Changes to divestment obligations for foreign shareholders
Limits on new licences for foreign investors
Transfers of licences
Extending contracts of work and coal contracts of work

Changes to divestment obligtions for foreign shareholders

In February 2010 the government issued the Regulation on Mining Business Activities (23/2010). Two years later, it issued Government Regulation 24/2012, which revises the earlier regulation in a number of respects.

Regulation 23/2010 imposed divestment obligations on foreign shareholders of a company with a mining licence or a special mining licence. Under Regulation 23/2010, such shareholders were required to divest a minimum of 20% of the capital in such a company to an Indonesian party no later than five years after the start of commercial production.

The revision to Regulation 23/2010 now requires a further progressive divestment of up to 51% of the capital in such a company no later than 10 years after the start of commercial production. A minimum divestment threshold of 20% after six years rises annually to 30%, 37% and 44% before reaching 51% after 10 years.

Divestment process
The foreign capital must be offered first to the central government. If the central government is unwilling to acquire the stake, the acquisition right passes to the provincial government or the regional or municipal government, which has 60 days to exercise it. If the provincial government or the regional or municipal government is also unwilling to acquire the stake, it is offered to government-owned companies through a tender process. Such companies have 30 days in which to respond. If no government-owned company takes up the offer, a privately owned Indonesian company may acquire the capital pursuant to a tender process.

Unsuccessful divestment
Regulation 23/2010 allows an unsuccessful divestment process to be repeated the following year.

No dilution
If the capital of the company is increased, the capital ownership of an Indonesian party cannot be diluted to less than the minimum divestment percentage.

Prior transfer
Regulation 23/2010 remains unclear on the question of whether a foreign investor can privately negotiate a transfer of shares to an Indonesian private company or individual without first offering the shares under the divestment process. However, it appears that the requirement to undertake the divestment process will not apply if the foreign investor has divested the required minimum percentage to an Indonesian private company or individual before the date on which the divestment obligation arises. For example, if the foreign investor transfers 20% of the capital in a licence-holding company five years and 11 months after the start of commercial production, no divestment obligation will arise on the sixth anniversary of commencement of commercial production.

Foreign investors should consider such changes carefully when contemplating an investment in an Indonesian licence-holding company or determining the valuation of such a company.

Limits on new licences for foreign investors

The normal system for issuing new Iicences (as opposed to converting pre-existing mining rights into licences) under the Mining Law would result in almost all such licences being issued at regional government level.

A new Article 3(b) of the revised Regulation 23/2010 provides that where an application for a licence is made by a foreign investment company, the application may be granted by the minister only.

It is unclear how this provision will operate, as tenders for vacant areas will largely be conducted by regional governments under Regulation 23/2010; nor is it obvious whether a foreign investment company can bid on a regional government tender for vacant mining areas or whether, if it does so successfully, the grant is made by the minister instead of the regional government.

Transfers of licences

Article 93(1) of the Mining Law 2009 clearly states that licences cannot be transferred. However, the transfer of ownership of licences may be achieved by transferring shares in the licence-holding company. Despite the law's unambiguous provisions on the subject, a number of regional governments have permitted the transfer of licences between companies.

Regulation 23/2010 has been revised to include a new Article 7A, but this new provision is ambiguous: it appears to confirm that a licence cannot be transferred, but the official explanatory notes on the article suggest that a licence can be transferred to a company in which at least 51% of the shares are held by another company that holds a licence. Thus, the new article seems to confuse rather than clarify the position.

Extending contracts of work and coal contracts of work

New Articles 112A and 112B set out the procedures for extensions of existing contracts of work and coal contracts of work. This is effectively legislating to amend the existing provisions in some existing contracts of work and coal contracts of work. Applications for extensions may be made between two years and six months before the expiry of the existing contract, and will be assessed on the basis of the contract holder's performance.

For further information on this topic please contact Philip Payne at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125), fax (+62 21 250 5121) or email ([email protected]).