A Little Boost for Little Businesses; Should the OJK Pass Private Investment Regulations Aiding Small Enterprises?

By Dioputra Ilham | 16 Mar 2017
Economy | 0 Participant(s) | 0 Response(s) | 943 Views

Written by Monika Febiola, Ramadinan Saptara, and Alif Suhada Nibra

 

Indonesia has steadily maintained its pace as one of the highest-growing of large emerging market economies. Going up from a 4.8 percent growth rate in 2015 to a 5 percent growth rate in 2016, Indonesia’s economy continues to showcase stable growth attributed to by its consumption-driven economy and solid economic policies. Recently, the startup industry in Indonesia has been surfing high waves with companies such as Go-Jek and GrabCar becoming household names. However, there are smaller, lesser known startup companies in Indonesia still struggling to garner the funds needed to grow and develop. The venture capital industry has played a key role in this issue, and acknowledging this, the government plans to make sure that their efforts are maintained.

 

According to the Financial Services Authority or Otoritas Jasa Keuangan (OJK) in Financial Services Authority Regulation or Peraturan Otoritas Jasa Keuangan (POJK) No. 35/2015, venture capital is the act of financing through equity provision and/or financing for a certain time period in order to ensure the business growth development of a business partner or a debtor. Companies which provide venture capital are thus referred to as Venture Capital Firms (VCF).

VCFs are significant to startups and other small enterprises since they are the first phase of the development of companies and may find it quite difficult to finance themselves in order to grow larger. Many of entrepreneurial success stories, particularly those of young companies, owe much of their growth to financing from VCF. Their success helps encourage the increase of startups and other small enterprises which will further boost the economy by creating more job opportunities and reduce the excessive, long-term problem of unemployment. This also contributes to maintaining Indonesia’s position as the country with the highest rate of new business entrepreneurship among other Southeast Asian countries.

 

As of the present moment, venture capital investments in Indonesia are regulated by the OJK through POJK No. 35/2015. As stipulated in Article 33 (1) of the official regulation, in order to establish a capital investment fund an investor is required to provide a minimum capital of Rp50 billion for a limited company, and Rp25 billion for either a cooperative or a limited partnership. Considering the large amount of the minimum paid-up capital, the regulation appears to only enable large startup enterprises to receive venture capital fund, thus removing small startups from such benefit.

The OJK is planning to establish a regulation for “micro venture capital investment” that reduces the minimum capital for a venture investment from Rp50 billion to Rp1 billion. With this new policy, the OJK hopes to promote the growth of Indonesia’s startup movement and small and medium enterprises. The arrival of this regulation will also provide provisions that can manage funds from state-owned enterprises to Partnership and Environmental Conservation Programs or Program Kemitraan dan Bina Lingkungan (PKBL). Financial assistance to PKBL programs is expected to accelerate the development of startup and small and medium enterprises, which will consequentially deliver positive contributions to the Indonesian economy.

 

Like two sides of the same coin, the OJK regulation aiming to manage VCFs as decided by the Decision of the Minister of Finance of the Republic of Indonesia No. 1251/KMK/013/1988 has posed the question of whether or not this regulation is actually necessary. In 2015, the OJK passed four laws overseeing the operation of VCFs in Indonesia as follows:

  1. POJK No. 34/2015 on the Licensing and Organisation of Venture Capital Companies;

  2. POJK No. 35/2015 on the Arrangement of Venture Capital Company Businesses;

  3. POJK No. 36/2015 on Good Corporate Governance for Venture Capital Companies; and

  4. POJK No. 37/2015 on the Direct Inspection of Venture Capital Companies

By passing these laws, the OJK is trying to revitalize existing VCFs and stimulate the formulation of new VCFs in Indonesia. These regulations are hoped to be a milestone for the revitalisation of VCFs in Indonesia who experienced a significant drop in 2015 when the value of the venture capital assets in the 1st quarter of 2015 was only Rp8.66 trillion, dropping by 3.72% compared to the value at the end of 2014 which is at Rp8.99 trillion.

Dumoly Pardede, Deputy Commissioner for Non-Banking Supervision at the OJK, stated that the growth of the national venture capital industry is less satisfactory due to a number of strict regulations, no incentive for VCFs to become promoters of small startup companies, and the freedom of private equity companies who serve a similar purpose to VCFs with less restrictions. According to Dumoly, the plan to revitalize VCFs in has been broken down into four key objectives, being: the expansion of funding sources that are tailored to the characteristics of the business of venture capital, the expansion of business activities, improvement of the divestment process, and strengthening the venture capital industry.

As the four objectives were put into action by the OJK through the passing of POJK regulations on VCFs, the OJK has in mind a vision of incentivising national economic growth and nurturing the VCF industry by improving the quality of business management, regulation, and supervision. The OJK regulation on VCFs was deemed necessary to fulfill the needs of startup companies who are seen to have large market potential in Indonesia, and very important is this potential indeed. As President Joko “Jokowi” Widodo stated himself in a closed meeting on the development of digital economy, “We must not let go of this huge market potential. I believe this market potential can make Indonesia the largest digital economy in Southeast Asia.” Thus, to budding startup companies, these OJK regulations have brought along a breath of fresh air. Government regulations are now coordinating capital funding and investments in such a way that has given VCFs a significant role in pushing the growth of the startup industry to propel Indonesia’s national economy forward.

On the other hand, OJK regulations on the operation of VCFs also limit capital investments that VCFs may only give to debtors, defined as an individual or company (including micro-, small-, medium-enterprises and cooperatives) in Article 1 (13) of POJK No. 35/2015. This puts VCFs in a position in which it is limited in giving capital investments to large, developed companies. Questions have been raised as to whether or not obstructing VCFs rights to invest in larger companies for their own guaranteed profit is constitutional.

 

The venture capital investment sector is a new stimulant to the development of Indonesia’s growing and constantly changing economic landscape. For many startup enterprises, venture capital investment is a significant source of capital. With a new policy and the government’s commitment, the venture capital investment sector will be carefully regulated in a way that it will render positive impacts on the growth of small and medium enterprises. However, to several VCFs, having their freedom to invest in what they perceive to be the most profitable restrained may be problematic. Some may even go far enough to deem it unconstitutional. This brings us to the larger question of whether or not these OJK regulations are, not only necessary, but lawful and fair. Is Indonesia right to be on the side of small enterprises to aid the growth of a larger variety of businesses for its domestic economy? Or are these regulations in violation of corporate rights?