Herwidayatmo Chairman Indonesian Capital Market Supervisory Agency 25 August 2003 SECURITIES MARKET REFORM: The Indonesia Experience

AGENDA Do we need a reform …? Fundamental problems encountered … How to deal with … The new regulatory regime in the Indonesian financial services industry …

1987 to 1992 Reforms Allowing foreign investors to own 49% maximum of listed shares, removing fluctuation trading limit, and introducing Parallel Bourse to allow medium-scale companies (Dec. 87) Moving towards a disclosured-based regime with the establishment of SSX in 1989 and privatization of the JSX in 1992 Market infrastructure was simultaneously modernized

As a result …

The Effectiveness of Capital Market Law in January 1996 brought significant changes in the Indonesian securities industry BAPEPAM becomes more independent in regulating and supervising the market BAPEPAM has more enforcement powers More stringent sanctions for serious violations such as market manipulation and insider trading Open-end Investment Fund is introduced and allow to operate The Exchange, Clearing Guarantee Corporation, and Central Securities Depository has stronger legal grounds as the SROs

But the growth of the issuers remained slow as 1997 monetary crisis gave its disastrous impacts to the market and to the Indonesian economy as a whole …

The JSX Market Capitalization (in Rp Trillion)

The JSX Market Capitalization (in billion US Dollar)

Average Daily Trading Value 1996 – 2002 (in Rp. billion)

Average Daily Trading Value 1996 – 2002 (in USD million)

Volume The JSX The SSX Exchange Members 178,5 billion 7,03 billion ,5 billion 6,57 billion ,4 billion 8,72 billion 189 AverageRp.1,01 b/yearRp.0,7 b/yearRp.0,8 b/year Average transaction value of exchange members was below Rp. 1 billion (USD billion) annually for each member, or below Rp. 90 million (USD 10,141 million) monthly Extreme Low Liquidity

Securities Companies with Losses (in percentage, out of total numbers of securities companies) 1999 – 2001

Transaction-related Income of Stock Exchanges 1999 – 2001 (in percentage)

Where we are … The JSX Market Cap accounted only 0,13% of the Global Market Cap The JSX trading value accounted only 0,04% of the global trading value Source: 2002 Annual Repot of the World Federation Exchanges

Numbers of Investors Total Population Singapore Malaysia Indonesia + 1 m + 3 m + 70, ,5 m + 18 m m Switzerland + 1,3 m+ 7,3 m Domestic Investors

Low competitiveness of the Indonesian securities industry JSX Market Cap only 0,13% of total global market cap JSX Trading Value only 0,04% of total global trading value (in USD) Slow growth of the number of issuers The Need to Reform the Industry Sluggish growth of the investors

Big opportunities, but small efforts, lowering its competitiveness: market cap trading value number of investors Weak supervision lowering confidence in the market Capital market instrument is limited Fundamental Problems We do need the 3 rd Reform

2 Main Recommendations Improving securities firms soundness through newly entry requirements, for exchange members in particular Improving the Indonesian SROs capacities by means of exchange demutualization Task Force on Exchange Demutualization Task Force on Securities Firms Enhancement REVITALIZING the Securities Firms and the Exchanges

Task Force on BAPEPAM Organizational Structure Restructuring The new structure of BAPEPAM will have more focus on market supervision and enforcement: Enhance supervision to issuers, market intermediaries and mutual fund industry A new unit to establish more effective enforcement cordination with other enforcement agencies offshore and onshore Certain bureaus will have market intelligence back up Research and a newly Product Development Unit will be more proactive to give a birth to newly instruments in the market Enhancing supervision and boosting up enforcement activities carried out by BAPEPAM

JSX Market Cap 2001 – August 15, 2003 (in Rp. Trillion)

JSX Composite Price Index (CPI) 2001 – August 15, 2003

The Growth of NAV of Mutual Funds (in Rp. Trillion) 2001 – August 15, 2003

About to launch INVESTMENT PRODUCTS In the market Asset-Backed Securities Indonesian Depository Receipts Single Stock Options Stocks Corporate Bonds Government Bonds Rights Warrants Mutual Funds Index Futures LQ45

The Enactment of Law Number 15 Year 2002 concerning Anti-Money Laundering To support the Implementation of AML Law, Bapepam revised Rule Number V.D.10 on Know Your Client Principles that became effective on 15 July 2003 A month before its effectiveness, BAPEPAM did sudden inspection to all securities companies offices to see the compliance level of each sec. Company to the new rule The result was positive, most sec. companies (almost 80%) were ready to implement the rule Bapepam and Indonesian Center for Financial Transaction Analysis and Examination (the Indonesian FIU) will sign MOU this year BAPEPAM FULLY SUPPORTS THE IMPLEMENTATION OF ANTI-MONEY LAUNDERING REGIME

MOVING TOWARDS A SINGLE SUPERVISORY AGENCY Rapid change in the worlds financial market industry characterized by growing convergence of financial services and blurring distinctions between financial services sectors

The Existing Regulatory Structures Bank IndonesiaMinistry of Finance Directorate General of Financial Institution Capital Market Supervisory Agency Insurance Pension Funds Finance Venture Capital Others Financial Services Stock Exchanges Issuers / Public Companies Securities Firms Investment Funds Others Capital Market Supporting Institutions Banks

Consistency between the FSA Law and Financial Services Sector Laws & Regulation Banking Law 23/1999 Insurance Business Law 2/1992 Pension Funds Law 11/1992 Securities Markets Law 8/1995 Plus regulation for finance companies and venture capital – and other relevant laws in specific cases such as Bankruptcy Law and the Company Law Law 7/1992 as amended by Law 10/1998 Govt Regulation Implementing Regulation Govt Regulation Ministerial Decrees Govt Regulation Ministerial Decrees Govt Regulation Ministerial Decrees Implementing Regulation Implementing Regulation Implementing Regulation

Accelerating the process of restoring international confidence in Indonesias financial system Fostering the development of financial services sector in Indonesia that is efficient, safe, stable and fair, thereby contributing to the welfare of the people of Indonesia by supporting the economic growth and stability of the Indonesian economy SHORT-TERM OBJECTIVE LONG-TERM OBJECTIVE

CAPITAL MARKET BLUE PRINT 2000 – 2004 VISION To develop a strong and globally competitive market to support the Indonesian economy MISSION Enhancing commitment to develop a more robust capital market; Providing more access to medium-sized enteprizes and credit union (cooperatives) to use capital market as their alternative source of financing; Supporting regional/local government to raise fund through the capital market; Strengthening domestic-based investors and encouraging them to participate actively in the capital market; Improving the quality of market infrastructure that meet international standards and to cope with global challenges

Thank You Herwidayatmo Bapepam Homepage: