On 8 April 2013, the Indonesian Investment Coordination Board (BKPM) issued the new BKPM Regulation No. 5 of 2013 on the Guidelines and Procedures for Licensing and Non-Licensing in relation to Capital Investments (Regulation 5/2013), which generally deals with foreign and domestic investments in public companies and their subsidiaries in Indonesia. Regulation 5/2013 was promulgated in the State Gazette on 12 April 2013 and took effect on 27 May 2013.
Classification of Public Companies as Domestic and Foreign-owned Companies
Regulation 5/2013 provides that a public company or Perusahaan Terbuka (TBK Company) will be categorised as:
- a foreign investment company or Penanaman Modal Asing (PMA Company), which is controlled1 by a foreign party;
- a domestic investment company or Penanaman Modal Dalam Negeri (PMDN Company)2, which is controlled3 by other PMDN Companies who are domestic parties.
Regulation 5/2013 also specifies that an investment made by a foreign party into a TBK Company is to be deemed as a direct investment for the purposes of Presidential Regulation No. 36 of 2010 on List of Lines of Businesses Closed for Investment and Lines of Businesses Conditionally Open for Investment (the Negative List), which sets out restrictions on foreign investment in certain sectors. This means that foreign investors are no longer able to exploit an ambiguity in the laws that allowed them to effectively circumvent the Negative List by seeking a listing of the closed businesses on the Negative List on the Indonesian stock exchanges and thereafter acquiring control of them under Indonesia’s public takeover regulations.
In addition, the plain reading of Regulation 5/2013 also seems to suggest where there is any change in shareholder composition4 and/or upon the change of control5 of the TBK Company which is a PMA Company, approval of BKPM would be required.
Principal Licence – To Apply or Not to Apply for One?
With the promulgation of Regulation 5/2013, there are now questions on whether existing foreign-controlled TBK Companies are required to apply for a new Principal License pursuant to Regulation 5/2013 and if so, what procedures are to be followed. Further guidance from BKPM will be required on this issue.
In applying to BKPM for a Principal Licence for the conversion to a PMA Company, a PMDN Company is required to list its subsidiaries, regardless of the percentage of ownership, where all its subsidiaries must apply within a year from the for the issuance of the Principal Licence to be converted into PMA Companies as well. Although Regulation 5/2013 is silent on whether this applies to direct and indirect subsidiaries, one may infer from Form I-A (which is attached to Regulation 5/2013 and used as the basis for submitting an application for the Principal Licence) that the conversion of subsidiaries of PMA Companies is only applicable for direct subsidiaries.
In addition, Regulation 5/2013 requires converted companies to divest the entire ownership in its subsidiaries to an Indonesian party if the subsidiaries’ business activities are closed to foreign investors under the Negative List. Regulation 5/2013 is however silent on two crucial points, which would require further clarification from BKPM: (i) there is no timeline imposed for such divestment; and (ii) where the subsidiaries’ business activities are only partially closed to foreign investments, it is unclear whether the divestment of shareholdings in excess of the permissible maximum shareholdings under the Negative List will nonetheless be required.
PMA Companies may be granted extensions of up to two years on their divestment obligations if they are unable to find a qualified Indonesian investor to divest their shareholdings to.
Regulation 5/2013 is silent on the issues of conversion and divestment of subsidiaries in respect of existing PMA Companies. This suggests that existing PMA Companies with non-PMA subsidiaries are not affected by Regulation 5/2013 insofar as the conversion and divestment obligations are concerned.
Minimum Size for Investments of PMA Companies
Prior to Regulation 5/2013, investment thresholds required of a PMA Company were set by BKPM on a case-by-case basis. The introduction of Regulation 5/2013 had remedied such uncertainty by introducing minimum investment thresholds:
- The minimum total investment for a PMA Company (excluding investments in land and buildings) is IDR10 billion or approximately USD1 million6;
- The minimum issued and paid-up share capital of a PMA Company is IDR2.5 billion or approximately USD257,0007; and
- The minimum equity of a shareholder is IDR10 million or approximately USD1,030 .
Restrictions on Venture Capitalists
Regulation 5/2013 restricts venture capitalists or Perusahaan Modal Ventura (PMV Companies) from being shareholders of (i) large-scale PMDN Companies with net assets in excess of IDR10 billion (excluding land and buildings); and (ii) PMA Companies. PMV Companies which are existing shareholders of such PMV Companies or PMDN Companies are required to divest their shareholdings to an Indonesian party within a period of ten years, presumably from the date of promulgation of Regulation 5/2013. This appears to stymie the exploitation of venture capital arrangements as a loophole to circumvent the foreign investment restrictions imposed by the Negative List and Investment Law.