The ASEAN Economic Community (AEC) is due to be established by the end of the year, which should encourage trade and attract investment into the region. The liberalisation and integration of ASEAN members’ capital markets has been a key focus area in the lead up to the AEC. Some analysts have claimed that the success of the AEC’s capital markets will be heavily dependent on the participation of Indonesia, ASEAN’s largest economy and most populous nation. But how ready is Indonesia? Meanwhile, Indonesia’s legal market has been busy, with a number of local firms looking to forge alliances with regional and international players in preparation for the new AEC era. Kanishk Verghese reports 

The establishment of the ASEAN Economic Community (AEC) by the end of 2015 is intended to encourage trade and investment between member nations, and to make ASEAN a major global player by transforming the region into a single trading bloc. Each of the ten member countries are at different stages of development as they prepare to integrate their markets. However, the readiness of Indonesia, ASEAN’s largest economy and most populous nation, has been a cause for concern, especially in the area of capital markets integration. Meanwhile, Indonesia’s legal industry has been abuzz with the formation of alliances between local firms and their regional and international counterparts as they prepare for the AEC.

The AEC aims to create a single market and production base with a free flow of goods, services, capital and labour. Member nations have been working – albeit at varying speeds – to align their regulations and structures in preparation for the AEC. Indonesia, which makes up nearly 40 percent of ASEAN’s $2.3 trillion economy, is considered a core component to the AEC’s success. From Indonesia’s point of view, the government has done quite a lot of preparation, but far from enough, says Fikri Assegaf, partner and co-founder of Assegaf Hamzah & Partners. “In terms of foreign direct investment, effort has been made to comply and open certain areas up to investment from ASEAN countries, such as the advertising sector,” says Assegaf. However, many in Indonesia argue that the country might not be ready for full-fledged market liberalisation, which has led the newly elected government to pursue protectionist policies. “The perception here is that the country is more on the losing side because it is already the largest market with the largest population in the region. But there are some doubts over if the domestic players are ready to compete with the regional players in Indonesia or in the region,” says Tjahjadi Bunjamin, a founding partner at Hiswara Bunjamin & Tandjung. 

The ASEAN Trading Link

The liberalisation and integration of ASEAN members’ capital markets has been a key focus area in the lead up to the AEC. The development of an integrated capital market in the AEC will enable the free flow of capital within the region, and should mould ASEAN into an asset class for international investors. The ASEAN Trading Link is a vital cog to this development. The Link connects participating exchanges through an electronic network, essentially allowing investors to freely trade securities in any participating member’s market. Analysts claim that the success of the AEC’s capital markets will be heavily dependent on Indonesia’s participation. However, so far, only Singapore, Malaysia and Thailand have joined the Link.

Indonesia’s Financial Services Authority (OJK) recently admitted that the country’s stock market still faces a number of challenges that need to be addressed before it is integrated into the regional economy. One difficulty for foreign companies looking to list in Indonesia is that their prospectuses must be audited by an auditing commission recognised by OJK. “One of the things that the government and regulators are struggling with is in the context of AEC, how do they make that fit with our Capital Market Law of 1995, which still assumes that auditors, securities companies and other supporting professionals to be an Indonesian entity or have an Indonesian presence,” says Melli Darsa, founder and managing partner of Melli Darsa & Co. “The Capital Market Law has been in the works to be amended for so long. One would think they would have amended the law to accommodate commitments under the AEC to be better implemented, but it still hasn’t been changed,” says Darsa.

As it stands, foreign companies are permitted to list on the Indonesia Stock Exchange (IDX) by issuing Indonesian Depositary Receipts. However, no foreign company has gone down that route to date. “One reason for this could be that we are still at the very early stages of improving the governance and regulatory aspects of our capital markets. There has been a dramatic improvement on various fronts, but more improvements to the standards can still be made,” says Assegaf.

Despite the movement towards market integration, competition is still fierce between ASEAN nations in many industries. It is therefore possible that this perceived regulatory inaction could be due to the IDX and OJK still viewing financial hubs like Singapore as a major rival. For example, if all of ASEAN’s exchanges were to join the Trading Link where securities can be freely traded across markets, companies may choose to focus their listings on the more liquid and mature exchanges, at the expense of other bourses in the AEC. 

Forming alliances

The creation of the AEC is likely to spur more cross-border transactions and investment, albeit not immediately. This potential increase in deal flow should trickle down to Indonesia’s law firms. While the current law in Indonesia prohibits international law firms from opening in the country, a number of local firms have forged cooperation agreements with regional law firms in the past 12 to 18 months to broaden their ASEAN reach. Jakarta-based Makes & Partners entered into an alliance with Singapore’s WongPartnership last August, while Rosetini & Partners inked an agreement with Japanese firm Nishimura & Asahi in September. Others have looked to align themselves with international law firms. Linda, Widyati & Partners entered into an association with Clifford Chance in early 2014, while IP boutique K&K Advocates and business law firm Nurjadin Sumono Mulyadi & Partners formed an alliance with Bird & Bird last June. Hanafiah Ponggawa & Partners formed an alliance with Taylor Wessing and its ASEAN network in late 2013. More integrated pairings like Hiswara Bunjamin & Tandjung and Herbert Smith Freehills, Hadiputranto, Hadinoto & Partners and Baker & McKenzie, and Allen & Overy and Ginting & Reksodiputro, have been in place for several years.  

Assegaf Hamzah & Partners, meanwhile, formed an alliance with Singapore’s Rajah & Tann in 2013. Then in August last year, Rajah & Tann combined its eight regional and associated law firms within Southeast Asia to form Rajah & Tann Asia, an integrated platform for cross-border transactional and dispute resolution services across the region. “Clients abroad are looking at firms that are able to provide local expertise and solutions across ASEAN. Our tie-up with Rajah & Tann Asia is a response to that growing requirement,” says Assegaf. However, Assegaf Hamzah & Partners has no immediate plans to enter into formal agreements on a larger scale, he says. “We work with a number of international firms and we want to maintain the ability to do so. By tying up with one international firm, you are closing doors to your relationships with other international firms,” says Assegaf. 

For some law firms, remaining independent is the preferred modus operandi. “If your firm is at a manageable size and you know what your niche market is, you’d like the flexibility of working with any law firm at any one time. In fact, the Indonesian clients really rely on us to help them find the best law firm that can do work in the region at any given time,” says Darsa. Melli Darsa & Co. recently ended its alliance with Squire Patton Boggs to focus on its best friend relationships with regional and international law firms. “With Squire Patton Boggs, although we entered into the alliance as part of its independent network, people read more into it. It didn’t benefit us because we weren’t really integrated and indeed our relationship was focused on more long-term strategies in any event like moving beyond our core securities and public M&A practice. As such, we decided that it is better to stay independent, which allows us to realign our relationship with several of the premium U.S. firms which generally do not have any presence in Indonesia,” says Darsa.

While foreign firms are prohibited from opening offices in Indonesia, the country’s Ministry of Law is able to issue up a recommendation for up to five foreign lawyer work permits to be employed in each local firm, says Bunjamin. “Many industry players hope that the government will consider allowing the issuance of more than five foreign lawyer permits per firm, considering the industry is also growing. The five permit limit has been in place for a long time, but the industry has grown significantly since then, so it would be good for business if the limit was raised,” he says. 

‘Waiting on the sidelines’

The creation of the AEC this year should strengthen the competitiveness and bargaining power of ASEAN countries in the global marketplace. At the same time, the free flow of goods, services, labour and capital will undoubtedly spark some competition between ASEAN countries. For Indonesia, as the region’s largest economy, this could pose a challenge. “The extent of the AEC attracting big deals in Indonesia also depends on how the country is perceived as an investment target. Laws have to be clearer, and regulators have to understand that foreign investment is required and be less protectionist. Investors are literally waiting on the sidelines, but Indonesia might not be completely ready yet for full integration,” says Darsa.

The Indonesian government needs to play a pivotal role in getting Indonesia ready for the AEC, and clear regulations regarding the implementation of the AEC could help Indonesia’s businesses – both big and small – and legal industry benefit from a fully integrated market and trading bloc. “We need to see clear guidance from the new government in terms of preparing ourselves for this liberalisation. I am sure opening up the market will ultimately be good for Indonesia, but it takes time, and the industry needs to adjust itself,” says Bunjamin. 

The key benefit of the AEC for Indonesia is that the ASEAN countries will be able to present themselves as one market and one community, says Assegaf. “When you present the AEC as one trading bloc, which will be the third biggest market in the world, that will attract more investors into this region and add to economic growth,” he says. “For many years, we have been talking about the AEC in 2015 as if it was so many years in the future. But we are already in 2015, so maybe people will begin to properly discuss real implementations of the AEC blueprint.”