Indonesian Capital Market

Indonesia is one of the vast developing, strategically located and most flourished country in Asia, a promising investment.
a. History of Indonesian Capital Market
i. Establishment of the Indonesian Capital Market by Dutch Indies Government
In the history of Indonesian Capital Market, equity transactions had started in the 19th century. According to Effectengids, a book published by Verreniging voor den Effectenhandel in 1939, transactions started since 1880. In December 14, 1912, Amserdamse Effectenbueurs established stock exchange in Batavia. It was reported that the Batavia Stock Exchange was the 4th oldest in Asia following Bombay, Hongkong and Tokyo.
At the beginning of the 19th century, Dutch Indies government began to grow massive-sized plantation in Indonesia. Funding came from depositors who consist of Dutch inhibitors and other European with have much higher income than the native Indonesian. From that time on, the colonial government established the capital market. After prudent preparation, the first Indonesian capital market was set up in Batavia (Jakarta) on December 14, 1912 with the name Vereniging voor de Effectenhandel (Stock Exchange) and started its operation. At the initial transaction, there were 13 members: Fa. Dunlop & Kolf; Fa. Gijselman & Steup; Fa. Monod & Co.; Fa. Adree Witansi & Co.; Fa. A.W. Deeleman; Fa. H. Jul Joostensz; Fa. Jeannette Walen; Fa. Wiekert & V.D. Linden; Fa. Walbrink & Co; Wieckert & V.D. Linden; Fa. Vermeys & Co; Fa. Cruyff dan Fa. Gebroeders. Securities traded in exchanged were stocks and bonds of Dutch companies/plantations operating in Indonesia, bonds published by government (provincial and municipality), stock certificate of American companies published by administration offices in The Netherlands and other Dutch Securities companies.
The development of the capital market was so remarkable that it attracted investors from other cities. To accommodate the demand, two stock exchange were established on January 11, 1925 in Surabaya and August 1, 1925 in Semarang. Members of the stock exhange in Surabaya at that time were: Fa. Dunlop & Koff, Fa. Gijselman & Steup, Fa. V. Van Velsen, Fa. Beaukkerk & Cop, dan N. Koster. And in Semarang were: Fa. Dunlop & Koff, Fa. Gijselman & Steup, Fa. Monad & Co, Fa. Companien & Co, serta Fa. P.H. Soeters & Co. The development of the stock exchanges were impressive as seen on the Securities value reported up to NIF 1.4 billion (if indexed by the price of subsidized rice in 1982, the value was + Rp 7 billion) derived from 250 different Securities.
ii. The closing of Stock Exchange in effect of World War II.
In the beginning of 1939, European political climate was sweltering with the rise of Adolf Hitler’s domination. Overseeing this, the Dutch Indies government took several considerations to focus Securities transactions in Batavia and closed the Surabaya and Semarang stock exchange. However, on May 17, 1940, all activities was seized and Securities must be held in reserve at the banks appointed by the government. The closing of the 3 stock exchange exasperated the liquidity of the Securities, bothered the Securities holders and affected many companies and entities to withdraw and called off their investment in Indonesia. Consequently, the break of.
World War II marked the end of capital market activity during the Dutch colonialization era.
iii. Re-activating-1 era, establishment of government bond and Emergency Law No. 15, 1952 regarding Stock Exchange.
A year after the government of The Netherlands acknowledged the independence of the Republic of Indonesia, precisely in 1950, the government issued bonds of the Republic of Indonesia. This marked the reactivation of Indonesian Capital Market.
Preceded by the establishment of Emergency Law No. 13, September 1, 1951, which soon affirmed as Law No. 15, 1952 regarding Stock Exchange, government of the Republic of Indonesia reopened the Stock Exchange in Jakarta on June 31, 1952 after being suspended for 12 years. Its operation was conducted by Money and Securities Trading Union (PPUE) which consists of 3 state banks and a few traders, and Bank of Indonesia as advisor.
Since then the Stock Exchange grew significantly, although the traded Securities are those offered before the World War II. The trading activity increased since Bank Industri Negara (state-owned industrial bank) issued bonds in 1954, 1955 and 1956. Buyers were mostly Dutch, as individuals and legal entities. All members were allowed to conduct arbitration transaction overseas especially with Amsterdam.
iv. Postponement-2 era, in conclusion of inflation in Indonesia.
The situation remained until 1958 because the trading activities began to break down and drew back. This was caused by political confrontations ran by the Indonesian government towards The Netherlands that created an unbalanced economy between the two countries which made many Dutch nationals left Indonesia.
The development worsened in effect of the dispute over Irian Jaya and the taking-over of all Dutch companies in Indonesia in accordance to Nationalization Law No. 86, 1958.
This disorder was followed by an instruction from the Board of Dutch Company Nationalization (BANAS) in 1960 to prohibit the transaction of all securities owned by Dutch companies in Indonesia including all Dutch-currency-based securities.
The inflation rate at that time was significantly high and created turmoil in the currency and capital market which made the society to loose trust. They also built negative sentiment towards Rupiah which hit its lowest value in 1966.
The decline caused low stock and bond nominal value which made them less interesting to investors. It was certainly the rise and fall of the Indonesian Capital Market during the Old Order regime.

v. Reactivating-2 era, formation of Capital Market Committee through Presidential Decree No. 52,1976.
Further steps were taken by the New Order government to restore society’s trust towards Rupiah. The government prepared the Capital Market and continuously promoted funding through savings and deposits.
In accordance with the decree from the Directors of Bank of Indonesia No. 4/16, July 26, 1968, preparation committee for Financial Market and Capital Market was formed. The result affirmed that the starting point of the Capital Market in Indonesia was designed by the government since 1952 but considering the turmoil and the undermined society, the Stock Exchange of Indonesia since 1958 until 1976 drew itself back.
After concluding their task, the committee was dismissed through a decree of the Minister of Finance No. Kep-25/MK/IV/1/72, January 13, 1972. In 1976, Indonesian Capital Market Supervisory Agency (Bapepam) and PT Danareksa was formed. Bapepam, led by the Governor of the Central Bank, was responsible to assist the Minister of Finance.
With the establishment of Bapepam, integrity to form Financial Market and Capital Market was seen once more. Besides serving as assistant to the Minister of Finance, Bapepam also acted as supervisor and manager to stock exchange.
In August 10, 1977, according to Presidential Decree No. 52, 1976, the Capital Market was reactivated and several companies go public. In the New Order the growth of the Capital Market can be divided into two periods, 1977 to 1987 and 1987 till now.
The growth of the Capital Market between 1977 and 1987 was sluggish although the government provided facilities to corporations to utilize funding from the market such as tax facilities to attract communities to play in the Capital Market.
The sluggishness at that period was caused by several problems which some of them concerned the rigid procedure of stock and bond issuance, and stock fluctuation price limits.
To overcome the problems, the government released deregulations regarding the growth of the capital market including December Policy Package 1987, October Policy Package 1988 and December Policy Package 1988.
vi. Growth Era, Deregulation Packages: December Package 87, October Package 88, December Package 88, Establishment of Surabaya Stock Exchange (SSX) and Jakarta Stock Exchange (JSX), Presidential Decree No. 53, 1990 and Decree of Minister of Finance No. 1548, 1990, Law No. 8, 1995 regarding Capital Market.
December Package 1987
The Package was to simplify stock and bond issuance requirements, cutting costs, which was once collected by Bapepam such as registration cost for securities issuance. It also provided opportunities to foreign investors to purchase securities to a maximum of 49% from the total offering.
The deregulation package removed stock fluctuation price limit from the capital market and introduced parallel exchange as an alternative choice for issuers that have not met the requirements to enter the market.
October Package 88
This package is aimed at banking sector but had certain impact towards the development of capital market. It consists of 3L (Legal, Lending, Limit), and tax charged over deposit interest.
The tax charged had a positive impact over the development of the capital market. It meant that the government provided equal treatment for banking and capital market sectors.
December Package 88
This deregulation package basically provided further drivers for capital market by giving opportunities to private corporations to conduct stock exchange.
The package was able to increase capital market activities. Until 1990 there were 153 companies listed with an investment of Rp 16.29 billion.




Establishment of Surabaya Stock Exchange (SSX) and Jakarta Stock Exchange (JSX)
Surabaya Stock Exchange was officially opened on June 16, 1989 according to Decree of Minister of Finance No. 654/KMK.010/1989 with only 36 stock holders. The establishment was to support the government in capital market and economic growth of eastern Indonesia.
On July 13, 1992, Stock Exchange was changed to Jakarta Stock Exchange (JSX) and started its role in stock market in Indonesia. It was then that Indonesian stock exchange made an increase in its capital and number of transaction.
Presidential Decree No. 53, 1990 & Decree of Minister of Finance
Besides running the operation, Bapepam also provides guidance and supervision. But these doubled tasks was eliminated with the issuance of Presidential Decree No. 53, 1990 and Decree of Minister of Finance No. 1548, 1990 which marked a new era of capital market growth. Bapepam now can focus on its duty to provide supervision on capital market.
This functionality addresses the goal of creating an orderly, fair and efficient capital market and to securing the welfare of investors and community. The task is similar to one done by Securities Exchange Commission (SEC) in the United States. It secures the fairness of capital market for investors and community from misleading activities.
Law No. 8, 1995 regarding Capital Market
Law No. 8, 1995 regarding Capital Market controls Indonesian Capital Market Structure. Bapepam is a government institution under and directly responsible to the Minister of Finance providing guidance, control and supervision on day-to-day basis in the capital market.
vii. 1995 - today
Until today, Indonesian Capital Market made an extraordinary growth. Its activities on number of companies going public in the stock exchange and Securities trading are plentiful. The number of Issuers increased from 145 companies in 1991 to 288 in July 2000 with stock distribution of 1,090.41 billion shares. The Combined Stock Price Index increased to the value of 600 at the beginning of 1994 and once came to 712,61 in February 1997.
After privatizing the Stock Exchange in 1992, Indonesian Capital Market made an increase in market capital and number of transaction. On May 22, 1995, JATS (Jakarta Automated Trading System) was implemented. It was a new system to replace manual trading and facilitated stock trading with larger frequency up to 200,000 transactions per day compared to the old system that traded only 3,800. It guarantees a more fair and transparent market activity.
On September 1996, Surabaya Stock Exchange (SSX) introduced S-MART system (Surabaya Market Information and Automated Remote Trading) that provides the opportunity to make remote transaction.
On July 2000, JSX implemented Scriptless Trading to increase market liquidity and prevent missing stocks and forgery. It also accelerates transaction completion process. In 2002, JSX also implemented Remote Trading System as an effort to increase access to market, efficiency, acceleration and trade frequency.


b. Roles of Capital Market
Besides its important role in the economy of a nation, it plays two roles simultaneously in economic function, which are creating an exchange of excess funds proprietor and one that needs funding and as financial function, providing chances and opportunities to gain capital through investment. Capital market also plays as an indicator of national economic progress and enhance economic growth by providing opportunities for companies to benefit directly from the public without waiting for internal funding from the company.
What are the benefits of the existence of Capital Market?
- Provides sources of budgeting (long term) for business community, and also allocating optimal financial resources
- Provides investment channels for investors and creating diversification possibilities
- Provides leading indicator for national economic trend
- Distribution of ownership to middle class community
- Distribution of ownership, openness and professionalism, creating healthy endeavors
- Creating interesting work fields and professions
- Provides opportunities to own a healthy and prosperous company
- Provides investment alternative in gaining profit with accountable risks through transparency, liquidity and investment diversification
- Guides transparency of the business environment and provides social control access
- Drives professional management benefit through open and good corporate governance.
- Long term budgeting sources for Issuers
c. Capital Market Today;
i. Indonesian Capital Market transaction activities:
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�� JSX
�� SSX
�� Himdasun
�� Clearing and Guarantee
�� Central Securities Depository
ii. Indonesian Capital Market Statistics