In August 2017 a new regulation came into effect which moderates the government's supervision of the energy and mining industries. The regulation revises procedures relevant to operators and investors in oil and gas, electricity, mineral and coal, geothermal and biodiesel businesses. It also introduces new requirements regarding changes to boards of directors and boards of commissioners and the transfer of shares.
On August 3 2017 the minister of energy and mineral resources enacted Regulation 48/2017 on the supervision of business activities in the energy and mineral resources sector, which revoked the short-lived Regulation 42/2017 on the same subject. Regulation 48/2017 took immediate effect and partially revokes the following regulations:
- Regulation 10/1981 on the guidelines and requirements for cooperation under joint operation contracts between Pertamina and contractors in the implementation of operation of geothermal resources – to the extent that it regulates the transfer of rights and obligations of contractors to third parties that are conducted outside of the Indonesian stock exchange.
- Regulation 10/2017 on the power sale and purchase agreements – to the extent that it regulates the transfer of rights over shares.
Regulation 48/2017 also revokes:
- Regulation 26/2016 on the procurement and utilisation of biofuel in the form of biodiesel for the purposes of financing by the Palm Oil Plantation Fund Management Agency; and
- Regulation 34/2017 on licensing in mineral and coal mining.
Like its predecessor Regulation 42/2017, Regulation 48/2017 applies to all industries in the energy and mineral resources sector, including upstream and downstream oil and gas, coal and mineral mining and production, geothermal, biodiesel and electricity production (including electricity from renewable sources). In a press release the minister explained that the aim of Regulation 48/2017 is to accommodate the interests of investors and prevent any hindrance to investment. While the previous Regulation 42/2017 imposed obligations on companies in the oil and gas sectors to obtain prior approval over changes to the board of directors and board of commissioners, and restricted share transfers in the downstream oil and gas industry, Regulation 48/2017 replaces these requirements with an obligation to report these changes only to the minister. Regulation 48/2017 makes no change to the requirements that Regulation 42/2017 introduced for companies in the mining sector to obtain approval for changes to the board of directors and board of commissioners, or for share transfers.
Regulation 48/2017 redefines some controversial requirements in the electricity industry under Regulation 42/2017 with respect to:
- changes to the board of directors and board of commissioners – Regulation 42/2017 previously imposed the obligation to seek approval from the minister for such changes; and
- the transfer of shares of geothermal and non-geothermal independent power producers (IPPs) – Regulation 42/2017 previously imposed the obligation to seek approval for such changes, where Regulation 10/2017 provided an earlier iteration of this obligation to notify the minister in the event of transfer of shares.
Regulation 48/2017 requires non-geothermal IPPs to:
- obtain written approval from the purchaser (the state-owned electricity company, Perusahaan Listrik Negara (PLN)) for the transfer of shares before the commercial operation date; and
- notify the minister in the event of the transfer of shares before the commercial operation date, and of changes to the board of directors and board of commissioners.
Lenders should be aware of the effects of Regulation 48/2017 with respect to security over shares in IPPs. In the event an IPP goes into default before the commercial operation date, any transfer of shares will require approval from PLN. If the transfer goes ahead it must be reported to the minister. This should not hinder any enforcement of security by the lenders because, in a typical project finance structure, PLN will provide consent over the transfer of shares in advance.
Non-geothermal IPPs will be exempt from the above requirements if they:
- hold an electricity supply licence;
- sell to PLN; and
- use a geothermal electricity power supply.
General requirements for transfer of shares The following provisions appear to be material to the transfer of shares of non-geothermal IPPs:
- Non-geothermal IPPs must obtain approval from PLN to transfer shares before the commercial operation date and subsequently notify the minister no later than five business days from the date that the Ministry of Law and Human Rights provides approval of the articles of association.
- Before the commercial operation date, non-geothermal IPPs could transfer shares only to affiliated parties whose shares were more than 90% owned by an equity financier or sponsor. Further, the affiliate must be one level below the sponsor (ie, a direct subsidiary of the sponsor).
Regulation 48/2017 does not define the term 'sponsor'. However, during discussions with officials from the Directorate General of Electricity under the Ministry of Energy and Mineral Resources with respect to Regulation 42/2017, officials explained that a 'sponsor' is a direct shareholder of the IPP. This interpretation applies equally to Regulation 48/2017. As such, the first restriction above does not seem to apply to transfers made to parties above the IPP's direct shareholders. By implication, the restriction of the changes of control in the IPP before the commercial operation date may not be achieved in practice, considering that – in a typical IPP structure – the IPP is a special purpose vehicle in which the actual controlling shareholder will be one (or more) levels above the direct shareholders.
It is unclear under Regulation 48/2017 whether the requirements to notify the Ministry of Energy and Mineral Resources of the transfer of shares also apply to enforcing a pledge of shares before the commercial operation date. However, in the absence of an explicit exemption, it seems that such enforcements will require notification.
Regulation 48/2017 does not seem to require notification to or approval from the minister for the transfer of shares after the commercial operation date, including in the context of enforcing a pledge of shares. As such, it seems that share transfers under Regulation 48/2017 will require only PLN approval, which is already the case under sponsor agreements.
Effect of restrictions on transfer of shares Regulation 48/2017 does not address the effect that the transfer of shares provisions will have with respect to IPPs which have already signed a power purchase agreement and sponsor 4 agreement (in larger power projects) with PLN. However, according to Directorate General of Electricity officials:
- Regulation 48/2017 will apply to all IPPs, including IPPs of existing power projects (at any capacity, including small to medium-capacity power projects). That is, there is no provision for the grandfathering of IPP projects under the new Regulation 48/2017 regime; and
- the provisions under Regulation 48/2017, including those relating to the transfer of shares, will prevail where there is a conflict with the sponsor agreement. However, this cannot be assumed to apply to provisions under a sponsor agreement that are stricter than those under Regulation 48/2017.
In larger power projects, most if not all sponsor agreements provide more stringent terms with respect to the transfer of shares after the commercial operation date, including that:
- transfers can be conducted only after specified periods following the commercial operation date;
- transfers will require a public offering; and
- the sponsor(s) or existing shareholder(s) must maintain a certain level of ownership in the IPP until full repayment of the senior loan.
Regulation 48/2017 is more lenient with respect to the transfer of shares after the commercial operation date – the regulation permits the sponsor(s) or direct shareholder(s) to transfer shares to any third party after the commercial operation date, without the need to obtain prior approval from PLN or the Ministry of Energy and Mineral Resources. This suggests the following:
- New IPPs that have not yet signed a power purchase agreement or sponsor agreement may benefit from the more lenient requirements under Regulation 48/2017 with respect to the transfer of shares. However, this is not certain as PLN may require sponsor agreements for new IPPs to include the same terms as would have been required before Regulation 48/2017.
- For existing IPPs which have signed a sponsor agreement, Regulation 48/2017 imposes additional obligations to notify the Ministry of Energy and Mineral Resources. Existing IPPs must also comply with (likely stricter) requirements under their sponsor agreement.
Changes to the composition of boards Under Regulation 48/2017, non-geothermal IPPs must notify the Ministry of Energy and Mineral Resources of any changes to the membership of the board of directors and board of commissioners within five working days of providing notification of these changes to the Ministry of Law and Human Rights. These requirements are less stringent and easier to implement than those under Regulation 48/2017, which imposed an additional obligation for an IPP to obtain a recommendation from PLN for all changes before notifying the relevant ministry.
Transfer of shares The existing Geothermal Law (21/2014) indicates that a geothermal IPP may conduct share transfers on the Indonesian Stock Exchange after it has completed its exploration phase, subject to receiving approval from the Ministry of Energy and Mineral Resources. However, this requirement is unclear, and the law appears to allow a geothermal IPP to transfer shares only by way of public trading or transfer.
In contrast, the now-revoked Regulation 42/2017 required geothermal IPPs to submit a broad range of documentation to the Ministry of Energy and Mineral Resources in order to obtain approval for the transfer of shares. The required documentation extended beyond matters that would be relevant to public trading and included a report on the identity of transferee(s). Because such reports would be relevant only to a private sale, Regulation 42/2017 indicated that it may permit geothermal IPPs to transfer shares to private purchasers, as well as through public trade.
Regulation 48/2017 clarifies matters by distinguishing the formal requirements for the transfer of shares by way of public trading from those relating to transfer through private sale. Regulation 48/2017 also covers geothermal concession holders, joint operation contractors and geothermal resources permit holders.
The wording of the Geothermal Law and Regulation 48/2017 suggests that geothermal IPPs cannot transfer their shares before completion of the exploration phase.
Public trading Regulation 48/2017 provides that geothermal IPPs may transfer shares on the stock exchange once the exploration phase is complete, subject to the minister's approval. Regulation 48/2017 states that the minister must approve such share transfers before the initial public offering or the transfer of share ownership is recorded on the stock exchange. The director general of new renewable energy and energy conservation has clarified that the minister's approval will be required before a geothermal IPP's initial public offering, as well as before the transfer of ownership is recorded on the stock exchange for all secondary offerings and rights issuances.
Approval The Ministry of Energy and Mineral Resources will issue its approval or rejection to a geothermal IPP for the transfer of shares through public trade within 14 business days after receiving all required documentation.
Private sale For transfer of shares conducted privately once the exploration phase is complete, geothermal IPPs need not obtain prior approval from the minister. However, geothermal IPPs must notify the minister of the transfer within five business days from the date of providing notice to, or obtaining approval from, the Ministry of Law and Human Rights.
Change of board members Geothermal IPPs must notify the minister of any changes to the membership of the board of directors and board of commissioners within five business days from the date of providing notice of the change to the Ministry of Law and Human Rights.
Regulation 48/2017 is considerably more investor friendly than Regulation 42/2017, which imposed stringent obligations with respect to the transfer of shares and changes to the board of directors and board of commissioners of non-geothermal and geothermal IPPs. The previous requirement for both non-geothermal and geothermal IPPs to obtain minister approval for any transfer of shares (before and after the commercial operation date), which would likely cause difficulty in practice, now applies only to geothermal IPPs for share transfers after the exploration phase and only to transfers made through public trading. Regulation 48/2017 drops the requirement for all IPPs to obtain minister approval for changes of the board of directors and board of commissioners, requiring IPPs to report these changes only to the minister. The regulation applies to a broad sweep of Indonesia's energy and mineral resources industries and is therefore an important development for new and existing companies.
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