8).
Earlier, OJK has informed that foreign venture capital firms should form a joint venture (JV) with local partners, to run their business in Indonesia. The regulation is an attempt by the FSA to supervise the inflow of foreign funds into the country, in particular through venture capital.
According to Djaelani, currently, significant amount of foreign capital inflows were coming into the startup companies in Indonesia. The FSA assesses that these capital inflows need to be regulated so that the it can monitor the inflow of capital from abroad. The regulator also claimed that this step was also an attempt to help avoid money laundering.
The decision is also part of efforts to protect the local venture capital industry and start-up companies, he said, adding that OJK is planning to work with the Ministry of Communications and Information to regulate online companies offering various financial services.
“The flow of foreign funds cannot be prevented. Under the OJK regulation, if venture capital firms want to operate here, their ownership (in the JV firm) can be as high as 85 percent, and 15 percent is owned by their local partners,” he explained.
Dumoly F Pardede, Deputy Commissioner of Non-Bank Financial Institutions of FSA, added the ruling regulates the technical aspects in setting up joint venture and the establishment of venture capital business. “We will also intensify monitoring of the foreign venture capitals which have entered local incubators,” he said.
Pardede added that the Creative Economy Agency (BeKraf) would regulate the tax relief from the government as a move to stimulate the growth of these incubators.
Agus Wicaksono, director of PT Bahana Artha Ventura sees that the OJK’s decision to regulate the venture capital sector will help stimulate the growth of the industry in a sustainable and healthy way.
He expects the regulator to create a level playing field for both the local and the foreign VCs. However, the regulations should not deter foreign VCs to enter the country as Indonesia’s startups still need funding sources, he added
Earlier, in the period from June to September 2015, the FSA revoked the licenses of five venture capital firms for violating legal provisions.
However, the latest policy may also lead to increased concerns from foreign investors, many of who are of the opinion that Indonesia is held back by complex regulations, local politics and bureaucracy. the country’s landscape, often helps bypass the country’s archaic laws on foreign investment and brighten the climate for investors.
A case in point is Indonesia’s largest M&A in 2015, that was inbound deal, where Sumitomo Corporation, through an affiliate, acquired an additional 17.5% stake in PT. Bank Tabungan Pensiunan Nasional Tbk (BTPN) from private equity firm TPG Capital for $460 million increasing its stake to 20.0%. Previously in 2014, Sumitomo Mitsui Banking Corporation had completed the purchase of its 15.74% stake in BTPN, increasing its stake to 40.0%. Indonesia’s financial services authority (OJK) expects both BTPN and Bank Sumitomo Mitsui Indonesia to merge as part of a consolidation arrangement. Both Sumitomo Corporation and SMBC jointly control 60.0% of BTPN.
“The acquisition of the 17.5% stake in BTPN by Sumitomo Corporation, has enabled both parties (Sumitomo Corporation and SMBC) to bypass the 40% shareholding threshold set by OJK for foreign ownership in banks,” advisory from Duff & Phelps had pointed out in their 2015 M&A report.
When President Joko Widodo took office in October, 2014, among his key pledges was to cut red tape to attract investment, and this continues to a major concern with investors, and is best illustrated by the fact that the country has only made marginal progress in this year’s ranking in the ‘ease of doing business report’, where it moved to 109, up by 11, of 189 countries surveyed in the World Bank Group’s Ease of Doing Business (EODB) 2016 survey.
Despite Indonesia not allowing foreign ownership in local retail e-commerce companies (the restriction does not apply to online marketplaces that mediate between buyers and sellers), this space was among the most active in 2015, as several startups raised funding, and existing players bagged follow-on financing.
Again, innovative deal structuring was in play.
A founder of an e-commerce firm that raised a multi-million (single digit) US$ funding from two foreign investors in 2015 had conceded that foreign VCs had routed their investment through debt round via convertible notes. Put simply, convertible notes help the investee firms to subscribe to a round, without being shareholders, and gives them rights equivalent to other stakeholders during exits and M&As. Other deal structures popular in 2015 has seen VCs invest in a holding company outside the country, or several companies in different jurisdictions, which in turn have exclusive agreements with a local e-commerce portal in Indonesia.
While deal structures are not known, local e-commerce firms that bagged funding from foreign VCs in 2015 include Kudo, cosmetics and beauty e-commerce engine Sociolla, Muslim fashion estore Hijup, Bizzy.co.id, Ralali, VIP Plaza and Lensza