The Insurance Law, enacted in 2014, introduced various new concepts and provisions; among others, the concept of a controller being held liable for an insurance company's liabilities, statutory management being appointed by the Financial Services Authority ("OJK"), the spinning off of sharia business units, the requirement that the Indonesian shareholder must be an Indonesian citizen or an Indonesian legal entity fully owned directly or indirectly by Indonesian citizens, and the single presence policy.
The OJK is mandated by the Insurance Law to issue implementing regulations on many of these issues. While the OJK has issued several implementing regulations, there are still regulations to be issued.
Some of the key issues under the Insurance Law are:
1. the spinning off of sharia business units.
2. the Indonesian shareholder must be an Indonesian citizen or an Indonesian legal entity fully owned directly or indirectly by Indonesian citizens.
3. the single presence policy requirement.
The OJK has not issued any implementing regulations on these three issues. However, insurance companies should start considering these issues, given the Insurance Law imposes deadlines for compliance with certain of these issues (and we note that the industry association is formulating its views for presentation to the OJK).
Divestment of Sharia Units
The Insurance Law requires insurance companies to spin off their sharia businesses before or on the earlier of (i) when the value of the 'tabarru' funds and participant investment funds have already reached 50% of the aggregate amount of all insurance funds, 'tabarru' funds and participant investment funds or (ii) 10 years after the enactment of the Insurance Law.
Although the Company Law acknowledges the concept of spin-off, there are no detailed provisions in the Company Law and no implementing regulations that would clarify the process. Consequently, a spin-off of a sharia business unit is really a business transfer, with all that that entails.
The following issues would have to be considered by insurance companies, and, depending on circumstances, may dictate an earlier spin-off:
- Foreign Investment Restrictions
The Insurance Law mandates that the Government must issue a Government Regulation, in consultation with Parliament, which regulates foreign investment. There are concerns that any such regulation may limit foreign investment, which would mean an existing foreign shareholder could not replicate its current shareholding in a sharia insurance company (assuming it holds 80% or less). This will also be the case now in any event if the foreign shareholder currently holds more than 80%. Unless this issue is addressed in the new Government Regulation, the OJK would have no flexibility on this issue as the existing regulation requires a maximum 80% foreign ownership when an insurance company is established.
The OJK is now focusing on this issue. We do note that the new Negative List on Investments is due before or in April 2016 (although whether the Government Regulation is ready by then to coincide with the issue of the new Negative List remains to be seen).
- New Company - New License
Currently the OJK is only issuing new insurance licenses to wholly Indonesian-owned companies (brokers being an exception). The OJK would be dealing with new licenses on a case-by-case basis. We would expect that the OJK will be flexible and allow foreign shareholdings in new sharia insurance companies created to comply with the spin-off requirements.
- Transfer of Employees
Insurance companies must factor in the employees' transfer process and cost if the spin-off involves a transfer of manpower (as it invariably will).
Employee transfers can be done through (i) an employee transfer agreement where employees agree to be transferred provided that their working period with the original employer is taken into account by the new sharia insurance company, or (ii) a termination and rehiring process where employees agree to be terminated and to receive severance payments and are rehired in the new sharia insurance company.
Severance costs on the one hand can be substantial, and clearly will increase with time, and if employees agree to be transferred with accrued entitlements, a large provision may need to be made by the sharia insurance company for these entitlements.
The tax office treats a spin-off as a business transfer and imposes tax on the transaction (namely any gain is taxable in the hands of the transferor). While it is possible to do a tax-free spin-off, conducted at book value, this can be done only if the new sharia insurance company undertakes an Initial Public Offering ("IPO") within one year. There currently is no industry exemption which would allow a tax free spin-off nor is this anticipated unless the insurance industry successfully lobbies for an exemption (which is rarely given).
Clearly if the sharia business and the value of the sharia business unit is increasing, under current tax regulations, the tax consequences could be greater the longer a spin-off takes.
- Partner for the Sharia Company
For joint venture insurance companies, if the current Indonesian shareholder in such companies is not wholly-Indonesian owned (whether directly or indirectly) there might be an issue in finding a new wholly-Indonesian owned partner that is willing to invest in a sharia insurance company.
Consequently, it may take time to find a suitable partner, and more so given the single presence policy (as appropriate partners, which are not "controlling" shareholders, as discussed below, are approached by other insurance companies).
Indonesian Shareholding Issue
The Insurance Law clarifies that Indonesian shareholders of insurance companies must be either (i) Indonesian citizens or (ii) Indonesian legal entities wholly owned, whether directly or indirectly, by Indonesian citizens.
Before the enactment of the Insurance Law, Bapepam-LK, the predecessor to the OJK, allowed Indonesian legal entities whose shares were indirectly owned by foreign shareholders to be the Indonesian shareholders in insurance companies. Consequently, joint venture insurance companies, with these local shareholders arrangements, are now required to unwind any such structures within 5 years after the enactment of the Insurance Law.
Existing joint venture insurance companies whose Indonesian shareholders do not meet the requirements, must either (i) ensure compliance or (ii) do an IPO.
As noted above, it may take time to find a suitable partner, and more so given the single presence policy (as appropriate partners are approached by other insurance companies).
Single Presence Policy
The Insurance Law provides that a person or entity can only be a controlling shareholder in one life insurance company, one general insurance company, one reinsurance company, one sharia life insurance company, one sharia general insurance company and one sharia reinsurance company.
Unfortunately, the Insurance Law does not provide the exact threshold for a controlling shareholder and the term is not defined, nor does the Insurance Law mandate a time for compliance (although the OJK has written to relevant insurance companies and asked about their compliance plans).
In the absence of any implementing regulation that clarifies this issue, to consider whether a party has become a controlling shareholder, the lowest threshold is the definition of "Controlling Shareholder" under the OJK regulation on fit and proper test, namely an individual, legal entity, and/or a business group that:
(a) owns 25% (or more) of the issued shares with voting rights or capital; or
(b) owns less than 25% of the issued shares with voting rights but where it is proven that the individual, legal entity, and/or the business group has control.
Shareholders which have controlling shares in several insurance companies in the same insurance business line should consider restructuring their shareholdings. This can be done by:
- Divesting their controlling shares to third parties.
This perhaps is the least preferred approach as foreign shareholders might be reluctant to transfer a business to a competitor.
- Merging the companies.
This might be a more preferred approach. However, the insurance company would have to consider whether this would create any issue with the other shareholders in each of the joint ventures (e.g., for joint ventures with Indonesian banks, banks may not want to be within the same ventures).
In any scenario there are tax issues on transactions, which may only increase over time as businesses grow.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.