Companies engaging in mining business activities in Indonesia can be established with 100% foreign investment, but they are subject to a divestment requirement, as set out under Law No. 4 of 2009 regarding Mineral and Coal Mining (the Mining Law) and Government Regulation No. 23 of 2010 regarding the Implementation of Mineral and Coal Mining Business Activities (as amended, GR 23/2010).
Essentially, companies that hold operation production mining business licenses (IUPOP) are obliged to gradually divest the shares owned by foreign shareholders beginning five years after production, so that by the tenth year of production 51% of the shares are held by Indonesian Participants. The Mining Law defines Indonesian Participants as the Government of Indonesia (GOI), local government (i.e., provincial or municipal/regency governments), Indonesian state-owned enterprises (SOE), Indonesian regional government-owned enterprises (ROE), and Indonesian private business entities.
Prior to the enactment of the Mining Law and the introduction of the IUP-OP, the GOI granted foreign investors contractually based mining concessions, known as Contract of Work (for minerals) (COW) and Coal Contract of Work (for coal) (CCOW). Despite the introduction of the IUP-OP, these contracts are to be honored by the GOI until the end of their terms, but the Mining Law requires that certain terms and conditions in the contracts be aligned with the provisions under the Mining Law. As a consequence, the divestment requirement also applies to COW and CCOW holders.
The Indonesian Minister of Energy and Mineral Resources (MEMR) has issued two regulations relevant to the divestment requirement, namely MEMR Regulation No. 25 of 2018 regarding Mineral and Coal Mining Business, as amended by MEMR Regulation No. 50 of 2018 (MEMR Reg 25), and MEMR Regulation No. 9 of 2017 regarding Procedures for Divestment and Mechanisms for the Determination of the Price of Divested Shares for Mineral and Coal Mining Businesses, as amended by MEMR Regulation No. 43 of 2018 (MEMR Reg 9). MEMR Reg 9 makes it clear that the divestment requirements contained in the regulation not only apply to the holders of IUPOP, but also to the holders of COW and CCOW.
There are a few key points in MEMR Reg 9 and MEMR Reg 25 that we would like to highlight:
(a) Choice of Method of Divestment: IUP-OP, COW and CCOW holders can gradually divest shares according to the provisions of the relevant regulations, or COW and CCOW holders can divest all 51% of the shares in the tenth year after production (lump sum). MEMR Reg 25 defines “after production” as the date when mining activity commences, as stated in the MEMR approval for the mining company’s annual budget and work plan (known in Indonesian as rencana kerja dan anggaran biaya or RKAB). The same regulation provides that mining activity consists of stripping cover soil/rocks, the excavation and extraction of minerals or coal, and the transportation of such minerals and coal.
If an IUP-OP, COW or CCOW holder elects to gradually divest shares, the minimum divestment is as follows:
MEMR Reg 9 also provides that the share divestment can be carried out through the issuance of new shares and/or the transfer or sale of existing shares, whether directly or indirectly. It should be noted that the holders of IUP-OP, COW and CCOW that conduct a divestment are prohibited from extending a loan to an Indonesian Participant to purchase the divested shares, nor can the divested shares be pledged by the IUP-OP, COW and CCOW holders.
(b) Sequence of Parties to Be Offered Divested Shares: Holders of IUP-OP, COW and CCOW must offer the divested shares to the Indonesian Participants in the following order of priority:
i. GOI, through the MEMR;
ii. Local government;
iii. Indonesian SOEs and ROEs; and
iv. Indonesian private business entities, in the form of limited liability companies entirely owned by Indonesian investors.
To streamline the process, the MEMR, when expressing an interest in purchasing the divested shares, can directly involve the local government, SOEs and/or ROEs. In such case, they will then coordinate among themselves and decide on the divestment scheme and the portion of divested shares to be purchased.
If none of the Indonesian Participants are interested in purchasing the divested shares, IUP-OP, COW and CCOW holders can offer the shares on the Indonesia Stock Exchange.
(c) Share Price Determination: The price of the divested shares shall be determined based on fair market value (FMV). The price calculation does not include mineral or coal reserves, except for the minerals or coal that can be mined during the term of the IUP-OP.
FMV can be calculated by one of or a combination of the following methods:
i. discounted cash flow on the economic benefit during the period commencing from the implementation of divestment until the end of the concession term; and/or
ii. market data benchmarking.
FMV shall be the maximum share price that can be offered to the GOI, local government and Indonesian SOEs and ROEs. The GOI, through the MEMR, will evaluate and negotiate the price of the divested shares being offered within 90 days as of the receipt of the offer in order to reach an agreement on the price of the divested shares. In performing such evaluation, an independent appraiser may be appointed by the GOI, through the MEMR. Calculated FMV will also be the base price for divested shares offered by way of auction to Indonesian private business entities.
Practical Issues for the Divestment of Shares by COW and CCOW Holders
As MEMR Reg 9 was issued recently, it is still not clear how it will be implemented or the effect on the determination of the price of divested shares and the calculation of fair market value. There is a paucity of examples of shares being divested by the holders of IUPs, COW and CCOW since the enactment of MEMR Reg 9 and MEMR Reg 25.
Certain issues may arise during the divestment process by COW and CCOW holders. The first issue is the determination of the divestment timeline. There may be cases where the company holding the COW and CCOW is a joint venture company between a foreign shareholder and a local company. The joint venture arrangement, entered into prior to the enactment of the Mining Law and MEMR Reg 9 and MEMR Reg 25, may contain option rights that the local company holds, exercisable within a certain period of time that is not identical to the timeline for gradual divestment. As explained previously, the holders of COW and CCOW may elect to conduct a gradual divestment starting from the sixth year after production, or they can conduct a lump sum divestment in the tenth year after production. MEMR Reg 9 allows for the sale of shares by the foreign investor to any parties at any time from the start of actual production until the day before the sixth anniversary of such actual production. If by the fifth year after production, 51% of the shares are held by the Indonesian shareholder, the company shall no longer be obligated to conduct the divestment.
A second issue is the determination of the price of the shares to be divested, which may also be applicable for IUP-OP holders. Pursuant to MEMR Reg 9, FMV is the highest price that can be offered to the GOI, local government, and Indonesian SOEs and ROEs. Conventionally speaking, the divestment share price should be determined based on the method set out in MEMR Reg 9 (i.e., using FMV, per the mechanisms set out in the regulation), and therefore the share price would not be higher than FMV. However, a joint venture arrangement for a COW or CCOW holder entered into prior to the enactment of the Mining Law and MEMR Reg 9 may have pre-determined a fixed formula for the shares to be sold to the local joint venture partner, which may result, for example, in a price that is higher than FMV. It is unclear how the price of divested shares will be strictly implemented in practice and how the GOI, through the MEMR, would evaluate and negotiate the price of the divested shares being offered, as stipulated in MEMR Reg 9.
Practical solutions for each of the above issues may need to be considered on a caseby-case basis and prior consultation with the MEMR is also recommended as the body that oversees the divestment of shares and which will eventually receive a report on the implementation of the divestment.