The Covid-19 pandemic has brought a significant blow to the sustainability of the capital market in Indonesia. There has been an increase in bond default risk in the last two years.

PT Pemeringkat Efek Indonesia (Pefindo) recorded that Rp 150.9 trillion of debt securities will mature in 2022, dominated by debt securities from banking sector at 16.9%, multifinance sector 15.57%, specialized financial institutions 10.12%, telecommunications sector 8.92%, and construction sector 7.35%.

Understandably, the Indonesia Stock Exchange is concerned  with the increase in the bond default. The condition when the bond issuer fails to make interest or principal payment within the specified period potentially result in disruption of investors’ cash flows.

Bonds refer to long-term debt securities issued by borrowers, who have the obligation to pay the bond holder a predetermined fixed amount of interest. Bond as a letter containing a promise that, one of the parties, be it a company or a government as the issuer, make principal payment and interest within a certain period.

Bonds are seen as a low-risk investment. However, possible bond default risk remains a concern for investors.

Failure to make interest or principal payment is a a known risk in investing. However, if the failure is caused by the negligence of the issuer, then it is considered a form of breach of promise, or default.

In fact, there are a number of forms of protection to the risk of default by law.  Some of the protections are in the form of preventive measures by conducting information disclosure for investors in relation to securities as regulated by Law No. 8/1995 on the Capital Market and appointing Trustee as a third party representing the interests of investors.

The Trustee, along with other relevant institutions, assess the issuer’s financial flows before bond processing. During the bond processing, the Trustee and other institutions are entitled to determine the rights of bond holders as creditors, such as the right to interest payments, principal payments, payment dates, and so on.

When the bonds are sold to public, the Trustee will monitor and report the results to the bond holders, the Capital Market Supervisory Agency (in this case the Financial Services Authority/Otoritas Jasa Keuangan) and the Indonesia Stock Exchange. If the issuer gets a warning but does not make improvements, the Trustee will hold a General Meeting of Bond holders. This meeting will determine whether the bonds will be continued or not in accordance with the Trustee contract.

Article 5 Financial Services Authority Regulation No. 20/POJK.04/2020 on the Trustee Contracts of Debt Securities or Sukuk requires the Trustee to conduct due diligence on the ability and credibility of the issuer.

Provisions on conditions that can cause issuers to be declared negligent or default are regulated in Article 24 of the Financial Services Authority Regulation No. 20/POJK.04/2020. This article stipulates the statement of default and how to solve it clearly, namely:

  1. Obligation to pay the principal amount or principal and/or interest, profit sharing, margin, or fee for debt securities and/or sukuk at maturity;
  2. Facts regarding the guarantee, condition, or status of the issuer and its management that are not in line with the information and information provided by the issuer;
  3. The condition of the issuer which is declared negligent in connection with a credit agreement by one or more of its creditors (cross default);
  4. A delay in the obligation to pay debts as referred to in the provisions of laws and regulations (moratorium); and
  5. Other obligations contained in the Trustee contract.

Regulation No. IX.C.11 in the Decree of the Chairman of the Capital Market and Financial Institution Supervisory Agency (Bapepam/LK) No. KEP-712/BL/2021 on Ratings of Debt Securities or Sukuk regulates the obligations of issuers who issue debt securities in the context of a public offering.

Debt securities must at least contain the following information;

  1. Advantages of issuers and debt securities and/or sukuk and their relation to the issuer’s ability to fulfill obligations on debt securities and/or sukuk;
  2. Disadvantages of issuers and debt securities and/or sukuk and their relation to the risks faced by debt securities and/or sukuk holders;
  3. The rating symbol for debt securities and/or sukuk reflecting the information referred to in letters a and b;
  4. The validity period of debt securities and/or sukuk ratings is one year after the rating is issued; and
  5. Prospects (outlook).

In addition to preventive measures, repressive measures can also be taken against issuers who fail to make payment. Based on the provisions of No. 2 letter E of Rule VI.C.4 in the Decree of the Chairman of Bapepam/LK Number KEP-412/BL/2010 on General Provisions and Debt Securities Trustee Contracts, the Trustee is required to report to Bapepam no later than two working days after finding the existence of indication of the issuer’s negligence as referred to in the Trustee contract.

Based on Article 5 letter e of Law No. 8 /1995 on the Capital Market, the Financial Services Authority as the supervisor of the Capital Market is given the authority to conduct examinations and investigations into the occurrence of events that are suspected to be violations of Law No. 8/1995 and its implementing regulations. Based on Article 102 of Law No. 8/1995, if there is a violation of the law or its implementing regulations, Bapepam may impose administrative sanctions in the form of written warnings, fines, restrictions on business activities, suspension of business activities, revocation of business licenses, cancellation of approvals, and cancellation of registration.

If there is a party who is negligent in implementing it, the other party can demand the fulfillment of the implementation of the engagement by filing a breach of contract, as stipulated in Article 111 of Law No. 8/1995. The party who is not satisfy can claim compensation from the party responsible for the violation.

Investors can also file for bankruptcy against the issuer’s failure to make payments of the bonds. If an investor expects to file a lawsuit for default or a petition for bankruptcy, the Trustee may be given the power to represent the interests of securities holders inside and outside the court without requiring a special power of attorney in accordance with Article 51 paragraph (2) of Law No. 8/1995.


Author / Contributor:

Adriesti Hannadwita Martiza,  S.H.

Junior Associate


Mail       :

Phone    : +62-21 799 7973 / +62-21 799 7975