Govt sets 10 rules to hasten business recovery

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.