On 13 September 2013, the Indonesian Minister of Energy and Mineral Resources (MEMR) released Regulation No. 27 of 2013 (MEMR 27/2013) in relation to procedures for the divestment of shares and other requirements in relation to certain changes to mining business investments in Indonesia.

In Brief

The main principles for the divestment obligations for companies holding mining licences (IUPs) were originally set out in the 2009 Mining Law and further regulated by Government Regulation No. 23 of 2010, as amended (GR 23/2010). MEMR 27/2013 is the long-awaited regulation from MEMR to further clarify and regulate the procedures for the implementation of the divestment obligations (including in relation to the scope, pricing, timing, structure and financing of divestment sales). While several provisions of MEMR 27/2013 (particularly in relation to the pricing of the divestment shares and its purported application to Contracts of Work (COWs) and Coal Contracts of Work (CCOWs)) may cause concern to parties subject to the divestment obligations; overall, MEMR 27/2013 provides foreign mining companies with more details to move forward and develop strategies to comply with the divestment obligations.

However, MEMR 27/2013 goes beyond the procedures for the divestment of shares and also imposes new approval requirements, foreign ownership limitations and feasibility study requirements in relation to certain changes to investments in mining businesses in Indonesia. These new requirements should be closely considered by foreign investors looking at new investments in the Indonesian mining industry. In particular, the acquisition by foreign investors of shares in a company holding an interest in an exploration or production operation IUP will now be limited by foreign ownership caps of 75% and 49%, respectively.

Background to the divestment obligation

The 2009 Mining Law contains a divestment obligation whereby foreign shareholders in such entities must, following five years of commencement of production, divest shares to the central or regional government, state or regional owned enterprises or private Indonesian parties. GR 23/2010 initially provided that, where a foreign party owns shares in the entity holding an IUP (Foreign IUP Company), the foreign shareholders are obliged to divest shares so that local parties held at least 20% of the shares in the Foreign IUP Company within 5 years from the commencement of production. GR 23/2010 was subsequently amended to provide that the foreign shareholders in a Foreign IUP Company are obliged to divest shares starting from the end of the fifth year from commencement of production so that local parties hold shares in the Foreign IUP Company of at least:

  • 20%, in the sixth year from commencement of production;
  • 30%, in the seventh year from commencement of production;
  • 37% in the eighth year from commencement of production;
  • 44% in the ninth year from commencement of production; and
  • 51% in the tenth year from commencement of production.

Once the divestment process in any particular year has commenced, shares must be offered in the following order of priority:

  • central government, provincial government and the regency/municipal government (Government), with the central government given priority in the event of multiple bidders;
  • state owned enterprises and regional owned enterprises, through a tender process (BUMN/BUMD); and
  • private Indonesian parties, through a tender process (Indonesian Parties).

Where no priority party is interested in or willing to buy the shares, the shares must then be offered by auction to the parties in the next level of priority. All offers must be made, and acceptances received, within the relatively short timeframes set out in GR 23/2010. Where the divestment shares are not transferred to an Indonesian party after the relevant divestment date, they must be offered in the subsequent year under a similar process.

Importantly, once a requisite percentage of shares is sold, it is required that the Indonesian party’s shares must not be diluted through a capital raising or otherwise.

MEMR further clarification of the divestment process

With the issuance of MEMR 27/2013, the procedure and mechanisms for the divestment obligations have been further prescribed with the overall effect of providing further certainty for the divestment process, although many questions do remain as to the practicality of implementing these processes.


As good news to foreign owned exploration, transportation/trading and processing/refining companies, MEMR 27/2013 makes it clear that the divestment obligations only apply to companies holding a production operation IUP (IUP-OP Companies) (and not to companies holding other types of IUPs, such as IUPs for processing and refining).


The price for the sale of the divestment shares will be based on the replacement cost of the cumulative investment costs of the IUP-OP Company incurred from the commencement of the exploration stage until the year of the relevant divestment, minus the accumulated depreciation and amortisation of the economic or benefit age of the relevant assets as adjusted for inflation and minus the financial obligations of the IUP-OP Company to the end of the calendar year in which the given divestment is due to occur (Appraisal Price). The actual price for the sale of the divestment shares to the Government must not be higher than the Appraisal Price. The Appraisal Price will be the benchmark price for the tender process for the sale of the divestment shares to BUMN/BUMD or Indonesian Parties. MEMR 27/2013 does not provide any further clarity in relation to the basis for the calculation of the Appraisal Price. However, MEMR 27/2013 states that an IUP-OP Company may employ a licenced third-party independent appraiser to determine the Appraisal Price; although, it is currently unclear whether the appointment of an independent appraiser is mandatory.

The price mechanism set out in MEMR 27/2013 is among the more concerning provisions for foreign shareholders. For on-going and successful long-term projects, the Appraisal Price will inevitably be well below the market-value for the shares and not adequately compensate the foreign shareholder for the true value of the project. Further, any outstanding debt financing obligations are likely to reduce the Appraisal Price.

Procedure and timing

MEMR 27/2013 further sets out the procedural requirements for the divestment process (including reporting obligations, documentary requirements and payment procedures). The timing for the divestment process set out in MEMR 27/2013 largely replicates the provisions already set out in GR 23/2010. However, MEMR 27/2013 clarifies that divestment to the Government will require the prior approval of the relevant parliamentary body at the national, provincial or regent/district level before the relevant government body can accept an offer for divestment shares. Given these prior approval requirements, we expect that it may prove practically difficult for the Government to comply with the statutory time-frames and that BUMN/BUMD entities are likely to be the beneficiaries of such timing issues.

The regulations do not expressly require the priority parties to buy the divestment shares on an ‘all or nothing’ basis, and we understand that priority parties will be free to take up part of the shares offered with the remainder being offered to parties with lower order of priority.

Financing and encumbrances

The IUP-OP Company and importantly its affiliates (including controlling shareholders) are not permitted to lend funds for the purposes of the purchase of the divestment shares. Further, an IUP-OP Company cannot record any shares pledges in respect of the divestment shares – in other words, the divestment shares must be sold free from any encumbrances. Although it is not entirely clear in the regulation, we understand that the Indonesian shareholders will be permitted to pledge their shares to third parties once the entire 51% foreign divestment obligation has been satisfied. This restriction may impose significant barriers to project financing and foreign borrowers and lenders may need to adopt more flexible security structures (including, potentially, the progressive release of security, more comprehensive security packages over the assets of the IUP-OP Company or quicker repayment schedules).

Capital markets and existing Indonesian shareholders

MEMR 27/2013 states that the listing of the IUP-OP Company itself on the Indonesian Stock Exchange will not satisfy the divestment obligations. However, we understand that the sale of shares in the IUP-OP Company to a publicly listed company (provided that such listed company is not a PMA company) should satisfy the divestment obligations.

Importantly, MEMR 27/2013 clarifies the previous uncertainty in relation to existing Indonesian shareholders. The regulation states that if, in the fifth year from commencement of production, 51% of the shares in the IUP-OP Company are already held by a local party then the divestment obligations will not apply. We understand that this exemption will also apply on a year-by-year basis in circumstances where a local party holds less than 51% of the shares in the IUP-OP Company but equal to or more than the percentage required to be divested during the relevant divestment year.As a result, these provisions will allow foreign shareholders to avoid the detailed progressive divestment procedure by implementing arrangements at market-value with other Indonesian shareholders prior to the end of the relevant divestment year. Such transfers will however be subject to MEMR, Governor or Regent/Major (as applicable) approval which may not be forthcoming if the Government is contemplating purchasing the divestiture shares. As a result, IUP-OP Companies may consider divesting directly to Indonesian shareholders well in advance of the relevant divestment year in an attempt to reduce this government approval risk.

New restrictions on the change of investment of IUP Companies

In addition to the divestment obligations and procedures, MEMR 27/2013 introduces new restrictions and requirements in relation to the change of investment in IUP companies (including companies holding exploration, transportation/trading, processing/refining and production operation IUPs) (IUP Companies).

MEMR 27/2013 states that a IUP Company must obtain prior approval from MEMR, Governor or Regent/Major (as applicable) in respect of any change to the investment plan and source of funds, change of company status, change of Articles of Association (including in relation to the company’s name, status, location, purpose and authorized capital), change of directors and commissioners and change of shareholders. Amongst other requirements, MEMR will only grant approval for such a change if the exploration or production operation IUP (if relevant) is on the Clean and Clear list.

MEMR 27/2013 also imposes new foreign ownership restrictions in the circumstances where a foreign shareholder acquires shares in local IUP Company or where there is any change of shareholding in a foreign investment company. Approval for such a transaction will only be granted if the foreign ownership in that company is no more than 75% (for an exploration IUP Company) or 49% (for an IUP-OP Company). Given the progressive divestment schedule discussed above (whereby a foreign shareholder may gradually divest its interest in an IUP-OP Company over 10 years) the general restriction on any change of shareholding in an IUP-OP Company where the foreign ownership is more than 49% appears to be inherently inconsistent with the staged divestment procedure. However, in practice, we understand that these foreign ownership restrictions will only apply to transactions involving shares transfers to (or between) foreign parties and, as a result, would not apply to the divestment process.In any event, we expect that these provisions could lead to acquisitions being structured ‘up-stream’ whereby foreign investors may chose to acquire shares in the shareholders (rather than directly the IUP Company) such that, provided the direct shareholders in the IUP Company do not change, no MEMR approval will be required and this foreign ownership restriction will not apply. However, we note that this approach will not reduce the foreign shareholder divestment obligations discussed above.

Further, in order for an exploration IUP Company to obtain approval in relation to the change of company status, change of its Articles of Association (including in relation to the company’s name, status, location, purpose and authorized capital) or change of shareholders, the exploration IUP Company must submit a feasibility study report showing at least two prospect areas. We expect that such provisions may have a detrimental effect on junior explorers and MEMR is clearly showing a clear preference towards mining companies with the ability and plan to develop new exploration projects over the longer-term.

Application to COWs and CCOWs

MEMR 27/2013 states that the procedures and pricing mechanism for the divestment of shares (as discussed above) also applies to COW and CCOW companies.

In practice, whether share divestment procedures and pricing mechanisms will apply to COW and CCOW companies will depend on the precise wording of the relevant COW or CCOW – although, in general, COW and CCOWs have market-based pricing mechanisms. To the extent that the COW or CCOW contains a divestment obligation with clear procedures and pricing mechanisms we expect that foreign shareholders will argue that they continue be subject to the obligations specified in the CCOW or COW (and not the procedures set out in MEMR 27/2013).

However, MEMR has indicated that the divestment of shares to local parties is one of the key areas that should be adjusted in COWs and CCOWs. However, in our view, such adjustments would have to be agreed to by the relevant COW or CCOW company and MEMR should not be able to impose such adjustments unilaterally. Any effort by MEMR to impose the divestiture procedures set out in MEMR 27/2013 on the COW and CCOW companies could result in actions being commenced against MEMR for breach of contract. However, once the COW or CCOW is extended by way of a conversion to IUP, the mining companies would become subject to the divestment obligations under the procedures and pricing mechanisms set out above.

Continued central government control of PMA companies

In additional to GR 23/2010, which states that MEMR has exclusive authority to issue IUPs to a PMA company, MEMR 27/2013 makes it clear that MEMR also has exclusive authority for the renewal of all IUPs issued to a PMA Company (even if that IUP was originally issued by a Governor or Regent/Mayor). For accountability and responsiveness, the continued efforts of MEMR to regulate the IUPs issued to Foreign IUP Companies is generally seen as a positive development for the industry.