INDONESIAN VENTURE CAPITAL INDUSTRY: (ASEAN ECONOMIC COMMUNITY) AEC STRATEGIC PERSPECTIVE Yusuf Ausiandra, S.H. LL.M Abstrak - Opinio Juris 18 Yusuf Ausiandra
INDONESIAN VENTURE CAPITAL INDUSTRY:
(ASEAN ECONOMIC COMMUNITY) AEC STRATEGIC
PERSPECTIVE
Yusuf Ausiandra, S.H. LL.M
Abstrak
Industri pembiayaan modal ventura Indonesia sedang mengalamipenurunan ditengah-tengah bertumbuhnya industri wirausaha global.
Penyebab dari fenomena tersebut ditengarai berasal dari lemahnya
pengaturan modal ventura di Indonesia, yang sedang diubah oleh
Otoritas Jasa Keuangan dengan mengamandemen Peraturan Menteri
Keuangan No. 18/PMK.010/2012 dan peraturan-peraturan terkait. Paper
berikut akan membahas peluang yang bisa diambil dari integrasi ekonomi
nasional dengan Masyarakat Ekonomi ASEAN. Dalam tulisan ini, Penulis
berpendapat bahwa revisi dari regulasi pembiayaan modal ventura harus
turut mempertimbangkan pendanaan modal ventura melalui ASEAN Fund
Passport dan dampak positif lainnya yang berasal dari integrasi ekonomi
ditingkat regional.Kata Kunci: Venture capital; OJK; ASEAN Economic Community
Introduction
Indonesia is currently undergoing an economical paradox. In the globally impacted booming age of venture capital financed start-ups and its success stories, the appearance of innovative entrepreneurs with brilliant ideas, Indonesia against the prevailing trend suffers from a weakening venture capital sector. From a total of 89 companies by the end of 2012 only 70 companies remain with only 60 companies effectively
1
operating. Furthermore, most of Indonesian Venture Capitals (IVC) are gradually weakening in terms of capital and 70% of the IVCs are transforming into bank loan intermediaries or deviating from the purpose of their juridical form as venture capital firms. The Indonesia Financial Service Authority (OJK) intends to reform the current conditions by publishing an upcoming new regulation. In parallel, Indonesia is progressively liberalizing its financial and services market through the Association of South East Asian Nation (ASEAN) framework agreements.
Historically, Indonesia is a founding member of the Association of South East Asian Nations (ASEAN). As an ASEAN Member State (MS), Indonesia has agreed the ASEAN Free Trade Area Agreement signed in
1 Asosiasi modal ventura Indonesia (Indonesian Venture Capital Association)
website. 6 June 2015. “70% Modal Ventura Berubah Jadi Bank”. The article could be
accessed on http://www.amvi.or.id/item-70-modal-ventura-berubah-jadi-039-bank-
1992. This Agreement followed by a more specific agreement on the
2
liberalization of trade in services intends to liberalize trade in good and services by gradually eliminating tariff and non-tariff barriers by 2015. The ASEAN Free Trade Area after the liberalization process would form the ASEAN Economic Community (AEC). The final objective of the AEC would be to achieve regional economic integration in the form of a (i) single market and production base, (ii) a highly competitive economic region, (iii) a region of equitable economic development and (iv) a region
3
fully integrated into the global economy . The AEC would include five elements which are the (i) free flow of goods; (ii) free flow of services; (iii) free flow of investments; (iv) freer flow of capitals; and (v) free flow of skilled labor.
The gradual progress towards the formation of the AEC provides an opportunity to adjust its regulatory reforms regarding the Venture capital industry while seizing a new scope of action in terms of funding access and spillovers that could result from cross-border cooperation and free flow of services, goods, freer flow of capital and skilled labor at a regional level. In the meanwhile, another more advanced regional organization, the European Union, has already achieved further financial integration. This paper would explore through a brief comparison to the European Union regional regulations concerning venture capital further
2 ASEAN Framework Agreement on Services 1995
venues to be transposed to the ASEAN progress. This would shed light on some strategies that could be pursued by the Indonesian government to complement the forthcoming regulatory reforms. The paper would be structured as following:
1. The issues encountered in the Indonesian venture capital industry 2.
The main regulation in the EU concerning venture capital and the current state of AEC
3. The required strategy to be pursued by Indonesia in regards to the AEC.
I. The Legal Framework Indonesian Venture Capital Industry
1.1 The current legal framework
1.1.1 Regulation of the Ministry of Finance 2012
The underlying legal infrastructure for Venture Capital resides in Regulation of the Minister of Finance Number 18/PMK.010/2012 on Venture Capital Firms. The regulation of the Minister of Finance permits 3 types of participation with equity, quasi equity (convertible bonds) and
4
profit or revenue sharing . The majority of Indonesia Venture Capitals
4 Article 2 of the Regulation of the Minister of Finance Number
focus on the third mode of financing. In other words, Indonesian venture capital firms only become another type of bank. Although legally valid, the non-equity participation in financing disrupts entrepreneurial motivation embedded in the venture capital concept itself. Equity or quasi equity financing constitutes the fundamental contracting tools to stimulate entrepreneurial through exit valuation rather than purely conservative loan rents. The underlying concept of venture capital itself would be a form of financing by equity participation in non-listed companies in order to finance their incubation stage, their developmental stage until the end of the fund term, which ideally should end by an exit through Initial Public
5 Offering (IPO. The financed companies are mostly Small and Medium
Enterprises (SME) and technology companies. The companies financed at its start mostly lack prior track record, valuable industrial assets and often only have an idea as a starting point. As a result, the start-ups are barred from capital market and banking finance due to the high risk and uncertainty of the business. This is where venture capitals become an intermediary and a business partner between long-term funds such as pension funds, public funds, and corporate funds and the start-up and SME
6 businesses.
5 th Gilles Mougenot. 2014. Tout Savoir sur le Capital Investissements. 5 edition.
Paris: Gualino lextenso editions. P.20 The Indonesian venture capital regulation prohibits direct
7
fundraising to the public as contrast to global venture capital practice due to a separate prudential requirements regime for equity funds. Indonesia finance law, distinguishes between private equity contracts managed by professional fund managers as would be elaborated below and venture capital funds acting as mere finance intermediary. This schism highly weakens the capacity of Indonesian venture capital to raise adequate (long- term) funds from adequate investors (professional investors), undermine
8
the quality of their portfolio companies and results in dependency to bank loans as source of liquidity in financing their portfolio companies. The structural inadequacy resides in bank loans as a source of financing for venture capitals (short term debt structure) in one hand and high-risk equity participation in portfolio companies in the other hand. A more adequate source of financing would be long-term idle funds such as pension funds or raising private equity funds from accredited wealthy investors.
7 Article 41 of the Bapepam LK Regulation No. IV.C.5 concerning Private
Equity Contracts prohibits to contract fund from the public in the form of gyro and
deposits. Indonesian venture capital funds also are prohibited from raising pools of funds
from investors to be invested in their portfolio firms. 8 According to the Indonesian Venture capital Association in 2014, certainventure capital companies has filed bankruptcy due to a drastic reduction in asset value
and bankruptcy coupled with incapacity to repay bank loans used to finance the
1.1.2 Private Equity Regulation
Indonesian finance law adopts a separate rule governing private equity contracts and regulates it through Bapepam LK Regulation Number
9 IV.C.5 Concerning Private Equity. The regulation confines the offering of
private equity to professional investors and with a threshold of 50
10
investors . Furthermore, the regulation mandates a prudential organizational structure to manage the private equity contracts such as (i) minimum paid-up capital of IDR 25 billion; (ii) hiring at least 1 employee who certified with Chartered Financial Analyst (CFA) or had registered as fund manager under prevailing Bapepam-LK regulations and have working experiences as fund manager for minimum 5 years; and (iii) has at least 1 participation unit in every fund managed by him/her. Those requirements demonstrate that the regulation prior to managing private equity adopts a certain prudential level. In return, private equity funds would be granted access to fundraising from professional investors.
9 Bapepam LK was Indonesian Capital Market Supervisory Agency in charge of
financing institutions along with Indonesian Investment Coordinating Board division and
the Minister of Finance until the shared authority of the three institutions was transferred
stto a single authority since 1 January 2013. The single authority is the Indonesian
Financial Service Authority or OJK. 10 Article 2 of the Bapepam LK Regulation No. IV.C.5 concerning Private Indonesia has no specific definition of professional or accredited investors, but for the purpose of the private equity regulation a private investor is an investor with financial capacity to purchase participation in designated private equity participation unit of IDR 5 billion or in the event that private equity fund is pooled in foreign currency, net worth of the relevant participation unit shall be equal to USD 500,000 or EUR 500,000; and have sufficient knowledge regarding private equity fund investment
11
risks. In contrast to the regulation on private equity, the Indonesian
12
venture capital regulation omits the obligation of management by specialized fund managers along with the above-mentioned prudential structure. Henceforth, the Indonesian venture capital legal structure is reduced to a mere financial intermediary function without access to potential source of investments as for private equity funds operating under the Bapepam LK Regulation.
The current regulatory framework for venture capital reveals to be to fragmented and overly centered on the legal structure rather than on its management aspects. The absence of a mandatory professional fund manager function as in the private equity regulation would undermine the quality of choice in terms of portfolio companies and subsequently hinder
11 Article 11 of the Bapepam LK Regulation No. IV.C.5 concerning Private Equity Contracts 12 Regulation of the Minister of Finance Number 18/PMK.010/2012 on Venture liquidity upon exit. Venture capital-backed companies mostly require further incubation period beyond the 10 year before being able to proceed to a profitable exit by IPO. This explains the domination of trade-sales exit over IPO in more bank-dominated economy such as in the European
13 Union for instance. A private sales exit requires an ex-ante financially
sound portfolio of investments hence most of the venture capital participations would be transferred to other private equity institutions before being able to precede to a profitable IPO.
1.1.3 Venture Capital Structural Indonesia deficiencies
From the above-mentioned elaboration, Indonesian venture capital regulation generates several issues for the industry. First, it favors the formation of intermediary bank-like institutions rather than a partnership relation between the venture capital (PMV) and the portfolio company (PPU). The regulation forsakes the importance of managerial participation by professional fund managers through equity financing. Secondly, the regulation hinders access to more adequate source of fundraising in particular accredited and professional investors falling under a special
13 Elisabete Gomes Santana Félix et al. Exit Decision in the European Venture
Capital Market. CEFAGE-EU Working Paper 2008/01. P. 24 private equity regime. The venture capital regulation should have adopted the same criterion for the venture capital industry by rendering mandatory the management of venture capital under the same prudential regimes as private equity. This policy would result in the qualification of venture capital investment parts as a quality asset class for accredited investors.
As a result from the current regulatory deficiency, the Indonesian Financial Services Authority (OJK) identified certain issues encountered by the Indonesian venture capital industry in the form of deviation in the
14
financing model . OJK through a press conference that 70% of the overall total 70 venture capita l firms in Indonesia avoid using “equity participation” scheme in financing a business. The present condition infers that the majority of Indonesia venture capitalists adopt conservative stances in direct contradiction with the spirit and the term of venture capital itself. The Indonesian Venture Capital Association posits that the reason for a deviation is a result of difficulties of funding. The association advances that Indonesian Venture Capital Association obtains funds from
15
bank loans causing a non-sustainable business structure. Venture capital by nature differs widely from banks for its industry resides on “high risk – high return” ventures.
14 http://www.ojk.go.id/siaran-pers-ojk-dorong-revitalisasi-industri-modal- ventura 15 http://www.amvi.or.id/item-70-modal-ventura-berubah-jadi-039-bank-
The problems of ex-ante source funding hereby is combined with liquidity problems ex-post as observed through a reading of Article 7 of the Regulation of the Minister of Finance Number 18/PMK.010/2012 on Venture Capital Firms consisting of exit through IPO; Managerial Buy- back or Private Sales (over-the-counter sales). The ministerial regulation has clearly omitted the recent problems encountered in the venture capital industry namely: post-investment liquidity problems. The development of a secondary private market would be a partial solution to the issue. To resume, the lack of “quality investments” by “qualified fund managers” in the form of venture capital would also block access to secondary private markets for venture capital funds. The secondary private market constitutes an important source of liquidity in the New Venture Capital
16
cycle. The illiquid nature of venture capital investment requires the establishing of a secondary private market to channel the transfer of shares
17
at a pre-IPO stage . In considerations of the current deficiencies, AEC in particular pertaining to the financial integration could have a positive impact for the Indonesian venture capital industry.
1.1.4 Upcoming Reform under OJK
16 Mendoza, Jose Miguel and Vermeulen, Erik P. M., The 'New' Venture Capital
Cycle (Part I): The Importance of Private Secondary Market Liquidity (May 3, 2011). Lex
Research Topics in Corporate Law & Economics Working Paper No. 1/2011. Available at
. P.11 The Indonesian Financial Service Authority (OJK) has planned to publish a new Financial Service Authority Regulation (POJK) in the following months of 2015 to reform and revitalize the existing regulations
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governing the venture capital industry. The reform would mirror a once used Japanese strategy consisting of a Government-to-Government initiative to enable Indonesian venture capital funds to access funding from foreign sources. Furthermore, OJK would support the venture capital industry through tax incentives, equity management programs, the establishment of a Business Angel Network, and the strengthening of
19
funding sources by the formation of venture funds. By venture fund, OJK implies the attempt to render possibly available for venture capitalist idle funds detained by insurances, pension funds and government (public) funds. Furthermore, OJK plans to impose the “accompanying function” (surveying and intervening in portfolio company day to day management) theoretically inherent in any US venture capital mechanism as an optional fee based business. Up until this the date of writing of this paper, the planned regulation is still under drafting by OJK.
18
27 April 2015. “OJK Susun Aturan Soal Modal Ventura”. The article could be
accessed on http://www.hukumonline.com/berita/baca/lt553de83c2f0f4/ojk-susun-aturan-
soal-modal-ventura 19 th The summary of the press conference that took place on the 27 of April 2015could be accessed on http://www.ojk.go.id/siaran-pers-ojk-dorong-revitalisasi-industri-
In resume, the Indonesian venture capital industry to date still encounters a dual level issue: (1) Functional
- – business problems (ex-ante Investments, ex-post liquidity and management issues) and (2) Regulatory framework problem. In context, Indonesian venture capital industry in addition to national regulatory reforms would require (i) Long-term venture funds; (ii) access to an extensive private secondary market and (ii) Professional fund managers experienced in managing venture capital funds.
The reform of the current regulatory structure would require a triptych reform consisting of Actor, Fund structure and Regional Fund Mobility. These reforms would be elaborated further below under the light of regional integration movement in progress in ASEAN. But before discussing the ASEAN financial integration scheme, a concise review of a more advanced integration regime would be beneficial. The European Union regulatory framework for cross border commercialization of venture capital funds would be an adequate insight.
II. AEC 2015: Towards an ASEAN VC Passport
The European Union financial liberalization model resides on three main pillars namely: (1) minimum harmonization; (2) mutual recognition
20
and (3) home-country control. The minimum harmonization pillar refers to t he principle adopted by the commission favoring the “lowest common denominator” in the process of harmonization amongst national
21
standards . The mutual recognition principle resides on the mutual recognition of the validity of rules in other countries upon minimum agreement on essential rules. The third pillar, the home country control principle, imposes responsibility upon the supervisory authority of each member states when their member states financial institutions conduct business in the territory of other member states. The three pillars govern the underlying rational of the regional financial regulation in the European Union including the Directives and regulation related to the Venture Capital Industry discussed below.
2.1 EU Regional VC regulation model
The EU law on financial integration including the rules governing venture capital is composed of a complex body of rules. Subsequently, the present section would discuss briefly the main points and structure of the
20 Bongini, Paola, The EU Experience in Financial Services Liberalization: A
model for GATS negotiations?. THE EUROPEAN MONEY AND FINANCE FORUM, SUERF Studies, 2003/2. Available at SSR. P. 12 main legal instruments that affects the operation of the Venture Capital industry at a European level namely (a) The Markets in Financial Instruments (MiFID) Directive; (b) The European Venture Capital Fund Regulation (EuVECA) Regulation and (c) The Alternative Investment Fund Managers (AIFM) Directive.
2.1.1 MiFID Directive
22 The MiFID replaces the Investment Service Directive (ISD) and
represents the most complex piece of European Financial Service
23
legislations in recent years. In this regards, this sub-section would sum the important points of the Directives considering that this regulation has a limited impact on the over-all operations of most Venture Capital funds.
24 Two key concepts could be extracted from the Directive inter alia : (1)
Investments firms should be granted access to operate throughout the EU on the sole basis of authorization in their home member states. In other words, investment firms could provide cross-border investment services and establish branches in all Member States under a single passport; (2) a high level of investor protection should be established wherever they are established in the EU. MiFID lay down detailed conduct of business rules
22 23 Directive 2004/39/EC in Markets in Financial Instruments Directive European Private Equity and Venture Capital Association (EVCA). March 2008. MiFID Technical Briefing Note. P.3 for investment firms setting a standard operating procedure for all member states.
2.1.2 EuVECA Regulation
25 The European Venture Capital Fund Regulation constitutes a
specific regime dedicated to the venture capital industry. A regulation in the EU law nomenclature has general and direct applicability towards all
26
member states . In other words the regime is available in all the member states with requiring prior transposition in the national law. The principle elements of the regulation consists of three main features: (1) Fund managers; (2) Qualifying funds (EuVECA) and (3) Qualifying portfolio
27
undertaking. The fund managers must fulfill the definition of (i) a legal person whose regular business is managing one or more qualifying venture
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capital; (ii) Established in the EU and (iii) managing funds below
29
30 AIFM Directive thresholds . The EuVECA Regulation provides that the
25 26 Regulation No. 345/2013 on European Venture Capital Funds 27 Article 288 of the Treaty on the Functioning of the European Union (TFEU) 28 Article 3 C of the EuVECA Regulation 29 Article 2 (1) (b) of the EuVECA Regulation The AIFM Directive (Directive 2011/61/EU) refers to the Alternative manager shall be either (i) an external manager, which is the legal person appointed by the EuVECA or on behalf of the EuVECA and which, through this appointment, is responsible for managing the EuVECA
31
(external Alternative Investment Fund Manager) ; or (ii) the EuVECA itself, which shall then be registered as manager, where the legal form of the EuVECA permits an internal management and where the Alternative Investment Funds governing body chooses not to appoint an external manager. An internally managed EuVECA cannot be appointed as the external manager or another EuVECA. The Qualifying EuVECA refers to
32
(i) Undertaking for Collective Investments (“UCI”) other than UCITS intending to invest at least 70% of its aggregate capital contribution and uncalled capital comm itments in in “qualifying investments” such as equity or quasi equity instruments issued by the qualifying portfolio undertaking, loans granted to a qualifying portfolio undertaking, units and
33
shares of other EuVECA ; (ii) established within territories of a Member State (“MS”) of the EU.
The Qualifying portfolio undertakings should be (i) established in the EU or third country that is not listed by the Financial Action Task Force on Anti-Money Laundering and Terrorist Financing (FATF) and has
30 31 Article 2 (1) (2) of the EuVECA Regulation 32 Article 3 of the EuVECA Regulation
UCITS relies on another regime laid down by the Directive 2009/65/EC
signed tax agreements with the home Member State of the fund manager
34
and each other member state in which fund is intended to be marketed ; (ii) in the for of a SME not admitted to trading on a regulated market or multilateral trading facility, employing fewer than 250 persons, annual turnover not exceeding € 50m / annual balance sheet total not exceeding €
35 43m.
In addition, EuVECAs may only be marketed to investors who have the experience, knowledge and expertise to make their own investment decisions and properly assess the risks associated with such
36
investments. In distinction with the AIFM Directive explained further below, the EuVECA Regulation revolves around the attribution of the “EuVECA label” for the commercialization reserved for qualifying venture funds opting in for the status. The intention behind the regulation would be to provide an efficient framework for the financing of SMEs across Europe through the formation of a single and simplified regime within the EU. Fund managers instead of being under the obligation to comply with 27 national laws would only comply with a single regime.
34 35 Article 3 (d) (4) of the EuVECA Regulation 36 Article 3 (d) (i) of the EuVECA Regulation Article 6 of the EuVECA Regulation delimits the scope of professional
investors as those who are (i) elect to be treated as professional clients and (ii) are willing
to invest at least €100,000: and (iii) have confirmed in writing that they are aware of the
risks associated with their investment. A “professional investor” is any investor which is
considered to be a professional client or may be treated as a professional client on request
Under this regulation, a registered AIFM can manage a EuVECA residents anywhere in the EU and can market it anywhere in the EU to professional and certain other investors.
2.1.3 AIFM Directive
37 Since the entry into force of the AIFM Directive , European
Union member states have adjusted their national securities laws in accordance with the new categorization of the directive. In the nomenclature of EU law, Directives should be transposed into the national
38
law in order to have full effect . The Directive adopts a classification
39 based on the nature of the funds and the object of the investment vehicle.
The rational on the directive would be the regulation of certain fund managers on the premises of the importance of the fund. By importance, the Directive aims to regulate funds that could trigger systemic issue due to their volume with the main idea of protecting the investors of the fund. The directive applies in the event, a fund manager in the European Union
37 38 Directive 2011/61/EU on Alternative Investment Fund Managers In accordance with Article 288 of the Treaty of the Functioning of the
European Union (TFEU), a directive is directly binding to the addressed member states as
to the result to be achieved leaving the implementation to the discretion of the concerned
national authorities in regards of the choice of form and methods. 39 Florence Moulin and Daniel Schmidt. 2015. Les Fonds de Capital
Investissement : Principes juridiques et fiscaux . 3rd edition. Paris : Gualino-lextenso manages a fund worth of more than €100 million in leveraged funds or €500 million in unleveraged funds in which redemption rights are blocked for a period of 5 years following the initial investment. The aim of this
directive would be to enhance transparency of Alternative Investment
Fund (AIF) managers subject to the AIFM Directive towards their
supervisory authorities, investors and other key stakeholders in order to
increase investor confidence and to regulate the main sources of risk
associated with alternative investment management. The Directive defines
AIFs (Alternative Investment Funds) as “collective investment
undertakings, including investment compartments thereof which ( i) raise
capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (ii) do not require authorization pursuant to Article 5 of
40 Directive 2009/65/EC .
Subsequently, AIFM refers to the legal persons whose regular
41
business is managing one or more of the AIFs. The AIFMD applies to: (a) EU AIFMs which manage one or more AIFs irrespective of whether such AIFs are EU AIFs or non-EU AIFs; (b) non-EU AIFMs which manage one or more EU AIFs; and (c) non-EU AIFMs which market one or more AIFs in the EU irrespective of whether such AIFs are EU AIFs or
40 This refers to funds regulated by the UCITS directive
42
non-EU AIFs. The AIFM directive has an interesting benefit for the funds falling under or opting in the directive regime: the granting of the
43 European Passport. This attribute permits the funds to be marketed in
terms of fundraising all around the European Union. The target clientele is
44
limited to professional investors. The types of funds under the AIFM regime are long-term and mostly high risked funds employing subtle and intricate investing strategies requiring the investors to have a thorough understanding of the nature of the funds. The particularity of the fund investment strategy renders the funds targeted by the Directive non- adaptable for retail investors. In regards to venture capital funds, the AIFM Directive would impact the funds in relation to the volume of the fund hence in certain EU jurisdiction as in France; the category of funds has been reduced to two types of funds namely OPCVM or UCITS and FIA
45
(AIFs). For the AIFs, a sub-division has been made creating AIFs
42 43 Article 2 of the AIFMD Directive The AIFMD in article 4 (x) defines marketing as “a direct or indirect offering
or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of
an AIF it manages to or with investors domiciled or with a registered office in the EU”44 Professional investors is defined in article 4 (ag) of the Directive as an
investor which is considered to be a professional client or may, on request, be
treated as a professional client within the meaning of Annex II to Directive 2004/39/EC dedicated to non-professional investors and AIFs dedicated to professional investors.
A concise assessment of the EU venture capital regulatory ecosystem would bring us two common underlying notions: (1) Regulatory simplification by the creation of an optional unified regime for Venture capital funds in order to granted market entry through out Europe and (2) The common recognition of each home country financial supervisors in the operations of its funds in other countries. These two notions permits to present to reduce transaction costs by reducing unnecessary red tapes while still maintaining necessary prudential measures to protect investors.
2.2 ASEAN Integration as Strategic Venue
2.2.1 The Regional Passport Strategy: CIS
th
At the 13 ASEAN Summit in Singapore in November 2007 ASEAN leaders jointly adopt the AEC Blueprint. Pursuant to the AEC Blueprint the ASEAN Capital Markets Forum (ACMF) developed the Implementation Plan approved by the ASEAN Finance Ministers at the
th
12 ASEAN Finance Minister meeting in Da Nang, Vietnam in April 2008. Amongst the initiatives figured the plan to develop a mutual
45 Article L.214-1, II Code Monétaire et Financier (French Monetary and
recognition framework to facilitate cross border offers of collective investment schemes within ASEAN Collective Investment Scheme
46
(ASEAN CIS) . On 1 October 2013, ACMF announced that the Securities Commission Malaysia, the Monetary Authority of Singapore and the Securities and Exchange Commission of Thailand have signed a Memorandum of Understanding (MOU) to establish an ASEAN CIS framework for cross-border offerings of CIS (ASEAN CIS Framework).
The ASEAN CIS Framework allows the units of an ASEAN CIS authorized in its Home Jurisdiction to be offered in other Host Jurisdictions under a streamlined authorization process, provided that the ASEAN CIS satisfies the set of common standards specified in the
47 BNP Paribas Securities Standards of Qualifying CIS (the “Standards”).
48 Services summed up the key features as following : (i) The Funds must
initially be assessed as suitable for cross-border distribution by Home Regulator (ii) Funds can only invest in specific assets: transferable securities, money market instruments, deposits, units in other CIS and financial derivatives; (iii) Eligible assets have investment restrictions according to qualifying standards; (iv) Funds must not engage in non-
46 th ASEAN Capital Market Forum. 25 of August 2014. Handbook for CIS Operators of ASEAN CISs. P.3 47 The standards could be accessed online at http://www.theacmf.org/ACMF/upload/standards_of_qualifying_cis.pdf 48 BNP Paribas Securities New-letter. ASEAN Collective Investment Scheme
(CIS) Framework. The document could be accessed at http://www.securitiesservices- newsletter.com/debt-issuers-and-arrangers/article/passport-development-opportunities- permissible activities such as securities lending, repurchase transactions and direct lending of monies; (v) Additional rules apply for money market funds, master feeder funds, fund-of-funds and exchange-traded funds ; (vi) CIS Operators must have at least 5 years of experience in managing CIS ; (vii) CIS Operators must have at least USD 500 million of Asset Under Management (AUM) globally in all related companies ; (viii) CIS Operator must have shareholder equity of at least USD 1 million and maintain specified capital adequacy; (ix) Trustee and fund supervisor must be resided and regulated in the same jurisdiction as the CIS it oversees ; (x) Appointed local intermediaries and representatives must be compliant with the Host Regulator requirements ; (xi) An independent party is required for valuation and Net Asset Value (NAV) calculation ; (xii) Eligible funds are subjected to on-going disclosure according to Host Regulator requirements. In sum, ASEAN CIS increases efficiency, accessibility and diversity of funds offered in ASEAN countries.
It seems that ASEAN has adopted a scheme similar to the European Undertakings for Collective Investment in Transferable
49 Securities (UCITS) , AIFMD Fund Passport, and EuVECA European
Passport Scheme in fostering regional integration amongst others. The
49 The UCITS (Undertakings for Collective Investment in Transferable Securities
Directive) Directive (Directive 2009/65/EC) permits collective investment schemes (CIS)
to be operated and commercialized throughout EU member states based on a single overall gradual strategy towards regional integration consists amongst others by: (1) Strengthening prudential regulations and harmonizing the rules amongst member states (setting of common standards); (2) Listing in the form of an inventory national laws that could pose an obstacle to financial integration specific legal areas such merger and acquisitions, distance marketing, transparency, accounting, bankruptcy law, competition
50
policy, etc. and (3) Mutual recognition amongst member states. As the same with the EU regional fund passport schemes, the ASEAN CIS represents an opportunity for the Indonesian venture capital industry in terms of fundraising and commercialization of venture funds part throughout ASEAN.
2.2.2 Indonesian Venture Capital Interest
In the midst of restructuring the current legal and business landscape for the Indonesian venture capital industry, Indonesia could seize the general trend of financial liberalization to negotiate a framework with other ASEAN member states in accordance with the interest of the national venture capital industry. As elaborated above, the Indonesian venture capital suffers from three levels of deficiencies. First, the lack of
50 Gloria O Pasadilla. Financial Services Integration in East Asia: Lessons from the European Union. Asia-Pacific Research and Training Network on Trade (ARNTNeT).
professional managers seasoned by success investment exit track records to manage the investments. Second, new sources of optimal and adequate funds. Third, in order to diversify the risk repartition and extend the clientele outreach in terms of composition, a regional mobility for fundraising or the commercialization of the funds would be necessary. In sum, Indonesian venture capital industry interests consists of: (1) Professional fund managers; (2) External funds and liquidity structured in private-public arrangements; and (3) Regional mobility.
2.2.2.1 Professional fund managers In order to lure and capture valuable highly experienced fund managers to fulfill the role of managing the venture capital fund, selecting the portfolio of investments and participating in the management of the portfolio companies, an attractive labor law regime along with compensation packages should be put in place. The free flow of services goal in the AEC blueprint could be geared towards a mutual recognition for fund managers and other supporting professions followed by enhanced free flow of professional fund managers between ASEAN member states. The Mutual Recognition Agreement (MRA) for the accounting profession constitutes a positive step.
2.2.2.2 Joint Private-Public Cooperation (Fund) Various attempts by different nations in engineering a mimetic of the United States success story - Silicon Valley - has resulted in utter failure. In classical venture capital literature, the root problem has been traced to the simultaneity of three elements namely entrepreneurs, specialized intermediaries (venture capital) and sufficient stock of
51
capital. Yet, attempts to fund a venture capital market solely through public fund has failed due to passivity or deviation from main purposes of
52
the funds. In other words, a venture capital industry fully backed by an enormous reserve of public fund could only disrupt the creation of a sustainable venture capital industry in the long run. The AEC Blueprint provides certain regional schemes and mechanism for investment in SMEs
53
in the region. One of the schemes scheduled to be accomplished in 2015 consist of the establishment of a regional SME development fund that would be used as a financial source for SMEs that are undertaking
51 Ronald J. Gilson. Engineering a Venture Capital Market: Lessons from the American Experience. Stanford Law Review. Vol. 55, No. 4 April 2003 pp. 1067-1103.
P. 1069 52 Two prime examples of these failures could be cited. First, there is the Chinese
experience with the China New-Tech Venture Capital corporation (CNVCC), which
deviated from its initial purpose of funding of financing technological innovation and
engaged in the real estate industry and money lending businesses. Secondly, there is the
German WFG experience which created a passive financial intermediary without
conducting supervising of investments ending in failure of portfolio companies. 53 The AEC Blueprints classifies the regional SME development frameworkunder the Equitable Economic Development section. The AEC blueprint refers to an even
more specific blueprint: the ASEAN Policy Blueprint for SME Development 2004-2014
54 business in the ASEAN region.
Albeit the idea deemed positive for novel source of financing, a Public-Private Partnership in the financing of innovation would constitute a more positive impetus to develop a dynamic regional venture capital
55
market. The economic rational of this structure would be the spill over effect or the transfer of knowledge from the private structure to the public sector along with a lower cost of capital from the participation of the
56
public sector. Hence, the AEC constitute an opportunity for foreign venture capital funds to cooperate in a public-private partnership scheme channeled towards independent and competing privately managed venture
57
capital firms as in the Yozma or Corfu Project. A variant of this scheme
- – could imply a tripartite cooperation between Indonesian private funds foreign (ASEAN) funds and public (national) funds or just a joint
54 Strategic schedule for SMEs development. AEC Blueprint P.54
55 The EVCA itself states its position to support the formation of a private
sector-managed pan-European fund-of-funds with a high commitment to venture
capital in its position statement of November 2014 entitled Accelerating
Innovation & Delivering Growth: Using the Jobs, Growth and Investment
Package to Attract Private Sector Investors to the European Venture Capital
Industry. The document could be accessed at the following link
http://www.evca.eu/media/340371/141109_EVCA_FOF_scheme.pdf 56 Marian Moszoro and Pawel Gasiorowski. Optimal Capital Structure of Public-Private Partnerships. IMF Working Paper WP/08/1. January 2008. International Monetary
Fund. P. 12 investment scheme between Indonesian venture capital funds and foreign (ASEAN) venture capital funds. The underlying rational remains the same: lowering capital cost and spillover effects in terms of know-how, and deterring dependence towards the use of public funds as source of financing. The constitution of ASEAN level funds of funds configured in a public-private structure would permit to secure a long-term fund availability adapted to Venture capital financing.
2.2.2.3 ASEAN Fund Passport Mobility