Knives at the ready in Indonesia

As the race between Grab and its unicorn rivals hots up, Indonesia’s regulators must make the route to an IPO easier for issuers and rules more transparent for investors if they want to give home-grown talent a boost.

The dinner knives and forks are officially out. 

“In 2019, our focus is on Indonesia,” Grab’s co-founder Tan Hooi Ling said on December 11, officially announcing the app-based ride hailing company’s plan to offer food delivery and travel services and capture millions of smartphone users onto its burgeoning platform.

Grab has effectively declared war on Indonesia’s home-grown unicorns Go-Food and Traveloka, having already gone head-to-head with banner Indonesian brand Go-Jek (which owns Go-Food) with demonstrable success.

To win in this market, scale is everything. A successful platform requires large volumes of active (and relatively wealthy) users and plenty of core services to keep them engaged and consuming.  

It also requires capital – plenty of it.

So far both Grab and its Indonesian rivals are well-backed; the former’s major financier is the deep-pocketed Softbank while Go-Jek’s financial backers include Google, Singapore’s sovereign wealth fund Temasek, and Tencent.  

Traveloka – a ticketing and hotel booking company – is not short of a few well-known investors either, with Expedia, JD.com, Hillhouse Capital Group and Sequoia Capital all on board.

But conventional wisdom dictates that the IPO is a crucial staging post to financial maturity and corporate success. With aggressive companies such as Grab on their tailcoats, it’s no surprise that Go-Jek and Traveloka are already laying the groundwork to float their shares.

STAYING HOME

And here’s the potential sticking point. Indonesian incorporated companies have a distinct strategic disadvantage to rivals with homes in mature listing markets. As FinanceAsia reported in November, were Indonesia’s unicorns to list in Jakarta, they would come up against a host of complications that could limit their capital-raising capacity.

There is an expectation that to keep the Indonesian government on-side, listing in Jakarta would be the wisest decision. And should Go-Jek, for example, choose to debut in a more mature market such as New York, or even Singapore, it would be liable for up to 25% in capital gains tax. This compares to a 0.6% founders tax if completed in Indonesia.    

But the major advantages arguably end there. Indonesia’s often complex listing rules and lack of IPO approval timetable makes it hard for candidates to execute efficiently (although there are ways around this).

Knowing what assets to list in Indonesia is also riven with dilemmas. Should you list consolidated operations in Jakarta, you would struggle to take advantage of offshore jurisdiction rules on dual-class shares (any future divestments would have to be executed through Jakarta, also).

Listing a subsidiary in Indonesia would solve this, but you run the risk of a lower valuation and capping your offshore listing’s potential. Indonesia’s attempt to promote local companies to execute dual listings has so far failed to gain any meaningful traction.

Equally important are the rights of investors and this is where Indonesia is at a distinct disadvantage. With a reputation for an opaque legal system not bound by precedent is something that will keep serious long-term investors on the fence, no matter how exciting the opportunity. 

Reforming Indonesia’s public equity markets should be high on the list of priorities for the government’s top brass if it wants home-grown companies to lead the way in Southeast Asia and beyond. Planning an IPO is tough enough as it is without the friction of fretting over the pitfalls of listing locally.

Some may argue that cutting up IPO bureaucracy and tightening investor protections for a handful of unicorns is too much to ask. But it would be crying shame that the country’s most exciting private companies to emerge for decades may end up being outgunned by foreign rivals based on access to capital.

 

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