INDONESIAN BOND MARKET

Group 5 Aditya Sharma (A051) Anchit Verma (A060) Ankit Kandoi (A028) Shivam Aggarwal (A002) Shubham Dikshit (A014) Swati Aggarwal (A003) Yashaswi Priyadarshi (A043)

INTRODUCTION

In Indonesia, according to Capital Market Law, clear definition of bonds comprises of Promissory note, commercial paper, shares, bonds, evidences of indebtedness, participation units of collective investment contracts, futures contracts related to securities, and all derivatives of securities. The Indonesian government bond forms vary from conventional and retail government bonds to government Sukuk in several tenors. Corporate and/or Public Bonds include: a) Corporate Bond and Medium-Term Note b) Corporate Sukuk c) Convertible Bonds Municipal bonds are issued by the province or district government for financing public utilities projects. Though both government and corporate bonds are listed on the Indonesia Stock Exchange (IDX), they are mostly traded Over-theCounter (OTC). Islamic bonds, which are based on shariah principles, play a major role in Indonesian capital markets.

SIZE & COMPOSITION

OUTSTANDING AMOUNT(billion) 1Q12 IDR TOTAL 1,013,454 US$ 111 IDR 1,154,804 1Q13 US$ 119

Government
Central Govt. Bond

858,644
760,580

94
83

958,369
861,515

98
88

Central Bank Bills

Corporate

98,064
154,810

11
17 1Q12

96,854
196,435

10
20 1Q13

GROWTH RATE (%)

q-o-q TOTAL Government Central Govt. Bond Central Bank Bills Corporate 2.0 1.4 5.1 (20.4) 5.3 y-o-y (1.6) (5.5) 12.7 (58.0) 27.8 q-o-q 5.9 6.2 5.0 17.6 4.8 y-o-y 13.9 11.6 13.3 (1.2) 26.9

MARKET STRUCTURE

CHARACTERSTICS
ITEMS SBI REGULAR GS RETAIL GS SPN/ SPNS CORPORATE BONDS

Form Tenure

Scripless Used to be 1 to 3 months Bank Indonesia

Discount

Scripless 2-30 years

Scripless 3 years

Scripless 1 to 12 months Min. of Finance

Discount

Scripless Currently 115yrs. ,5 yrs. Corporation

Mostly Quarterly Coupons

Issuer
Coupon

Min. of Finance

Min. of Finance

Fixed Rate: Fixed Rate: SemiMonthly Annually Variable Rate: Quarterly Competitive Auction OTC & ontheIPO OTC & on-theexchange(FITS)

Issuance Trading

Competitive Auction OTC

Competitiv e Auction OTC

IPO OTC & on-theexchange(FITS)

MARKET PARTICIPANTS

Issuers a) Government Principal issuer in the debt market Issues treasury bill through Ministry of Finance (MoF) and short term bank certificates called Sertifikat Bank Indonesia b) Corporate Corporate bond issuers re-entered the bond market in 2002 Since then they have issued conventional bonds and Islamic sukuk bonds Investors a) Pension Funds Two types of state funds dominate the pension fund industry: Jamsostek for non government workers and Taspen for civil servants b) Insurance Companies Insurance companies hold about 13% of all tradable government bonds c) Mutual Funds FI assets comprise a significant portion of investment fund assets The NAV of these funds was valued at IDR 154.53 trillion

INVESTORS BREAKUP
7.79% 0.40% 6.89% 5.29% 36.46% Insurance Companies Mutual Funds Banks Foreign Holders

10.19%

Pension Funds
Others Bank Indonesia 32.97%

MARKET PARTICIPANTS
Intermediaries

a)

Banks
Indonesias Banking law and Capital markets law allows banks to act as intermediaries in Government securities trading

b)

Securities Companies
Act as broker-dealers, underwriters and investment managers after approval from BAPEPAM-LK Currently there are 146 security companies in Indonesia

Rating Agencies

The BAPEPAM-LK licenses local rating agencies specialising in Indonesian debt The two local rating agencies are Credit Rating Indonesia and PT Kasnic Credit Rating Indonesia

MARKET INSTRUMENTS

Government Bonds

Promissory notes issued to BI Hedge bonds Fixed rate bonds Variable rate bonds

Corporate Bonds

Conventional bonds and sharia- compliant instruments

SPECIAL BONDS : SUKUKS

Islamic bonds structured in such a way as to generate returns to investors without infringing Islamic law Most commonly used structures are sukuk-al-ijarah and sukuk-almudharabah In sukuk-al-ijarah the investor gets partial ownership of the asset which is created out of the proceeds of the bond In sukuk-al-mudharabah one partner provides capital and the other provides managerial skills. The first sharia bonds listed on IDX issued by PT Indosat Tbk, using mudharabah contracts In 2004, Sharia bonds using Ijarah contracts were issued The passage of the Islamic Sharia Debt Bill in April 2008 allowed the Govt. to issue Islamic bonds to fund their budget deficits

ISSUANCE & OFFERING OF GOVERNMENT BONDS

Authority to issue government securities (or SBN), consisting of SUN and SBSN, lies with the government represented by the MOF The MOF should consult with BI prior to executing the government securities issuance program every year Conducted through auction, book building, and private placement in the local or international primary markets Each method is governed by a corresponding Finance Minister Regulation

ISSUANCE & OFFERING OF CORPORATE BONDS AND SUKUK

Structured Process consists of the following :

Submission of Registration Statement to Conduct Public Offering Request for Amendment and/or Additional Information Publication of Summary Prospectus, Prospectus, and Preliminary Prospectus Effectivity of Registration Statement (45 days from the date the completed or modified Registration Statement is received by Bapepam-LK) Publication of Revision of and/or Additional Summary Prospectus Period of Public Offering, Allotment, and Report on the Result of Initial Public Offering (execute public offering within 2 working days when the Registration Statement becomes effective. The period of public offering is at least 1 working day and a maximum of 5 working days) Shelf Registration (to enable the issuer or public company with good performance to make a public offering of debt securities and/or sukuk within a period of time)

PROCESSES EMPLOYED FOR PUBLIC OFFERING

Auction

Auction is used for public offering of government securities. It is conducted by entering competitive and/or non-competitive bids during a predetermined bidding period via a system provided by an agent who conducts the auction of SUN or SBSN. For government bonds, participants in the auction are banks or securities companies appointed by the Minister of Finance as primary dealers, which are entitled to several rights and obligations.

Book Building
Private Placement

SECONDARY MARKET A VIEW

The

Inter-Dealer Market Association for Government Securities (HIMDASUN) was created in March 2003 to increase the liquidity of the secondary bond market by facilitating price information.
The

secondary market for corporate bonds is underdeveloped in Indonesia because bondholders usually hold their bonds until maturity.
The

trading of corporate bonds is facilitated through IDXs FITS.

SECONDARY MARKET PROCESS

Investor ask a broker-dealer to place a bid or offer on the OTC-FIS system, where it can be accessed by other participants in real time.

In general, no fees is charged in transacting bonds. However, securities companies acting as broker charge a spread between the buying and selling price.
After a trade is completed, the buyer and seller enter the purchase instruction into their BI-SSSS terminal. Since trade is carried out over-the-counter, settlement may vary. On average, Sub-Registries settle 2 days (T+2) after the trade. After settlement, BI-SSSS sends confirmation advice to Bank Indonesia and the Sub-Registries, which send statements of account to the buyer and seller.

PAYMENT OF INTEREST & REDEMPTION

Bank Indonesia as paying agent pays coupon by crediting banks that holds government bonds. Investors banks are pre-advised of incoming funds from BI, and are required to make these funds available to investors on coupon payment date. If bank account and Sub-Registry are at different institutions, the funds are credited to the investors account on payment date, but the investor may not be able to withdraw until the following day. Coupon interest is paid quarterly or semiannually according to the terms and conditions of the issued bonds.

REOPENING ISSUES

Re-openings are the offering of new securities with the same terms and conditions as an existing issue. They are used to increase the size of an outstanding issue. A reopened bond has the same maturity date, security identifier, and coupon rate as the original security. The only difference is that they have a different issue date and usually, a different purchase price based on current market yields. Procedures for purchasing reopened issues are the same as purchasing a new issue.

Ministry of Finance

SelfRegulatory Organizations

Regulatory Agencies

Bank Indonesia

Bapepam-LK

ROLES

MOF Main body responsible for the administration of finances of the central government and for all economic and financial matters affecting the country. Bank Indonesia Responsible for maintaining the stability of the rupiah, monetary policy, payment system, and regulating and supervising the banking system. Acts as the central depository for the settlement and safekeeping of government bonds and the Certificate of Bank Indonesia. Bapepam-LK To guide, regulate, and supervise daily the capital market under Ministry of Finance To ensure an orderly, fair and efficient capital market, as well as to protect the interests of the investors and public

ROLES

Self-Regulatory Organizations Each regulates its own areas of operations and all regulations issued by the SRO are subject to BapepamLK approval. IDX (Indonesian Stock Exchange) is a private-owned limited company, whose shareholders are local stock broking firms. KPEI ( Indonesian Clearing & Guarantee Corporation) is a limited company to provide clearing and settlement, guarantee services for stock exchange transactions, and provide securities and borrowing. KSEI (Indonesian Central Securities Depositories) is a depository and settlement institution and perform settlement operations in scripless form.

INDONESIAN GOVT. BONDS TERM STRUCTURE

Data as per July 16th, 2013

COMPARATIVE ANALYSIS
Indonesian Market BB+ Actual/Actual IDR 1 million 8.1297 119 83:17 26 13.9% Characteristics Credit Rating Day Count Convention Min. Tender Amount 10- year yield (18
th

Indian Market BBB30E/360 Rs. 25,000 8.08 835 73:27 1,092 24.3%

July)

Size of LCY bond market

(USD bn)

Government: Corporate Bond Trading Volume (USD bn) Growth Rate (Y-o-Y)

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