Law on Financing Institution

Business Law Department

 - CONVENTIONAL BANK
BANK F.I - SHARIA BANK

- INSURANCE
- PENSION FUND
Financial NON-
- PAWNSHOP
Institution BANK F.I.
- MUTUAL FUND
- STOCK EXCHANGE

- LEASE
- CAPITAL VENTURE
FINANCING - FACTORING
INSTITUTIO - CREDIT CARD
N - CONSUMER FINANCE
- PROJECT FINANCE
 Explanation
• Bank Financial Institution: legal entity conducting activities in
financial sector by collecting fund from the society in the form of
savings and transfer it back to the society in the form of credit or
other forms in order to improve people’s quality of life
• Non-Bank Financial Institution: legal entity which conducts its
activities in the financial sector, either directly or indirectly by
gathering fund by way of issuing commercial paper and
transferring it to the society to finance company’s investment
• Financing Institution: a legal entity performing financing activities
in the form of supply of fund or capital goods by not withdrawing
fund directly from the society.
 Laws and Regulations on Financing Institution
• Minister of Finance Decision 1251/KMK.013/1988 on Rules and Procedures of Running Financing Institution;
• Minister of Finance Decision 1169/KMK.01/1991 on Leasing;
• Minister of Finance Decision No. 448/KMK.017/2000 on Financing Companies;
• Minister of Finance Regulation No. 84/PMK.012/2006 on Financing Companies;
• Presidential Regulation No. 9 of 2009 on Financing Institutions
• Presidential Regulation No. 9 of 2009 revokes Presidential Decree No. 61 of 1988 on Financing Institutions.
• Presidential Regulation No. 110 Year 2020 concerning revoking of Presidential Regulation No. 9 Year 2009
concerning Financing Institution.
• Financial Supervision Authority (OJK) Regulation: POJK No. 35/POJK.05/2018 concerning Implementation of
Financing Companies
• Financial Supervision Authority (OJK) Regulation: POJK No. 35/POJK.05/2015 concerning Venture capital
company implementation
• Financial Supervision Authority (OJK) Regulation: POJK No. 34/POJK.05/2015 concerning License and
organization of Venture capital company
 Financing Institutions’ Activities
No Type of Financing Kegiatan BENTUK BADAN HUKUM
Institution LP
1. Investment financing 1. Financial Lease;
2. Sale and Leaseback LLC or Cooperative
company 3. Factoring With Recourse
4. Purchasing with instalment scheme
5. Project Financing
6. Infrastructure Financing and/or
7. Other financing approved by OJK

2. Working Capital Financing 1. Sale and Leaseback LLC or Cooperative

2. Factoring With Recourse
company 3. Factoring Without Recourse
4. Working capital financing
5. Other financing approved by OJK

3. Multipurpose Financing 1. Finance Lease; LLC or Cooperative

2. Purchasing with instalment scheme
3. Other financing approved by OJK

4. Other financing activities

that have been approved
by OJK
 Prohibition
• withdrawing fund directly from society in the form of Giro, Deposit, Savings, and
other forms.
• Giving suretyship in any form toward fulfilment of other party’s obligation
• Issuing promissory notes, except for the bank which has been its creditor.
• Doing any activities which cause and force other financing institution under OJK
supervision to violate existing regulations
• Doing any activities which cause and force other financing institution under OJK
supervision to avoid existing regulations
 Leasing
• Leasing is a financing activities in the form of supplying capital
goods either by way of operating lease or financial lease to be
used by lessee during a certain period of time, based on
installment (payment) transfer of benefit and control
• Elements:
– Supply of capital goods (machinery, airplane, etc)
– With or without options (financial/operating)
– A certain period of time
– Periodical installment
 Parties in Leasing
• Lessor: party who gives funding by way of
leasing to those who need
• Lessee: party who needs capital goods
• Supplier: party who provides capital goods
which become leasing’s object. However, there
is a type of leasing which does not involve
supplier, it is called sale and lease back.
 Parties in Leasing
Bank LESSOR 1 SUPPLIER

4 LESSEE

1: Payment of capital goods in cash

2: Handing in capital goods
3: Insurance (optional)
4: Repayment of capital goods in periodical installment
 Types of Leasing
• Operating Lease: leasing activities where lessee
only pay leasing fee in accordance with the
contract, without being followed by option rights
to own the capital goods when the agreement
ends
• Financial Lease: lessee pay the leasing fee, and has
option rights when the agreement ends whether to
buy the capital goods based on the agreed-price.
 Sale and Lease Back
• Lessee also supply the goods (no supplier)
• Lessor lease the goods for a certain period of
time
 Types of Leasing based on
Method of Payment
1. Straight-payable Lease
2. Seasonal Lease
3. Return on Investment Lease
 Straight Payable Lease
• A type of leasing with same-amount of
installment paid by lessee to the lessor in
every month.
 Seasonal Lease
• The installment is paid in a certain period
• For example: every three months
 Return on Investment Lease
• Installment pays the interests only
• The main debt is paid in every end of
accounting year, taken from lessee’s business
profit.
 Leasing v Loan
• Loan: providing fund; leasing: providing capital goods
(asset-based finance);
• Loan: focusing on creditor’s money; leasing: focusing
on capital goods;
• Loan has financial risk; leasing: has financial and
physical risks;
• Loan: no relation between the collateral and the
borrowed-money; leasing: the collateral is bought using
leasing fund.
 Leasing vs Rent
• Rent: no collateral; leasing: collateral
• Rent: can be of any goods; leasing: capital
goods or production tools
 Collateral in Leasing
• Main collateral: lessor’s confidence that lessee
is willing and able to re-pay the installment;
• Principal collateral: the capital goods bought
from leasing transaction
• Additional collateral: collateral goods (fiducia,
share pledge), personal guarantee, corporate
guarantee
 Leasing v. Sale and Purchase
• Sale and Purchase: goods are owned by the
buyer after levering
• Leasing: after levering, goods are not
automatically owned by lessee unless he/she
uses option rights.
 Termination of Leasing Agreement
• Parties’ consent
• Lapse of time
• Breach of contract
• Force majeure
 Factoring
• Factoring: transfer of receivables from its
owner to another party.
• Factoring: a financing activities in the form of
buying company’s short-term receivables
together with the management of the said-
receivables
 Parties in Factoring
• Factoring company: the one who buys the
receivables
• Client: having receivables to be sold to the
factoring company
• Customer: debtor who has debt to the client;
will repay the debt to the factoring company
 Elements of Factoring
• Receivables: only limited to receivables arising
out of the commercial transactions
• Transfer of receivables: the transfer of
receivables from client to factoring company.
 Factoring
Supplier Customer
(Client) Commercial (debtor)
Transaction

Receivable
Transfer Payment
Factoring
Company
 Factoring Characteristics
• Factoring company could gain 80% fund from the book-
value
• 80% payment from the sales of receivables
(prepayment) is not a down payment
• Receivables arising out of commercial transaction: not
grants, loan, or work agreement
• Factoring is not a collection-activities but also loan
management: makes it different from debt-collector
 Transfer of Receivables
Taking into account stipulations on:
• Cessie (Art. 613 Civil Code): the transfer of
receivables on behalf of old creditor to the new
creditor
• Subrogation (Art. 1400 Civil Code) the transfer of
creditor’s rights to the third party as a
consequence of paid-receivables from the third
party (loan shifting, the loan is not eliminated)
 Types of Factoring
• Recourse factoring: when a factoring company
does not receive payment from the customer,
client shall pay the receivables (option rights)
• Without-recourse factoring: receivable
collections and risk are on the factoring
company
 Types of Factoring
• Disclosed factoring: transfer of receivables
with notification to the debtor (customer)
• Undisclosed factoring: transfer of receivables
without notification to the debtor (customer)
 Venture Capital
• Venture Capital Company is a company doing financial business/capital
participation into a Company which receives funding assistance
(investee company) for a certain period of time in the form of shares,
convertible bonds, and/or funding based on profit sharing (Perpres
9/2009)
• Venture Capital Company is a company doing venture capital activities,
management of venture capital, actifities based on fee, and other
activities approved by OJK. (POJK 35/ 2015)
 Parties in Venture Capital
• Venture Capital Company
• Investee Company: needs funding
• Custodian Bank
 Venture Capital Company’s Activities
• Equity participation - shares
• Quasi equity participation – convertible bond
• Profit/revenue sharing
• Financing through purchasing debt securities issued by investee company in start-
up phase and/or business development;
• Financing productive business (can use channelling and joint financing)
• Activities based on fee
• Any other activities approved by OJK
à For each investee company maximum 25% of its equity
à Can be added by management assistance to investee company
 Characteristics of Venture Capital Company
• Funded-capital investment and company management;
• Temporary investment – divestment;
• Expecting high risk-high return
• Investment not in the form of loan but equity participation (or at
least convertible bond and others form approved by OJK)
• Return: dividend and capital gain;
• Investment with no collateral;
• Suitable for small companies with great potential to develop;
• Suitable for new company who cannot apply for Bank Loan
 Investee Companies
• Capital participation in Investee Companies are
designated for:
– Developing new invention;
– Developing new company; incld MSME and cooperative
– Assisting company in its setback;
– Developing research project and engineering;
– Developing new technology and technology transfer
– Diverting company’s ownership
 Custodian Bank
• VCC or Sharia VCC can be collaborated with
custodian bank to manage venture capital
(dana ventura)
 Custodian bank has aimed to:
• Act as custodian or giving custody service related to the venture
capital.
• Calculating venture capital in every 3 months
• Paying any cost instructed by Venture capital company or sharia
venture capital company which manage venture capital
• Storing and preserving any notes separately of data changes related to
the investors.
 VC Mechanism: Single Tier Approach
(VCC have 2 functions: Fund Company and Management Company)

Fund
Investor Manager

Divestation
Investor Venture Capital Investee
Company Company

Investor
Investment
Company

Leverage venture capital

Equity venture capital
FI Law 36
 VC Mechanism: Two-Tier Approach
(Investee Company receives funding assistance from different VCC )

VCC 1
Investor

Divestasi
Investor Fund Investee
Manager Company

Investor

Investment
VCC 2 Company
 Duration – Venture Capital
• Cannot be more than 10 years; (9/2009)

• Can be extended into maximum another 10

years (POJK 35/2015)
 Divestment
• An action to withdraw equity participation
conducted by Venture Capital Company (VCC)
from the Investee Company
• After the purpose of equity participation has
been reached, VCC can withdraw its
investment (conducting divestment)
 Divestment Mechanism
1. When Investee Company has fulfilled qualifications in capital market,
the investee company can perform Initial Public Offering (IPO); where
investor will sell its shares in the capital market;
2. Investor has options to sell its shares to existing shareholders;
3. Investor can sell the shares to the investee company’s management
4. Investor can sell the shares to third party which are not competing
against the investee company
5. Investee company can buy shares owned by VCC as long as the former
has sufficient cash flow.
à VCC will receive capital gain owned as a result of selling shares. Besides,
during the investment period, VCC also receive income in the form of fee if it
gives managerial assistance to the investee company.
Development trend of Venture Capital
• Venture capital scheme is being more popular,
especially for the founders of start up companies
• Many variations of venture capital scheme due to
the difficulties accessing banking loan or getting
involve into capital market
• Venture capitalists are not limited for company, can
be individual and organization
 Venture Capitalist
• Venture capital corporation
• Angel Investor
• Angel Investor Organization (Example: ANGIN,
Angel-eQ Network, SGAN,BANSEA )
 Type of Funding
• Seed Funding
• Early-stage funding
• Crowdfunding (as an alternative)
 Seed funding
• Seed funding allows a startup to develop a prototype
product and generate sufficient investor interest for
successive financing rounds.
• The sources of seed funding include the founders'
personal savings and investments from family and
friends.
• Banks usually do not lend to startup companies
because of the high risks, and venture capitalists (the
conventional) tend to stay away from seed funding.
 Seed funding
• a startup entrepreneur might have more success
with angel investors and private equity funds.
• Angels are former entrepreneurs and other
wealthy investors who get involved in some startup
companies.
• Private equity funds pool money from individuals
and institutions to invest in high-growth
companies.
 Early-stage funding
• Early-stage funding allows additional operational
flexibility over the medium to long term.
• Early-stage funding typically comes from venture
capitalists, who may also bring experience and
industry contacts that can help a startup rapidly
grow its business.
• Startup valuation is important because it
determines the return on investment.
 Crowdfunding
• The use of small amounts of capital from a large number of
individuals to finance a new business venture.
• Crowdfunding makes use of the easy accessibility of vast networks
of people through social media and crowdfunding websites to
bring investors and entrepreneurs together, and has the potential
to increase entrepreneurship by expanding the pool of investors
from whom funds can be raised beyond the traditional circle of
owners, relatives and venture capitalists.
• Example : Kickstarter, Indiegogo
 Types of Crowdfunding
• Donation based crowdfunding
• Reward based crowdfunding
• Debt based crowdfunding
• Equity crowdfunding
 Equity Crowdfunding
• OJK regulation No. 37 Year 2018 regarding Fund contribution
services through share offers based on information technology
(Equity Crowdfunding)
• = The service a supply of stocks performed by issuers to sell
stock directly to investors through the opened electronic
system
• Max period 12 months and maximum raised fund 10 billion
IDR
Thank you