Goldman was initially in talks with Tiga Pilar last year and had completed due diligence, a deal structure and valuation for the Jakarta-based securities firm.

But a lack of progress with Goldman prompted Tiga Pilar's owners to initiate discussions with Morgan Stanley, the sources who had direct knowledge of the matter told Reuters.

"The deal is almost done and the regulator is looking at it now," said a source, adding the process could be completed before the end of the first quarter.

The sources declined to comment on the financial value of the deal and did not want to be identified because the talks are private. Tiga Pilar, Morgan Stanley and Goldman declined to comment.

Morgan's move to expand in Indonesia, recently lifted to a sovereign investment grade status, follows Nomura Holdings (8604.T) and Citigroup (C.N) who last year ramped up equity teams in Jakarta to challenge leaders Credit Suisse (CSGN.VX) and Deutsche Bank (DBKGn.DE).

The deal still requires regulatory approval. A full broking license would allow Morgan Stanley to cover the secondary side of sales and trading as well as research in a country that saw a record high stock market .JKSE last year and is expected to see new fund inflows in the wake of the ratings upgrade.

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Graphic on top deal underwriters in Indonesia: link.reuters.com/qyz36s

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Indonesia sets almost no ownership limits for foreign investors who want to own a stock brokerage but a brokerage firm must be a member of the country's stock exchange to trade Indonesian stocks among its members.

The stock exchange currently has 120 members and will not issue anyone new memberships, so if any foreign banks want to join they must buy an existing members' seat, said Eddy Sugito, a listing director at the Indonesia stock exchange.

Tiga Pilar agreed to open talks with Morgan Stanley because Goldman appeared to show insufficient enthusiasm after completing its due-diligence, a source said.

The deal value is likely to be in the low millions as Morgan Stanley is only seeking to buy the brokerage license but it will need to inject at least 50 billion rupiah ($6 million) in license costs and required brokerage capital.

Tiga Pilar, which is controlled by the Tan Pia Sioe family, traded 178 billion rupiah by stock value in the first nine months of 2011, ranking it 114 out of 117 active brokerages, according to stock exchange data.

NEW HIRES

Morgan Stanley has hired James Brewis, former head of sales at UBS's (UBSN.VX) Indonesia unit, as the head of its Indonesian equities and plans to hire more salesmen, traders and research staff in coming months, the sources said.

Morgan Stanley secured an underwriting license in 2008 but is seeking a bigger presence through a full-fledged broker license, while Goldman does not have an underwriting or broking license in Indonesia.

James Gorman, Morgan's chief executive officer, said in a statement in November that the U.S. bank plans to establish an onshore presence in Indonesia this year with a new equity brokerage operation in mid-2012 as it sees the country as a strategic priority.

"The level of competition is obviously going to be heightened, whether it is about underwriting and stock deals or human resources," said Harry Su, head of research at a Jakarta-based brokerage PT Bahana Securities.

"I think brokerage firms will have a challenging time hiring across the board as they will aim to take many people from local firms while there is a scarce supply of good brokerage professionals here," Su said.

Morgan follows the path of Citigroup, which bought Indonesian brokerage Republik in 2010 and then added bankers and analysts, including veteran Ferry Wong from Macquarie (MQG.AX) as its new head of research.

Citi has since surged ahead in the league table for underwriting equity deals to rank second among global banks, behind Deutsche, while topping the debt underwriters table last year.

(Additional reporting by Fathiya Dahrul Editing by Matthew Bigg, Michael Flaherty and Muralikumar Anantharaman)

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