This is the third in a series of client alerts in relation to Law No. 4/2023 on the Development and Strengthening of the Financial Sector (“P2SK Law“), dated 12 January 2023. You may access our previous client alerts in relation to the impact of the P2SK Law on the financial technology sector here and financing service businesses here.
The P2SK Law introduces the concept of financial instrument managers (badan pengelola instrumen keuangan – special purpose vehicle, “SPV“) and trust fund managers (pengelola dana perwalian – “Trustee“). Both are designed as specific purpose entities licensed by Otoritas Jasa Keuangan (“OJK“) and established to perform asset securitization and/or trustee fund management activities. The government expects the existence of SPVs to contribute to financial instrument diversification. Trustees, on the other hand, are regulated with the aim of increasing participation by financial market players and bringing about improvement in disclosure and good corporate governance regulations.
The P2SK Law is set to give the Indonesian financial industry a broader variety of securitization structure. Securitization of assets has long been acknowledged in Indonesia. Before the introduction of the P2SK Law, the only local structure for securitization of assets available was collective investment contracts for assets-backed securities (in Indonesian, EBA) (“CIC”), instead of having an SPV as the issuer. CIC, however, are not legal entities as other types of securitization issuer commonly used in other jurisdictions are. In 2005, we issued an article “Structuring asset-backed securities in Indonesia” in the DB Global Securitisation and Structured Finance Handbook explaining why the concept of CIC was created (instead of that of SPV), given issuing laws is not easy here. CIC are entered into between a licensed Indonesian investment manager and a licensed Indonesian custodian bank, where the investment manager is authorized to manage the portfolio investment, and the custodian bank is authorized to carry out the collective custody of the investment funds. But now, the P2SK Law has made the SPV available as a securitization vehicle.
As mentioned, while CIC have always been able to perform securitization over receivables (CIC can easily enter into a bilateral contract for receivables assignment without involving registration of ownership), CIC have their own limitations when it comes to performing securitization over assets with registered ownership (e.g., land), since CIC are not legal entities. Meanwhile, the SPV introduced by the P2SK Law are legal entities in the form of Indonesian limited liability companies (with certain special features, e.g., they can have one shareholder). They are designed to hold legal title over assets attributable to legal entities, such as land, allowing the SPV to not only use receivables as the underlying assets for securitization purposes, but also other forms of assets.
Similar to the bankruptcy remote characteristic that exist in CIC, the creation of SPV isolates the assets from financial risk and bankruptcy risk that are inherent to the originator. The P2SK Law makes it clear that if the originator becomes insolvent, its assets that have been transferred to the SPV will not form part of the bankruptcy assets (boedel pailit). As additional protection, the P2SK Law also makes it clear that an insolvency request over a Trustee and SPV can be only made by OJK.
With regard to the concept of Trustee, we issued a client alert on a Bank Indonesia regulation on custodianship with management of assets (Peraturan Bank Indonesia No. 14/17/PBI/2012) which introduced the term “trust”. As we pointed out in that client alert here, technically the arrangements under PBI 14 are (only) based on an agency contract. Now, with the introduction of the concept of Trustee in a law, there would be an opportunity for OJK to look into aligning PBI 14 (now an OJK regulation, POJK No. 25/POJK.03/2016) with the Trustee concept under the P2SK Law. Details of the Trustee concept are expected to be introduced in implementing regulations.
The opportunity to use the SPV and Trustee concepts for (new) business activities will depend on the implementing regulations of the P2SK Law, which are mandated to be issued within two years after the enactment of the P2SK Law. The P2SK Law also highlights that the implementing regulations will cover the tax treatment of Trustees and SPVs. The establishment of SPVs and Trustees is aimed at creating more room for financial innovations in Indonesia.