Implementation of Sharia Principles in Capital Markets
In November 2015, the Financial Authority Services (Otoritas Jasa Keuangan – “OJK”) issued Regulation No. 15/POJK.04/2015 on Implementation of Sharia Principles in Capital Markets (“POJK 15”), replacing Bapepam-LK Regulation No. IX.A.13 concerning Issuance of Sharia Securities (“Bapepam Reg. IX.A.13”).
Compared with Bapepam Reg. IX.A.13, POJK 15 provides more detailed qualifications on the types of capital market transactions that are considered to contravene sharia principles, and elaborates more detailed provisions on sharia principles such as (i) requirements for sharia securities, (ii) types of sharia parties, (iii) Sharia Monitoring Board (Badan Pengawas Syariah – “BPS”), and (iv) reporting obligations, as will be explained further below.
Capital market sharia activities consist of (i) offering of sharia securities, (ii) trading of sharia securities, (iii) management of sharia investments in capital markets, (iv) activities of issuers and public companies in relation to sharia securities issued by them, (v) activities of securities companies conducted under sharia principles, and (vi) the entities and professions relating to sharia securities.
♦ Activities and Transactions that Contravene Sharia Principles
Business activities that contravene sharia principles
- betting and games that are categorized as gambling;
- financial services that constitute usury (riba);
- sale and purchase of risks that consist of uncertainty (ghahar) or gamble (maisir); and
- production, distribution, trading, or procurement of (i) goods/services forbidden based on substance (haram li-dzatihi), (ii) goods/services forbidden not based on substance (haram li-gharihi) as stipulated by the National Sharia Board (Dewan Syariah Nasional – “DSN”) – Indonesian Ulama Council (Majelis Ulama Indonesia – “MUI”), and/or (iii) goods/services that are morally corrupt and mudharat
The qualifications are basically the same as under Bapepam Reg. IX.A.13, however POJK 15 deletes the restriction on acquisition of a company that at the time of acquisition has loans from usury financial entities (lembaga keuangan ribawi) that are greater than its equity.
Transactions that contravene sharia principles
- trading/transaction with fake offering or demand;
- trading/transaction with no delivery of goods or services;
- trading of goods that are not owned;
- insider trading;
- marginal transaction of sharia securities that includes interest (riba);
- trading/transaction with purpose of hoarding (ihtikar);
- trading/transaction that includes the substance of bribery (risywah); and
- other transactions that include speculation (gharar) or fraud (tadiis), including the conceal of defect (ghisysy) and the effort to influence another party that is deceitful (taghrir).
♦ Requirements for Sharia Securities
POJK 15 defines the types of securities that can be deemed Sharia Securities, among others, sukuk, mutual funds, asset backed securities, and any other securities stipulated by OJK.
The securities should be in accordance with the schemes of contract (akad) stipulated under Bapepam-LK Regulation No. IX.A.14 concerning Contracts Used in the Issuance of Sharia Securities in Capital Markets or any other contract (akad) that does not contravene sharia principles, such as:
- Ijarah, the lease of goods or services for a certain period of time, with payment during the lease period;
- Istishna, an arrangement for the seller to sell certain products (istishna objects) to the buyer;
- Kafalah, a guarantee between a borrower and a guarantor to guarantee the liabilities of the borrower;
- Mudharabah (qiradh), cooperation of fund management in a specific business between the fund owner and the fund manager;
- Musyarakah, an agreement between parties to participate in capital either in the form of money or other form, to conduct a business; and
- Wakalah, an agreement between a principal and a proxy for the proxy to conduct certain actions.
♦ Sharia Parties
Three types of parties may conduct sharia activities:
- AOA sharia party: a party that states sharia activities in its Articles of Association;
- Sharia services provider: a party that does not state sharia activities in its AOA, but
– has a sharia business unit;
– is a sharia investment manager;
– is custodian of a sharia investment;
– part of its business activities are conducted in accordance with sharia principles in the capital market; or
– provides other sharia services; and
- Sharia issuer: a party that that is neither of the above, but issues Sharia Securities and/or has the role to support the issuance of Sharia Securities in the capital market.
♦ Sharia Monitoring Board (Badan Pengawas Syariah – “BPS”)
Before the enactment of POJK 15, only AOA sharia parties and sharia investment managers were obliged to form a BPS. After the enactment of POJK 15, sharia services providers must appoint a BPS, director, or person in charge to supervise and monitor the implementation of sharia principles in the company. Sharia issuers are not obliged to form a BPS.
Based on the Company Law (Law No. 40 of 2007), the BPS shall be appointed by the General Meeting of Shareholders (“GMS”), while under POJK 15, the BPS may be appointed by: the GMS, any resolution equal to GMS, or the directors of the company.
The BPS may be an individual or a business entity that has obtained a license as an Expert in Sharia Capital Markets (Ahli Syariah Pasar Modal –”ASPM”) from OJK. An ASPM can be appointed as BPS in up to four companies and can only hold dual-positions as director/commissioner in two other companies engaging in capital markets.
♦ Reporting Obligation
Sharia parties must report their fulfillment of sharia principles to OJK. The reports shall be drafted by the BPS (for AOA sharia parties and sharia investment managers), or a director/person in charge (for sharia services providers, other than sharia investment managers).
The reports shall be submitted to OJK simultaneously with the annual report or annual financial report.
February 12, 2016
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- February 12, 2016