Protecting the investing public

Protecting the investing public

In the next several months, the House of Representatives (DPR) will review a new bill on Indonesia's capital market. It should be greatly welcomed.

In view of the rapid developments in the business sector, notably financial transactions, it would indeed be too risky to let the capital market, whose capitalization of US$48 billion already represents about one third of the country's gross domestic product, be governed by a law enacted in 1952.

Moreover, the draft legislation focuses attention on the right area by vesting more power with the Capital Market Supervisory Agency (Bapepam). Instead of trying to tighten market control by providing the statutory body with licensing authority, the bill zeroes in on improving the rules of the games -- and by empowering Bapepam to properly enforce the rules. Bapepam will then be better suited to ensure the development of a fair, efficient, transparent and liquid capital market.

Of course, many of the rules stipulated in the bill are currently in effect, but they are based on numerous government regulations and ministerial decrees issued separately over the last two decades.

The draft legislation takes the right approach in that the government (Bapepam) will not approve of or license a share listing, a measure that could be construed as a recommendation for a share issue. Bapepam instead focuses its attention on enforcing full disclosures and monitoring disclosures, after listing, by share issuers. Such rigor will provide the investing public with adequate, fair and accurate information, which is essential for assessing the normal business risks of a particular corporate stock.

Bapepam also sees to it that the boards of directors and commissioners of listed companies fulfill their prescribed responsibilities. Financial intermediaries and other supporting institutions in the capital market, such as public accountants, legal consultants, appraisal companies, underwriters and brokers, will also be held to the same standard.

These boards and institutions will be responsible for the truth and accuracy of all the information provided in the statement for the registration of a share listing. Should they fail to carry out their responsibilities properly, they will be subject to heavy penalties.

The bill also empowers Bapepam to conduct investigations into suspected market manipulation, such as artificially hiking share prices, and other forms of securities fraud. They may also take legal actions against those suspected of involvement in similar forms of manipulation.

All these rules are indeed necessary to protect the interests of the investing public, especially because most of the companies listed on the domestic stock exchanges have sold less than 50 percent of their total shares. As a result, those publicly listed companies, and consequently their management and boards of commissioners (supervisors), remain controlled by the founders, who are also the majority shareholders.

So all in all, the provisions of the bill on the capital market are designed mainly to ensure a fair, transparent and efficient market to enable investors to adequately analyze the normal business risks of their portfolio management. There is not a single provision in the bill that can be construed as a recommendation, let alone a guarantee, that investments in the capital market will produce profits.

Investing in the stock exchange presents greater risks than placing money in savings accounts or time deposits. That is normal. The potential returns or rewards from investments in corporate stocks are also bigger than those in bank deposits. Share owners may get dividends and capital gains, whereas depositors benefit only from interest incomes.