Semen Gresik in limbo

One finds it difficult to fathom the motive of the Supreme Audit Body (Bapeka) in repeatedly questioning the legality of state-owned PT Semen Gresik's acquisition of two other state- owned cement companies, PT Semen Padang in West Sumatra and PT Semen Tonasa in South Sulawesi.

Bapeka senior auditor Amrin Siregar again asserted at a news conference last Friday that the 1995 acquisitions might have been legally defective because they were not based on a government regulation, as required by Law No. 9/1969.

The audit body has twice raised this issue through letters to the minister of finance and the state minister for state enterprises, dated Dec. 7, 2001, and March 4, 2002, respectively.

But the real motive behind Bapeka's public inquiries is questionable, because every time the audit body publicly questions the legality of the Semen Gresik acquisitions it coincides with Bapeka auditors pouring out their frustration over their legal inability to audit Semen Gresik and other publicly listed state companies.

These frustrations, however, are groundless because according to the stock market regulations, every company listed on the Jakarta stock exchange must be audited by independent public accountants and Semen Gresik has been listed on the exchange since 1991.

By questioning Bapeka's motives we do not mean to dismiss out of hand its concerns that Semen Gresik's acquisition of the two other sate-owned cement firms was legally flawed.

Government Regulation No. 12/1969 concerning the implementation of Law No. 9/1969 on state companies stipulates that every government decision to put up equity capital in a limited liability, state company must be based on government regulations.

Until now, no one at Semen Gresik, the finance ministry or the State Secretariat has been able to produce such a document to support the acquisitions.

There was only a directive issued by then minister of finance Mar'ie Muhammad on June 5, 1995, which stipulated that Semen Gresik, Semen Padang and Semen Tonasa would be consolidated to strengthen their marketing, management and finances, and to expand their production capacities.

But the directive was so ambiguous that it raised issues that sabotaged the consolidation of the three cement units from the outset.

Mar'ie's directive stated that after the consolidation, Semen Gresik would become the holding company for both Semen Padang and Semen Tonasa. But the directive also stipulated that despite the consolidation, both Semen Padang and Semen Tonasa would remain autonomous. This stipulation immediately aborted the operational consolidation of the three cement units.

The 1995 transaction for the consolidation of the three cement companies was supposed to be so simple that no one at the finance ministry at the time realized the need for a government regulation to support the deal. Then president Soeharto's approval of the transaction was deemed strong enough to serve as a legal foundation.

The acquisition took place when Semen Gresik launched a rights issue in the middle of 1995 to raise funds to expand its production capacity. The government at the time wanted to exercise its rights, otherwise its ownership of Semen Gresik, which had declined to 67 percent in 1991 after the company's initial public offering, would have been further diluted.

However, since the government did not have the cash for the deal, it used its shares in both Semen Padang and Semen Tonasa to pay for additional shares in Semen Gresik. Hence, Semen Gresik became the controlling owner of the other two state-owned cement firms.

Yet, despite the imbroglio of this acquisition, it seems pointless for Bapeka to continue making such a public fuss about an old issue. But the minister of finance and the state minister for state companies also are at fault for not immediately clarifying and resolving this legal issue.

The ministers might understandably be worried about the legal implications if it was found that the Semen Gresik deal was legally defective, because such an admission could set off a messy litigation battle with Mexico's Cemex, which acquired in good faith 25.50 percent of Semen Gresik in 1998 by paying a 127 percent premium on its share price.

However, letting this legal uncertainty hang over Semen Gresik, the country's largest cement group, is much more damaging. It would be advisable for the government to consult with the House of Representatives to clarify the issue and correcting the mistakes, if any, and then approach Cemex and the investing public for an amicable resolution. After all, what is now claimed to be a legal defect by no means affected the financial probity of the 1995 transaction.

Moreover, Cemex has shown a good understanding of the legal question and has remained a loyal investor in Semen Gresik even though the company has since 2000 suffered legal harassment by vested interest groups in West Sumatra, who have been fighting to have Semen Padang spun off from Semen Gresik.