Indonesia’s Investment Coordinating Board (Badan Koordinasi Penanaman Modal / “BKPM”) has issued a new regulation that amends BKPM Regulation No. 6 of 2018 (“Reg. 6/2018”),[1] which sets out guidelines and procedures for licensing and facilities under Indonesia’s foreign direct investment (FDI) regime. The new regulation (BKPM Regulation No. 5 of 2019 / “Reg. 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 Reg. 5/2019 are as follows:

1. Reaffirmation of the requirement for certain PMAs[3] to comply with divestment obligations;

2. Incorporation of provisions on fulfillment of PMA divestment obligations; and

3. Confirmation that shareholding foreign directors and commissioners are exempt from the normal expatriate employment rules (subject to a minimum shareholding threshold).

We will now discuss these changes in greater detail.

1. Reaffirmation of requirement for certain PMAs to comply with divestment obligations

Reg. 5/2019 provides clarity as regards the status of divestment obligations incorporated in Approvals/Business Licenses issued to PMAs by the BKPM prior to the coming into effect of the Investment Law 2007.[4]

These divestment obligations were based on the Investment Law 1967,[5] which imposed a general divestment requirement on PMAs. However, this general divestment requirement was subsequently dropped by Investment Law 2007, which led to some confusion as to whether divestment obligations incorporated in earlier Approvals/Business Licenses still needed to be complied with. While a number of BKPM regulations issued post-Investment Law 2007 expressly stated that all such divestment obligations had to be fulfilled, such stipulation was not included in Reg. 6/2018, thus leading to renewed speculation as to whether PMAs needed to comply with divestment obligations under Approvals/Business Licenses issued under Investment Law 1967.

The situation has now been clarified by Reg. 5/2019, which specifically provides that all divestment obligations incorporated in Approvals/Business Licenses granted to PMAs remain binding and must be fulfilled within the prescribed timeframes.

In addition, Reg. 5/2019 stresses that divestment obligations imposed on PMAs operating in specific economic sectors, such as oil and gas, mining, etc., must be complied with in accordance with the provisions of the relevant sectoral laws and regulations.

2. Provisions on fulfillment of PMA divestment obligations

Reg. 5/2019 sets out specific rules governing the nuts and bolts of the divestment process, which may be summarized as follows:

Shares may be divested to (i) Indonesian citizens; or (ii) Indonesian business entities that are 100% Indonesian owned.

Divestment should be carried out:

(a) by way of a direct sale of shares based on an agreement; or

(b) through the domestic capital market.

In the case of a direct sale, shares with a minimum nominal (par) value of IDR 10 million must be divested by each of the PMA’s shareholders. Meanwhile, a divestment effected through the domestic capital market is subject to the normal capital-market regulations.

Reg. 5/2019 permits the buying back of divested shares, subject to the approval of the Minister of Law and Human Rights (“MOLHR”).

Further, Reg. 5/2019 provides two exemptions from the divestment obligations set out in a PMA’s Approval/Business License (i.e., Approval/Business License issued under Investment Law 1967). These are as follows:

a. An exemption in the case of a PMA that is not 100% owned by foreign investors where the Indonesian shareholder(s) provide an express waiver of their right to receive divested shares under the PMA’s Approval/Business License;

b. An exemption for a PMA that is 100% owned by foreign investors where the shareholders declare that they are not bound by commitments/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 deed form.

Upon the occurrence of a change in the shareholding composition of a PMA as a result of the fulfillment of a divestment obligation, the PMA should update its data in the OSS System as required.

3. Confirmation that shareholding foreign directors/commissioners are exempt from normal expatriate employment rules

In line with Minister of Manpower Regulation No. 10 of 2018,[6] Reg. 5/2019 exempts shareholding foreign directors/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“ (kepemilikan saham paling sedikit Rp1.000.000.000,00 (satu miliar Rupiah) atau yang setara dalam mata uang dollar Amerika Serikat yang tercantum dalam akta).[7] Unfortunately, no explanation is given as to precisely which deed is being referred to here.

Reg. 5/2019 also expressly provides that should a shareholding foreign director/commissioner fail to satisfy the minimum shareholding-value threshold of Rp 1 billion, then the normal expatriate employment rules must be complied with.