A draft new law on plantations is now in circulation that would limit foreign shareholdings in Indonesian plantation companies to a maximum of 30 per cent. Under the current law, foreigners can hold up to 95 per cent.

The draft proposes that foreign investment only be permitted only where the foreign investor can introduce ‘new technology’, while the meaning of this term is not entirely clear.

Forced divestment?

The most controversial aspect is that if the bill is enacted in its current form, foreign shareholders would have to divest within five years of the draft becoming law. This is extremely unusual for Indonesia, as existing foreign shareholdings are usually ‘grandfathered’ whenever new restrictions are introduced.

Other restrictions

The draft also:

  • prohibits a plantation company with foreign shareholders from being affiliated with other foreign companies in the plantation industry
  • requires plantation companies to use domestic banks (mirroring other regulations)
  • requires plantation companies to offer internships in order to allow the transfer of the ‘new technology’
  • requires plantation companies to use domestic production facilities. At this stage, the extent of this obligation is not yet clear, although it would appear to follow recent trends in other industries in Indonesia; and
  • requires plantation companies to
    • utilize at least 30 per cent of their land for plantation activities within three years of the relevant right being granted; and
    • ‘technically cultivate’ the entire plantation area within six years of the relevant right being granted

at the risk of having their land repossessed by the State if these timeframes are not met.

Background

In the lead-up to this year’s Presidential elections, the mining industry was bombarded by regulations promoting resource nationalism. Investment by foreigners in production mines was, for the most part, reduced to 49 per cent, and all raw ore must now be processed onshore. To the extent that raw ore may be exported on a short-term basis, a large export tax applies, and exporters must commit to building a smelter in Indonesia.

For some time, the powerful Indonesian plantation (and particularly CPO) industry was thought to be immune from resource nationalism.

We reported in July 2013 that a new restriction was proposed for Indonesian plantation holdings by ‘groups of companies’. This restriction, which came into effect in September last year, uses a broad definition of ‘groups of companies’. It limits Indonesian CPO holdings to a maximum of 100,000 hectares per ‘group of companies’, while double that area is permitted in Papua.

Next steps

We emphasise that this is merely a draft bill whose future is uncertain. Outgoing President Yudhoyono has stated that he is against these foreign shareholder restrictions. If the draft becomes law, the Government is concerned that Indonesia could face legal challenges to this watered-down form of ‘nationalisation’.