Share Buy-Backs -- Indonesia

The globe is in the midst of interesting and tough financial times. The financial crisis might have begun with the unfolding of some of the world’s biggest financial institutions based in the US but the impacts of this meltdown will undoubtedly be felt around the world.

The International Monetary Fund has already declared some economies to be in recession and other economies as being under threat of recession. It is nice to note that the IMF has declared Australia to be at a very low risk of recession. However, it is probably worth noting that the Australian Stock Exchange has taken a beating over the last week or so. It is bloody and bruised although seeming it had a good day today.

These might be interesting times but they are also dangerous times in the financial sense.

The Indonesian Government has been seeking to convince Indonesians and investors in Indonesia that the fundamentals of the Indonesian economy are sound and that the impacts of the global financial crises are likely to be minimal. Nevertheless, the government has sort to minimize any negative impacts even further by facilitating the ease in which issuers can buy back shares without falling into breach of provisions relating to market manipulation and insider trading, among others.

This suggests that perhaps the fundamentals of the economy are not as sound as the government is saying. Yet, there are plenty of excellent minds in the Department of Finance that are more than capable of handling this crisis. It might call for some tough action but the powers that be are capable of that too, if they want to be.

The provisions concerning the buy-back of shares of issuers and public companies are contained in Bapepam-LK Rule No. XI.B.3 and is attached to Head of Bapepam-LK Regulation No. KEP-401/BL/2008. The Regulation was issued on 9 October 2008 and came into immediate force.

It is interesting that some of the news is not just about the ability to buy-back shares that one has issued but that the government is also suggesting that some State Owned Enterprises might also be utilizing some of the IDR 4 trillion fund made available to them to buy into some troubled concerns, such as Bumi Resources.

Bumi Resources is owned by the Coordinating Minister of Social Welfare's family. It is a Bakrie entity at the moment. It should not be for long as it seems destined to default of loans when they fall due in April of 2009. If SOEs were to buy into these Bakrie companies then there will undoubtedly be some difficult PR times ahead as the government seeks to avert claims of favoritism and the stench of what many would see as being as bad as corruption even where no laws were actually broken.

The idea that this crisis is going to get messier before it gets better seems to be a real possibility.

Back to the Bapepam-LK Rule. There are 16 points contained in the Rule. In essence, the issuers and public companies that are inclined to do so can buy back their shares without breaching the provisions of Article 91, 92, 95, and 96 of the Capital Market Law (Law No. 8 of 1995) whilst this Rule remains in force.

The key feature of the Rule is that the issuer or public company can conduct a buy-back of its shares without having to undertake a General Meeting of Shareholders (GMS) to gain shareholder approval for the buy-back.

However, the buy-back is limited to 20% of the paid-up capital of the issuer or public company. Any buy-back will require the issuer or public company to notify both Bapepam-LK and the Stock Exchange of their plans and then the buy-back must be completed within three months of that notification.

A buy-back of shares can then become part of an Employee Stock Option Plan or an Employee Stock Purchase Plan. However, this must be done with the approval of the GMS and in accordance with Bapepam-LK Rule No. IX.E.1 as it relates to conflict of interest transactions.

Any share buy-back can be sold outside of the exchange at a fair market price. Nevertheless, that fair market price cannot be less than the price paid in the buy-back of those shares.

It is expected that this Regulation and Rule will allow for greater stability in the market.

Starbucks

Now is probably not a good time to be a Starbucks employee in the US. Starbucks are reporting that they are to close 600 of their coffee shops in the US and this will eliminate some 12,000 jobs. Strangely enough the market reacted pretty well to the news and put on as much as 7.2% in Nasdaq trade. The shares eventually closed up 4.7% in after hours Nasdaq trading at USD 16.35.

Starbucks had more than doubled in size in the last three years but despite store growth the company had seen declining earnings. Perhaps if there is a case to be made for a company growing too fast then this might be it. Almost 70% of the stores to be closed are less than three years old. However, the company maintains that it is going to stick to its plan of opening another 200 stores through September 2009.

Analysts are suggesting that Starbucks has fallen victim to surging world oil prices where consumers are less likely to spend income on luxuries such as cafe lattes and caramel machiatto.

I was in Starbucks in Plaza Senayan last night and it was doing a roaring trade for a Tuesday evening at 21.00. It was full and more people were lining up to get their gourmet coffee fix. I would be surprised if the franchise holder in Indonesia was looking at consolidating or closing stores, in fact I would be more surprised if an expansion in the number of stores was not being contemplated. However, I am not privy to the financial books and my observations are completely anecdotal based on drinking coffee in various Starbucks stores and them always being full.

Come to think of it, it is time for a coffee!

But it ain't gonna be no Starbucks but rather it is going to be a Kapal Api!