Comments of Baker & McKenzie.Wong & Leow on S7-02-03

Your Ref:
Our Ref: SEC letter (final)b.doc

Baker & McKenzie.Wong & Leow
1 Temasek Avenue #27-01
Millenia Tower
Singapore 039192

February 14, 2003

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
U.S.A.

Re: Request for Relief in Relation to Conflicts Between Provisions of the Sarbanes-Oxley Act of 2002 and Rules and Regulations Thereunder
and Indonesian Laws, Rules and Regulations Applicable to
Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk

Dear Mr. Katz:

We are submitting this letter to the Securities and Exchange Commission (the "Commission"), on behalf of our client, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk ("Telkom" or the "Company"), an Indonesian company that is majority-owned by the Government of Indonesia, in response to the Commission's request for comments with regard to the application and effect of the provisions of the Sarbanes-Oxley Act of 2002 (the "Act") on foreign private issuers subject to the Act, as well as in response to the Commission's request for comments on its proposed rules on standards relating to listed company audit committees dated January 8, 2003 (the "Audit Committee Rule Proposals") (Commission Reference: File No. S7-02-03; 68 Fed. Reg. 2638 (2003)(proposed January 17, 2003)).

Telkom is the principal provider of domestic telecommunications services in Indonesia as well as the leading provider, through its majority owned subsidiary PT Telekomunikasi Selular, of mobile cellular services in Indonesia. It is one of the largest companies by market capitalization in Indonesia, with a market capitalization of approximately US$3.9 billion as of

January 29, 2003. Because the Government of Indonesia holds a majority of Telkom's shares and also holds a special Series A Share (the "Golden Share") that carries special veto rights with respect to certain corporate actions including the nomination, election and removal of directors and commissioners, Telkom's board of directors ("BOD") and its supervisory board of commissioners ("BOC") are effectively appointed by the Government of Indonesia in its capacity as such shareholder. Telkom's ordinary shares are listed on the Jakarta Stock Exchange ("JSX") and the Surabaya Stock Exchange, and its ordinary shares in the form of American Depositary Shares ("ADSs") are listed on The New York Stock Exchange (the "NYSE") (Ticker symbol: TLK) and the London Stock Exchange. Telkom is therefore subject to the Act.

In the course of reviewing with Telkom the application and impact of the Act, we have identified issues relating to, or conflicts between, the requirements of (i) the Act and the rules and regulations promulgated or proposed thereunder, and (ii) Indonesian law or practices (including the rules and regulations of Bapepam, the Indonesian Capital Market Supervisory Agency, and the Jakarta and Surabaya Stock Exchanges, the primary stock exchanges in Indonesia on which the shares of Telkom are traded), as well as other matters with respect to which we believe clarification or exemptive relief would be appropriate.

Relief is Appropriate

As a preliminary matter, we believe that the intent of Congress with regard to the applicability and effect of the Act to foreign private issuers is reasonably reflected in the words of Senator Michael B. Enzi¹:

"I believe we need to be clear with respect to the area of foreign issuers and their coverage under the bill's broad definitions ... [T]he SEC historically has permitted the home country of the issuer to implement corporate governance standards. Foreign issuers are not part of the current problems being seen in the U.S. capital markets, and I do not believe it was the intent of the conferees to export U.S. standards disregarding the sovereignty of other countries as well as their regulators."

Senator Enzi went on to say:

"I believe it is the intent of the conferees to permit the Commission wide latitude in using their rulemaking authority to deal with technical matters such as the scope of the definitions and their applicability to foreign issuers. I would encourage the SEC to use its authority to make the act as workable as possible consistent with longstanding SEC interpretations."

Pursuing a similar approach, Chairman Harvey Pitt, on October 8, 2002, stated²:

"... we are prepared to consider how we can fulfill the mandate of the Act through our rulemaking and interpretive authority in ways that accommodate the home country
requirements and regulatory approaches of the home jurisdiction of our foreign registrants and potential registrants."

The NYSE, in its Corporate Governance Rule Proposals Reflecting Recommendations from the NYSE Corporate Accountability and Listing Standards Committee As Approved by the NYSE Board of Directors August 1, 2002 (the "NYSE Proposals") also commented³:

"Both SEC rules and NYSE policies have long recognized that foreign private issuers differ from domestic companies in the regulatory and disclosure regimes and customs they follow, and that it is appropriate to accommodate those differences. For this reason, the NYSE for many years has permitted listed non-U.S. companies to follow home-country practices with respect to a number of corporate governance matters, such as the audit committee requirement and the NYSE shareholder approval and voting rights rules."

The Commission has also adopted a similar approach by providing foreign private issuers with a number of accommodations to home country practices and policies. Chairman Harvey Pitt, on October 8, 2002, reaffirmed his intention to continue this approach by stating that "We intend to continue our adherence to this important international perspective and philosophy as we move forward."⁴

We also note that in Mr. Giovanni Prezioso's presentation⁵ on October 16, 2002, he stated that on a policy level, the Commission has been given the mandate to implement the letter and the spirit of the Act as it relates to foreign private issuers. We also note that he had stated that the record shows that Congress was presented with proposals to exclude foreign private issuers and rejected these proposals; and that therefore, the Commission will be taking that factor into account from a policy perspective when drafting rule proposals and will be wary of using its general exemptive power under Section 36 of the Securities Exchange Act of 1934 (the "Exchange Act").

However, the compelling reasons that the Commission and the NYSE have long recognized the need and desirability to accommodate differences in foreign regulatory and disclosure regimes remain undiminished by the adoption of the Act. As the Commission is already aware, as evident from its prior statements and Audit Committee Rule Proposals, a number of issues and conflicts with foreign regulations exists under certain provisions of the Act. As the Commission can clearly perceive, due to fundamental statutory differences in the corporate governance and supervisory structures between Indonesian limited liability companies, such as Telkom, and US companies, it is not possible for Telkom to comply with both mandatory statutory provisions of its jurisdiction of incorporation and principal business operations and the audit committee rules in the form that the Act requires the NYSE to adopt and enforce them.

We note that the Commission has proposed certain limited exemptions for foreign private issuers in its Audit Committee Rule Proposals to address some of these conflicts. However, other conflicts have not yet been addressed or fully resolved. Accordingly, unless exemptive relief or other measures of flexibility are introduced in the rules adopted by the Commission, Telkom will be put in the untenable position of having to choose which laws and rules it must violate. As a public listed company in Indonesia, Telkom cannot allow itself to be put in this position.

Conflicts between Provisions of the Act and Indonesian Laws and Regulations Applicable to Telkom

Composition of Audit Committee under Section 301
Provisions of the Act
Section 10A(m)(3)(A) of the Exchange Act, as amended by Section 301 of the Act ("Section 301"), requires the Commission to direct the NYSE, the NASDAQ Stock Market, and other exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the following audit committee requirements:
"Each member of the audit committee must be a member of the board of directors of the issuer, and shall otherwise be independent."

In order to be considered to be independent for the purposes of Section 301,
"a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee:
(i) accept any consulting, advisory, or other compensatory fee from the issuer; or
(ii) be an affiliated person of the issuer or any subsidiary thereof."

Relevant Indonesian Regulations
The requirement under the Act that the audit committee must be comprised of members of the board of directors is inconsistent and conflicts with the corporate management structure of companies in Indonesia and the JSX rules with regard to the composition of audit committees, as described below.
As the Commission has discussed in its Audit Committee Rule Proposals, foreign private issuers incorporated in some jurisdictions have a two-tier board. Companies in Indonesia, including Telkom, are required pursuant to Article 1 of Law No. 1/1995 on Limited Liability Companies to adopt a two-tier board structure, consisting of a BOD and a BOC. The executive management functions are conducted by the BOD, whose members are comprised of the top executives of the company, comparable to the chief executive officer, chief financial officer and other such officers of corporations incorporated under the laws of the States of the United States. The BOC, which supervises the policies of the BOD, does not have day-to-day management functions or authority, except in limited circumstances where all members of the BOD have been suspended for any reason. The statutory duties of the BOC are to conduct general and special supervision, and to provide advice to the BOD⁶.
Members of Telkom's BOD and BOC are elected and dismissed by shareholders' resolutions at a general meeting of shareholders, subject to veto rights vested in the Government of Indonesia by virtue of the fact that it holds the Golden Share . The two boards are separate, and no individual may be a member of both boards. Attached as Appendix A to this letter is a copy of an unofficial English translation of Article 1 of Law No. 1/1995 on Limited Liability Companies.
Telkom is required to establish and maintain an audit committee pursuant to JSX Securities Listing Rules No. I-A: Regarding the General Requirements of Equity Securities to be Listed in the Stock Exchange, as attached in the decision of the Board of Directors of PT Bursa Efek Jakarta No. Kep-315/BEJ/06-2000 dated 30 June 2000, as amended by the decision of the Board of Directors of PT Bursa Efek Jakarta No. Kep-339/BEJ/07-2001 dated 20 July 2001 (the "JSX Audit Committee Rule"), paragraph C.3, which provides:
"The audit committee shall consist of at least three (3) members, one of whom shall be an independent commissioner of the listed company and concurrently the chairman of the audit committee, while the other members shall be external independent parties of which at least one such party shall have accounting and/or finance expertise." (unofficial translation)

Members of Telkom's audit committee are appointed and dismissed by the BOC.
For a commissioner to be independent for purpose of these provisions he or she must not be:
An independent commissioner is also required to have a good understanding of capital market regulations.
Attached as Appendix B is a copy of an unofficial English translation of the JSX Audit Committee Rule. The Company understands that similar requirements are generally considered to apply in determining the independence of external audit committee members, subject to an exception discussed in paragraph 3(b) below.
1. Commissioners should be permitted to sit on the audit committee
  The Company agrees with the Commission that where foreign private issuers have a two-tier board, with one tier designated as the management board and the other tier designated as the supervisory or non-management board, the supervisory or non-management board would be the body within the company (or at least its member(s) would be) better equipped to comply with the proposed requirements. However, the Commission in its Audit Committee Rule Proposals refer to both tiers of boards as "boards of directors", and uses the term "two-tier boards of directors". The Company would like to clarify that although Indonesian issuers have two-tier boards, they are not "two-tier boards of directors". The term "commissioner" is not a subset of "director", and the two are distinct under Indonesian law. Therefore, the Company respectfully requests that the Commission in adopting implementing rules modify such reference to "two-tier boards of directors" to clarify that members of the non-management or supervisory board may not be directors.
  Section 301 provides that "[e]ach member of an audit committee must be a member of the board of directors of the issuer ..." The Company believes that the purpose of limiting membership in the audit committee to independent directors under Section 301 is to facilitate the independence of the audit committee and insulate its function from undue influence of management directors.
  Because the "board of directors" of an Indonesian company consists of executive management personnel, a strict application in Telkom's case of Section 301's requirement that each member of the audit committee must be a member of the "board of directors" will have precisely the opposite effect of that which is intended by Section 301, namely shifting membership of the audit committee to the management of the company, who are unable to satisfy the independence requirements prescribed by the Act. The board of commissioners on the other hand cannot and does not include members of management. Accordingly, the Company agrees with the Commission that the board of commissioners, rather than the board of directors, is the body from which members of the audit committee should be selected for Telkom and other similarly situated Indonesian companies.
2. Inclusion of non-BOC members in audit committee
  The JSX Audit Committee Rule, to which Telkom is subject, requires that members of the audit committee consist of at least three persons, one of whom must be a BOC commissioner and the other members must be external independent members.
  The external independent members are not considered employees of the company on whose audit committee they sit and do not participate in any employee plan or benefits of such company. At least one of such external independent members must have accounting and/or finance expertise.
  The Company believes that the intent of the Act in requiring that "each member of the audit committee... shall be a member of the board of directors of the issuer, and shall otherwise be independent" is to ensure that the audit committee is independent from influence by management and would provide a "forum separate from management in which auditors and other interested parties can candidly discuss concerns"⁷. Like Section 301, the JSX Audit Committee Rule requires that each member of the audit committee be independent. The JSX Audit Committee Rule goes on to require that at least two of the members, the external independent members, in effect be independent not only of the management but also of the BOC and BOD and the company as a whole. At least one of these persons, according to the JSX Audit Committee Rule, must have accounting and/or finance expertise. Telkom believes that the standard established by the JSX Audit Committee Rule is in some ways more stringent than the standard set out in Section 301, and at least equally effective in implementing the purposes of the Act.
  Further, the structure of the audit committee mandated by the JSX Audit Committee Rule is similar to the "board of auditors" proposed to be exempted by the SEC's Audit Committee Rule Proposals. Similar to such board of auditors, the audit committee under the JSX Audit Committee Rule (i) is independent of management, (ii) excludes from its members executive officers of issuers and (iii) is required by home country legal or listing provisions. However, the audit committee under the JSX Audit Committee Rule does not fit squarely within the exemption provided with respect to the board of auditors and other such bodies or any other exemption proposed under the Audit Committee Rule Proposals because under the JSX Audit Committee Rule, the audit committee is not separate from the board of commissioners as (i) one audit committee member must be a commissioner, and (ii) the audit committee members are appointed by the board of commissioners.
  Thus, it will not be possible for Telkom to comply with both the JSX Audit Committee Rule and the provisions of Section 301 as proposed to be implemented by the Audit Committee Rule Proposals.
  Accordingly, the Company requests that, in adopting implementing regulations, the Commission acknowledges that so long as Telkom maintains an audit committee that complies with the provisions of the JSX Audit Committee Rule, it will be deemed to be in compliance with Section 301 and the rules thereunder. In particular, Telkom requests confirmation by the Commission that the composition of the audit committee may deviate from that stipulated in Section 301 by the inclusion on the audit committee of external independent members having the appropriate qualifications mandated by the JSX Audit Committee Rule. Failure to provide such relief would force Telkom to face a choice of violating either the JSX rules or Section 301. Otherwise, Telkom would have to establish two "audit committees" with duplicative functions, which, as the Commission recognizes in its Audit Committee Rule Proposals in its discussions on foreign issuers with boards of auditors, would not only be costly and inefficient, but could also generate possible conflicts of powers and duties.
  The Company notes that the Commission has proposed that a foreign private issuer availing itself of the exemptions from the independence standards and certain other general exemptions proposed in the Audit Committee Rule Proposals be required to disclose their reliance on the exemption and their assessment of whether, and if so, how, such reliance would materially adversely affect the ability of their audit committee to act independently. The Company believes that this approach, extended to additional exemptions requested herein, would be consistent with the protection of investors and the purposes of the Act, without, in the words of Senator Enzi, disregarding the sovereignty of other countries as well as their regulators.
Definition of Audit Committee under Section 2(a)(3) of the Act
Provisions of the Act
Section 2(a)(3) of the Act defines the term "audit committee" to mean
"(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and
(B) if no such committee exists with respect to an issuer, the entire board of directors of the issuer."

Relevant Indonesian Considerations
The definition of "audit committee" affects not only the operation of Section 301 of the Act but other sections of the Act in which the term is used. For example, Section 201 of the Act amends Section 10A(h) of the Exchange Act to provide that:
"A registered public accounting firm may engage in any non-audit service ... that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, only if the activity is approved in advance by the audit committee of the issuer ..."

Section 202 of the Act amends Section 10(A)(i) of the Exchange Act to provide that:
"All audit services...and non-audit services, other than as provided in subparagraph (B), provided to an issuer by the auditor of the issuer shall be preapproved by the audit committee of the issuer."

Based on the definition in Section 2(a)(3) of the Act and as discussed in item 1 above, the audit committee of Telkom would technically appear not to fall under the definition of an "audit committee" under either Section 2(a)(3)(A) or Section 2(a)(3)(B) of the Act, and would not be able to comply with many of the provisions of the Act that require the "audit committee" to perform specified functions such as preapproving audit services and non-audit services to be provided by the auditor. Therefore, the Company respectfully requests the Commission, in adopting implementing rules, to clarify that an audit committee with a composition like that discussed in paragraph 1 above (namely, one independent commissioner and two or more external independent members), will be deemed to fall within the definition of "audit committee" under Section 2(a)(3)(A).
Independence of Audit Committee Members under Section 301 of the Act
Provisions of the Act
Section 10A(m)(3)(A) of the Exchange Act, as amended by Section 301 of the Act, requires the Commission to direct the NYSE, the NASDAQ Stock Market, and other exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the following audit committee requirements:
"Each member of the audit committee ... shall otherwise be independent."

Also, as set forth in paragraph 1 above, in order to be considered independent, the audit committee member may not, other than in the member's capacity as a member of the audit committee, the board of directors or any other board committee,
"(i) accept any consulting, advisory or other compensatory fee from the issuer; or
(ii) be an affiliated person of the issuer or any subsidiary of the issuer."

The Commission has proposed in its Audit Committee Rule Proposals to define "affiliate" and "affiliated person", consistent with the definition of these terms under the U.S. securities laws, such as in Rule 12b-2 under the Exchange Act and Rule 144 under the Securities Act of 1933, to mean "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified." In addition, the Commission, in its Audit Committee Rule Proposals, has clarified that a director, executive officer, partner, member, principal or designee of an affiliate would be deemed to be an affiliate under the proposed rules.
Relevant Indonesian Regulations
Practices in Indonesia with regard to the compensation of the audit committee members differ in some respects from the practices in the United States. In addition, in part due to the two-tier board structure in Indonesia, Indonesian rules on the independence of audit committee members also differ from those in the United States. These differences give rise to a number of issues relating to the independence of audit committee members under Section 301 of the Act.
As set forth in paragraph 1 above, for a commissioner to be independent for purposes of the JSX Audit Committee Rule, he or she must not be:

(i) related to or affiliated with the controlling shareholders of the listed company;
(ii) related to or affiliated with any director or commissioner of the listed company; or
(iii) a director in a company that is affiliated with the listed company.

An independent commissioner is also required to have a good understanding of capital market regulations.
The JSX rules do not define what affiliation means, although under Article 1 of the Indonesian Law No. 8 of 1995 on Capital Markets, "affiliation" is defined to mean:
1. family relationship by reason of marriage and birth up to the second degree, direct as well as collateral;
2. relationship between a party and its employees, directors, or commissioners;
3. relationship between two companies, where one or more members of the board of directors or board of commissioners is/are the same person(s);
4. relationship between a company and a party, which either directly or indirectly controls or is controlled by that company;
5. relationship between two companies controlled either directly or indirectly by the same party; or
6. relationship between the company and the substantial shareholders.
We highlight below three issues relating to the independence of audit committee members where the Company believes clarification on the requirements of the Act would be appropriate, in light of local practices and rules.
1. Compensation of commissioners and audit committee external independent members
  Each external independent member of the audit committee of Telkom is paid only a fixed monthly fee based on a percentage of the fee paid to a commissioner.
  Each commissioner of Telkom, including the commissioner who is a member of the audit committee receives:
  (i) a fixed monthly fee;
  (ii) a "tantiem", or profit-linked payment; and
  (iii) certain other benefits including transport allowance and an insurance policy that will pay a lump-sum amount at the end of the commissioner's term.
  
  Such amounts, including the tantiem, are provided to a commissioner in his or her capacity as a commissioner. Currently, a commissioner of Telkom does not receive any additional amounts for serving on the audit committee.
  The compensation for commissioners described above are typical, and are recommended by the Indonesian Ministry of State-Owned Enterprises, for state-owned enterprises in Indonesia, pursuant to a letter from the Indonesian Ministry of State-Owned Enterprises which sets forth guidelines for the compensation of directors and commissioners.⁸ Such letter also sets the maximum amounts that may be provided for each recommended fee component set forth above. Telkom understands that such guidelines have been provided to implement and ensure a consistent compensation structure across the many state-controlled companies that exist in Indonesia.
  The Company believes that the compensation for commissioners described above, including the payment of the tantiem, would not impair the independence of a commissioner based on the standard of independence set out in Section 301, since the compensation would be paid to the commissioner solely in his or her capacity as a commissioner. Moreover, the cash value of the aggregate compensation paid to all directors and commissioners is publicly disclosed by Telkom.⁹
  The Company therefore respectfully requests that the Commission take into account the home country practices in Indonesia relating to the compensation of audit committee members, and confirm the Company's understanding that the payment to commissioners of the types of compensation described above, including the tantiem, would not disqualify an otherwise independent commissioner from being considered independent under Section 10A(m)(3) of the Exchange Act, as amended by Section 301 of the Act.
2. Multiple appointments as commissioners and/or external audit committee members
  Under the JSX Audit Committee Rule, the independence of an otherwise independent commissioner would not be impaired by virtue only of the fact that he or she is also a commissioner (as opposed to a director) of another company that is affiliated with the issuer. The Company understands that the rationale for this position is that the functions of a commissioner are non-executive and supervisory only in nature and therefore do not pose the same conflict of interest risk as being a director of an affiliated company. A commissioner would not be considered independent under the JSX Audit Committee Rule if he or she is also a director of another company that is affiliated with the issuer¹⁰.
  However, in a JSX circular letter No. SE-008/BEJ/12-2001 dated December 7, 2001, the JSX stated that an external audit committee member who is also a commissioner of another company that is affiliated with the issuer would not be considered to be independent. The Company understands that the JSX took such a position with regard to the independence of external audit committee members because the JSX found that a number of companies appointed as their external independent audit committee members persons who were commissioners of companies within the corporate group, and it wished to discourage such practice as it felt that such persons' ability to be independent could be affected. The Company understands that the JSX is prepared to consider on a case by case approach the question of whether an issuer's external independent audit committee member may be a commissioner in companies that are affiliated to the issuer.
  The Company notes that under proposed Exchange Act Rule 10A-3(e)(1)(ii) in the Audit Committee Rule Proposals, a director, executive officer, partner, member, principal or designee of an affiliate of Telkom would be deemed to be an affiliate of Telkom. If the Commission's reference to a "director" of an affiliate includes a commissioner of an affiliate, it would mean that a person who was a commissioner of a state-owned company would be considered an affiliate of Telkom and hence be unable to sit on Telkom's audit committee, because of the common state ownership. This would preclude a commissioner of Telkom or an external independent member of Telkom's audit committee from holdings positions as a commissioner of other affiliates, including state-owned entities. The Company believes that as the functions of a commissioner are non-executive and supervisory only in nature, a commissioner of an affiliate of Telkom should not be considered to be an affiliate of Telkom for purposes of Section 10A(m)(3) of the Exchange Act, as amended by Section 301 of the Act, and that the question of whether an external independent audit committee member may be a commissioner of an affiliate of the issuer should be left to the JSX to resolve.
  Likewise, an external independent audit committee member of an affiliate of Telkom is not a director, executive officer, partner, member, principal or designee of such affiliate of Telkom, and hence, the Company believes that an external independent audit committee member of an affiliate of Telkom should not be considered to be an affiliate of Telkom for purposes of Section 10A(m)(3) of the Exchange Act, as amended by Section 301 of the Act.
  The Company therefore respectfully requests that the Commission confirms that a member of Telkom's audit committee may hold positions as a commissioner and/or an external independent audit committee member of an affiliate of Telkom, including another state-owned company, without his or her independent status being affected for purposes of Section 10A(m)(3) of the Exchange Act, as amended by Section 301 of the Act, by virtue only of such position(s) held. It is not uncommon in Indonesia for a person to be a commissioner or external audit committee member of more than one state-owned company, and by virtue of the Government of Indonesia's control and/or ownership of the numerous companies, each would be an affiliate of the others as a result of the common control. Thus, the Company believes that any determination from the Commission that diverges from what is accepted practice in this regard in Indonesia would be unnecessarily disruptive and increase the difficulty of securing the services of suitable independent commissioners and external independent audit committee members.
3. Government of Indonesia as controlling shareholder of Telkom
  The Company notes the Commission's clarification in its Audit Committee Rule Proposals that a designee of an affiliate would be deemed to be an affiliate. Since the Government of Indonesian is an affiliate of Telkom by virtue of its control, this raises the question as to whether or not the audit committee member of Telkom who is also a commissioner is considered a "designee" of the Government of Indonesia and hence non-independent. The question arises because while Telkom's commissioners are elected by the shareholders in a general meeting, the Government of Indonesia holds the majority of Telkom's shares, and also holds the Golden Share, by virtue of which the Government enjoys the right to veto corporate actions including the nomination, election and removal of directors and commissioners. The commissioners are thus effectively elected by the Government in its capacity as such shareholder.
  The Company believes that a commissioner of Telkom who is appointed to the audit committee by the BOC should not be deemed to be a designee of the Government of Indonesia, as the Government of Indonesia does not directly designate such commissioner to sit on the audit committee. The Company also believes that this position would not deviate from the objective of ensuring the independence of audit committee members, since commissioners perform non-executive functions, and the audit committee will consist of a majority of external independent members.
  Therefore, the Company respectfully requests confirmation by the Commission to the effect of the foregoing paragraph, namely, that a commissioner of Telkom who is appointed to the audit committee by the BOC will not be deemed to be a designee of the Government of Indonesia for purposes of Section 10A(m)(3) of the Exchange Act, as amended by Section 301 of the Act, notwithstanding the fact that the Government of Indonesia holds the Golden Share and has a majority shareholding in Telkom, and effectively elects the commissioners of Telkom.
Application of References to Directors in the Act to Commissioners
The Company respectfully requests clarification as to whether in each case in the Act and in the rules thereunder (or proposed rules) where reference is made to the term "director", such term should be understood to apply also to a member of the non-management or supervisory board, where appropriate.
For certain references, such as in Section 301 and Section 2(a)(3), as discussed above and addressed in the Audit Committee Rule Proposals in the context of the composition of the audit committee, it is clear that the term "director" should refer to a member of the supervisory or non-management board where the issuer has a two-tier board.
For other references, such as in the Commission's proposed Exchange Act rule 10A-3(e)(1)(i)(C) and 10A-3(e)(1)(ii) on the definition of affiliates, and as discussed in paragraph 3(b) above, the Company believes that, because of the supervisory nature of the duties of commissioners, the term "directors" should refer only to management directors and should not include commissioners.
Two other examples of references to "director" in the Act where such clarification would be appropriate include:
The Company believes in these two examples, the policy reasons behind the provisions do not apply with equal force as it relates to commissioners or members of the non-management board because of the non-executive role of such persons, and that therefore, the term "directors" should refer only to management directors and should not include commissioners.
The above examples are not exhaustive and the Company believes it would be appropriate for the Commission to make clear the applicability of provisions of the Act and in the rules thereunder (or proposed rules) to persons sitting on the non-management or supervisory board in a multi-tier board system for each reference to the term "director".
Appointment and Compensation of Auditor under Section 301 of the Act.
Provisions of the Act
Section 10A(m)(2) of the Exchange Act, as amended by Section 301 of the Act, requires the Commission to direct the NYSE, the NASDAQ Stock Market, and other exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with certain audit committee requirements, including the following:

"The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee." [Emphasis added.]

The Company also notes the Commission's proposals to add an instruction (the "Instruction") to Exchange Act rule 10A-3 that such proposed requirement

"...does not conflict with, and does not affect the application of, any requirement under an issuer's governing law or documents or other home country requirements that require shareholders to ultimately elect, approve or ratify the selection of the issuer's auditor. The requirement instead relates to the assignment of responsibility to oversee the auditor's work as between the audit committee and management. In such an instance, however, if the issuer provides a recommendation or nomination of an auditor to its shareholders, the audit committee of the issuer, or body performing similar functions, must be responsible for making the recommendation or nomination. Also the requirement ...does not conflict with any requirement in a company's home jurisdiction that prohibits the full board of directors from delegating the responsibility to select the company's auditor. In that case, the audit committee, or body performing similar functions, must be granted advisory and other powers with respect to such matters to the extent permitted by law, including submitting nominations or recommendations to the full board."

Relevant Indonesian Regulations
Under Article 63(1) of Law No. 1/1995 on Limited Liability Companies (the "Indonesian Company Law")¹¹ and Article 25(1) of The Decision of the Minister of State-owned Enterprises No. Kep-117/M-MBU/2002 dated 31 July 2002 on the Implementation of Good Corporate Governance Practices in the State-owned Enterprises (the "External Auditors Article"), both of which apply to Telkom, the ultimate authority to appoint the auditor lies with the shareholders (at a general meeting of shareholders) of Telkom and not with the audit committee. The Commission's clarification in the proposed Instruction will thus address the apparent conflict with the Indonesian requirement that shareholders appoint the independent auditor.
However, Article 25(2) of the External Auditors Article further provides that the independent auditor will be appointed by the shareholders (at a general meeting of shareholders) from the candidates nominated by the BOC, as advised by the audit committee. Further, Article 25(2) of the External Auditors Article provides that the audit committee, through the BOC, must submit to the general meeting of shareholders the reasons for such nomination and the fee for the independent auditor. Attached as Appendix C is a copy of an unofficial English translation of the External Auditors Article.
These Indonesian regulations directly conflict with the requirement of the Act and proposed Instruction that the audit committee must be directly responsible for the compensation of the registered public accountant and directly responsible for making the recommendation or nomination if the issuer provides a recommendation or nomination of an auditor to its shareholders. The Act and proposed Instruction continue to require the audit committee to remain responsible for approving the compensation of auditors, and does not provide for the compensation of auditors to be submitted to shareholders for approval, as is required under Indonesian law.
Further, the Instruction provides that "if the issuer provides a recommendation or nomination of an auditor to its shareholders, the audit committee of the issuer, or body performing similar functions, must be responsible for making the recommendation or nomination". The Instruction is not entirely clear as to whether such instruction is met where, as required by the applicable Indonesian regulations, it is the BOC (as opposed to the audit committee) that is responsible for nominating the candidates, and where such nomination is based on the advice of the audit committee.
One of the primary intended purposes of the Act in making the audit committee directly responsible for the appointment, compensation and oversight of the registered public accounting firm was to facilitate auditor independence by removing any such decision making from the purview of the executive management and placing it in the hands of the independent directors comprising the audit committee. It was believed that this would further strengthen auditor independence because the auditors would not have to answer to those whose work they were auditing, and because of "the unique ability of the audit committee to insulate the auditor from the pressures that may be exerted by management."¹²
Telkom understands and believes that the requirement under Indonesian law that shareholders in a general meeting appoint and approve the auditors and approve their compensation were motivated by similar concerns about auditor independence. The requirements under Indonesian law arguably set a higher standard in safeguarding auditor independence in this respect, since it vests such authority in the shareholders directly rather than the audit committee. The appointment by shareholders of the auditor and the approval by shareholders of the compensation to be paid to the auditors, together with the requirement that the BOC recommends the candidates, based on proposals of the audit committee, fortifies the independence of the auditors ultimately selected.
Accordingly, the Company requests confirmation from the Commission that (i) either the supervisory board (BOC in the case of Indonesian companies), audit committee or shareholders at a general meeting of shareholders may be responsible for the both the appointment and compensation of the auditor and that such a structure would comply with the Act and the rules and regulation promulgated thereunder by the Commission; and (ii) the supervisory board may be responsible for nominating candidates for the independent auditor, based on the advice of the audit committee. The Company believes that such provision would meet the intended objectives of the Act and would accommodate a practice and a process that is comparable if not superior to that required by the Act and which is required by local laws to safeguard auditor independence.
General Approach to Exemptions Where Existing Foreign Regulatory Regime Provides Comparable Safeguards
In circumstances where a foreign system of corporate governance is in place which is at least as effective, if not more so, in safeguarding the objectives of the provisions, such as in relation to the responsibility for the appointment and compensation of the auditor, the Company respectfully urges the Commission to generally take a more expansive approach towards allowing broader exemptions, so as to allow for such foreign systems of corporate governance to work as intended as well as develop in the future. Not to do so may result in straitjacketing such foreign systems, which may not have been envisaged by the Act, to fit within an alien framework, and may result in new conflicts when such foreign systems develop within their own framework.

We have not attempted to undertake an exhaustive review of all instances where there may be potential issues relating to, or potential conflicts between, the requirements of the Act and Indonesian law or practices, but have limited our discussion and comments to the major issues that the Company has identified.

We would be happy to discuss, together with our Indonesian correspondent firm Hadiputranto, Hadinoto & Partners, if desired, any questions the Commission or its staff may have with regard to the above matters. You may direct such questions to Scott Clemens (scott.clemens@bakernet.com) in Hong Kong, and/or Ashok Lalwani (ashok.lalwani@bakernet.com) or Jih-Shian Yeo (jih-shian.yeo@bakernet.com) in Singapore.

Very truly yours,
Baker & .Wong & Leow

cc: Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk

Unofficial Translation

APPENDIX A

LAW OF THE REPUBLIC OF INDONESIA
NO. 1 OF 1995
ON
LIMITED LIABILITY COMPANIES

CHAPTER I
GENERAL PROVISION

Article 1

As defined in this Law:

A Limited Liability company, hereinafter referred to as "company", shall be a legal entity which is established by virtue of an agreement, carries on business operations with an authorized capital divided into shares, and which fulfills the requirements as stipulated in this Law and its executory regulations.
The company's organs shall be the General Meeting of Shareholders, the Board of Directors and the Board of Commissioners.
The General Meeting of Shareholders, hereinafter referred to as the GMS, shall be the company's organ that is vested with the highest power in the company and holds all the authorities that are not delegated to the Board of Directors or the Board of Commissioners.
The Board of Directors shall be the company's organ that is fully responsible for the management of the company for the interest and objectives of the company and represents the company both in and out of court in compliance with the provisions of the Articles of Association.
The Board of Commissioners shall be the company's organ having the tasks of carrying out supervision in general and/or specifically and gives advice to the Board of Directors in running the company.
An Open Company shall be a company the capital and number of shareholders of which fulfill a certain criteria, or a company that carries out a public offering in accordance with the statutory regulations in the field of capital market.
The Minister shall be the Minister of Justice of the Republic of Indonesia.

Unofficial Translation

APPENDIX B

SECURITIES LISTING
REGULATION NO. I.A : GENERAL REQUIREMENTS FOR EQUITY
SECURITIES TO BE LISTED IN
THE STOCK EXCHANGE

Attachment To The Decision of
Directors of Jakarta Stock Exchange

Number : Kep-315/BEJ/06-2000

Dated : 30 June 2000

As amended by : Kep-339/BEJ/07-2001

Dated : 20 July 2001

(Note: This translation only contains Paragraph C of the regulation)

C. INDEPENDENT COMMISSIONERS, AUDIT COMMITTEE, AND CORPORATE SECRETARY

In order to implement good corporate governance, Listed Companies shall have:

Independent Commissioners, the total number of which is proportionate to the total percentage of shares owned by non-controlling shareholders, provided that total number of Independent Commissioners is at least 30% of the total number of commissioners;
An Audit Committee;
A Corporate Secretary.

To be an Independent Commissioner of a Listed Company, such Commissioner must:

Not be affiliated with the Controlling Shareholders of the Listed Company;
Not be affiliated with any director or commissioner of the Listed Company;
Not be a director in a company that is affiliated with the Listed Company;
Have a good understanding of capital market regulations.

The Audit Committee shall consist of at least three (3) members, one of whom shall be an Independent Commissioner of the listed company and concurrently the chairman of the audit committee, while the other members shall be external independent parties of which at least one such party shall have accounting and/or finance expertise.
The Audit Committee shall be responsible for providing independent professional opinions to the Board of Commissioners on reports or any other matters addressed by the directors to the Board of Commissioners and identifying such matters that require attention from the Board of Commissioners, including:

Examining the financial information that will be issued by the company, such as Financial Statements, projections and other financial information;
Examining the independence and objectivity of the public accountant;
Examining the adequacy of audits conducted by the public accountant in order to ensure that all important risks have been considered;
Examining the effectiveness of the company's internal controls;
Examining the degree of compliance from the Listed Company with capital market regulations and other regulations relating to the activities of the company;
Examining any alleged errors in the resolutions of directors meetings or deviations from the implementation of such resolutions. The said examination may be conducted by the Audit Committee or by an independent party appointed by the Audit Committee at the expense of the Listed Company.

In performing their duties as referred in paragraph C.4 above, the Audit Committee shall submit their reports upon the examinations to all members of the Board of Commissioners of the Listed Company at the latest 2 (two) working days after the finalization of such report.
Based on the foregoing report, the Board of Commissioners shall prepare a recommendation for revisions or suggestions which will be submitted, together with the examination reports prepared by the Audit Committee, to all directors of the Listed Company at the latest 7 (seven) working days after the Board of Commissioners receive the final examination reports.
The examination reports which are material and such recommendations with regard to the revisions or suggestion, as referred in paragraph C.6. above, shall be submitted to the Stock Exchange and available for shareholders in the office of the Listed Company at the latest 7 (seven) working days after the directors receive such recommendations from the Board of Commissioners.
Circular resolution in lieu of directors meeting shall be approved by all directors.
A minutes of meeting shall be prepared in every directors meeting, and one copy of the minutes shall be submitted to the Board of Commissioners at the latest the following working day after the date of such meeting.
The Independent Commissioners shall inform of any important events or occurrences identified by them to the Board of Commissioners.
The Audit Committee shall periodically submit report regarding their activities to the Board of Commissioners, at least once in every 3 (three) months.
Annual Financial Statements of Listed Company shall contain reports regarding the activities of Audit Committee, which relate to:

Violations of prevailing regulations by the Listed Company (if any);
Error/mistakes in the preparations of financial statements, internal control and the independence of company's auditor (if any);
Review regarding the implementation of directors' and commissioners' total compensation package.

Corporate secretary functions as set forth in the Capital Market and Supervisory Agency Regulation No. IX.I.4 regarding Establishment of Corporate Secretary shall be performed by one director or officer of the Listed Company specifically appointed to perform such function. The Corporate Secretary shall have the access to important and relevant information of the Listed Company and shall have a good understanding of capital market regulations, especially in relation to disclosure matters.
If the Corporate Secretary is not a director of the Listed Company, the Board of Directors shall be responsible for any information submitted by the Corporate Secretary.
Other than duties as referred in the Capital Market and Supervisory Agency Regulation No. IX.I.4 regarding Establishment of Corporate Secretary, the Corporate Secretary shall also perform the following duties:

Prepare a Special Register with regard to directors, commissioners and their families shareholdings, business relationship and other roles in the Listed Company or its affiliates which might trigger a conflict of interests with the Listed Company;
Prepare a Register of Shareholders which includes any 5% (five percents) or more shareholdings;
Attend directors' meeting and prepare the minutes of meetings;
Organize the General Shareholders Meeting.

The appointment of the Corporate Secretary shall be reported to the Stock Exchange at the latest on the following trading day after such appointment, and shall be published at least in 1 (one) daily newspaper which has national circulation.

Unofficial Translation

APPENDIX C

Decision of the Minister of State-owned Enterprises No. Kep-117/M-MBU/2002
regarding
The Implementation of Good Corporate Governance Principles in
State-owned Enterprises

___________________________________________________________________________

Chapter VI
EXTERNAL AUDITORS

Article 25

(1) The external auditor shall be appointed by the General Meeting of Shareholders / Capital Owners from the candidates nominated by the Commissioners/Supervisory Board as advised by the Audit Committee.

(2) The Audit Committee through the Commissioners/Supervisory Board is obliged to submit to the General Meeting of Shareholders / Capital Owners the reasons for such nomination and the amount for honorarium / service fee for the external auditor.

(3) The external auditor shall be free from any influence of the Commissioners/Supervisory Board, Board of Directors or other stakeholders of the State-owned Enterprise.

(4) The State-owned Enterprise shall provide all accounting records and other supporting data for the external auditor to enable the external auditor to provide its opinion on the appropriateness, obedience and compliance of the State-owned Enterprise's financial statement with the Indonesian Financial Accounting Standard.

____________________________

¹ Remarks of Senator Michael B. Enzi on July 25, 2002, Cong. Rec. page S7356.
² Remarks at the Financial Times' Conference on Regulation & Integration of the International Capital Markets.
³ Commentary to requirement 11.
⁴ Remarks at the Financial Times' Conference on Regulation & Integration of the International Capital Markets.
⁵ "Live from the SEC: A Review of Critical Securities Issues Affecting Non-US Issuers Whose Securities are Traded in the US or are Otherwise Subject to US Federal Securities Laws", presented by the ABA Section of International Law and Practice.
⁶ The principal statutory duties of a commissioner under Law No. 1/1995 on Limited Liability Companies (the "Indonesian Company Law") include the following:

to supervise the policies of the BOD in the operation and management of the company and to give advice to the BOD (Article 97 of the Indonesian Company Law);
to act in good faith and with a full sense of responsibility in carrying out their tasks for the best interest of the company (Article 98 (1) of the Indonesian Company Law);
to report to the company on their share ownership and/or their family member's share ownership in the company and in any other company (Article 99 of the Indonesian Company Law); and
based on the articles of association of the company or the resolution of a general meeting of shareholders, the BOC may perform actions to manage the company in certain situations for a certain period of time (Article 100 (2)) of the Indonesian Company Law.

⁷ Audit Committee Rule Proposals, 68 Fed. Reg. 2638 (2003), at pg.2638.
⁸ Letter No. S-326/S.MBU/2002 dated May 3, 2002 from the Secretary to the Minister of State-Owned Enterprises regarding Remuneration for Director and Commissioner/Board of Representative for State-Owned Enterprises.
⁹ The Company notes that the NYSE Proposals propose that an independent audit committee member may receive his or her fee in cash and/or company stock or options or other in kind considerations ordinarily available to directors, as well as all of the regular benefits that other directors receive. Commentary to requirement 6. In addition, the NYSE Proposals state "[h]owever, as the concern is independence from management, the Exchange does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding." Commentary to requirement 2. Like the tantiem, the value of shares in an issuer depends to a large degree on reported earnings.
¹⁰ Jakarta Stock Exchange Securities Listing Rules No. I-A: Regarding the General Requirements of Equity Securities to be Listed in the Stock Exchange, as attached in the decision of the Board of Directors of PT Bursa Efek Jakarta No. Kep-315/BEJ/06-2000 dated 30 June 2000, as amended by the decision of the Board of Directors of PT Bursa Efek Jakarta No. Kep-339/BEJ/07-2001 dated 20 July 2001, paragraph C.2.c.
¹¹ The Indonesian Company Law does not specifically provide that the independent auditor is required to be appointed by the shareholders. However, this is inferred by Article 63 (1) of the Indonesian Company Law, which provides that the general meeting of shareholders has all authorities that are not granted to the BOD or BOC under the Indonesian Company Law and the articles of association.
¹² Release No. 33-8154, Strengthening the Commission's Requirements Regarding Auditor Independence.

Baker & McKenzie.Wong & Leow 1 Temasek Avenue #27-01 Millenia Tower Singapore 039192

Baker & McKenzie.Wong & Leow
1 Temasek Avenue #27-01
Millenia Tower
Singapore 039192