Capital market as one of the financial services sectors plays an important role in the development of the national investment sector, where the supply of capital provided by investors meets the demand of the securities issuers e.g. corporations, investment trusts, or domestic or foreign governments, that is, to finance their operations. Due to the high turnover of funds in the economic sector, the capital market is highly regulated, but potential disputes, violations or legal problems often occur. Legal disputes in the capital market are somewhat unique. This uniqueness can be seen from the type of violation, from the viewpoint of the perpetrator who is well-educated and neat, from the perspective of the violation pattern, from the side of the possible consequences and from the side of the imposition of sanctions that are much heavier than that of ordinary violations with a similar nature to these violations. This article aims to outline and overview the proceeding and progress of the effectiveness of capital market dispute settlement through several dispute resolution institutions in Indonesia. We will discuss each of the matters in more detail.
According to the Capital Market Law, capital market is an activity related to Public Offerings and Securities Trading, Public Companies related to the securities they issue, as well as institutions and professions related to Securities. The capital market acts as a liaison between investors and companies or government institutions through trading in long-term financial instruments such as bonds, stocks and others. Furthermore, the capital market itself is a market for various long-term tradable financial instruments, including debt securities (bonds), equities (stocks), mutual funds, derivative instruments and other instruments.
Thus, the capital market facilitates various facilities and infrastructure for buying and selling activities and other related activities. Financial instruments traded on the capital market are long-term instruments with a term of more than 1 year such as stocks, bonds, warrants, rights, mutual funds, and various derivative instruments e.g. options, futures, and others. With the various activities that exist in the capital market, apart from getting profit, it does not rule out the possibility of creating risks and differences of opinion, which will eventually lead to various disputes between the parties.
In addition, the function of the capital market supervision after the enactment of Law Number 21 of 2011 on OJK Law is to replace the function previously performed by the Capital Market Supervisory Agency (“Bapepam”). Based on article 6 point b of OJK Law, the main task of the OJK is to regulate and supervise financial service activities in the capital market sector. Supervision under the OJK is based on the passion to give attention, protection and education for consumers in every business activity in the financial services sector and to provide opportunities for the development of the financial services sector in a fair, efficient and transparent manner.
Capital Market Disputes
Capital market disputes that occur amongst capital market players are generally due to policies in the economic sector. Capital market disputes involve capital market players i.e. issuers, investors and institutions in capital market activities.
Public Law-based Dispute
Capital market offense is a form of capital market violations or problems in public law, namely in the field of criminal and administrative law, which is regulated in the Capital Market Law. This offense commonly includes universal capital market offenses such as market manipulation, insider trading, licensing problem, and fraud in the capital market as described below :
This criminal act is regulated in Article 90 point C on Capital Market Law which states that in securities trading activities, every party is prohibited directly or indirectly from:
- deceiving other parties by using any means;
- participating in cheating on or deceiving other parties; and
- making false statements regarding material facts, or not disclosing material facts so that the statements made are misleading with the intention of benefiting or avoiding harm to oneself or other parties, or with the aim of influencing other parties to buy or sell securities
2. Market Manipulation
Market manipulation according to Article 91 of the Capital Market Law is an act carried out by a party directly or indirectly with the intention of creating a false or misleading picture of trading, market conditions or price of securities on the stock exchange.
The capital market authority anticipates parties who have the capacity and capability in terms of capital and technology or facility with which they are likely able to do the depiction in such a way that the market understands and responds to the depiction as true. One type of market manipulations is to spread false information about issuers to affect the price of the company’s securities on the stock exchange. For example, a party spreads a rumor that Issuer A will be liquidated soon, and the market response causes the price of its securities to fall sharply on the stock exchange.
In the practice of international securities trading, certain activities can be classified as market manipulation, one of them is Cornering The Market – the act of buying securities in large quantities so that it can dominate or corner the market. This practice can be done by short-selling, namely selling securities where the seller does not yet have the effect.
3. Insider Trading
This form of crime is regulated in Articles 95 of the Capital Market Law. Article 95 states that an insider of an issuer or public company that has inside information is prohibited from buying or selling securities of:
- the issuer or public company concerned; or
- other companies conducting transactions with the relevant issuers or public companies.
Furthermore, Article 96 states that insiders as referred to in Article 95 are prohibited from:
- influencing other parties to buy or sell securities, or
- providing inside information to any party reasonably suspected of being able to use the information to make a purchase or sale of securities.
As the institution of capital market supervision nowadays, OJK is authorized to conduct investigations and examinations for public law-based disputes.
Private Law-based Dispute
Violations or problems of private law include violations or problems in the field of civil law, which can be classified as follows:
- In terms of sources of disputes, civil disputes in the capital market originate from unlawful acts or defaults on agreements.
- In terms of perpetrators, based on the perpetrator’s perspective, there are three patterns of violations that commonly occur in the capital market, namely those committing the violations individually and in groups, and those committing violations in the form of ordering other parties (either directly or indirectly) to commit violations. Apart from that, the perpetrators can also be categorized based on their position, among others, as self-regulatory bodies, investors, issuers and others.
- In terms of legal bases, based on the governing legal basis, violations are based on either conventional law or sharia law.
Furthermore, the following are civil disputes in the capital market that commonly arise:
- Disputes between an investment manager and a customer regarding failure to fulfill obligations by the investment manager to the customer;
- Disputes between a finance company and its parent company regarding a funding agreement with stock guarantees;
- Disputes between an underwriter and an investor regarding the fulfillment of the obligation in the share allotment order;
- Disputes between the issuer and the old shareholder regarding the sale of shares to another party without giving prior bids to the old shareholders.
These violations of law—civil disputes—are frequent, and some are resolved through non-litigation (through alternative dispute resolution institutions) or litigation resolutions (through formal court procedures).
Capital Market Dispute Settlement
Disputing parties can choose several channels or institutions in resolving capital market disputes, namely through litigation and non-litigation including the forum that is related to capital market legal issues.
1. Negotiation for Settlement Agreement
To protect the involved parties in the financial services (including the capital market), OJK has issued POJK 1/2014. Under Article 1 number 13, OJK as the supervisor of financial services acts is an instrument of dispute settlement between consumers and financial services Institutions in the activities of placing funds of consumers at financial services institutions and of the utilization of services and/or products of the financial services institution.
Based on the regulatory concept in POJK 1/2014, the settlement of disputes in the financial services sector that arises from complaints from consumers (investors) must first be resolved internally at the relevant financial services institution, which is more to negotiation or deliberative settlement to reach consensus. If no settlement agreement is reached on the complaint, consumers and financial service institutions can resolve the dispute by way of settlement through Alternative Dispute Resolution (“ADR”) in their respective financial service sectors or through courts.
2. Court Settlement
Capital market is a highly regulated field since it has a high potential for violations. This is because its activities are always related to investment transactions with high economic value. The players in the capital market have their own business interests that sometimes conflict and cause losses on the other parties. The Capital Market Law regulates several violations in the capital market sector:
- Sanctions for administrative violations as referred to in Article 102 of the Capital Market Law;
- Sanctions for crime as referred to in Article 103 to Article 110 of the Capital Market Law; or
- Civil violation as referred to in Article 111 of the Capital Market Law.
Article 111 of the Capital Market Law stipulates that any party who suffers losses as a result of a violation of capital market law or its implementing regulations can claim compensation, either individually or jointly with other parties who have similar claims, against a party or parties who are responsible for the violation. This provision is in line with the rules regarding unlawful acts in Article 1365 of the Civil Code, which states that every act of violating the law that brings harm to another person obligates the person who due to his fault has issued the loss to compensate for the loss. In relation to activities in the capital market, any actor who feels legally disadvantaged can file a civil suit in District Court.
Furthermore, civil disputes can also arise as a result of defaults on an agreement in the form of breach of contract. Dispute of this type is related to violations of the articles of the agreement that have been made by the parties (both oral and written), which is classified as civil violations as referred to in Article 111 of Capital Law.
3. Capital Market Dispute Settlement Through Badan Arbitrase Pasar Modal Indonesia (“BAPMI”)
In resolving business disputes, especially in the capital market, the use of dispute resolution methods through alternative dispute resolution has become an option for the disputing parties. Article 1 point 10 of Law Number 30 of 1999 on Arbitration and Alternative Dispute Resolution (“ADR”) defines that alternative dispute resolution is a dispute resolution institution or opinion through a procedure agreed upon by the parties, namely settlement outside the court through consultation, negotiation, mediation, conciliation, or expert judgment.
BAPMI as an ADR in civil disputes in the capital market sector provides four types of dispute resolution services that the disputing parties can choose, namely binding opinion, mediation, adjudication or arbitration. The following are the requirements for disputes to be resolved by BAPMI:
- Disputes that arise between parties in the sectors related to the capital market;
- If there is an agreement between the disputing parties that the dispute will be resolved through BAPMI;
- If there is a written request (case registration) from the disputing parties to BAPMI;
- If the dispute does not constitute a case within the scope of criminal law and/or administrative law.
BAPMI shall mediate between the two parties involved. If no agreement is reached, BAPMI will continue the complaint to the arbitration process. The arbitration process is estimated to take up to eight months for the dispute to finally reach a binding decision. The proceeding at BAPMI is relatively much faster compared to that in court.
4. Choice of Forum on Capital Market Dispute settlement
In principle, the choice of a dispute settlement forum is the freedom of the parties to choose and agree on. This is the principle of freedom of contract adhered to by the Indonesian civil law system. If the parties to the agreement have agreed that any dispute will be resolved in court, then it must be brought to court, and other institutions become unauthorized. Likewise, if the parties to the agreement have agreed that any dispute will be resolved to arbitration institution “X”, the dispute must be brought to that arbitration institution“X”; the court or other arbitration institutions are not authorized. In essence, the parties do not regulate two settlement-forum options in their contract, for example by stating “it will be resolved through BAPMI or the competent District Court”. This clause will cause confusion in its implementation at a later date.
Progress of Capital Market Dispute Settlement in Indonesia Nowadays
In practice, even though it has been around for 15 years, BAPMI as a distinctive dispute settlement of the capital market in Indonesia has only mediated very few people and corporates to resolve their disputes. According to the OJK data, Applications for dispute resolution in the capital market through BAPMI in 2019 have decreased. OJK noted that there were only 9 applications of dispute resolutions submitted to BAPMI last year while in the previous year there were 12 applications. A decrease in numbers does not mean fewer disputes in the capital market.
However, the potential for dispute settlement requests is now greater. Until mid-2020, there have been 25 reports of consumer complaints in the capital market sector submitted to the OJK. Apart from the lack of socialization, BAPMI also has a number of challenges e.g. the difficulty of local market players in accessing these facilities and the limited number of mediators. The majority of companies currently settle disputes through mediation. Thus, the number of settlement applications submitted by the corporation is very low. Most requests submitted to BAPMI by far are disputes between Securities Exchange Member (AB), securities companies and investors, especially those related to margin and re-purchase (“Repo”) transactions. The value of disputes handled by BAPMI regarding margin and repo transactions is quite large. In fact, in one case, the agency handled disputes between investors and AB with a transaction value of tens of billions of rupiah.
On the other hand, some other causes why BAPMI resolves very few cases are due to the high cost, time and inefficiency to reach a deal between the disputing parties to choose to resolve the dispute through BAPMI. On the other side, district court can be an alternative settlement wherein one of the parties could file a lawsuit unilaterally. Along with that, OJK is targeting the establishment of an Alternative Dispute Resolution Agency (“LAPS”) to be completed in December 2020. LAPS combines several dispute management agencies in the financial services sector. They are the BAPMI, the Indonesian Insurance Mediation and Arbitration Agency (“BMAI”), and the Pension Fund Mediation Agency (“BMDP”). The purpose of unifying these institutions is to make work more efficient and to reduce operational costs incurred. So far, there are several institutions that have received very few complaints, but in other places, there are excessive complaints to handle.
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