Client Alert | Mergers & Acquisitions Indonesia’s New 2016 Negative List June 2016 Authors: Kristo Molina, Putra Nugraha On 18 May 2016, the Indonesian Government enacted Presidential Regulation No. 44 of 2016, which sets out the new negative investments list (the “2016 Negative List”) and revokes the 2014 Negative List1 . The 2016 Negative List has been issued following extensive discussions within the Indonesian Government and corporate sector. It is intended to help increase Indonesia’s regional competitiveness and encourage greater foreign direct investment, whilst maintaining protections for domestic businesses of a certain size. As such, the 2016 Negative List is largely consistent with the 10th Economic Package announced by the Indonesian Government in February 2016. From an investment perspective, the key categories that are relevant in the context of the 2016 Negative List are: A. Business lines that are now open for 100% foreign ownership (subject to specified licensing/technical requirements in certain instances); B. Business lines where 100% foreign ownership is not permitted, but where the level of permitted foreign investment has been increased; C. Business lines that are reserved for investment by, or in partnership with, Domestic SMEs2 ; and D. Business lines that are entirely closed to both foreign and domestic investment. We have set out below a summary of the key revisions introduced by the 2016 Negative List. A. Business lines in which 100% foreign ownership is now permitted 100% foreign ownership is now possible in a number of business lines where this was previously not permitted or specifically regulated. These are business lines that are not listed in the 2016 Negative List. According to the Indonesian Coordinating Ministry for the Economy, these business lines have been opened for investment on the basis that they either already face sufficient domestic competition or require advanced technology and/or greater funding. In some instances this is, however, subject to certain conditions. We have set out below the key examples of business lines where 100% foreign ownership is now permitted. 1 Presidential Regulation No. 39 of 2014 on the List of Business Lines that are Closed for Investments and Business Lines that are Open with Limitations for Investments (the “2014 Negative List”). 2 Domestic Indonesian micro, small and medium enterprises and cooperatives as further detailed in Law No. 20 of 2008 on Micro, Small and Medium Businesses (the “SME Law”) and Law No. 25 of 1992 on Cooperatives. Client Alert White & Case 2 Business Line 2014 Negative List 2016 Negative List Communication and Informatics Sector Certain e-commerce activities (in the form of marketplace, daily deals, price grabber and/or online classified ads model) involving investments of more than IDR100 billion Not specifically stipulated in the 2014 Negative List 100% Telecommunication equipment certification Capped at 95% 100% Energy and Mineral Resources Sector Biomass pellet industry for (renewable) energy Partnership with Domestic SMEs required 100% Healthcare Sector Business and management consultancy/hospital consultancy services Capped at 67% 100% Healthcare support services: (a) Medical equipment rental (b) Laboratory, medical check-up clinic (a) Capped at 49% (b) Capped at 67% (a) 100% (b) 100% Manufacture of raw materials for medical pharmaceuticals Capped at 85% 100% Industrial Sector Crumb rubber Closed 100%3 Public Works Sector - Toll road management - Non-hazardous waste management Capped at 95% 100% Trade Sector Cold storage Capped at (i) 33% for Sumatera, Java and Bali and (ii) 67% for Kalimantan, Sulawesi, Nusa Tenggara, Maluku and Papua 100% Distribution affiliated with production Capped at 33% 100% - Futures brokers - Direct selling through marketing networks Capped at 95% 100% Tourism and Creative Economy Sector Bars, cafes and operation of sports facilities (e.g. bowling arenas, gyms) Capped at 49% (or up to 51% if in partnership with Domestic SMEs) 100% Film studios, film processing laboratories, film dubbing facilities, film printing and/or duplication facilities Capped at 49% 100% Film shooting facilities, film editing facilities, film subtitling facilities, film production, cinema, recording studios, film distribution Closed for foreign investments 100% Restaurants Capped at 51% 100% 3 Subject to (i) a specific license from the Ministry of Industry and (ii) requirements as regards sourcing its own raw materials, these may include minimum sourcing requirements from Domestic SMEs. Client Alert White & Case 3 B. Business lines in which the permitted level of foreign ownership has been increased The 2016 Negative List permits an increased level of foreign ownership in a number of business lines, where previously foreign investment was either prohibited, limited or not expressly permitted. The categories of business in which ASEAN investors are now entitled to a preferential higher cap on foreign ownership has also been expanded, as detailed below. We have set out below the key changes that the 2016 Negative List has implemented in this regard. Business Line 2014 Negative List 2016 Negative List Communication and Informatics Sector Certain e-commerce activities (in the form of marketplace, daily deals, price grabber and/or online classified ads model) with investments of less than IDR100 billion Not specifically stipulated in the 2014 Negative List Capped at 49% - Fixed and mobile telecommunication networks - Telecommunication networks integrated with telecommunication services Capped at 65% Capped at 67% Telecommunication services (e.g. internet service providers) Capped at 49% Capped at 67% Energy and Mineral Resources Sector Examination and testing of high voltage electrical installation Closed Capped at 49% Manpower Sector Professional training (e.g. computer courses, TOEFL/IELTS courses, speed reading courses, modelling courses) Capped at 49% Capped at 67% Public Works Sector Construction consultancy services involving (i) advanced technology, (ii) high risk, and/or (iii) a value of more than IDR10 billion Capped at 55% (regardless of the nature or value of the work) Capped at 67% (or up to 70% for ASEAN investors) Tourism and Creative Economy Sector - Golf courses - Travel bureaus Capped at 49% (or 51% if in partnership with a Domestic SME) Capped at 67% (or up to 70% for ASEAN investors) Motels Capped at 49% (or 51% if in partnership with a Domestic SME; or up to 70% for ASEAN investors) Capped at 67% (or up to 70% for ASEAN investors) Private museums Capped at 51% Capped at 67% Meetings, incentives, conferences, and exhibitions (MICE) operations Capped at 51% Capped at 67% (or up to 70% for ASEAN investors) Trade Sector Department stores (with retail space of 400 m2 to 2,000 m2) Closed (in respect of department stores of less than Capped at 67%4 4 Subject to (i) obtaining specific licenses from the Ministry of Trade and (ii) certain requirements (e.g. it must be located within a shopping mall and not be a stand-alone outlet). Client Alert White & Case 4 Business Line 2014 Negative List 2016 Negative List 2,000 m2) - Distribution (non-affiliated with production) - Warehousing Capped at 33% Capped at 67% Transportation Sector - Passenger land transportation (inter-city and inter-province transport, rural transport, urban transport, in province intercity transport, cross-border transport) - Non-scheduled land transportation (taxis, tourism transport, certain area/destination transport) Closed Capped at 49% - Supporting services for transport terminals - Air transportation supporting services (computer reservation system, ground handling and aircraft leasing) - Services activities related to airports - Freight forwarding services - Air cargo expedition services - General sales agencies for foreign airlines Capped at 49% Capped at 67% Maritime cargo handling services Capped at 49% (or up to 60% for ASEAN investors) Capped at 67% (or up to 70% for ASEAN investors in specific ports) C. Business lines reserved for, or subject to partnership with, Domestic SMEs The 2016 Negative List has in fact increased certain limitations/restrictions that are applicable for certain business lines, by reserving these business lines for investment by, or in partnership with, Domestic SMEs. We have set out below examples of some of the key changes that the 2016 Negative List has implemented in this regard. Business Line 2014 Negative List 2016 Negative List Industrial Sector Cane sugar (white, refined and raw) Foreign ownership capped at 95% (and subject to certain sugarcane plantation requirements) Reserved for partnership with Domestic SMEs (on the basis of an ‘inti-plasma’ scheme) Public Work Sector Construction consultancy services that (i) use simple/medium technology, (ii) are low/medium risk and/or (iii) have a work value of less than IDR10 billion Foreign ownership capped at 55%, regardless of its nature and/or work value Reserved for Domestic SMEs Construction implementation services that (i) use simple/medium technology, (ii) are low/medium risk and/or (iii) have a work value of up to IDR50 billion Note that for construction implementation services that (i) use advanced technology, (ii) are high risk and/or (iii) have a work value of Reserved for Domestic SMEs if (i) use simple technology, (ii) are low risk and/or (iii) have a work value of up to IDR1 billion Foreign ownership of up to 67% if (i) use advanced technology, (ii) are high risk and/or (iii) have a work value of more than IDR1 Reserved for Domestic SMEs. Client Alert White & Case 5 more than IDR50 billion, the foreign ownership limit is maintained at up to 67% (or up to 70% for ASEAN investors) billion Trade Sectors Retail trading via mail or internet order (for goods under the categories of food, beverages, tobacco, pharmacy, cosmetics, laboratory devices, textiles, apparel and footwear, household and kitchen goods) Closed for foreign investments Subject to partnership with Domestic SMEs There is no further explanation in the 2016 Negative List as to how partnership schemes with Domestic SMEs should be implemented or whether foreign ownership in the relevant business lines will be capped. As to the manner of implementation, the SME Law (as further implemented) does provide for a broad range of partnership schemes, that include sub-contracting, franchising, trading, distributorship and agency, profit sharing, cooperation, joint venture, outsourcing and other schemes of partnership, but further clarification from the Capital Investment Coordinating Board (the “BKPM”) will be required on a case-by-case basis as to the permitted level of foreign ownership in such partnership arrangements. D. Business lines closed to any domestic and/or foreign investment The 2016 Negative List has maintained a list of business lines which are reserved for the government and in which any private investment, whether foreign or domestic, is prohibited. This is on the basis of Article 12(3) of Law No. 25 of 2007 on Capital Investment, which authorizes the Indonesian Government to prohibit investment in certain sectors due to Indonesia’s national interests (for example, on national defense, health or environmental grounds). These business lines include the management of land terminals for passengers, casinos and the production of alcoholic beverages. The 2016 Negative List has added business activities relating to the distribution of sea coral and marine salvage to the closed list specified in the 2014 Negative List. E. Other Key Changes 1) Streamlined Investment Process The 2016 Negative List has removed the need to obtain specific recommendations from technical ministries/government institutions for a number of business lines, including within the agriculture sector (e.g. food crops - seeding an area of more than 25 hectares). These changes have been made with the intention of reducing the number of bureaucratic steps required, and we will be following closely the practical implications of these changes from a transactional perspective. 2) Simplified Categories Certain closely-related business lines have been combined into single categories in the 2016 Negative List, in an effort to simplify the list. For example, numerous previously separate constructionrelated business lines have now been consolidated in a single “construction services” business line. However, the 2016 Negative List leaves some uncertainty as to whether the BKPM would use its discretion to re-categorize business lines not currently specifically mentioned in the 2016 Negative List (and thus, assumed to be unrestricted or completely open to foreign investment) to fall within a sector subject to foreign investment restrictions and/or limitations. Such re-categorization would detract from the intended benefits of the simplified regulations. Client Alert White & Case 6 F. What has not changed The following provisions were provided for in the 2014 Negative List and continue to be maintained in the 2016 Negative List. 1) Grandfathering The 2016 Negative List includes grandfathering provisions in order to minimize any uncertainty for existing investments and businesses: • Any prior approved existing investment will not be affected where the 2016 Negative List has reduced the foreign ownership limit, unless such new provision in the 2016 Negative List is more favorable for such investment. This should include future business expansions in the same business line where the foreign ownership level has been reduced. • Existing investments are also grandfathered in the event of a merger or an acquisition (but not a consolidation of companies) where the relevant companies are in the same business line. 2) Application of the 2016 Negative List to publicly listed companies The 2016 Negative List stipulates that portfolio investments conducted through the Indonesian Stock Exchange are not subject to the 2016 Negative List. However, as with the 2014 Negative List, exactly what constitutes a “portfolio investment” is not specified and therefore there remains some uncertainty as to how this exemption will be implemented by the regulators. As a result, we would expect the current market practice as regards the applicability of the 2016 Negative List to publicly listed companies to be maintained. 3) Rights issues The 2016 Negative List provides that if a domestic investor is unable to participate in a rights issue in an expanding business, then a foreign investor will be permitted to subscribe for the excess unallocated shares, thereby exceeding the prescribed permitted foreign ownership percentage, provided that within two years any shares in excess of the relevant ownership cap are divested by the foreign shareholder, either by way of (i) a sale to a domestic investor, (ii) a public offering or (iii) a share buy-back. 4) Ownership restrictions for certain business lines remain unchanged The 2016 Negative List maintains the foreign ownership restriction and cap for certain sectors/business lines such as: Sector Business Line Foreign ownership Agriculture Plantations with an area of more than 25 Hectares Capped at 95% Communication and Informatics Telecommunication towers Closed for foreign ownership Financial - Insurance - Venture Capital Capped at 80% Capped at 85% (in each case subject to OJK regulations) Health Hospital services Capped at 67% (or up to 70% for ASEAN investors) Client Alert White & Case 7 G. Conclusions The 2016 Negative List is regarded as a key part of the economic incentive packages introduced under President Joko Widodo’s leadership, that are intended to increase foreign direct investment and Indonesia’s competitiveness in the region. The opening of certain sectors to foreign investment in the 2016 Negative List, as well as other key changes, such as the streamlined investment process and simplified categories, are significant steps forward in this regard and are indicative of the intention of policymakers and lawmakers to achieve these goals. In response to the 2016 Negative List, foreign investors should consider opportunities to, among others, (i) invest in the newly opened or relaxed sectors and/or (ii) increase their existing investments in sectors which have been further relaxed. We would recommend close consultation with the BKPM and/or the relevant technical ministry to ensure that issues are not encountered with any inconsistent implementation of the streamlined investment process or varying interpretations of categories that are not explicitly mentioned under the 2016 Negative List. Witara Cakra Advocates (WCA) Sampoerna Strategic Square North Tower, Level 17 Jl. Jend. Sudirman Kav. 45-46 Jakarta 12930 T +62 21 2992 7000 (In association with White & Case LLP) Contacts: Kristo Molina, Putra Nugraha White & Case Pte. Ltd. 8 Marina View #27-01 Asia Square Tower 1 018960 Singapore T +65 6225 6000 Contacts: Barrye Wall, Jonathan Olier, Jon Bowden In this publication, White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities. This publication is prepared for the general information of our clients and other interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.