BCA's sales controversy

Analysts agree that the combination of a second public offering and private placement by a strategic investor is the best option for divesting the government's stake in Bank Central Asia with optimum results. Even the House of Representatives, which rejected a similar divestment plan last year in defiance of a government-IMF agreement, approved early this year the move to sell 10 percent through a second public offering and 30 percent to a strategic investor.

The second public issue, after the initial public offering of around 20 percent in May last year, was considered about the right size, given the bearish market condition, but not too small to gauge market sentiment toward the bank.

However, both the second public offering and the bidding process for strategic investors have been mired in controversy and allegations of collusion and corruption against several House members and executives of the Indonesian Bank Restructuring Agency (IBRA). And upon strong demand from analysts, legislators and the Oversight Committee of IBRA, the bidding for a strategic investor will be reopened. What went wrong?

It is up to the Jakarta Stock Exchange watchdog -- the Capital Market Supervisory Agency -- to investigate and judge whether there had been insider trading in the 10 percent stake offered in the second public issue at Rp 900 a share early this month, compared to its closing price of Rp 925 in late May, when the planned issue was first announced.

But the biggest controversy seems to center around the bidding process for strategic investors for the 30 percent stake.

There are two main bones of contention against the bidding process, which reportedly had resulted in two final bidders -- Newbridge Capital and Indonesia Recovery Company Ltd. (IRCL). Both are investment companies.

The IRCL was alleged to be the investment vehicle of the Salim family, the former founding shareholders of BCA, thereby breaching the rule that bans former shareholders to increase their stake. Mar'ie Muhammad, chairman of the Oversight Committee, criticized the two final bidders as not the best investors in BCA, pointing out that, as investment firms, they would not bring in anything in the way of strategic alliances or synergy for BCA.

One should indeed wonder why the final two bidders, which were reportedly shortlisted from more than 50 initial bidders, consisted of only two investment firms. Many foreign banks interested in establishing a foothold or expanding operations in Indonesia should be greatly keen in having a 30 percent stake in BCA despite the political uncertainty.

After all, BCA, one of the jewels among the assets held by IBRA, is the largest retail bank in the country with the most extensive branch network, modern information technology, and plays a vital role in Indonesia's payment system.

But the public has remained in the dark about the bidding process, which started in May. Even I Putu Gede Ary Suta, the new chairman of IBRA -- the controlling shareholder of BCA after it took over the bank from the Salim Group in the wake of the financial crisis in 1998 -- claimed he had not yet been informed of the bidders. That was a bit strange. How could Ary Suta have not learned of such an important program more than 23 days after he took over the reins of the agency?

Lack of transparency, therefore, seems to be one of the main reasons behind the controversy. Even though some degree of confidentiality should be maintained in the tender process, there are many things related to the process that can and should be publicly announced to prevent unnecessary rumors and allegations.

The other main reason, we think, is the seemingly unclear criteria of what IBRA expects from private placement: whether it is proceeds from optimum sales (highest price) or strategic alliances that should be given the greatest weight in the assessment of bids.

But we think because BCA is still in the early process of consolidating after its recapitalization in 1999, strategic alliances with investors, who can bring in synergy, is the best choice for the future growth of the bank. If that is the case then the preferred bidders should be strong banks. Even though Newbridge Capital did a wonderful job of turning around the Korea First Bank less than 1.5 years after it took over that major bank, most investment firms usually only have a medium-term horizon for their investments. But strategic investors look to long-term prospect through the synergy they bring to their investments.

IBRA should take a great lesson from this case, the second after the aborted sale of Bank Bali to Standard Chartered Plc. in 1999. Its divestment programs in the numerous companies it currently owns, on behalf of the government, would always be vulnerable to collusion, controversy or wild rumors as long as the transaction process lacks transparency and is not based on clear-cut criteria.