On 28 December 2015, the Indonesian Financial Services Authority (“OJK”) issued a new regulation No.34/POJK.05/2015 (“POJK 34”) regarding Licensing and Organization of Venture Capital Companies which came into force on 28 December 2015.
The venture capital sector was regulated under Minister of Finance Regulation No. 18/PMK.010/2012 on Venture Capital Companies. However, OJK re-regulates the sector to revitalize venture capital business in Indonesia.
POJK 34 was issued to improve the national economic growth and revitalize the venture capital sector. This regulation also supports the alternative financing for the country’s small enterprises and startups from micro, small, and mediumsized business, including the online app-based startups that have blossomed recently, but are often considered “not feasible” for financing by banks, due to the tight banking regulations.
This note is intended to give an overview only on the key provisions introduced under POJK 34, as described below:
1. Establishment of Venture Capital Companies
POJK 34 provides that a Venture Capital Company (“PMV”) may engage in either conventional PMV or Sharia (Islamic-based) Venture Capital Company (“PMVS”). A PMV or PMVS can be established in the form of either a limited liability company (“PT”), cooperative, or limited partnership (“CV”). Cooperatives and CVs are limited to Indonesian Investment, while PMVs or PMVS in the form of a PT can be owned by (i) Indonesian citizens; (ii) Indonesian legal entities; (iii) foreign entities or institutions; (iv) Indonesian state government; and/or (v) regional governments.
POJK 34 provides a minimum capital requirement to establish a PMV or PMVS, as follows:
(a) In order to establish a PMV, an investor or institution is required to provide a minimum paid-up capital of IDR 50 billion for a PT and IDR 25 billion for either a cooperative or CV.
(b) An investor or institution planning to establish a PMVS is required to provide a minimum paid-up capital of IDR 20 billion for a PT and IDR 10 billion for either a cooperative or CV.
Foreign Ownership Limitation
The maximum shares which can be directly or indirectly owned by foreign party in a PMV or PMVS (in the form of PT) is 85%. Furthermore, PMV or PMVS may only trade a maximum of 85% of its shares on the stock exchange, and the remaining 15% must always be owned (directly or indirectly) by Indonesian citizens, Indonesian state government and/or regional government. Thus the 15% must remain unlisted.
The 85% foreign ownership limitation, however, does not apply to existing PMVs that have obtained its business licence before the enactment of POJK 34 as long as there is no change of capital structure, shareholding composition and/or shareholders. If existing PMVs whose ownership shareholding exceeds the 85% foreign ownership limitation and change their capital structure, shareholding composition and/or shareholders, then the 85% foreign ownership limitation shall be applicable to them starting from 31 December 2020.
Existing PMVs that have obtained business licence and have traded its shares on the stock exchange before the enactment of POJK 34 is not required to comply with the 85% maximum shares trading.
Net Equity Requirement
The maximum direct capital participation in a PMV or PMVS by either an Indonesian legal entity, foreign entity or foreign institution as a shareholder is limited to the maximum amount of such entity’s net equity. This net equity requirement must be fulfilled at the time (i) such entity injects its capital at the time of establishment of the PMV or PMVS, (ii) any changes of shareholders and/or (iii) the PMV or PMVS increases its paid-up capital.
POJK 34 defines a “Controlling Shareholder” as an individual, legal entity, and/or a business group that: (i) owns 25% or more of the total issued shares with voting rights; or (ii) owns less than 25% of the total issued shares with voting rights but is proven to have direct or indirect control over the PMV or PMVS. POJK 34 does not specifically define what constitutes an “indirect control” for this purpose, but as a general concept, the ability of a shareholder to influence or determine the management and/or policy of the company by any means will be regarded as having control over the company.
2. Licensing and Organization of Venture Capital Companies
A PMV or PMVS must first obtain a business license from the OJK before conducting its business activity. The Board of Directors of PMV or PMVS must file an application to obtain the business license to OJK. After receiving the complete application, OJK will either issue the business license or reject the application within 30 working days. The PMV or PMVS must commence its business operation no later than 6 (six) months after obtaining the business license. Furthermore, a PMV or PMVS must also submit a business commencement report to OJK no later than 10 (ten) working days after commencing the business operation.
The PMV or PMVS must have an organizational structure which clearly illustrates, at least, the following functions: (i) administration and bookkeeping; (ii) business feasibility analysis; (iii) risk management and internal control; (iv) financial management including the investment portfolio management; and (v) program on anti-money laundering and combating terrorism financing.
Existing PMVs that have obtained business licence before the enactment of POJK 34 must comply with the organizational structure stipulated under POJK 34 within two years from 28 December 2015, which the latest date will fall on 28 December 2017.
3. Merger, Consolidation, and Acquisition of Venture Capital Companies
A PMV or PMVS may only conduct merger and consolidation with a same legal entity that engages in the same line of business (a PMV merges with another PMV or a PMVS merges with another PMVS).
Any party seeking to acquire an existing PMV or PMVS must comply with certain requirements provided under the POJK 34, among other things the maximum foreign ownership limitation, the maximum shares that can be traded on a stock exchange (in case of a listed PMV or PMVS) and the net equity requirement.
A merger, consolidation, or acquisition of PMV or PMVS must be prior approved by the OJK. Under POJK 34, the OJK will either grant the approval or reject the application within 30 working days as of a complete receipt of the application documents. The PMV or PMVS must commence the merger, consolidation, or acquisition no later than 60 (sixty) working days after obtaining the approval. Furthermore, the PMV or PMVS must also submit a written notice to OJK no later than 10 (ten) working days since the date of receipt of approval or notification of changes to the articles of association for the merger and consolidation, and the date of the deed made before a notary for the acquisition.
How does this affect you?
- Existing PMVs that have obtained business licence before 28 December 2015 will not be subject to the 85% foreign ownership limitation as long as such PMVs do not change its capital structure, shareholding composition and/or shareholders.
- Existing PMVs that have obtained business licence before 28 December 2015 whose foreign ownership exceeds the 85% limitation and have changed their capital structure, shareholding composition and/or shareholders recently will have time until 31 December 2020 to comply with the 85% foreign ownership limitation.
- Existing PMVs that have obtained business licence before 28 December 2015 whose foreign ownership exceeds the 85% limitation and intends to change their capital structure, shareholding composition and/or shareholders will be subject to the 85% foreign ownership limitation.
- PMVs that are planning to conduct initial public offering after 28 December 2015 may only list and trade up to 85% of its shares on the stock exchange, and the remaining 15% must not be listed and traded on the stock exchange and cannot be owned by foreign party.
- The 85% foreign ownership and trading limitations apply in the case of merger, consolidation, and acquisition.