GOVERNMENT AMENDS REGULATION ON FOREIGN CAPITALS IN INSURANCE-RELATED COMPANIES
On 20 January 2020, Indonesian government enacted Government Regulation Number 3 of 2020 which regulates the foreign ownership in insurance companies (“GR 3/2020”). GR 3/2020 serves as the amendment of Government Regulation Number 14 of 2018 (“GR 14/2018”. GR 3/2020 and GR 14/2018 collectively shall be referred to as “GR on Foreign Capitals”) and was enacted amidst the massive investigation launched against large-scale corruption scandal over one of the biggest state-owned enterprise insurance company, PT Asuransi Jiwasraya (Persero).
Insurance industry plays major role in economy in supporting national development. Indonesian government realizes that the development of the potential of insurance sector in Indonesia cannot rely solely on the role of local insurance company or local investor but also requires contribution from foreign insurance company as well as foreign investor in possession of capital, experience and technology. Thus, with the aim of realizing a healthy, reliable, trustworthy and competitive insurance industry as well as taking into account the importance of the role of insurance industry in national economy, the regulations governing foreign capital in insurance business were enacted and amended from time-to-time in line with the development of insurance industry and for the purpose of increasing the participation of local investors.
Content and Implications
GR 3/2020 provides a more applicable approach in requiring participation from local investors in insurance-related industry in Indonesia, as such, GR 3/2020 stipulates new regime with regard to the requirement of local investors to partake in any capital increase—undertaken not by way of public offering—conducted by insurance company whose foreign shares ownership has exceeded eighty percent (80%) prior to the enactment of GR on Foreign Capitals. GR 3/2020 also offers clarity pertaining the limitation of foreign shares ownership in sharia insurance and re-insurance company spun-off from the sharia units of its parent insurance companies.
GR 3/2020 was set to prevail as of the date of its enactment and has laid out a series of administrative sanctions which may be imposed to insurance-related companies in violation of the provisions of GR on Foreign Capitals. Insurance-related companies who shall be subjected to the GR on Foreign Capitals encompass insurance company, sharia insurance company, re-insurance company, sharia re-insurance company, insurance brokerage company, re-insurance brokerage company and insurance loss adjuster company (“Insurance-Related Companies”).
- Limitation of Foreign Shares Ownership in Insurance-Related Companies
GR 3/2020 reaffirms the eighty percent (80%) foreign shares ownership limitation for Insurance-Related Companies with the exception of publicly-listed ones. Exception of such limitation is also granted to Insurance-Related Companies whose foreign shares ownership has exceeded eighty percent (80%) prior to the enactment of GR on Foreign Capitals provided that such Insurance-Related Companies shall not undertake any capital increase, and in the event of any divestment, the new foreign shareholding would prevail as the new foreign capitals limitation for such company, a provision which commonly recognized as ‘grandfather clause’.
Previously, pursuant to GR 14/2018, Insurance-Related Companies benefitting from the grandfather clause are permitted to undertake capital increase only if twenty percent (20%) of such capital increase is contributed by local investors, legal entity and individual alike, or is offered through an initial public offering in the Indonesian Stock Exchange (“IDX”). However, it is later apparent that such provisions resulted in the obstruction of growth in Indonesian insurance industry. Therefore, whilst GR 3/2020 adopts the same limitation and exceptions as stipulated under GR 14/2018, GR 3/2020 scraps the obligation of having twenty percent (20%) local investor contributions in a capital increase which is not undertaken by way of public offering through IDX as previously required under GR 14/2018, provided that such company shall maintain its original/current foreign shares ownership percentage following such capital increase. For instance, an insurance company with ninety percent (90%) foreign capitals intends to increase its paid-up capital in the amount of IDR100,000,000,000.-, thus, as opposed to having twenty percent (20%) out of IDR100,000,000,000,- to be contributed by local investors, pursuant to GR 3/2020, the participation of foreign capitals in such capital increase is limited to IDR90,000,000,000.- or ninety percent (90%) out of the total intended capital increase, thereby maintaining the ninety percent (90%) foreign capitals in such insurance company.
In addition, it is also important to remember that in order to be allowed to partake in the shareholding of Insurance-Related Companies, foreign investors are required to satisfy the following conditions:
- Foreign investors shall be Insurance-Related Companies having similar business or are parent companies with minimum of one subsidiary engaging in similar insurance-related business;
- Foreign investors shall be in possession of equity amounting to a minimum of five (5) times of the amount of direct participation at the Insurance-Related Companies upon the establishment and upon the change of ownership of such Insurance-Related Companies; and
- Foreign investors shall satisfy other requirement stipulated by the Indonesia Financial Services Authority (“OJK”).
The above requirements however do not apply for foreign investors who partake in the shareholding of Insurance-Related Companies through the stock exchange.
- Limitation of Foreign Shares Ownership in Spun-Off Sharia Insurance/Reinsurance Companies
GR 14/2018 was silent on the foreign ownership of a sharia insurance/re-insurance company resulting from spin-off of a sharia unit from Insurance-Related Companies. Following the enactment of GR 3/2020, it is confirmed that the same regime which applies to Insurance-Related Companies pertaining its foreign capitals would also apply to sharia insurance and/or re-insurance companies resulting from a spin-off, in which such spun-off sharia insurance/re-insurance companies would also be able to benefit from the grandfather clause enjoyed by its parent company and would also have to be subjected to the same mechanism and requirement in the event of any capital increase.
- Administrative Sanctions
Insurance-Related Companies in violation of the GR on Foreign Capitals may be imposed with administrative sanctions, the implementation of which shall be subjected to the OJK regulations, encompassing:
- written warnings;
- limitation of business activity, either partially or entirely;
- revocation of business license; and/or
- administrative fines.