The Financial Services Authority (OJK) recently introduced Regulation Number 25 of 2023, addressing the Operation of Venture Capital Companies and Sharia Venture Capital Companies. This strategic move by the OJK aims to foster the growth of startups and support micro, small, and medium enterprises (MSMEs).
This regulation replaces the previous Regulation Number 35 of 2015, focusing on refining the landscape for venture capital operations.
Venture Capital (VC) entities stand out as financial institutions that inject investment capital into companies deemed to exhibit substantial growth potential. Their primary mission revolves around supporting early-stage startups and businesses in their initial phases of development.
In the realm of economic evolution, venture capital plays a pivotal role in propelling innovation and fostering growth in emerging sectors. These entities act as a critical gateway to capital for companies that might encounter challenges securing funding through conventional means.
Under the recent regulatory framework, venture capital companies undergo categorization into two distinct segments: venture capital corporations and venture debt corporations. Venture capital corporations concentrate on equity participation, engagement through the purchase of convertible bonds/sukuk, and managing venture funds.
POJK Number 25 of 2023 concerning Venture Capital Companies
Aman Santosa, Head of the Department of Literacy, Financial Inclusion, and Communication at OJK, highlighted the alignment of this POJK number 25 regulation with the directives of Law Number 4 of 2023 on the Development and Strengthening of the Financial Sector (UU P2SK).
Santosa emphasized, “Venture capital and Sharia venture capital play a crucial role in financing companies in the early or startup stages, as well as companies/debtors with a scale of MSMEs that cannot be reached through funding by other financial institutions.”
Within this regulatory framework, a pivotal provision revolves around the meticulous categorization of venture capital and Sharia venture capital companies concerning their business activities.
Venture capital companies are now mandated to align their business operations with their designated category, focusing on equity participation, involvement through the purchase of convertible bonds/sukuk, or the management of Venture Capital—referred to as Venture Capital Corporation.
Moreover, these companies are directed to channel their focus towards financing through the acquisition of debt/securities issued by business partners during the early stages of startup or business development. This financing approach adheres to profit-sharing principles, identified as Venture Debt Corporation.
The categorization serves a dual purpose: enabling venture capital and Sharia venture capital companies to concentrate and optimize their business activities based on their chosen business lines.
Strengthening Regulations for Venture Capital Companies
This regulatory update not only introduces new operational paradigms but also fortifies existing regulations in several dimensions:
Prudential Measures:
Regulation Number 25 of 2023 establishes obligations for venture capital companies and Sharia venture capital companies. They are now required to maintain and enhance their financial health by adhering to prudential principles and implementing effective risk management practices in their business operations.
Enhanced Management of Venture Funds:
This regulation provides a comprehensive framework for the management of venture funds, covering aspects from the application process for permission to manage venture funds to the eventual dissolution of these funds.
In the broader context, Regulation Number 25 of 2023 emerges as a legislative response to the mandates outlined in Law Number 4 of 2023 on the Development and Strengthening of the Financial Sector (UU P2SK). This regulatory intervention proves instrumental in supporting the industrial evolution and meeting the legal requirements essential for the operation of venture capital companies.
The OJK’s discernment acknowledges the pivotal role that venture capital and Sharia venture capital companies play in financing companies during their early or startup phases. Additionally, they provide vital support to companies/debtors operating within the micro, small, and medium enterprise (MSME) spectrum, who may face challenges securing funding from other financial institutions.
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