Divestment of foreign ownership under the new Indonesian mining law

The Indonesian Government has taken a further step in its resource nationalism drive with the promulgation of the recent government regulation (Peraturan Pemerintah or PP) No. 24/2012 regarding Implementation of Coal and Mineral Mining Business Activities (PP No. 24 of 2012, which amended PP No. 23 of 2010). Foreign owners or shareholders of companies holding Indonesian mining business licenses (Izin Usaha Pertambangan or IUP) now face the eventuality of having their controlling interests divested over a ten year timeline.

This article discusses the implementation of the foreign investor divestment obligations as regulated in PP No. 24 of 2012.

Threshold requirements for divestment of foreign ownership in Indonesian mining companies

Minimum 51% local ownership

Article 97(1) of PP No. 23 of 2010 concerns the divestment obligations of IUP holders with foreign capital and has been amended by PP No. 24 of 2012 which came into force on 21 February 2012.

Previously under PP No. 23 of 2010, IUP holders with more than 80% foreign capital are only required to divest such number of shares to ensure that at least 20% of its shares are held by local Indonesian parties after five years of business production.

Article 97(1), as amended by PP No. 24 of 2012, now stipulates that an IUP holder with more than 49% foreign ownership after five years from the commencement of business production must divest its shares annually in stages whereby by the tenth year of business production, at least 51% of its total share capital is to be held by local Indonesian parties.

Timing for divestment/divestment stages

Under PP No. 24 of 2012, the new article 97(1a) sets out a divestment schedule for foreign ownership which applies to affected IUP holders after five years of business production.

After the fifth year of production, affected IUP holders will be obligated to ensure that local Indonesian parties at least own the following percentages in the total issued share capital of the IUP holder:-

  1. 20% locally owned by the sixth year;
  2. 30% locally owned by the seventh year;
  3. 37% locally owned by the eighth year;
  4. 44% locally owned by the ninth` year; and
  5. 51% locally owned by the tenth year,

(collectively, the Divestment Stages).

However, PP No. 24 of 2012 does not address whether an existing IUP holder which has foreign ownership, whether direct or indirect, exceeding 80% of the share capital as previously permitted under PP No. 23 of 2010, and has already been in production for more than 10 years will be affected by the new divestment requirements as set out in the new article 97(1a).

In the situation where there are multiple foreign shareholders which collectively own more than the permitted foreign share ownership in the IUP holder at each Divestment Stage, PP No. 24 of 2012 does not provide whether the divestment must be on a pro rata basis or is to be decided among the parties. In this case, the parties must decide the divestment structure. If the foreign shareholders are unable to decide the divestment structure, the divestment structure shall be resolved through a general meeting of shareholders of the IUP holder.

Non dilution

In the event of an increase of capital of the IUP holder, the shareholding of the Indonesian participant(s) shall not be diluted to below the minimum percentages as set out in article 97(1a) above.

Examples

  1. Example A
  1. Foreign investors wish to acquire or invest in the IUP holder.
  2. Following the recommendation of the issuer of IUP and/or the governor, approval from the Minister of Energy and Mineral Resources (MEMR) and the Indonesian Investment Coordinating Board (BKPM) approval for PMA conversion of the IUP holder (if necessary), incoming foreign investors eventually hold more than 80% of the share capital of the IUP holder.
  3. Five years after the production operation IUP, foreign shareholders continue to hold more than 80% foreign ownership in the IUP holder.
  4. Foreign shareholders shall then be mandatorily obligated to sell such number of its shares in the IUP holder in accordance with each of the Divestment Stages to ensure that at least 51% of the shares of the IUP holder are held by local Indonesian parties by the 10th year of business production.
  1. Example B
  1. Foreign investors wish to acquire or invest in the IUP holder.
  2. Following recommendations of the issuer of IUP and/or the local governor, approval from MEMR and BKPM approval for PMA conversion of the IUP holder (if necessary), incoming foreign investor acquires less than 49% of the share capital of the IUP holder
  3. No divestment obligation shall apply for this case.
  1. Example C
  1. Foreign investors wish to acquire or invest in the IUP holder.
  2. Following recommendations of the issuer of IUP and/or the local governor, approval from MEMR and BKPM approval for PMA conversion of the IUP holder (if necessary), incoming foreign investor acquires 60% of the share capital of the IUP holder.
  3. No divestment obligation is required in the sixth, seventh and eighth years of the Divestment Stages. However, in the ninth year and tenth year, foreign shareholders must divest 4% and 7% of the share capital respectively to local Indonesian parties.
  4. Hence, the IUP Holder will eventually have at least 51% of its shares held by local Indonesian parties by the tenth year of business production.

Indonesian participants

Types of Indonesian participants

Where the mandatory divestment obligation arises, after five years of business production, at least 51% of the issued share capital in the IUP holder must be divested to Indonesian participants by the tenth year of business production.

Such Indonesian participants include the central Indonesian government, regional governments, state-owned entities, region-owned entities, or national private business entities.

Procedure for divestment

Upon the end of the five year period from the date of the commencement of business production under the production operation IUP, the foreign shareholder(s) of the affected IUP holder shall divest their shares as specified below and ensure that the Indonesian shareholders hold at least 51% of the total share capital of the IUP holder by the tenth year. The share offer must be made no later than 90 business days from the date where the divestment obligation arises.

The shares shall be offered to the Indonesian participants in the following order of priority:-

  1. first, to the central government by way of a direct offer;
  2. second, to provincial, regency or municipal governments by way of a direct offer;
  3. third, to state-owned enterprises (BUMN) and regional governmentowned enterprises (BUMD) by way of a tender; and
  4. fourth, to national private business entities by way of a tender.

In each case, the Indonesian participant shall have 60 business days to accept the sale offer. Upon the expiry of the offer to BUMN or BUMD, a tender offer must then be made to the national private business entities within 30 business days. However, further regulations would be required with regards to the mechanism for the exact procedure of tender for the shares and determination of the share price for the offers.

Where there is expressed interest from an Indonesian participant to take up the sale offer, transfer and delivery of the shares shall be completed within 90 business days of the date of expression of interest or the date of award of preferred bidder status. Should there be no divestment reached after completion of the share offer set out above, the share offer shall be carried out in the following year.

Foreign investors looking to invest into existing IUP holders or forming new joint venture companies which will bid for new IUPs will need to be aware of the mandatory divestment thresholds in accordance with the Divestment Stages.

MEMR approval for change of shareholding

Following PP No. 24 of 2012, any changes to the shareholding in a PMA IUP holder will require a recommendation letter from the MEMR before the BKPM will issue the necessary approval for such change.

The MEMR has indicated that it will only issue the recommendation letters if:-

  1. for exploration IUP holders, the foreign ownership is not more than 75%; and
  2. for production operation IUP holders, the foreign ownership is not more than 49%.

Foreign investors which intend to acquire interests in PMA IUP holders would need to be aware of the regulatory hurdle presented by the requirement to obtain MEMR’s recommendation letters in order for the change of shareholding to be approved by BKPM.

Conclusion

PP No. 24 of 2012 marks a significant change in divestment requirements calling for majority Indonesian ownership after 10 years of production and alters the basis on which many significant investments in the mining sectors in Indonesia have been made. Foreign owners and investors in mining equity would benefit from greater clarity on how these laws will be implemented. Greater clarification by MEMR is needed in areas such as the applicability of PP No. 24 of 2012 to PMA companies who have been in business for more than 10 years.