According to the World Bank's 2006 report on the Role of Non-Bank Financial Institutions, weaknesses were identified in Indonesia's equity market regarding enforcement of transparency, information disclosure, and corporate governance, as well as administrative sanctions for violation. Furthermore, at the time of the assessment, the securities regulator had limited and unclear powers to supervise the capital markets and market participants and to enforce issuer compliance. It also seemed to face important constraints in resources and staff. However, as noted in the Asian Development Bank's 2006 Country Strategy and Program report, regulations and supervisory practices for the non-bank financial sector are gradually being strengthened and brought into line with the international standards. Still, further efforts are needed for Indonesia to comply with International Organization of Securities Commissions Objectives and Principles of Securities Regulation. Following the merger of the Capital Markets Supervisory Agency (Bapepam) with the Financial Institution Directorate General into the Indonesian Capital Market and Nonbank Financial Service Supervisory Agency (Bapepam-LK) in 2004, the Financial Services Authority was created in 2007 as an integrated supervisory authority for the financial sector in Indonesia. Furthermore, the Jakarta Stock Exchange and the Surabaya Stock Exchange were integrated into the Indonesia Stock Exchange in December 2007. The main law governing stock markets in Indonesia is the 1995 Capital Market Law.

General Overview

According to the Asian Development Bank's (ADB) 2006 Country Strategy and Program Report, while regulations and supervisory practices for the non-bank financial sector are gradually being strengthened and brought into line with international standards, further efforts are needed for Indonesia to comply with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. Moreover, the World Bank, in its 2006 report on the Role of Non-Bank Financial Institutions, identifies weaknesses in Indonesia's equity market regarding enforcement of transparency, information disclosure, and corporate governance. It also finds that administrative sanctions for violation are "particularly inadequate" (p. 18). Per the same report, the securities regulator seems to face important constraints in resources and staff. The regulator's ability to supervise the capital markets and market participants and enforce issuer compliance is also undermined by its limited and unclear powers.

The main law governing stock markets in Indonesia is the 1995 Capital Market Law. On May 2, 2007, according to Theodoor Bakker and Emir Nurmansyah in their 2007 International Financial Law Review (IFLR) article, Indonesia adopted Investment Law No. 25 of 2007, which provides for equal treatment between domestic and foreign investment by replacing the previous two separate laws. The Law also introduces requirements on good corporate governance for investors. In 2004, as noted in the ADB's 2006 Completion Report, the Ministry of Finance (Departemen Keuangan, or MoF) prepared an action plan through the ADB's technical assistance program to improve the regulation and supervision of non-bank financial institutions in Indonesia. The first step consisted in merging the Capital Markets Supervisory Agency (Badan Pengawas Pasar Modal, or Bapepam) with the Financial Institution Directorate General (Direktorat Jenderal Lembaga Keuangan, or DJLK) into the Indonesian Capital Market and Nonbank Financial Service Supervisory Agency (Bapepam-LK). According to the ADB 2006 Completion Report, by remaining under the MoF following the merger, the Bapepam-LK lacked autonomy and flexibility in terms of organizational structure, staffing, and salaries. In its 2006 report on the Role of Non-Bank Financial Institutions, the World Bank recommended giving immediate and full independence to the Bapepam-LK, as well as strengthening its capacity while waiting for the establishment of the new supervisory authority.

The Financial Services Authority (Otoritas Jasa Keuangan, or OJK) was finally created in 2007 as an integrated supervisory authority for the financial sector. The OJK will supervise banks, insurance companies, pension funds, and venture capital and financing companies, and is given the authority to regulate capital market activities. The legal framework for the OJK, as noted in a 2007 IFLR article by the BT Partnership law firm, is comprised of the 1999 Law No. 23 concerning the Bank Indonesia (BI), Indonesian central bank, and its 2004 amendment. According to the same article, the OJK was expected to be operational before 2010.

The Jakarta Stock Exchange and the Surabaya Stock Exchange were integrated into the Indonesia Stock Exchange (Bursa Efek Indonesia, or IDX) in December 2007. During the same year, market capitalization of the IDX, as noted on its website, amounted to USD 276.25 billion (IDR 2,539 trillion), of which 78 % came from equities, representing a 58.69% increase from the previous year. As of 2007, the IDX had 383 listed companies. In its 2006 Country Strategy and Program Report, the ADB recommends developing Indonesia's bond and secondary markets "to ensure transparency and efficiency of price discovery through an electronic platform" (p. 116-117). The World Bank, in its 2006 report on the Role of Non-Bank Financial Institutions, further encourages the participation of the Central Securities Depository in the Bank Indonesia-Scripless Securities Settlement System.

The IOSCO multilateral memorandum of understanding (MMoU) is based on the thirty IOSCO Principles of Securities Regulation adopted in 1998 and the experience gathered by securities regulators in using bilateral Memoranda of Understanding (MoUs). The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. The Ontario Securities Commission website explains that IOSCO members who complete the screening process but are found to lack the legal authority to fully comply with the terms of the IOSCO MMoU will be invited to become signatories to Annex B of the IOSCO MMoU, provided that they express their commitment to obtaining the necessary legal authority to become full signatories. The IOSCO website lists the Bapepam as a signatory to Annex B.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

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Following the merger of the Bapepam and the DJLK into the Bapepam-LK in 2004, the OJK was created in 2007 as an integrated supervisory authority for the supervision of banks, insurance companies, pension funds, venture capital, and financing companies. The OJK also has legal powers to regulate capital market activities. According to the 2007 BT Partnership article, the purpose of the OJK is "to develop and maintain a competitive, stable, and secure financial services sector." Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

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Following the merger of the Bapepam and the DJLK into the Bapepam-LK in 2004, according to the ADB's 2006 Completion Report, the Bapepam-LK lacked autonomy and flexibility in terms of organizational structure, staffing, and salaries. In its 2006 report on the Role of Non-Bank Financial Institutions, the World Bank recommended giving immediate and full independence to the current Bapepam-LK, as well as strengthening its capacity, while waiting for the establishment of the new supervisory authority. The OJK was created in 2007 as an integrated supervisory authority for the financial sector. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

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See Principle 2.

4. The regulator should adopt clear and consistent regulatory processes.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

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The World Bank, in its 2006 report on the Role of Non-Bank Financial Institutions, recommended developing the Self-Regulatory Organizations "to raise awareness and increase the effectiveness of implementation and enforcement of legislation and regulations to improve corporate culture and practices" (p. 57). Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

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According to the ADB's 2006 Completion Report, the Bapepam-LK's on-site supervision and regulatory enforcement of the capital market was "inadequate" (p. 3). In its 2006 report on the Role of Non-Bank Financial Institutions, the World Bank further noted that the Bapepam-LK suffered from a shortage of experienced staff to conduct complex investigations" (p. 8). In its 2006 Completion Report, the ADB recommended developing the Bapepam-LK's capacity for monitoring and enforcement in order to improve the effectiveness of administrative sanctions, as well as the flow of information. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

9. The regulator should have comprehensive enforcement powers.

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According to the ADB's 2006 Completion Report, Indonesia is fully compliant with the requirement to enforce sanctions for non-compliance, and enhance enforcement procedures where necessary. However, per the same report, the Bapepam-LK's on-site supervision and regulatory enforcement of the capital market is "still inadequate" (p. 3). In its 2006 report on the Role of Non-Bank Financial Institutions, the World Bank further notes that the Bapepam-LK suffers from a shortage of experienced staff to conduct complex investigations" (p. 8). The ADB report recommends developing the Bapepam-LK's capacity for monitoring and enforcement in order to improve the effectiveness of administrative sanctions, as well as the flow of information. The OJK was created in 2007 as an integrated supervisory authority for the financial sector. As stated in the 2007 BT Partnership article, the OJK will have the authority to impose sanctions in the case of violation. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle. The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. The Ontario Securities Commission website explains that IOSCO members who complete the screening process but are found to lack the legal authority to fully comply with the terms of the IOSCO MMoU will be invited to become signatories to Annex B of the IOSCO MMoU, provided that they express their commitment to obtaining the necessary legal authority to become full signatories. The IOSCO website lists Indonesia's Bapepam as a signatory to Annex B.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

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See Principle 11.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

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See Principle 11.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

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According to the World Bank's 2006 report on the Role of Non-Bank Financial Institutions, weaknesses were identified in Indonesia's equity market regarding enforcement of transparency, information disclosure, and corporate governance. On December 28, 2007, the IDX, as noted on its website, launched an electronic reporting system -- IDXnet -- for listed companies, which is used as a supervision and communication tools, and as a means for listed companies to submit their reports and information disclosures to the IDX. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

15. Holders of securities in a company should be treated in a fair and equitable manner.

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Under the 1995 Company Law, which was replaced by the "New Company Law" in 2007, "each individual shareholder has the right to file a lawsuit against the company to compensate for the loss arising from unjust and unreasonable acts of the company" (p. 6), as noted in the World Bank's 2004 Corporate Governance Country Assessment. The World Bank report recommended facilitating the ability of shareholders and investors to file class suits against directors and managers for breaches of duty and violations of the law. The World Bank, in its 2006 report on the Role of Non-Bank Financial Institutions, advised establishing cumulative voting to give minority shareholders a greater voice in the selection of commissioners. However, neither assessment directly addresses Indonesia's compliance with this principle.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

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Under the Capital Market Law, as stated in the World Bank's 2005 report on Accounting and Auditing, issuers and public companies are required to file audited financial statements with the Bapepam-LK on an annual and semi-annual basis. Furthermore, financial statements must be prepared in accordance with generally accepted accounting principles, which refer to the Indonesian Financial Accounting Standards, set by the Indonesian Institute of Accountants. Per the same report, capital markets may also be subject to accounting regulations established by the Bapepam-LK when deemed necessary. However, as noted in the World Bank's 2006 report on the Role of Non-Bank Financial Institutions, "the auditing profession is weak and needs to be brought up to international standards of best practice" (p. 59). According to the ADB's 2006 Country Strategy and Program Report, the International Accounting Standards and the International Financial Reporting Standards were expected to be fully introduced by 2008. The OJK was created in 2007 as an integrated supervisory authority for the financial sector. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

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According to the World Bank's 2006 report on the Role of Non-Bank Financial Institutions, collective investment mutual funds in Indonesia are governed by a number of detailed regulations regarding disclosure. Furthermore, rules of the Bapepam-LK include disclosure requirements for the prospectuses of mutual funds. The World Bank report recommended enforcing disclosure of material information in prospectuses. The OJK was created in 2007 as an integrated supervisory authority for the financial sector. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

21. Regulation should provide for minimum entry standards for market intermediaries.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

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According to the ADB's 2006 Completion Report, Indonesia is fully compliant with the requirement to monitor compliance with reporting requirements related to the publication of audited financial reports and unaudited interim reports. It also fully complies with the obligation to monitor compliance of securities companies with risk-based capital requirements. Per the same report, the Bapepam-LK has considered a range of parameters for an early warning system, including sanctions imposed on securities companies. In its 2006 report on the Role of Non-Bank Financial Institutions, the World Bank recommends setting minimum authorized capital for investment management companies. The OJK was created in 2007 as an integrated supervisory authority for the financial sector. Nevertheless, there is insufficient information publicly available regarding Indonesia's compliance with this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

27. Regulation should promote transparency of trading.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

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There is insufficient information publicly available regarding Indonesia's compliance with this principle.