Indonesia has released its much-anticipated updated foreign investment regulation. Some areas are now more open to foreign investment, while others have been restricted or closed.
Indonesia’s Investment Law provides that all business sectors are open to foreign investment, except those listed in the Presidential Regulation commonly known as the Negative List.
The Negative List identifies the business sectors that are closed to foreign investment, or open subject to conditions. The sectors in the Negative List are derived from the Indonesian Standard Classification of Economic Activities (KBLI). Sectors that are open subject to conditions usually involve restrictions on the maximum foreign ownership permitted and sometimes specific requirements, such as approvals from specific ministries or agencies.
Key sectors more open to foreign investment are:
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In 2013, speculation suggested that airport, toll road and water utility projects might be made more open to foreign investment, but this is not reflected in the new Negative List.
Conversely, despite rumours of potential new restrictions, business and management consultation remain open to 100% foreign ownership.
Generally, any business sector which is not expressly regulated in the Negative List is 100% open to foreign investment, subject to any restrictions or policies of specific ministries or agencies.
One of the major changes is that distributorships for all sectors are now limited to 33% foreign ownership (previously some sectors were 100% open). Conversely, distributorships in sectors which were previously closed to foreign investment (eg, pharmaceutical distribution), are now permitted to have up to 33%.
Other new restrictions on foreign investment include:
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Sectors which are now closed to foreign investment include:
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Despite the Negative List appearing technical, listing KBLI sectors and associated percentages, it is inherently political. It is a reconciliation of competing interests and priorities of different domestic political and business stakeholders. The challenge of such reconciliation is reflected by its delayed release, as well as the fact that it comes between the parliamentary election on 9 April and the Presidential election on 9 July.
While the changes will affect particular businesses, the overall impact on foreign investment and hence Indonesia’s economy must be considered in a broader context:
The new Negative List does not apply to a foreign investment limited liability company (PMA Company which has already obtained the relevant Indonesian Investment Co-ordination Board (BKPM) approval, unless the new Negative List is more favourable. As such, a foreign investor’s current investment is preserved and it is entitled to take advantage of any increase in the maximum foreign ownership permitted under the new Negative List.
We understand that the grandfathering protection will be preserved if a foreign investor sells its current interest to another foreign investor, provided there is no change in the overall foreign ownership percentage in the relevant PMA Company. Similarly, if a foreign investor sells part of its current interest to a domestic investor (eg, in compliance with other law, regulations or policies), the foreign investor will be entitled to retain its interest above the maximum foreign ownership permitted under the new Negative List, but will not be able to revert back to its higher interest prior to that sale.
The grandfathering protection will also be preserved if a PMA Company undergoes a merger or acquisition, with the maximum foreign ownership permitted remaining that of the surviving or acquiring company (respectively) under its original BKPM approval (although it is unclear whether this original maximum applies if the merged or acquired company operates in a different business sector). In contrast, if a PMA Company undergoes a consolidation, the maximum will be as determined in relation to the new company.
If a PMA Company expands its business activities through an increase of capital from its foreign investors (without any domestic investor participation), the maximum remains that under the original BKPM approval. If the increase in capital results in the PMA Company exceeding that maximum, it must sell the excess either to domestic investors, by way of an Indonesian stock exchange public offering or by the PMA Company repurchasing them.
In addition to the Negative List, specific industry laws, regulations and policies may impose additional restrictions on foreign investment. BKPM is responsible for the Negative List, while other ministries and agencies are responsible for other restrictions. Often there is limited co-ordination, and sometimes even competition or conflict, between different government entities and their respective regulations. It’s also not always clear whether the Negative List or other restrictions take precedence. The new Negative List is only part of the regulatory story.
Minority investor risks
While structures and agreements might be considered which seek to preserve a minority foreign investor’s effective management control, the Investment Law prohibits nominee arrangements. Any arrangement that reduces the effective control of the majority investor(s) in favour of the minority investor(s) risks being deemed a proscribed nominee arrangement and rendered invalid. Hence, it is difficult for such arrangements to entirely preclude the possibility of the majority investor(s), through their effective management control, making decisions which might fundamentally change the nature of the business or dispose of key approvals or assets. In this context, the difference between a maximum foreign ownership of 33% or 49% might be marginal.
Domestic investor risks
For some businesses, such as pharmaceutical companies, even if majority foreign ownership is permitted, the potential for minority investor(s) to access valuable intellectual property or confidential information may still render any domestic investment unattractive. For these businesses, the difference between a maximum foreign ownership of 10% or 95% might be marginal.
Ultimately, regardless of the maximum foreign ownership permitted, as well as any structures or agreements which seek to preserve a minority foreign investor’s interests, foreign investors must fundamentally be comfortable with their Indonesian business partner(s) and the overall investment climate. These considerations are more important than ever and should ultimately drive foreign investment decisions.