Semen Gresik in limbo

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.