The Indonesian government has issued a new Regulation 13, which is intended to simplify the process of obtaining investment licenses and investment facilities procedures. Below we consider some of the key changes brought about by Regulation 13 and the implications for foreign investors.
Authors: Matthew Gorman
On 4 December 2017, the Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) issued Regulation 13 on Guidelines and Procedures for the Implementation of Capital Investment Licensing and Facilities (Regulation 13).
Prior to the introduction of Regulation 13, all investors wishing to establish a new company were required to follow a two-stage process that involved: (i) obtaining initial permission by way of an in-principle licence from BKPM; and (ii) subsequently making a separate application to the relevant government ministries for the applicable business permits. This would then result in the granting of an investment licence by BKPM. So, for example, a company proposing to engage in mining would require an in-principle licence from BKPM and a mining business license, and various other ancillary documents, from the regent/mayor or governor of a province, depending on the scale and focus of the proposed operations.
In December 2017, in an attempt to streamline this process, a one-stop service was introduced whereby it would be possible for companies that fit certain criteria (detailed below) to apply directly to BKPM for an investment registration (in order to obtain the in-principle licence and the business permit in one go, without having to visit various government agencies) rather than go through the lengthy two-stage process, as set out above.
With regards to the one-stop service operated by the Central Office of BKPM, the new Regulation 13 came into effect on 2 January 2018. For provincial/regional offices of BKPM, it will become effective, at the latest, on 2 July 2018.
Businesses that do not satisfy the applicable criteria will continue to be subject to the current two-stage regime.
1. Simplification of initial investment approval
What was previously known as the in-principle licence has now been partially replaced by an investment registration regime (Pendaftaran Penanaman Modal) so that there are now effectively two parallel regimes. The investment registration regime allows investors in newly established businesses and in respect of certain specified business fields to directly obtain a business permit without having to first obtain an in-principle licence. This is with a view to accelerating the process which can, at times, be somewhat bureaucratic.
For the purposes of determining whether a business qualifies as a newly established businesses article 10.1 of Regulation 13 sets out the activities that fall within the category of ‘starting businesses’. These qualifying activities include (a) the establishment of a foreign/domestic investment company; (b) a change of status to become a foreign or domestic investment company; and (c) the expansion of a company’s lines of business.
Article 11 of Regulation 13 provides that investments falling within qualifying activities may be granted a business permit without the need to first obtain an in-principle licence provided that investors have:
(i) obtained legal entity status (and the entity’s share ownership is in line with the limitations prescribed by law);
(ii) acquired a taxpayer registration number; and
(iii) acquired an office (exactly what will constitute an office is still to be determined; however, it is likely that a representative office will be sufficient).
Certain lines of business are excluded from this article 11 exemption and include those that:
(i) involve construction activities;
(ii) require investment facilities;
(iii) may potentially cause environmental damage; or
(iv) relate to state defence, management of natural resources, or energy and infrastructure.
The intended effect of the exemption provided by Regulation 13 is to simplify the process of obtaining investment approvals. However, only time will tell how this will actually be implemented in practice as the implementation of Regulation 13 requires support from other institutions. Most notably, the Ministry of Law and Human Rights typically only processes applications from foreign investment companies once an in-principle licence has been obtained. It will be interesting to observe whether the Ministry of Law and Human Rights amends this process and implements Regulation 13 and therefore works alongside BKPM to issue investment registrations through the one-stop service.
2. Divestment obligations
Previously, a Penanaman Modal Asing company (PMA) (foreign investment company) was obligated to gradually transfer part of its shares to an Indonesian participant within a prescribed period (typically 15 years from when it commenced the relevant commercial activity). Article 16.6 of Regulation 13 provides that PMA companies may disregard the divestment obligations stated in any Investment Licences issued prior to 2 January 2018 (i.e., the date Regulation 13 became effective) provided that there is a shareholders’ resolution of the company that contains:
(i) for a joint venture company: a statement from the Indonesian shareholders that they do not wish to claim for (or they waive) the share ownership in accordance with the divestment requirement; or
(ii) for a PMA company that is wholly owned by foreign parties: a statement from the foreign shareholders confirming that they have not committed to any agreement with any Indonesian parties to sell their shares.
In addition, PMA companies must obtain an amendment to the investment licence, from BKPM, in order to remove the divestment obligations. However, it should be noted that in the event of any claims in the future by an Indonesian party, in connection with amendments to the divestment requirement in reliance on article 16.6 of Regulation 13, any liability will rest with the shareholders of the company (as opposed to any liability falling on BKPM).
Furthermore, Regulation 13 permits any shares that have been sold to Indonesian parties, as a result of the fulfilment of divestment obligations, to be bought back by the relevant foreign entity. However, the foreign shareholding after the buy-back must continue to comply with the foreign ownership limitations under the prevailing laws (most notably Indonesia’s negative list).
This amendment provides a substantial potential benefit for foreign investors. If they are able to secure the necessary shareholder approvals they will no longer have to comply with divestment obligations which previously had a very restrictive effect on their investments into Indonesia; foreign investors should now be able to make sustained and long-term investments.
3. Nominee arrangement prohibition
Any arrangement whereby an investor declares that its share ownership in a company is for or on behalf of another party is prohibited by Law No. 25 of 2007 on capital investment. This provision therefore prohibits any agreement between parties containing a nominee arrangement that stipulates that the Indonesian party will hold shares in Indonesian companies on behalf of the foreign party. Any violation of this provision may result in the agreement being declared null and void.
Regulation 13 now provides BKPM with the discretion to require Indonesian shareholders to provide a notarised statement confirming that their shareholding is truly theirs and is not being held for and on behalf of another party.
This increases BKPM’s powers in this respect and should act as a further deterrent to foreign investors attempting to circumvent the prohibition by using nominee arrangements.
4. Requirement for PMA subsidiary companies to convert
Article 20(5) of Regulation 13 requires the conversion of a Penanaman Modal Dalam Negeri company (PMDN) (a domestic/local investment company) to a PMA company to be followed by the conversion of each of its Indonesian subsidiaries into a PMA company. This was not previously required.
Regulation 13 requires such conversion to be made when the subsidiary next conducts a corporate action. However, the regulation does not clarify what constitutes a corporate action for such purposes. Therefore, technically, it could include a variety of corporate actions such as mergers and acquisitions, a declaration of a dividend, reduction of capital, etc. Ultimately, only time will tell as to what BKPM considers to be a corporate action for such purposes as precedents are set going forward.
This is especially important for foreign investors to bear in mind, and to ensure that they carry out a careful analysis when they are considering internal restructuring/conversion of a PMDN company to a PMA company. Failure to do this could result in foreign ownership requirements for a group of companies being exceeded inadvertently.
5. Ownership of shares by venture capitalists
Previously, venture capitalists could only become shareholders in investment companies for up to 15 years. This period comprised an initial period of 10 years and, subject to approval from BKPM, a one-off extension of five years. However, Regulation 13 now allows venture capital companies to own shares in investment companies for up to 20 years, consisting of an initial period of 10 years and, subject to approval from BKPM, two extensions for a maximum period of up to 10 years in aggregate.
This should increase the attractiveness of Indonesia to venture capitalists as they know that, should the need arise, they can increase the longevity of their investments in Indonesia by an additional five years – a substantial period of time where venture capital is concerned.
6. Steps going forward
Under the transitional provisions specified by Regulation 13, companies that have obtained investment registration (by way of an in-principle licence) from BKPM, pursuant to Regulation No. 12 of 2009 on the Guidelines and Procedures for Investment Licences, but have not yet obtained a full business permit, must apply for a business permit within six months of 2 January 2018. Failure to apply for a business permit prior to the required due date may result in the revocation of the company's in-principle licence by BKPM or the relevant investment board.
Previous investment approval issued by BKPM (by way of an in-principle licence followed by the requisite business permit) before 2 January 2018 will continue to be valid until the expiry date of such approval.
It is hoped that the changes that have been or will be brought about by Regulation 13 will make investment in Indonesia somewhat easier and more appealing to foreign investors. Some concerns have been raised as to whether these changes could lead to an increase in competition and potentially lead to an increase in prices/more competitive bidding wars for Indonesian assets. This is both an advantage and a disadvantage, depending upon whether it is being considered from the buyer’s or the seller’s perspective.
However, whether the introduction of Regulation 13 has any fundamental effect remains to be seen. It is a lengthy piece of legislation that could be difficult to interpret and lead to confusion and uncertainty. On the other hand, various regulatory departments could fail to follow it, which could lead to no change whatsoever. Ultimately, only time will tell.
Client Alert 2018-091