VZCZCXRO8605
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1619/01 2390750
ZNR UUUUU ZZH
R 260750Z AUG 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 9893
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2413
RUEHBJ/AMEMBASSY BEIJING 5333
RUEHBY/AMEMBASSY CANBERRA 2951
RUEHUL/AMEMBASSY SEOUL 4846
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 001619 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA/MALACHY NUGENT 
COMMERCE FOR 4430/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
USTR WEISEL, EHLERS 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: STALLED MAYBANK TRANSACTION HIGHLIGHTS LACK OF POLICY 
COORDINATION 
 
¶1. (SBU) Summary.  The Indonesian Ministry of Finance's Capital 
Markets Regulatory Agency (BAPEPAM) modified its takeover rules in 
late June, generating unintended consequences for the regional 
financial sector.  The most visible is the stalled bid by the 
Malayan Banking Corporation (Maybank) to acquire Bank Internasional 
Indonesia (BII).  The transaction would have allowed Singapore's 
sovereign wealth fund, Temasek, to conform with Indonesia's single 
presence policy (SPP), which prohibits a single entity from owning a 
majority stake in more than one bank by 2010.  While there are 
prudential and market development rationale for both the SPP and the 
tender offer rules, the implementation of these policies has 
reinforced the view that financial sector regulations in Indonesia 
are poorly coordinated and subject to frequent modification.  These 
developments undermine the Indonesian investment climate and 
progress on ASEAN financial sector integration.  End Summary. 
 
Financial Sector Policies Remain Moving Target 
--------------------------------------------- - 
 
¶2. (SBU) In June, BAPEPAM issued new rules on the acquisition of 
public companies.  The new rules relax regulations for public 
company acquisition by increasing the level of the purchase which 
triggers a mandatory tender offer.  Acquirers are required to make a 
tender offer to all stockholders only if they are purchasing 50% or 
more of the company's shares, or can be shown to have a direct or 
indirect controlling interest in the firm.  The previous trigger 
level was 25%.  The new rules also require the acquirer to ensure 
that at least 20% of the company's shares are widely held within two 
years of the acquisition.  According to BAPEPAM Chairman Ahmad Fuad 
Rahmany, the acquisition rules were changed to bring the regulations 
in line with Indonesia's legal definition of control.  Many 
institutional investors opposed the new regulation as the new rules 
may allow acquiring firms to take managerial control of a firm 
without having to make offers to minority shareholders, diluting 
minority shareholder protection.  Market analysts have also 
questioned the direction of the regulatory change, as the previous 
rules were broadly in line with international standards. 
 
Malaysian Regulators Block Maybank Transaction 
--------------------------------------------- - 
¶3. (SBU) The new takeover rules prompted Bank Negara Malaysian 
(BNM), the Malaysian central bank, to block the previously approved 
acquisition of BII by the (Malaysian) state-owned Maybank, 
underscoring the impact of implementing regulatory changes without 
careful planning or coordination.  The Malaysian regulators blocked 
the transaction over concerns that the requirement to sell as much 
as 20% of the stock within two years could force Maybank to take 
significant losses, particularly in light of the agreed price of 4.7 
times BII's book value.  The Malaysian Ringgit 480 million deposit 
(US$145 million) that Maybank may forfeit by pulling out of the 
transaction illustrates the level of concern the Malaysian 
regulators have over the potential loss. [Note:  While companies can 
be taken private in Indonesia, the fact that Maybank engaged in a 
bilateral agreement with Temasek to purchase Temasek's BII shares 
prohibits Maybank from taking BII private, according to BAPEPAM. 
End Note.] 
 
¶4. (SBU) Maybank reportedly met with BAPEPAM on August 12 to discuss 
easing the new rules in a move that could reverse BNM's decision. 
BAPEPAM Chairman Fuad has been widely quoted as stating that BAPEPAM 
will extend the time frame for compliance with the new regulations 
under "adverse market conditions," such as a significant drop in a 
firm's stock price or other capital market problems.  Whether an 
"adverse market" clause will be sufficient to prevent large 
potential losses at Maybank is yet to be seen.  However, the 
market's perception that BNM's decision was based on second thoughts 
about the pricing of the deal rather than Indonesia's regulatory 
change will make it difficult for BAPEPAM to make a more significant 
exception for Maybank.  In a private conversion, BAPEPAM Chairman 
Fuad put the onus on BNM, noting to the Embassy that BNM had the 
power to relax Maybank's mark-to-market accounting requirements 
related to the transaction if they were concerned about accounting 
losses, suggesting that Indonesia had taken such action in the past. 
 
 
JAKARTA 00001619  002 OF 002 
 
 
 
Inconsistent Policies Undermine Investment, 
Regional Integration 
-------------------- 
¶5. (SBU) Regardless of the outcome of the Maybank transaction, 
Indonesia's mixed regulatory signals continue to undermine the 
integrity of Indonesia's regulatory environment and provide 
disincentives to potential investors.  The current owner of BII, 
Singapore's sovereign wealth fund Temasek, is selling BII in an 
effort to conform with another relatively recent financial sector 
regulation, Bank Indonesia's (BI) single presence policy.  The 
single presence requirement prohibits a single entity from owning 
25% or more shares of more than one Indonesian banking organization. 
 Temasek also owns Bank Danamon.  Policy coordinated between BI and 
BAPEPAM has been limited in the past, and it is unclear if BI was 
consulted on the BAPEPAM policy change prior to its announcement. 
If the Maybank deal fails, Temasek may be forced to merge BII and 
Bank Danamon or sell BII to the next highest bidder (Bank of China) 
to comply with the single presence policy.  In addition, while 
BAPEPAM's general reluctance to grant special treatment to Maybank 
is a positive development from a regulatory standpoint, BAPEPAM 
suggestion that Malaysia ease accounting rules to accommodate the 
transaction raises concerns about Indonesia's own commitment to 
prudential supervisory standards. 
 
¶6. (SBU) The unintended consequences of the new takeover regulation 
also highlight challenges to regional integration within ASEAN, 
which the regional block hopes to complete by 2015.  The Maybank 
episode reinforces the market perception that national regulators in 
ASEAN, in this case BNM, remain closely linked to the business 
decisions of state-owned banks, rather than arms-length prudential 
supervisors.  The actions and reactions of the Indonesian and 
Malaysian regulators in this situation also point to a very poor 
level of communication and coordination among ASEAN authorities. 
 
¶7. (U) This message was coordinated by Embassies Jakarta, Kuala 
Lumpur, and Singapore. 
 
HUME