LEGAL SERVICES ON CAPITAL MARKET

Category: Legal Services
Written by Valdo Auzan Putra M. on 25/10/2022
The author’s views are entirely their own and may not always reflect the views of Putranto Alliance.

Capital market provides various alternatives for investors in addition to other investment alternatives, such as: saving in a bank, buying gold, insurance, land, buildings, etc. Capital market act as a connector or liaison between investors and companies or government institutions through long-term trading of instruments such as bonds, stocks, and others. The function of the capital market is to efficiently increase and link long-term fund flows with its “market criteria” that support the real growth of the whole economy.

CAPITAL MARKET BENEFITS

For publishers, the capital market has some benefits, such as:

  1. The amount of funds that can be raised is large;
  2. The funds can be received at once when the primary market is completed;
  3. There is no covenant, so management can be more free in managing funds/company;
  4. Helps show company solvency to improve the image of the company;
  5. The dependency of publishers on banks has become smaller.

For investors, the capital market has some benefits, such as:

  1. The value of investments develops with the growth of the economy. The increase is reflected in the increase in stock prices that reach capital gains;
  2. Earn dividends for those who own or hold shares and floating interest;
  3. Simultaneously make investments in several instruments that reduce risk.

THE ADVANTAGE AND DISADVANTAGES OF THE CAPITAL MARKET

Below are some advantages of the capital market:

  1. Source of funding for companies

    Companies that want to develop a business needs more fund. When a company has trouble with their fund, they usually choose the capital market to obtain fast funding for the company. By utilizing the capital market to obtain funds, the company does not need to rely on banks.

  2. Indicators of the economic development of a country

    When calculating national income, investment can be one of the indicators taken into account. So, if a nation has many activities in investment, it can be said that its economic development is good.

  3. People can invest in the capital market

    People can invest in companies listed on the capital market. Should the invested company obtain profit, people who invest in that company also obtain profit. Doing this also helps stimulates the movement of money.

Below are some disadvantages of the capital market:

  1. Unequal capital market education

    In Indonesia, knowledge regarding the capital market is mainly known by those of the upper-middle-income class. The lower-middle-income class is generally unfamiliar with the terms, how it works, and the procedures to get involved. Money turnover tends to be in the upper class of society only. While it may lead to nominally rising economic growth, it does not illustrate an improvement in the quality of life for people with lower-class economic conditions.

  2. The unstable of the exchange rate greatly affects the stock price

    Stock price depends on the exchange rate movement, such as a currency's value against another country's value. When the exchange rate's value is unstable, investors are afraid to invest since it can lead to their loss.

  3. Not all investments are sweet-ended

    Investing in the capital market is risky. There are times when an investment can generate profits and even cause capital gains. However, it can also cause losses. Therefore, in investing, you must be prepared to face every possibility, whether it is profit or loss.

CAPITAL MARKET LAW

Capital market law is a law that regulates the legal relationship between the investor (who own funds) and issuers or public companies (which require funds) through the stock exchange as a medium where they meet. The capital market in Indonesia is regulated by capital market law No.8 the year 1995, which consist of 18 chapter and 116 articles.

Capital market law defines public offering as an activity carried out by the issuer to sell securities to the public which follows existing regulations. With the above provisions, the main focus in the capital market is to sell and buy securities in the form of debt recognition letters, commercial securities, stocks, bonds, proof of debt, units of participation in collective investment contracts, securities futures contracts, and any derivatives of securities.

In addition to the capital market having its laws, it also has a supervisory body that aims to supervise, organize and protect investors, the Otoritas Jasa Keuangan/Financial Services Authority (OJK). OJK is led by a chairman appointed by the president and has the task and function to carry out integrity regulation and supervision of all financial services activities in the banking sector, capital market, and non-bank financial industry sector.

Aside from OJK, there are self-regulatory organizations (SRO) that exercise the authority to apply rules in the Capital Market industry. In Indonesia’s capital market, there are four SRO institutions, namely:

  • Indonesia Stock Exchange/Bursa Efek Indonesia (BEI);
  • Indonesian Clearing and Guarantee Corporation/Kliring Penjaminan Efek Indonesia (KPEI);
  • Indonesian Central Securities Depository/Kustodian Sentral Efek Indonesia (KSEI);
  • Indonesia Securities Investment Protection Fund (SIPF).

INITIAL PUBLIC OFFERING

Initial Public Offering or IPO is the process by which a company can go public by selling its shares to the general public. IPO is usually done by companies that have been established for quite a time and decides to be listed on the stock exchange so that they can go public. The company can increase its capital by issuing new shares to the public or existing shareholders by holding an IPO. In addition, the company can sell its shares to the public without spending capital.

By issuing securities, the company offers and sells them to the public in the form of shares. After IPO, the company’s shares are traded on the open market. Stakeholders can further sell the shares through secondary market trading. IPOs are generally carried out for the first time by a company so it can go public. In other words, a previously privately owned company will become a public company through an IPO.

The purpose of the company holding an IPO:

  1. Raising capital for growth and expansion

    Each company needing more funds to improve its operations, create a new product, or pay off existing debts can use IPO to gain more funds.

  2. Making it easier for early investors to sell shares

    IPO is a way for early investors and venture capitalists to sell their shares to make money. A company becomes liquid through the sale of shares by holding an IPO, which could be the right moment for venture capitalists and early investors to sell their shares in the company to obtain profit.

  3. Building Public Awareness

    IPO is usually marked as an important event because there will be a lot of buzz and publicity, a great way for companies to publish their product and services to customers and new investors in the stock market.

With its apparent benefits, it is not surprising that many companies want to apply for an IPO to issue their shares to the public. However, companies must fulfill the following conditions before they can apply for an IPO:

  1. Have a complete leadership structure

    The first requirement in applying for an IPO is that company must have a complete leadership structure, starting from independent commissioners, corporate secretaries, committees, audits, and others.

  2. Companies meet accounting and financial criteria

    In addition to having a complete leadership structure, the company’s accounting and financial calculations must also meet the criteria for submitting an IPO. The company must have carried out its operations for at least 1 year of an accounting period. The company’s accounting and financial reporting must also be managed following applicable accounting rules. In addition, the company must be proven to have not suffered any losses for the past two years before filing.

  3. Comply with the minimum limit of shares to be published

    A company must follow the minimum number of shares offered to the public. The minimum limit includes 150 million shares. Meanwhile, the number of investors or shareholders has to be at least 500 parties or more. For the stock price, the company must sell it for a minimum of Rp. 100.

LEGAL SERVICES REGARDING INITIAL PUBLIC OFFERING

As a consultant on the IPO transaction, the consultant must know the basic information of the transaction. The information includes the purpose of raising funds, the range of funds needed, the percentage of public share ownership they want to release, the agreement that needs to be amended before the IPO, and the legal issues of prospective issuers.

In addition, legal consultants must also ensure the availability of documents that must be completed in the IPO application, such as a cover letter for registration statements, prospectuses, shareholder statements, and company financial statements.

As part of the IPO process, private companies must perform due diligence to ensure they meet all the requirements for going public. When conducting due diligence, legal consultants must ensure at least five important aspects: corporations, material and liabilities permits, assets, agreements with third parties, and legal cases. Legal consultants also sign legal opinions regarding securities issuance that must meet the provisions of the code of ethics, professional standards, and OJK regulations. Legal Consultants also coordinate with other professions and supporting institutions following OJK provisions.

For companies that want to go public, legal consultants are responsible for issuing two documents, a legal audit and a legal opinion. Capital market legal consultants must prepare material facts, the structure of companies that will go public, examinations in terms of legal or legal audits, making prospectuses for public offerings, registration statements, and providing opinions from a legal point of view.

Based on Law Number 8 the year 1995 regarding the capital market (capital market law), KHPM (Konsultan Hukum Pasar Modal) is obliged to apply the principle of disclosure, which is a general guideline to inform the public on time. The general guideline includes information about the business and other information that can affect the decision of financiers as well as the price of the securities.

INITIAL PUBLIC OFFERING PROCESS

The process of an IPO takes time. The average time a company needs to prepare to conduct an IPO is 3-6 months. Below are the steps to go public:

  1. Working with an underwriter

    Underwriters are professionals who help the company to go public. Underwriters help companies in the public issuance of equity/common stock or preferred stock. They are also responsible for the distribution of the company's stock.

  2. Submit documents to the Indonesia stock exchange (IDX)

    After the submission documents are complete, the IDX studies the documents and visits the company. IDX will ask the company’s administrators, underwriters, and other professionals to present why the company is worthy of carrying out an IPO. Should it meet the requirements, the IDX approves through a Preliminary Share Listing Agreement.

  3. Awaiting OJK approval

    The company requires supporting documents such as a prospectus. If the OJK has issued a permit, the company can release a short prospectus in the media and make a book-building.

HOW CAN WE HELP

Nowadays, many investors are emerging to find the right and strategic company for them to be able to invest their money, creating an opportunity for companies to find financiers for their business. One option is for companies to conduct an IPO. However, companies need to know a few things before conducting an IPO. The company must be able to choose the right and trustworthy legal consultant.

Putranto Alliance is here to help you as your company’s capital market consultant. By relying on our consultants, who have been experienced and trusted by many companies, we can help you to determine the steps that the company wants to take, and we can maintain your trust.

FAQs

Indonesian Clearing and Guarantee Corporation (KPEI) is an institution that provides clearing services and guarantees for the settlement of stock exchange transactions. Clearing stock exchange transactions is a process of determining the rights and obligations that arise from securities trading activities on the Indonesia Stock exchange.

Based on Law No. 21 the year 2011, OJK was established to ensure that all activities in financial services can be carried out regularly, fairly, transparently, and accountably.

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