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Investors grapple with Indonesian rice scandal

Tiga Pilar denies fraud accusations after police raid warehouse

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Indonesia's National Police Chief Tito Karnavian, second from left, and Indonesia's Agriculture Minister Amran Sulaiman, second from right, hold bags of rice after the police raided rice warehouse of PT Indo Beras Unggul in Bekasi, West Java province, Indonesia on July 20.   © Reuters

JAKARTA -- Investors are scrambling to deal with a controversy over Indonesian food producer Tiga Pilar Sejahtera Food after police and government officials confiscated more than 1,000 tons of rice from its warehouse outside Jakarta, accusing the company of inflating prices by falsely labeling inexpensive rice as premium brands.

Tiga Pilar -- backed by U.S. private equity firm KKR -- has denied the accusations, claiming that its business practices meet existing regulations and follow industry standards. Still, the case has spooked investors wary of President Joko Widodo's efforts to crack down on volatile food prices. Shares of Tiga Pilar have fallen 26% since the raid last Thursday, giving it a market capitalization stood of around 4 trillion rupiah ($300 million) as of Tuesday.

The police allege that Tiga Pilar's subsidiary Indo Beras Unggul bought subsidized rice from farmers, repackaged it as premium-brand rice and sold it to consumers at a higher price. The labels on the rice products also allegedly displayed false nutritional content. Police chief Tito Karnavian has said the practice has cost tens of billions of dollars in state losses and potentially violates the consumer protection act.

Tiga Pilar shrugged off the allegations in a press conference on Tuesday. Jo Tjong Seng, a spokesman, confirmed that the company buys rice from farmers who may have received subsidized seed and fertilizer from the government. He added, though, that prices are determined "based on market mechanism" that generally tracks a reference rate set by the government. "The rice we buy is the same as what other people buy," he said.

Seng added that quality standards that determine price are not set by the variety of rice but "physical parameters," such as the percentage of whole grains, which are processed in the company's rice mills. He also denied allegations of labels understating carbohydrate content. The labels, he said, only display the percentage of the carbohydrate content related to the "recommended dietary allowance" for carbohydrates. Indonesian regulations that require food products to detail nutritional content are not widely applied to rice, Seng said.

At the press conference, however, Tiga Pilar also detailed a strategy to diversify its business, in what seemed like an attempt to distance itself from the rice scandal. The company said it plans to enter the beverage business this year and launch new snack products.

Tiga Pilar was established in 1992 by three Indonesian businessmen and initially sold dried noodles. It expanded into the rice business in 2010, and acquired Indo Beras Unggul, which owned rice mills and popular rice brands, in 2011. Rice accounted for around 60% of Tiga Pilar's 2016 revenue of 6.54 trillion rupiah. In its 2016 annual report, the company calls itself the "largest and most modern rice producer in Indonesia," with a production capacity of 480,000 tons.

KKR acquired a 9.5% stake in Tiga Pilar in 2013 and has increased its ownership to around 27%, according to Sjambiri Lioe, chief finance officer.

The probe came amid heightened efforts by Indonesian President Joko Widodo to control inflation, which is often caused by volatile food prices and is a major source of frustration among the public.

In early May, just a few weeks before the start of Ramadan this year, the government launched the so-called Food Taskforce, an ad-hoc committee comprising of officials from the National Police, the Agriculture Ministry and the Trade Ministry, among others. The team is specifically tasked to fight what they call the food cartel or mafia -- with rice distribution being the current focus.

The rice industry in Indonesia, an archipelago that is home to the world's fourth-largest population, involves a complex supply chain consisting of layers of middlemen. This has led to accusations that farmers remain poor despite consumers having to pay higher prices. The so-called food cartels allegedly withhold supplies and make them rare in the market, and only release the commodity again after prices soar.

Karnavian, the police chief, on Tuesday said it is continuing its investigation into Indo Beras Unggul. "We will submit the violation and evidence for the public to understand," he told local media.

In the meantime, the task force has raided other rice warehouses in other regions.

Bobby Nugroho in Jakarta contributed to this story

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