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Update on Foreign Investment Regulation

By November 20, 2013July 12th, 2021No Comments

The Head of Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) has issued a new Regulation No. 5 of 2013 regarding Guideline and Procedure for Licenses and Non-Licenses for Capital Investment (the New Regulation). This new regulation revokes the previous Regulation of Head of BKPM No. 12 of 2009 regarding Guideline and Procedure of Capital Investment Application (Old Regulation). The New Regulation was enacted on 12 April 2013 and became effective 30 (thirty) days thereafter.

Key provisions of the New Regulation to be highlighted are as follows:

1. Starting a Business and Applications in General

The requirement to obtain Investment Registration under the Old Regulation is eliminated by the New Regulation, thus accelerating the process straight to obtaining Principle License from BKPM. Starting a business in this context includes the establishment of new PMDN or PMA Company, starting business in the framework of PMDN or PMA Company or starting business activities at a new location.

With respect of procedures of investment licensing and facilities, the New Regulation introduces new and adjusted application forms.

2. Required Minimum Investment

A foreign investment company (PMA Compan) must have a total investment of more than Rp. 10,000,000,000.00 (ten billion rupiahs) or its equivalent in US dollar, not including the value of land and buildings. Out of such total investment amount, at least Rp2,500,000,000.00 (two billion five hundred million rupiahs) or its equivalent in US dollars, must be allocated as the amount of issued and paid up capital of the PMA Company. In addition, the New Regulation also sets out minimum equity participation by each shareholder in a PMA Company, which is Rp10,000,000.00 (ten million rupiahs) or its equivalent in US dollars.

3. Change in Shareholding Composition

BKPM’s has been consistent in its view that a PMDN Company which shares are transferred to a foreign national/entity or PMA Company must be converted into a PMA Company, regardless of the amount or percentage of shares being transferred to the foreign national/entity or PMA Company. BKPM has a rather wide interpretation of PMDN Company, which may include local companies that do not receive any facilities from BKPM. In practice, it is not uncommon to find that a newly converted PMA Company still owns subsidiaries which hold the status as PMDN Company or local company.

Provisions relating to change in shareholding composition under the New Regulation are stricter in terms of making sure that the subsidiaries of a PMA Company also hold the status as PMA Company and engage in businesses that are not prohibited under the prevailing Negative List (a list which specifies the lines of business prohibited and conditionally open to foreign investment). To enforce the foregoing, the New Regulation provides that if the ownership of shares in a PMDN Company is intended to be transferred to a foreign national/entity or a PMA Company, the PMDN Company must submit a list of its subsidiaries in the application for Principle License as PMA Company. Subsidiaries with PMDN Company or local company status must also be converted into PMA Company at the latest one year since the issuance of Principle License for the parent PMA Company.

If the relevant subsidiary of a newly converted PMA Company engages in a line of business prohibited under the Negative List, the parent PMA Company is required to divest all of its shares in the subsidiary to Indonesian national/entity. It remains to be seen whether BKPM will proactively enforce this requirement and what sanction will be imposed in the event of non-compliance, considering the New Regulation does not explicitly provide any sanction in this respect.

4. Divestment Requirement for Venture Capital Companies

A venture capital company (VCC) may no longer become a shareholder in a large scale domestic investment company (€œPMDN Company) and a PMA Company. The grandfather clause does not apply in this circumstance, as VCCs that already own shares in PMA Companies prior to enactment of the New Regulation are required to divest their shares to an Indonesian party at the latest within ten years. The relevant provision is not definitive in terms of determining the date of commencement of the ten year period. Particularly in connection with PMDN Company, the restriction of shares ownership by VCC in a PMDN Company may be intended to prevent an indirect foreign investment by foreign investor through a VCC.

5. Impact to Portfolio Investment in Publicly Listed Companies

Portfolio investments in a publicly listed company are now being subjected to BKPM’s jurisdiction, if the controlling shareholder of such company is a foreign investor. The term controlling shareholder is defined in the New Regulation as a party that owns more than 50% of issued shares in a listed company or a party that has the ability to determine, either directly or indirectly, the management and/or policies of the listed company.

The procedural consequence is that a listed company with a foreign controlling shareholder will have to obtain a Principle License as PMA Company from the BKPM. In submitting the application for such Principle License, the listed company is also expected to provide a copy of statement from the controlling shareholder addressed to the Financial Services Authority, which confirms its capacity as controlling shareholder of the company.

The requirement to obtain Principle License from BKPM triggers an uncertainty as to whether portfolio investment by foreign national/entity constitute as direct or indirect investment. Foreign direct investment in Indonesia is subject to availability of the intended line of business in respect of the prohibited lines of business under the Negative List, while indirect/portfolio investments conducted through the stock market are exempted. This gives rise to question on how to treat a listed company owned by a foreign controlling shareholder if such company engages in a line of business which is closed to foreign investment. One way to observe this particular requirement is that the Negative List applies when a listed company has a foreign controlling shareholder, but does not apply when there is no foreign controlling shareholder. In its implementation, it remains unclear how and to what extent BKPM will enforce the requirement.

This publication is a summary overview of Indonesian laws and regulation, and/or court decisions prepared by Indrawan Darsyah Santoso team for discussion purposes only. The summary captures selected sections of the regulations and/or decisions and is not intended to be relied upon as legal advice. For further information on the above subject, please contact us.
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