Govt sets 10 rules to hasten business recovery

JAKARTA (JP): In an effort to facilitate the restructuring of Indonesian companies, the government has introduced 10 rules. Some of these rules revise prior regulations, while others are new rules.

The rules in question are as follows:

1. Revaluation of fixed assets (revision).

This rule is intended to make it easier for companies to reevaluate their fixed assets, so that the reserves created from the reevaluation can be converted into new paid-in shares. Furthermore, this rule covers matters such as:

a. In addition to land and groups of buildings, the types of assets that can be reevaluated include categories other than buildings.

b. The ownership period, that formerly was five years, is not limited.

c. Reevaluation can be done yearly and companies that made a reevaluation in fiscal year 1988, based on the old rule, can now reevaluate based on the new rule.

d. In calculating income tax, the asset reevaluation surplus is first charged against losses in the current fiscal year and the balance against tax losses in prior years (vertical and horizontal losses).

e. In the event that reevaluated assets are transferred as a result of a merger or consolidation, the transfer is exempt from the final tax of 15 percent;

f. In the event of a business consolidation, the final (10 percent) tax on the excess reevaluation after charging off vertical and horizontal losses, if any, can be paid as late as five years after the reevaluation was done;

2. Income tax on forgiven loans (haircuts)

In accordance with current regulations, a forgiven loan is considered to be income that is subject to tax at the general rate (Article 4, paragraph 1, section k of 1983 income tax law).

The current regulations do not stipulate that the benefit received by the company is calculated after first subtracting losses of the current year and the balance of tax losses of prior years (vertical and horizontal losses);

3. The use of foreign currency in financial reports.

As of Aug. 21, 1998, the Indonesian Accountants Association (IAI) has issued Accounting Standard (PSAK) Number 52 with respect to foreign currency reporting that makes it possible for a company to use foreign currency (functional currency) in its financial reports if certain criteria are met.

The criteria indicated are as follows:

a. Cash Flow Indicator. When the cash flow related to the principal activity of a company is denominated in a certain currency.

b. Selling Price Indicator. When the selling price of products of the company in the short run and heavily influenced by movements in a certain exchange rate or when the companies' products are primarily marketed for export.

c. Cost indicator. When the costs of a company are heavily influenced by movements of certain currencies.

In the special case of companies that have already sold shares to the public (issuers and public companies), the government, by means of the Capital Market Supervisory Agency (Bapepam) has already issued the following rules that are related to corporate restructuring:

4. Mergers

Based on current rules, mergers with the use of book value and without the incidence of tax are only allowed for banks, insurance companies, pension funds, financial institutions, and companies that have made initial public offerings. With respect to others, the requirements call for mergers to be allowed only if the companies are affiliated.

Because of this, to encourage companies to undertake restructuring by means of merger, there will be issued rules that allow mergers in various lines of business and that permit book value to be used by companies that are not affiliated.

5. Issuance of shares in different series of categories.

Based on provisions of the Company Law, there is a possibility for companies to undergo restructuring with an influx of new investment with respect to the issuance of new shares in series or categories that are different and with lower par value to the outstanding shares.

Considering that some companies have gone public and others have not, the rule will be as follows:

a. For ordinary companies, the value of the shares will first be calculated by an independent appraiser.

b. For companies with shares listed on an exchange that are quoted below par, there will be a possibility to issue shares in different series or categories, with the stipulation that each class or series will have the same rights with respect to voting, dividends, and liquidation (proportional 1:1)

Specifically for issuers and public companies, the government, through the Capital Market Supervisory Agency (Bapepam), has also issued rules relating to corporate restructuring, as follows :

6. Capital increases without preemptive rights.

This rule makes it possible for companies to increase capital without issuing preemptive rights to current shareholders, as long as certain conditions are met.

The criteria to be met by the company, as mentioned, are as follows:

a. A bank that has received a loan from Bank Indonesia or other governmental institutions of an amount that exceeds 200 percent of the paid-in capital or other circumstances that would result in a restructuring of the bank by the competent governmental authority.

b. A nonbank corporation that has negative working capital and liabilities that are greater than 80 percent of the assets of the company.

c. A corporation that has failed or that is not able to avoid failing to pay its obligation to a nonaffiliated lender, when the lender agrees to receive equity or convertible debt in settlement of the loan.

d. A corporation that increases its capital by issuing equity- type securities in an amount up to 5 percent of paid-in capital in any three-year period;

7. Repurchase of shares by issuers and public companies

This rules makes it possible for issuers and public companies to repurchase shares in circulation, with the conditions established in law No.1 of 1995 on limited lability companies, and other conditions such as:

a. The repurchase is limited to 10 percent of paid-in capital.

b. The repurchase must be paid out of net profit.

c. Approval of the shareholders' meeting is required.

d. Rules with respect to disclosure, fairness, and liquidity must be observed.

e. In the event that such shares are resold, the sale can only be done at the same or higher price as the purchase.

f. Companies with shares listed on an exchange may not repurchase shares if this will reduce the amount of shares to a level that could significantly reduce liquidity or result in delisting.

8. Registration and prospectuses for a rights issue

The existing rules have been revised with the intent to speed up and increase the efficiency of document processing with respect to a rights issue of a public company or issuer.

The revision includes, among other things:

a. A simplified process so what formerly took 107 days now takes only 42 days.

b. The requirement for underwriting the unsubscribed portion has been eliminated.

c. In the interest of protecting investors, the quality of disclosure has been maintained and improved.

9. Accounting for foreign currency transactions

This new rule was issued in response to the developments in the rupiah foreign exchange market as a result of the current national economic situation, as well as the Financial Accounting Standards Statement (PASK) Number 10 concerning transactions in foreign currency that at this time is being reviewed by IAI.

In principle, the accounting treatment of exchange differences resulting from foreign currency transactions of issuers and public companies is governed by the terms of PSAK 10, with the following additions:

a. For companies that are not hedging, the accounting treatment of differences that arise from postings to assets and long-term monetary liabilities can be postponed and recognized as profit or loss in current or future periods, as long as the posting to assets of monetary liabilities is done systematically.

b. If the company chooses to carry forward exchange differences then the company must disclose the cumulative exchange differences that will be carried forward and the amount that will be charged to the current period;

c. These provisions are valid for financial reports prepared for periods ending after Jan. 1, 1998.

10. Improvements in the exchange listing rules

Based on conditions that companies face as a result of the economic crisis, there is concern that the shares of many companies will be delisted because of difficult financial conditions. This already has had a negative effect on investors that have been pressured to sell.

In order to anticipate this matter, officials of the Jakarta Stock Exchange will immediately revise delisting rules, that will be effective on Dec. 1, 1998, by reviewing the delisting criteria now in force and refrain from using this criteria as a "check list", but instead with attention to "corporate governance" and compliance with disclosure rules.