JAKARTA, Indonesia—The central bank of Indonesia has cleared the way for what could become the largest acquisition in the country's history, giving the green light to the multibillion-dollar sale of a local bank to Singapore's DBS Group Holdings Ltd.D05.SG -0.26% a year after the deal was proposed.
The decision means DBS will be able to acquire a stake in Bank Danamon, Indonesia's sixth-largest bank by assets, as part of its $7.3 billion bid to acquire the entire bank.
Bankers with knowledge of the transaction said Friday that DBS will be permitted to acquire 40% of Danamon—the initial limit for bank acquisitions in Indonesia—before building up a majority stake if it meets the central bank's corporate-governance and financial-health standards.
The people said legal documentation for the deal would be completed in May.
Bank Indonesia, the central bank, declined to comment.
When it announced plans to buy Danamon in April last year, DBS proposed acquiring up to 99% of the bank. But Indonesia delayed considering the deal while it altered its regulations on bank ownership. In July, Indonesia announced rules that would limit some stakes by foreign investors in the country's banks to 40%, but banks considered healthy could buy up to 99%. Analysts said that appeared to clear the way for the deal to go through.
Bank Indonesia has also sought guarantees of reciprocity for Indonesian companies wanting to operate banks in Singapore, which has one of the region's most restrictive environments for foreign operators. It wasn't known Sunday whether such a deal had been struck. In most countries in Asia, foreign investors are restricted to holding less than 50% of a local bank.
Earlier last week, DBS confirmed it had secured a two-month extension on a deadline to complete its deal, which expired on April 2, one year after it announced its bid.
The deal gives DBS, Southeast Asia's largest bank by assets, a foothold in the growing Indonesian market, where banking penetration is low and tens of millions of people are forecast to join the ranks of the middle class in the coming decade.
Indonesia's growth rates have exceeded 6% in recent years, with domestic consumption driving a boom and largely shielding the country from the worst of the global downturn.
In its bid, DBS proposed acquiring Danamon, first by buying a 67.4% stake held by the Singapore state-investment company Temasek Holdings Pte. Ltd., and then by making a general offer for the remaining shares, giving it up to 99% of the bank. Temasek is a controlling investor of DBS.
The deal will likely also dispel some fears of protectionism in the Indonesia banking industry, coming in a period ahead of national elections in which lawmakers have expressed concern about levels of foreign ownership in a number of industries. Foreign miners were recently obligated to divest ownership in their companies to stakes of less than 50%.
Kahlil Rowter, an economist and lecturer at the University of Indonesia, said Sunday that he doesn't view the DBS acquisition as significant in terms of banking-sector development in Indonesia, but that "this is more a signal on BI's policy on foreign banking presence [given that] after all, Temasek ultimately owns DBS and Danamon."
He said a greater change might lie ahead as Indonesia prepares to join the Asean Economic Community in 2015, which will likely push the banking industry to enlarge domestic banks through mergers to gain the capital they need to compete with regional banks.
"Domestic banks and other financial institutions need to raise their game," he said.
DBS's purchase is likely to mark the Singapore bank's most aggressive expansion since it bought Dao Heng Bank in Hong Kong in 2001. It could also create Indonesia's fifth-largest bank by assets.
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