Repo Cases in Indonesian Stocks

According to Investopedia, the repurchase agreement, or repo, is an agreement between two parties in which the first party borrows some funds from the second party with certain securities as collaterals, such as stocks, bonds, or government securities, with the promise that the first party would buy back the collaterals (thus the second party will get their money back). Usually the value of the loan is lower than the value of the collateral, for example A borrows Rp100,000,000 from B with 100,000 shares of X as collateral, at a price of Rp1,000 per share (so the loan value is Rp100 million), while the stock price of X in the market was higher at Rp1,500. In theory, if A later can not repay the debt, then B could just sell the shares of X that he holds in the market, so he will still make 50% profit.

In practice, these repo transactions are somewhat different from each other, depending on the points of agreement between the borrower and the owner of the fund. For example, there is a repo transaction where the borrower will not buy back the collateral stock, or in other words he actually sells the stock to an investor, and consequently the said investor can only regain the money by selling the stock in the market. There is also a repo in which the collateral stock can only sold back in the market by the owner of the fund after a certain period of time (the stock is locked). And there is a repo in which the borrower gives the stock at a price equal to the market price, so the owner of the fund will not make any profit if he sell the stock in the market, but with the promise that the stock will be bought back at the same price plus interest.

In developed countries like the US, repo transactions are considered safe because the collaterals are usually in the form of government bonds or treasury bonds, which have much lower risks than stocks. However, in a developing country like Indonesia, this 'repo' has a bad reputation. Because there were several cases in which although the borrower promised to buy back the stock at a predetermined price, but the promise was not fulfilled. Or, when the repo holder will sell the stock in the market, the price has already dropped before, for example the stock X above where the price was 1,500, but later it deflated to 500, so that he suffers losses (because he got the collateral stock at the price of 1,000).

And for the second case in which the stock price dropped dramatically, usually involving ‘pumped stocks’, ie penny stocks which might fly high at a time, but slashed down like crazy at another time. In recent years, some pumped stocks have fallen unnaturally (thus caused massive losses to the shareholders), usually after they went up high before, and it is suspected that one of the causes of the fall is due to repo transactions. For example, the cases of ‘fallen penny stocks’ of Trada Maritime (TRAM), Sekawan Intipratama (SIAP), Express Transindo Utama (TAXI), Hanson International (MYRX), and Sugih Energy (SUGI).

But why we consider that the decline of the above stocks were related to the repo? Well, because the sequence of events is very similar to each other, which were like this. First, there would be a certain individual or company, say A, who holds X shares in large quantities (this individual/company is usually the majority shareholder/the owner of the X company, but it could be also another, unrelated party). A then trades his own X shares in the market (so the buyers and the sellers are the same party, but using two (or more) different trading accounts), where each transaction is done at a price higher than the previous one. As a result, stock X continues to rise. For example, the price of stock X in the market was only Rp100 per share, but after being ‘pumped’, it can go up to as high as Rp500 per share.

Later, A hold meetings with many investors, both individual investors and institutions, to sell the shares of X, or to borrow money with X stocks as collaterals. It is usually said that the loan money will be used to develop/to expand the business of the X company itself. Let say that one of these investors is B, who agrees to lend cash of Rp30,000,000, with collateral of 100,000 shares of X at Rp300 per share. Since the price of X stock in the market is Rp500, its seems that B does not have to worry, because if A can not repay the debt/buy back the guaranteed stock, then B could just sells the stock in the market, and he will still make a profit.

But heres’ the problem: Since the beginning, the increase in stock prices of X from 100 to 500 was not because of a reasonable market mechanism (for example because X has a good fundamentals so that there are many public investors who buy it in large quantities, and consequently the price rises), but only because of a manipulation that explained above. This means that, other than A as the ‘pumping guy’, there would be no one else who wants to buy the stock (except maybe speculators, or small traders who do not understand anything/are just interested in the rising price of the stock). As a result when X shares dropped significantly, say 5%, in a day, then investors who hold the repo could be panic and quickly sell the stocks that they hold. And when almost all investors who holding the repo sell the stock at the same time when nobody’s there to buy, then here was the result: On October 2014, the shares of TRAM crushed down from 1,850 to 330 in just one month, and continued to fall until finally reached the bottom price of Rp50 per share.

Deflation of RIMO shares

So when the stock of Rimo International Lestari (RIMO) suddenly drops from 700 to below 200 in just a week, then it is natural if the rumor of repo emerged, because the chronology was very similar to previous cases: First, RIMO issued a large number of new shares (40.6 billion shares) through a right issue in March 2017, at Rp101 per share. As a result, the stock trading volume became liquid. Entering April and May 2017, RIMO began to rise to 150, and at this point the gains were still reasonable as the book value of the company also increased significantly after the rights issue (RIMO was a small near bankrupt retail company, acquired by a businessman named Benny Tjokrosaputro to be an object of backdoor listing for his property company).

However, entering June, RIMO suddenly climbed up with a very large volume of transactions (reached half a billion of shares per day), and just kept going up, until reaches 770 in October, or inflated more than fourfold in less than six months! Considering its financial performance that is not at all special, it was hard to say that RIMO's rise is due to fundamental factors, and I can usually say that the stock will fall sooner or later. And indeed: In last several days, RIMO went back from 700’s to 200’s, or loses about 70% of its ‘value’ in just one week.

Back to the repo issue. Although we can say that the sharp decline of RIMO, or any other penny stocks, is among others because of the repo, but we can not know surely say whether the decline was because of the repo or not, considering that the investor who holds the repo will usually not admit (that he holds the repo), because 1. They realized from the very beginning that their decision to join the repo is a pure speculation, or 2. They notified by the borrower/the person who offers the repo, not to tell anything about this repo to others. Because it's not ‘fair’ that someone else has to buy RIMO at Rp700 per share (market price), but you as the repo holder can receive the stock as a collateral at Rp300 per share only. So it's just like if you got a fraud phone call saying that you won the lottery, but before sending you to the ATM to transfer the tax money, the caller will usually tell you to ‘do not tell anyone’ that you won the lottery.

And by the way, during my career in the Indonesian stock market since 2009, I myself had been offered a repo like this, or even offered to resell the repo to another party, that I would receive some commission fee. But I refused all of the offers because, whether coincidentally or not, the collateral stocks were usually have poor fundamentals, and the management of the company was just selling future prospects without strong track record. For example, in 2015, the stock of SIAP, a coal mining company, was repo-ed by the owner of the company with the word that the coal mine belonged to the company will generate very large earnings in the future, but the said mine has not been developed at all/the mine was still in the shape of dense forest which of course takes a lot of cost for cut down, digging, and so on, but the company has absolutely no money for the development (hence the company owner seek for the funds to dig up the coal by way of selling/repo-ing the stocks). Unfortunately, although the company’s owner made a lot of proceeds from the repo, but still they cannot dug the coal, because at the time (year 2015) the price of coal was at its lowest points (so if the company forced to operate the coal mine, they would lose money). And before SIAP actually produces coal, its stocks have been slashed down first, and the company itself went bankrupt.

So if I was, for example, offered a repo with the stocks of ASII, BBRI, or UNVR at a price far below the market price as collateral, I would gladly take it, I could even sell my house! But if you are offered a repo of stocks that you may not even have heard of before, then now you know what to do. In this case I also want to submit a little criticism to the Indonesia who has been worked hard to organize the Indonesian capital market, but so far there has been no action or new regulations to specifically regulate this repo. I’m worry that if this issue is not addressed, then not only will fall more victims from retail investors, but this will also damage the reputation of Indonesian stock market in the eyes of international fund managers, because you will find nothing here except ‘pump and dump’ stocks.

Anyway, while waiting for these big bosses to take action, the important thing here is that we ourselves as investors should not be easily tempted if there are some people who offer you a repo with a certain persuasion (sometimes the borrower refuses to call this 'repo', but rather call it as private placement or others, whereas private placement is clearly different from repo), or tempted by ‘rising stocks’ when the rise is not supported by fundamental factors. In short, just invest in a normal way as it should be! And do not try your ‘luck’ by take a repo or something like that, OK?

Any inquiries, contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com.