A key component in boosting participation and capitalisation in Indonesia’s capital markets is widening and diversifying the stock market base by encouraging private companies and state-owned enterprises (SOEs) to go public. In recent years initial public offerings (IPOs) have taken place at a modest rate, in spite of the potential for more rapid growth supported by strong economic fundamentals. According to figures from the Indonesia Stock Exchange (IDX), at the end of 2015 there were approximately 124,000 limited liability and incorporated companies receiving Rp1trn ($75.4m) in funding through bank loans, 26m small and medium-sized enterprises (SMEs) operating in the country and roughly 120 SOEs controlling some 750 subsidiaries.
STRATEGIES: The government and the private sector have been aiming to further incentivise these businesses to join the market. Regulators have loosened listing requirements for smaller companies and sought to boost domestic liquidity through its tax amnesty programme. IDX is also rolling out a four-pronged approach – ease, persuade, educate and force – designed to increase the number of listed companies. These measures include simplifying the listing process through greater digitalisation, establishing Go Public information centres, allowing cross-border offerings, and introducing regular coaching clinics across the country to educate and encourage companies to list.
Furthermore, the stock market is targeting specific sectors it feels have the greatest potential for growth in the market, such as start-ups, creative industries and resource-based companies, along with the privatisation of state-owned assets.
So far, the results of this push for more offerings have been mixed. A total of 18 IPOs took place in 2015 and 16 the following year. These numbers did not meet expectations. This was largely due to economic and political factors, including depressed commodity prices in 2015 that had an adverse effect on the economy as a whole, and a degree of political uncertainty in 2016 with the governorship of Jakarta up for election along with hundreds of lower level tribunal positions. As a result, many companies that may have otherwise been prepared to go public held out for more favourable market conditions.
ENTERING THE MARKET: IPO activity was strong in 2017, with 26 companies in total listing by mid-October. This figure is making good progress towards IDX’s target of 35 for the year, putting the market on course to exceed its highest IPO level since the turn of the century – a total of 31 were listed in 2001 and again in 2013. IDX reports that 10 offerings are in the pipeline, making the achievement of 35 IPOs for the year possible. Yet, while the exchange may be on pace for a record year in terms of the quantity of IPOs, it remains less successful in significantly adding to overall market capitalisation.
The 26 IPOs issued in the first three quarters of 2017 raised a sum of Rp5.54trn ($417.6m), less than the Rp12.11trn ($912.8m) raised from just 16 IPOs in 2016 and far below the roughly Rp30trn ($2.3bn) raised in 2010. In the exchange’s mid-year review, the largest IPO up to July 2017 was that of industrial and chemicals company Kirana Megatara, which raised Rp527.8bn ($39.8m) through its listing. Other major companies going public included property, real estate and construction company Totalindo Eka Persada, which captured Rp516.5bn ($38.9m), and Amidian Karyatana, also in the real estate, construction and property sector, which attracted Rp491.3bn ($37m). Other listings raised less than Rp350bn ($26.4m) each.
PRIVATISATION DRIVE: One of the largest untapped reservoirs for potential IPOs lies within the state itself in the form of approximately 750 government-owned subsidiary companies spread across 120 parent SOEs. To date, only a handful of these companies – which operate across a wide spectrum of the economy, including construction, transportation, power generation and banking – have been listed on the stock exchange.
The current lack of capital market utilisation by these types of businesses is due in part to regulations that require SOEs to obtain parliamentary approval prior to flotation. With many competing interests within the government, achieving a consensus for approval can sometimes prove difficult. The same restrictions do not apply to SOE subsidiaries, however, which leaves an opening for the listing of these smaller but attractive businesses.
There is an established track record for listing SOE subsidiaries. The 2016 market entrance by Waskita Beton Precast, a unit of listed state-controlled construction company Waskita Karya, proved to be one of the largest IPOs in terms of capital raised in the past five years. The business, which primarily produces precast concrete structures for bridges, tunnels and elevated roads, raised Rp5.2trn ($392m) in September 2016 on the promise of increased infrastructure spending in the coming years. The second-largest IPO that year was also unique, in that Cikarang Listrindo became the first power plant company to publically list on the market, raising a total of Rp3.75trn ($282.7m).
One major IPO from the public sphere took place in the third quarter of 2017. In June government-owned GMF Aero Asia, a subsidiary of flag carrier Garuda Indonesia, announced that it had appointed underwriters for its IPO, which subsequently took place in late September. In addition, state subsidiaries Presisi, Energi and Urban are seeking to enter the market before the end of 2017.
EASING ACCESS: Looking closer at the business landscape, numerous smaller companies with less established track records and a need for investment are also prime candidates for the capital markets. One way in which the government is moving to make the market more accessible to these companies, which often operate in financial technology and other creative industries, is by reducing the listing requirements for some sectors.
Although a developmental board with less stringent prerequisites already operates in parallel to IDX, efforts are being made to further ease the listing process for smaller players seeking to get on the primary board. In August 2017 IDX indicated that it was working on new regulations supporting the listing of SMEs and start-ups on IDX, which would differ somewhat from those governing the development board’s rules. Likewise, the Financial Services Authority (OJK) is putting the finishing touches on its own IPO regulations for SMEs, which are expected to be finalised by the end of 2017.
RULES OF THE GAME: Current regulations for companies conducting an IPO on the main board require an operational history of at least three years, furnishing of audited financial reports for that time period and maintaining an operating profit for at least one year. The company must also meet capital requirements of a minimum of Rp100bn ($7.5m) in net tangible assets. Requirements for the development board are less stringent, with aspiring companies mandated to be operational for only one year. They are permitted to experience operational losses with the caveat that the business will achieve operating and net profits within two years, based on projections. Capital requirements are also a fraction of those required for IDX, at Rp5bn ($377,000). While the OJK had yet to issue official changes as of mid-2017, some of the proposed amendments being evaluated are expected to include lowering capital requirements and reducing the number of years financial history records must cover.
In spite of easing requirements, some roadblocks remain for SMEs. Smaller companies must take into consideration the requirements related to good corporate governance, transparency and disclosure, particularly when multiple business interests are intertwined. This can make taxation and transfer pricing particularly challenging. Family businesses also run the risk of transferring ownership to outside investors who can then take control of the company.
JOINT LISTINGS: Apart from encouraging SOEs and smaller private companies to issue IPOs on the local bourse, a third option for boosting market capitalisation is to bring large foreign-listed companies into secondary joint listings on IDX.
Some of these potential candidates are multinational corporations that retain substantial assets and operations in Indonesia but chose to list in other countries, often Singapore of Malaysia, in order to take advantage of the greater exposure and liquidity offered by those markets. One of the largest of these is the agricultural giant Wilmar, one of the biggest palm oil producers in the world, which is currently listed on the Singapore stock exchange but has substantial production assets in Indonesia.
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