Feature for Conversion into Ordinary Shares or Write Down of Additional Tier 1 Capital and Tier 2 Capital Instruments

To:

1. The Board of Directors of Conventional Commercial Banks; and
2. The Board of Directors of Sharia Commercial Banks
   at their respective locations.

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 20/SEOJK.03/2016 CONCERNING THE FEATURE FOR CONVERSION INTO ORDINARY SHARES OR WRITE DOWN OF ADDITIONAL TIER 1 CAPITAL AND TIER 2 CAPITAL INSTRUMENTS

In relation to the Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital Requirements for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 25, Supplement to the State Gazette of the Republic of Indonesia Number 5848) and the Financial Services Authority Regulation Number 21/POJK.03/2014 concerning Minimum Capital Requirements for Sharia Commercial Banks (State Gazette of the Republic of Indonesia Year 2014 Number 352, Supplement to the State Gazette of the Republic of Indonesia Number 5630), hereinafter referred to as the POJK on Minimum Capital Requirements (POJK KPMM), it is necessary to regulate implementation provisions regarding the Feature for Conversion into Ordinary Shares or Write Down of Additional Tier 1 Capital and Tier 2 Capital Instruments in this Financial Services Authority Circular Letter as follows:

I. GENERAL PROVISIONS

1. Bank means a Commercial Bank as referred to in Law Number 7 of 1992 concerning Banking as amended by Law Number 10 of 1998, and a Sharia Commercial Bank as referred to in Law Number 21 of 2008 concerning Sharia Banking.

2. Subsidiary Company means a legal entity or company owned and/or controlled by the Bank directly or indirectly, both domestically and abroad, which conducts business activities in the financial sector, consisting of:
   a. subsidiary company, namely a Subsidiary Company with Bank ownership of more than 50% (fifty percent); b. participation company is a Subsidiary Company with Bank ownership of 50% (fifty percent) or less, but the Bank has control over the company;
   c. a company with Bank ownership of more than 20% (twenty percent) up to 50% (fifty percent) that meets the following requirements:

1. Bank ownership and other parties' ownership in the Subsidiary Company are equal; and
2. each owner exercises joint control over the Subsidiary Company;
   d. other entities that must be consolidated based on financial accounting standards, but excluding insurance companies and companies owned for the purpose of credit restructuring.

3. Capital for Banks with headquarters in Indonesia consists of:
   a. core capital (Tier 1) which includes:

1. core capital tier 1 (Common Equity Tier 1);
2. additional tier 1 capital (Additional Tier 1); and
   b. supplementary capital (Tier 2).

4. Additional Tier 1 capital instruments (Additional Tier 1) as referred to in item 3.a.2) include among others:
   a. debt or investment instruments with capital characteristics, subordinated nature, no maturity, and non-accumulable return/margin/fee payments (perpetual non-cumulative subordinated debt); b. non-cumulative preference shares (perpetual non-cumulative preference shares) with or without a call option feature; and
   c. hybrid instruments with no maturity and non-accumulable return/margin/fee payments (perpetual and non-cumulative).

5. Tier 2 capital instruments (Tier 2) as referred to in item 3.b include among others:
   a. cumulative preference shares (which grant holders the right to receive dividends prior to holders of other share classifications) (cumulative preference share); b. debt or investment instruments with capital characteristics, subordinated nature, and cumulative nature (cumulative subordinated debt); and
   c. debt or investment instruments with capital-like characteristics that can automatically be converted into shares after obtaining approval from the Financial Services Authority (mandatory convertible bond).

6. Additional Tier 1 capital instruments (Additional Tier 1) and Tier 2 capital instruments (Tier 2) must meet the requirements as regulated in the POJK on Minimum Capital Requirements (POJK KPMM).

7. Requirements that must be met by an instrument to be counted as Additional Tier 1 capital (Additional Tier 1) or Tier 2 capital (Tier 2) as referred to in item 6 include among others:
   a. having a feature to be converted into ordinary shares or subjected to a write-down when the Bank's going concern is potentially impaired (point of non-viability); and b. obtaining approval from the Financial Services Authority to be counted as a capital component.

II. TRIGGER EVENTS CAUSING ADDITIONAL TIER 1 (ADDITIONAL TIER 1) AND/OR TIER 2 (TIER 2) CAPITAL INSTRUMENTS TO BE CONVERTED INTO ORDINARY SHARES OR SUBJECTED TO WRITE DOWN

1. The Bank must convert into ordinary shares or write down Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) when the Bank's going concern is potentially impaired (point of non-viability).

2. Conversion into ordinary shares or write-down of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) is carried out when:
   a. the Common Equity Tier 1 (CET 1) capital ratio is lower than or equal to 5.125% (five point one two five percent) of risk-weighted assets (RWA) both individually and consolidated with Subsidiary Companies; and/or b. there is a plan from the competent authority to inject capital into the Bank deemed to potentially impair the Bank's going concern; and
   c. there is an order from the Financial Services Authority to convert into ordinary shares and/or write down.

3. The trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in item 2 must be stated in the issuance documentation or agreement.

4. Conversion into ordinary shares or write-down due to conditions as referred to in item 2.b is carried out before the competent authority carries out capital injection. The capital injection mechanism refers to applicable legislation.

5. In the event that the Bank experiences a tendency to decrease in Core Equity Tier 1 (CET 1) capital that potentially causes the Bank to meet the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in item 2, the Bank must take steps to increase Core Equity Tier 1 (CET 1) capital according to the internal minimum target for Core Equity Tier 1 (CET 1) capital requirements.

6. The minimum amount to be converted into ordinary shares or subjected to write-down is according to the minimum Core Equity Tier 1 (CET 1) capital requirement target to be achieved based on the Bank's proposal approved by the Financial Services Authority, considering among other things:
   a. minimum capital provision obligations as regulated in the POJK on Minimum Capital Requirements (POJK KPMM); and b. projected losses to be incurred by the Bank.

7. Conversion into ordinary shares or write-down of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) can be carried out proportionally, partially, or entirely with the approval of the Financial Services Authority.

8. The Bank must state the chosen feature for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2), namely:
   a. converted into ordinary shares; and/or b. subjected to write-down, in the issuance documentation or agreement for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2).

9. In the event that the Bank chooses to state the feature to be converted into ordinary shares in the issuance documentation or agreement for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2), the Bank must state the following:
   a. the number of ordinary shares to be received by holders of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) upon conversion into ordinary shares; or b. the conversion formula to determine the number of ordinary shares to be received by holders of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) upon conversion into ordinary shares.

10. In the event that the Bank chooses the feature to be subjected to write-down for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2), the Bank may provide compensation to holders of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) in the form of ordinary shares upon write-down. The provision of compensation must be stated in the issuance documentation or agreement for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2).

11. In the event that the Bank chooses to state both the feature for conversion into ordinary shares and the feature to be subjected to write-down in the issuance documentation or agreement for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2), then upon the occurrence of the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in item 2, the Bank must determine one of the chosen features for all investors who purchased Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) for each instrument.

12. Conversion into ordinary shares or write-down, in addition to referring to these provisions, must also refer to applicable legislation.

13. The Bank must make efforts to ensure that conversion into ordinary shares or write-down can be carried out when the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down occur, including among others:
    a. requesting a legal opinion from an independent party at the time of issuing the instrument stating that the clause for conversion into ordinary shares and/or write-down can be carried out when the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down occur; b. ensuring that there are no agreements made between the Bank and other parties, including shareholders, that can hinder the conversion into ordinary shares and/or write-down when the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down occur.

14. Before issuing Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2), the Bank must submit the proposed chosen feature to the Financial Services Authority as referred to in item 8, accompanied by an analysis of the basis for choosing the feature and its impact on the Bank's capital, including calculations of potential dilution and impact on the Bank's shareholder structure.

III. TRIGGER EVENTS CAUSING ADDITIONAL TIER 1 (ADDITIONAL TIER 1) AND/OR TIER 2 (TIER 2) CAPITAL INSTRUMENTS TO BE CONVERTED INTO ORDINARY SHARES OR SUBJECTED TO WRITE DOWN FOR SUBSIDIARY COMPANIES THAT ARE PART OF A BANK GROUP

In the event that Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) issued by a Subsidiary Company are counted in the Bank's consolidated capital calculation, then in the issuance documentation or agreement, in addition to stating the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in item II.2, the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down referring to the parent Bank's consolidated conditions must also be stated.

A. Trigger Event Conditions for Additional Tier 1 (Additional Tier 1) and/or Tier 2 (Tier 2) Capital Instruments to be Converted into Ordinary Shares or Subjected to Write Down for Subsidiary Companies that are Banks Owned by the Bank

Subsidiary Companies that are Banks owned by the Bank, in addition to stating the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in item II.2, in the issuance documentation or agreement must also state the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down referring to the parent Bank's consolidated conditions as follows:

1. the parent Bank's consolidated Core Equity Tier 1 (CET 1) capital ratio with Subsidiary Companies is lower than or equal to 5.125% (five point one two five percent) of RWA; and/or
2. there is a plan by the competent authority to inject capital into the parent Bank deemed to potentially impair the going concern; and
3. there is an order from the Financial Services Authority to convert into ordinary shares and/or write down.

B. Trigger Event Conditions for Additional Tier 1 (Additional Tier 1) and/or Tier 2 (Tier 2) Capital Instruments to be Converted into Ordinary Shares or Subjected to Write Down for Non-Bank Subsidiary Companies Owned by the Bank

In the event that Non-Bank Subsidiary Companies owned by the Bank and Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) issued by the aforementioned Subsidiary Companies are recognized in the parent Bank's consolidated capital, then the issuance documentation or agreement must state the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down referring to the parent Bank's consolidated conditions as follows:

1. the parent Bank's consolidated Core Equity Tier 1 (CET 1) capital ratio with Subsidiary Companies is lower than or equal to 5.125% (five point one two five percent) of RWA; and/or
2. there is a plan by the competent authority to inject capital into the parent Bank deemed to potentially impair the going concern; and
3. there is an order from the Financial Services Authority to convert into ordinary shares and/or write down.

C. Compensation in the Implementation of Write Down

Subsidiary Companies may provide compensation in the implementation of write-down when the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in letters A and B occur. The aforementioned compensation must be in the form of ordinary shares that can be issued by either the Subsidiary Company or the parent company.

D. Trigger Event Conditions for Additional Tier 1 (Additional Tier 1) and/or Tier 2 (Tier 2) Capital Instruments to be Converted into Ordinary Shares or Subjected to Write Down for Bank Subsidiary Companies Owned by Banks Abroad

1. Bank Subsidiary Companies owned by banks abroad, in addition to stating the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down as referred to in item II.2, in the issuance documentation or agreement must also clearly state the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down referring to the parent bank's consolidated conditions as regulated by the parent company's authority, if:
   a. the Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) issued will be recognized in the parent bank's consolidated capital; and b. required to have a feature for conversion into ordinary shares and/or write-down by the parent company's authority.

2. Conversion into ordinary shares or write-down carried out by Banks that are Subsidiary Companies owned by banks abroad when the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down referring to the parent bank's consolidated conditions as referred to in item 1 occur must obtain approval from the Financial Services Authority.

IV. MECHANISM FOR CONVERSION INTO ORDINARY SHARES OR WRITE DOWN

The mechanism for conversion into ordinary shares and/or write-down of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) when the trigger event conditions for Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2) to be converted into ordinary shares or subjected to write-down occur are as follows:

1. The Financial Services Authority orders the Bank to calculate the minimum Core Equity Tier 1 (CET 1) capital requirement target to be achieved and to formulate an action plan to meet the minimum Core Equity Tier 1 (CET 1) capital requirement target.
2. Based on the Financial Services Authority's order as referred to in item 1, the Bank submits the minimum Core Equity Tier 1 (CET 1) capital requirement target to be achieved and the action plan for approval from the Financial Services Authority, which must include details of the types and amounts of instruments to be converted into ordinary shares and/or subjected to write-down, accompanied by an analysis of the impact on the Bank's capital conditions.
3. The Financial Services Authority approves the minimum Core Equity Tier 1 (CET 1) capital requirement target and action plan submitted by the Bank as referred to in item 2.
4. In the event that the Financial Services Authority does not approve as referred to in item 3, the Bank must revise the minimum Core Equity Tier 1 (CET 1) capital requirement target and action plan previously submitted.
5. Based on the Financial Services Authority's approval, the Bank carries out the process of converting into ordinary shares and/or write-down of Additional Tier 1 capital instruments (Additional Tier 1) and/or Tier 2 capital instruments (Tier 2).
6. The Bank reports the realization of the conversion into ordinary shares and/or write-down process as referred to in item 5 to the Financial Services Authority.

V. CLOSING

The provisions of this Financial Services Authority Circular Letter shall take effect on the date of establishment.

Established in Jakarta on 21 June 2016
EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, sd
NELSON TAMPUBOLON

Copy matches the original
Director of Legal Affairs 1
Legal Department sd
Yuliana