Introduction

Indonesia is the largest economy in Southeast Asia. It is rich in natural resources, such as coal, minerals and metals, oil and gas, and agricultural products such as rice, rubber and cocoa. With the fourth biggest population in the world, and a growing middle class, it is expected that Indonesia’s economy will continue to grow. Just between 2006 and 2015, the inward foreign direct investment in Indonesia has already quadrupled from US$4.9 billion to US$20 billion.

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Investment considerations

Investment vehicles

There are generally three common investment vehicles in Indonesia used by foreign investors:

  1. limited liability company with foreign investment (Penanaman Modal Asing (PMA)) status (the PMA Company);
  2. branch of foreign company; and
  3. representative office.

The most common of which is the establishment of a PMA Company. More restrictions are placed on a representative office, while branches of a foreign company can usually only be established by a foreign bank or an oil and gas company.

Setting up a PMC company

Based on Law Number 40 of 2007 concerning Limited Liability Companies (the Indonesian Company Law), the PMA Company typically comprises the following:

  1. Shareholders;
  2. Board of Commissioners; and
  3. Board of Directors.

The PMA Company shall have:

  1. at least two shareholders;
  2. at least one commissioner; and
  3. at least one director.

For a PMA Company, while there is no requirement that at least one director or commissioner must be an Indonesian citizen, the Indonesia Investment Coordinating Board (Bada Koordinasi Penanaman Modal (BKPM)) has recommended that each company should have at least one local director. Further, there is a requirement that at least one director must have a tax identification number (Nomor Pokok Wajib Pajak) as well as a work permit (Kartu Izin Tiggal Sementara).

The minimum official investment to start a PMA Company is IDR10 billion (approximately US$750,000). The source of investment can be in the form of equity or debt, and a debt to equity ratio in the range of 3:1 is permitted by BKPM. The minimum issued and paid up capital of the PMA Company is IDR2.5 billion (approximately US$190,000) and each shareholder shall hold at least IDR10 million (approximately US$750) of shares in the PMA Company

Restrictions on foreign investment

There are restrictions on foreign investment set out in the 2016 Negative Investment List (Daftar Negatif Investasi) as issued under Presidential Regulation No. 44 of 2016 Concerning Lists of Business Fields That Are Closed To and Business Fields That Are Open with Conditions to Investment.

The 2016 Negative Investment List revokes and replaces the 2014 Negative Investment List, and is seen as intending to increase foreign direct investment to boost Indonesia’s economy.

The key categories under the 2016 Negative Investment List are as follows:

  1. Open Business Fields – Business fields which are open to foreign investment without conditions.
  2. Restricted Business Fields – Business fields which are open to foreign investment with certain conditions.
  3. Closed Business Fields - Business fields which are closed to foreign investment activities.

Foreign investors should check the Negative Investment List to understand the restrictions that may be relevant to the industries or business fields they may be looking to invest in.

Some restrictions under the Restricted Business Fields category include restrictions on foreign capital ownership to 49% for certain agricultural related fields, divestment obligations for mineral and coal mining businesses and specific licensing requirements

Protection of foreign investors in Indonesia

Protection of foreign investors in Indonesia is regulated under Law No. 25 of 2007 regarding Investment (Law 25/2007), the key provisions of which are summarised as follows:

  1. Equal treatment - Article 6 of Law 25/2007 requires the Government to provide the same treatment to any investors originating from any countries making investment in Indonesia pursuant to the provisions of laws and regulations.
  2. Equal Liability - Article 16 of Law 25/2007 provides that every investor shall be liable to:
    1. secure capital originating from any sources not in violation with the provisions of laws and regulations;
    2. bear and settle any obligations and losses if such investor halt or leave or abandon its business activity unilaterally in accordance with the provisions of laws and regulations;
    3. create healthy competitive business climate, refrain from monopoly practice, and any other matters that inflict damage to the state;
    4. preserve the environment;
    5. provide safety, health, convenience, and prosperity to workers; and
    6. comply with all of the provisions of laws and regulations.

Domestic and foreign investors have the same responsibility and obligation to comply with the laws of Indonesia, e.g. in the event there is an obligation of domestic investor which remains outstanding, such foreign investor is entitled to file a claim to the court and the domestic investor is obliged to fulfil its obligation.

  1. No Nationalization Assurance - Article 7 of Law 25/2007 provides that the government shall neither nationalise nor take over the ownership right of any investors, except through the law. In the event that Government either nationalises or takes over the ownership right of any investors, the Government is required to pay compensation whose amount is stipulated based on market price.
  2. Repatriation and Transfer of Capital - Article 8 of Law 25/2007 provides that:
    1. Any investors may transfer their assets to another party they choose in accordance with the provisions of laws and regulations.
    2. Any investors shall have the right to transfer or repatriate in foreign currency to, among others capital, profit, bank interest, dividend, and any other revenue, proceeds of asset sale set forth in paragraph (i) above, etc.
  3. Dispute Settlement - Article 32 of Law 25/2007 provides that a dispute in investment sector between Government and any foreign investors may be settled through international arbitration based on the agreement between them.

Financing environment

Based on the Regulation of Chairman of Indonesia Investment Coordinating Board No. 14 of 2015, the sources of financing for investment in Indonesia may be in the following forms:

  1. capital injection;
  2. profits which are reinvested;
  3. domestic loan; and/or
  4. offshore loan.

The restrictions on offshore loan

In December 2014, Bank Indonesia (BI) issued BI Regulation No. 16/21/PBI/2014 and Circular Letter No. 16/24/DKEM regarding the Implementation of Prudential Principles in the Management of Offshore Borrowing for Non-Bank Borrowers. In addition, BI issued BI Regulation No. 16/22/PBI/2014 and Circular Letter No. 17/3/DSta on the Reporting of Foreign Exchange Flows and Implementation of Prudential Principles in the Management of Offshore Borrowing for Non-Bank Borrowers. They set out the restrictions that are implemented on domestic Indonesian companies taking out offshore loans. 

  1. Prudential Requirements

There are three prudential requirements that have to be met:

  1. Hedging ratios - The BI Regulation requires borrowers to hedge at least 25% of their open foreign exchange positions that fall due within six months. The hedging transactions in fulfilment of Hedging Requirements must be with Indonesian banks.
  2. Liquidity ratios - Borrowers are required to maintain a minimum liquidity ratio of 70%.
  3. Credit ratings - Borrowers are required to maintain a minimum credit rating equivalent to BB-. The credit rating must be issued by the rating agencies recognised by BI. /li>
  1. Reporting

Borrowers are required to submit reports and supporting documents including audited accounts for the financial year or quarterly financial reports to Bank Indonesia to evidence the fulfilment of its prudential requirements. Under BI Circular Letter No. 17/3/DSta dated 6 March 2015, the reporting is divided into four reports (the Implementation Activities of Prudential Principles Report (IAPP Report) /Laporan Kegiatan Penerapan Prinsip Kehatian-hatian) as follows:

  1. IAPP Report, covering the foreign currency assets and foreign currencies liabilities which are due within the next three months and six months. This report shall be submitted every three months, at the latest at the end of third month of the end of the quarterly report;
  2. IAPP Report, which has passed the attestation procedure, made by a public accountant. This report shall be submitted at the latest in June of the following year;
  3. the information concerning the achievement of credit rating. This information shall be submitted at the latest at the end of the next month after the underlying agreement/ document evidencing the external debt is signed/ issued; and
  4. the financial report covering the unaudited quarterly financial report, which shall be submitted at the latest at the end of the third month of the end of the quarterly report and the audited annual financial report (which shall be submitted at the latest in June of the following year).

3. Sanctions for non-compliance in reporting

Furthermore, the Bank Indonesia Regulation Number 16/22/PBI/2014 concerning the Reporting of Foreign Exchange Flows and Implementation of Prudential Principles for the Management of External Debt of the Non-Bank Corporation regulates the following administration sanctions:

  1. if the IAPP Report is submitted incomplete or is stated incorrect and has not been resolved, the reporter can be imposed with a penalty in the sum of IDR50,000 per incomplete and/or incorrect line (record) and in a maximum of IDR10 million;
  2. if the IAPP Report is submitted incomplete or is stated incorrectly, the reporter can be imposed with a penalty in the sum of IDR500,000 per IAPP Report;
  3. if the IAPP Report is submitted after the reporting period, the reporter can be imposed with a penalty in the sum of IDR500,000 per day, and in a maximum of IDR5 million; and
  4. if IAPP Report is not submitted, the reporter can be imposed with a penalty in the sum of IDR10 million.