Today it was reported that Singapore’s DBS bank has extended its offer to purchase a controlling stake in PT Bank Danamon. This is just the latest development in a long-running saga, and again illustrates the difficulty for some ASEAN companies to make cross-border investments within the regional bloc, despite the coming into force of the ASEAN Comprehensive Investment Agreement (ACIA). This move comes after Indonesia in July 2012 imposed rules that would limit investment in Indonesian banks to 40%, with larger shareholdings requiring additional regulatory approvals. More recently, Bank Indonesia indicated that approval of the DBS-Danamon share purchase would be conditional on Singapore’s allowing for reciprocal market access in the retail banking industry for Indonesian banks.
One question I often get asked how can the Indonesian government throw up these restrictions if the ACIA is in place? Doesn’t the ACIA require that the Indonesian government treat DBS of Singapore the same as an Indonesian investor? The answer, of course, rests in the details of the ACIA.
The ACIA has a carve-out for regulation of financial service providers. Article 17(2) of the ACIA specifically incorporates paragraph 2 (Domestic Regulation) of the Annex on Financial Services of the General Agreement on Trade in Services in Annex 1B to the WTO Agreement (“GATS”), which states in part:
Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement.
Hence Bank Indonesia has couched its measures as justified for such prudential reasons. The second sentence does specify that measures for prudential reasons should not be used to avoid commitments under the agreement. If one looks at the July 2012 restrictions, the Indonesian government took pains to note that they applied all investors, foreign and domestic. Hence in writing the restrictions do not violate the ACIA’s national treatment obligation (e.g., the obligation to treat ASEAN investors the same as domestic investors). Now in practice, these restrictions may have the effect of discouraging foreign investment, particularly if domestic investors can use indirect shareholding to circumvent the restrictions (more so if Bank Indonesia does not actively look for them) but in principle they are consistent with the ACIA’s national treatment obligations.
Furthermore, enforcing this within ASEAN would be difficult, given that ASEAN dispute resolution procedures are untested. In any event Singapore, like other ASEAN members is reluctant to invoke such procedures.
Thus, the ACIA has affected the DBS-Danamon saga, but in a more indirect way than perhaps one would expect. Yet because financial institutions have a fundamental effect on regional economic integration (e.g., the Euro saga in the EU) perhaps this is to be expected. Hopefully such sagas will become the exception and not the rule in the development of the ASEAN Economic Community.