International -- Finance: MARKETS
ANGLING FOR THE LOCALS (int'l edition)
Indonesia's stockbrokers got a rare pleasant surprise in mid-July. Two weeks before the initial public offering of PT Bimantara Citra, a holding company owned by a son of President Suharto, the $112.6 million issue was more than 40 times oversubscribed. Who were all those eager buyers? Brokers could only wonder how the underwriter managed to scare up so much demand.
Stock traders and analysts hope such successes will be less of a mystery after Parliament passes a new capital markets law later this year. The goal is to increase liquidity in the market, which suffers from low domestic participation, by making it more transparent, thus attracting more local investors and larger issues. The law is the brainchild of Bacelius Ruru, chairman of the Capital Market Supervisory Agency (BAPEPAM), with support from President Suharto.
Officials don't have a moment to lose. Beginning this November, new shares will begin to flood the market when half a dozen state-run companies will be spun off. First will be the domestic phone company, PT Telkom, which hopes to raise $2 billion through simultaneous listings in Jakarta, London, Tokyo, and New York. The offering follows the successful dual listing of the long-distance carrier PT Indosat, which raised nearly $1.18 billion on Wall Street and the Jakarta Stock Exchange (JSE) last October. But it will take a 20% to 30% increase in demand to soak up the new issues. Says Marzuki Usman, chairman of the JSE: "We cannot fully depend on foreign investors. We must build up domestic investment."
MOVING ON UP. Change is already in the air. On May 22, the JSE moved into a pristine 30-story building, complete with a 394-terminal Hewlett-Packard computer network. Computerization--plus renewed foreign investor interest in Asia's emerging markets--has helped the Jakarta Composite Share Index to turn in its biggest rally since last August (chart). There's no doubt trading is easier. "Dealers used to write their orders on a white board, and they used binoculars to read it from across the trading room," recalls Hengki Suherman, a spokesman for the JSE.
Other recent changes may be partially responsible, too. A capital gains tax of 35% was abolished at the beginning of 1995 and was replaced with a nominal transaction tax. But the market has a long way to go. Only 220 companies are listed on the JSE, most of which are tightly held, and total capitalization is just $55 billion. At least 70% of turnover is driven by foreign investors, and fewer than half a million Indonesians buy stocks.
The current regulatory environment does not favor individual investors either. Open-end mutual funds have been prohibited in the past. Penalties for foul play, from share-price manipulation to insider trading, are rarely enforced. Also to be considered is the general reluctance of brokerage houses to play penny ante in a country where per capita income is only $880.
In addition, high interest rates keep most investors away from the market. Interest on time deposits in Indonesian rupiah range from 16% to 19%, although they are expected to settle at around 16% later this year as regional rates ease. By contrast, average rates of return on the JSE have been only 10% to 14% since 1990, according to Jardine Fleming Nusantara.
BIGGER AND BETTER. The new law will attempt to address some of these concerns. Brokers and regulators have heard a range of possibilities, including strengthening the enforcement powers of BAPEPAM, regulating takeovers, and setting a minimum level for free floats. "That will help liquidity by putting bigger offerings on the market," says Gregory L. Miller, head of research at Jardine Fleming Nusantara. And open-end mutual funds will be permitted.
Signs of progress are evident.
BAPEPAM is processing about 300 applications from companies that want to set up pension funds. "Things are definitely moving in the right direction," says J. Casey Hammond, research manager at Dutch-owned brokerage H.G. Asia Indonesia. But authorities will have to keep on coaxing domestic investors if the next wave of IPOs is to succeed as nicely as Bimantara did.By Michael Shari in Jakarta