Introduction
Reaffirmation of requirement to comply with divestment obligations

Provisions on fulfilment of FDI companies divestment obligations
Shareholding foreign directors or commissioners exempt from normal expatriate employment rules


Introduction

Indonesia's Investment Coordinating Board (BKPM) has issued a new regulation amending BKPM Regulation 6/2018,(1) which sets out guidelines and procedures for licensing and facilities under Indonesia's foreign direct investment (FDI) regime. BKPM Regulation 5/2019(2) came into effect on 29 July 2019 but was only made available to the public in early August 2019.

The most significant changes introduced by Regulation 5/2019 are:

  • the reaffirmation that certain FDI companies(3) must comply with divestment obligations;
  • the incorporation of provisions on the fulfilment of FDI companies' divestment obligations; and
  • the confirmation that shareholding foreign directors and commissioners are exempt from the normal expatriate employment rules (subject to a minimum shareholding threshold).

This article discusses these changes in greater detail.

Reaffirmation of requirement to comply with divestment obligations

Regulation 5/2019 clarifies the status of divestment obligations incorporated in business licences that the BKPM issued to FDI companies before the Investment Law 2007 came into effect.(4)

These divestment obligations are based on the Investment Law 1967,(5) which imposed a general divestment requirement on FDI companies. However, this requirement was subsequently dropped in the Investment Law 2007, which led to confusion as to whether divestment obligations incorporated in earlier business licences still needed to be complied with. While several BKPM regulations issued after the Investment Law 2007 expressly stated that all such divestment obligations had to be fulfilled, such stipulation was not included in Regulation 6/2018. This led to renewed speculation as to whether FDI companies needed to comply with divestment obligations under business licences issued under the Investment Law 1967.

Regulation 5/2019 has since clarified this situation. The regulation specifically provides that all divestment obligations incorporated in business licences granted to FDI companies remain binding and must be fulfilled within the prescribed timeframes.

In addition, Regulation 5/2019 stresses that divestment obligations imposed on FDI companies and operating in specific economic sectors (eg, the oil and gas and mining industries) must be met, in accordance with the relevant sectoral laws and regulations.

Provisions on fulfilment of FDI companies divestment obligations

Regulation 5/2019 sets out specific rules governing the details of the divestment process, which can be summarised as follows:

  • Shares can be divested to:
    • Indonesian citizens; or
    • Indonesian business entities that are 100% Indonesian owned.
  • Divestment should be carried out:
    • by way of a direct sale of shares based on an agreement; or
    • through the domestic capital market.

In the case of a direct sale, shares with a minimum Rp10 million nominal (par) value must be divested by each of the FDI company's shareholders. Meanwhile, a divestment effected through the domestic capital market is subject to the normal capital market regulations.

Regulation 5/2019 permits the buying back of divested shares, subject to the minister of laws and human rights' approval.

Further, Regulation 5/2019 provides two exemptions from the divestment obligations set out in an FDI company's business licence (ie, business licences issued under Investment Law 1967). These are as follows:

  • An exemption is provided for in the case of an FDI company that is not 100% owned by foreign investors where the Indonesian shareholders provide an express waiver of their right to receive divested shares under the FDI company's business licence.
  • An exemption is provided for an FDI company that is 100% owned by foreign investors where the shareholders declare that they are not bound by commitments or agreements requiring the sale of shares to an Indonesian party. This requirement can be satisfied by the adoption of a shareholders' circular resolution recorded in the form of a deed.

If a change in the shareholding composition of an FDI company occurs as a result of a divestment obligation's fulfilment, the FDI company should update its data in the online single submission system, as required.

Shareholding foreign directors or commissioners exempt from normal expatriate employment rules

In line with Minister of Manpower Regulation 10/2018,(6) Regulation 5/2019 exempts shareholding foreign directors and commissioners from the normal expatriate employment rules, subject to the requirement that they have a "shareholding of at least IDR 1 billion or equivalent in United States dollars, as stated in the deed".(7) Unfortunately, no explanation is given as to precisely which deed is being referred to here.

Regulation 5/2019 also expressly provides that should a shareholding foreign director or commissioner fail to satisfy the minimum Rp1 billion shareholding-value threshold, the normal expatriate employment rules must be complied with.

For further information on this topic please contact Elsie F Hakim or Rully Hidayat at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125) or email ([email protected] or [email protected]). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.

Endnotes

(1) BKPM Regulation 6/2018 on Guidelines and Procedures for Foreign Investment Licensing and Facilities.

(2) BKPM Regulation 5/2019 on the Amendment of BKPM Regulation 6/2018 on Guidelines and Procedures for Foreign Investment Licensing and Facilities.

(3) A foreign direct investment company is a company established under Indonesia's foreign direct investment licensing regime.

(4) Law 25/2007 on Investment.

(5) Law 1/1967 on Foreign Investment.

(6) Minister of Manpower Regulation 10/2018 on Procedures for the Employment of Expatriate Manpower.

(7) As of 23 August 2019, Rp1 billion is $70,360.