By Makarim & Taira S.
1 Overview of foreign investment in the Indonesian mining sector
After almost four years of discussions, the Bill on Minerals and Coal Mining was finally passed by the House of Representatives on 16 December 2008 and signed by the President on 12 January 2009 as Law No. 4 of 2009 (the "New Mining Law"). The enactment of the New Mining Law in Indonesia brings mining under a new licensing regime, replacing the one that has prevailed for the last 40 years under which foreign investors have had to sign a Contract of Work with the Indonesian government to conduct mining activities. The New Mining Law also introduces many other important changes and some new provisions.
The New Mining Law introduces a new licensing structure which does not differentiate between domestic and foreign investors. All investors must have either a Mining Business Permit (Izin Usaha Pertambangan - "IUP"), a People's Mining Permit (Izin Pertambangan Rakyat - "IPR") or a Special Mining Business Permit (Izin Usaha Pertambangan Khusus - "IUPK") to engage in mining activities. IPRs will only be issued to individuals (for up to 1 Ha), groups of people (for a up to 5 Ha) and cooperatives (for up to 10 Ha). IUPs and IUPKs can be issued to private companies with the size limitation explained below. IUP/IUPKs are divided into Exploration and Production Operations IUPs or IUPKs. Exploration IUP/IUPKs cover general surveys, exploration and feasibility studies, while Production Operations IUP/IUPKs cover construction, mining, processing and refining activities as well as transportation and sales. Each type of IUP/IUPK has its own term and area limitations.
Terms of Exploration IUPs are as follows: Metals: up to 8 years for a concession area of between 5,000 Ha and 100,000 Ha; Non-metals: up to 3 years for a concession area of between 500 Ha and 25,000 Ha; Specific non-metals: up to 7 years; Rocks: up to 3 years for a concession area of between 5 Ha and 5,000 Ha; and Coal: up to 7 years for a concession area of between 5,000 Ha and 50,000 Ha. Meanwhile for Production Operations IUPs they are: Metals: up to 20 years for a concession area of up to 25,000 Ha, extendible for 10 years a maximum of twice; Non-metals: up to 10 years for a concession area of up to 5,000 Ha, extendible for 5 years a maximum of twice; Specific non-metal: up to 20 years extendible for 10 years a maximum of twice; Rocks: up to 5 years for a concession area of up to 1,000 Ha, extendible for 5 years a maximum of twice; and Coal: up to 20 years for a concession area of up to 15,000 Ha, extendible for 10 years a maximum of twice.
IUPKs are issued for National Mining Reserve Areas by the Minister of Energy and Mineral Resources (the "MEMR"). The following are the terms and concession areas of IUPKs: for Exploration IUPKs: Metals: up to 8 years for a concession area of up to 100,000 Ha; and Coal: up to 7 years for a concession area of up to 50,000 Ha; for Production Operations IUPKs: Metals: up to 20 years for a concession area of up to 25,000 Ha, extendible for 10 years a maximum of twice; and Coal: up to 20 years for a concession area of up to 15,000 Ha, extendible for 10 years a maximum of twice.
The relevant regional government is responsible for issuing WIUPs (Wilayah Izin Usaha Pertambangan / Mining License Business Area) to business entities, cooperatives or individuals. A Metal minerals or Coal WIUP can be issued through a public tender, while a Non-metal minerals and Rocks WIUP can be issued in response to an application for a reserve area. IUP is issued by regent/mayor (if a WIUP located is within one city/regency), or governor (if a WIUP is located between cities/regencies within one province, after the governor has obtained a recommendation from the relevant regent/mayor), or the MEMR (if a WIUP is located between provinces and after the MEMR has obtained recommendations from the relevant governor and regent/mayor).
State Reserve Areas (Wilayah Pencadangan Negara-"WPN") are to be determined by the Central Government with prior approval from the House of Representatives. These areas may be exploited under IUPKs which may be issued to Indonesian legal entities, including State Owned Enterprises, Region Owned Enterprises or private sector entities. State/Region Owned Enterprises are given priority in obtaining IUPKs and if they do not take them up, the private sector will be offered them through a public tender.
Existing investments (under the previous Mining Law regime), such as Contracts of Work (Kontrak Karya) including Coal Contracts of Work (Perjanjian Karya Pengusahaan Pertambangan Batubara – PKP2B), remain valid until they expire. However, the contract terms and conditions must be adjusted to the provisions of the New Mining Law within 1 (one) year of the enactment of the New Mining Law, ie. 12 January 2010, except for those regarding state revenue. Mining Authorizations (Kuasa Pertambangan - KP) issued to local companies (meaning 100% owned by Indonesian parties) prior to the New Mining Law also remain valid, but subject to certain conditions, among others that they must be converted to an IUP or IPR by 1 May 2010 and the holder must submit its activities plan for the entire mining area until the end of the term to the MEMR, governor or regent/mayor according to their authorities. The Governor or regent/mayor is referred to as the "regional government".
2 Foreign investment in the Indonesian mining sector
2.1 Direct investment
Foreign investors, whether individuals or corporations, subject to the applicable Indonesian Investment Negative List, may establish a foreign investment company (usually known as a PMA company) in Indonesia. As a general rule, partnerships, branch offices and sole proprietorships are not available as investment vehicles for foreigners and while a number of different types of representative office can be established in Indonesia, depending on the business activity of the foreign company, this is not applicable to the mining sector.
A PMA company is a limited liability company established under Law No 40 of 2007 on Limited Liability Companies (the "Company Law"). A PMA company may be a joint venture company established by a foreign investor and an Indonesian partner or (where 100% foreign shareholding is permitted) a wholly foreign-owned company. For the mining sector, the current Indonesian Investment Negative List allows all shares of a PMA company engaged in mining to be held by foreign investors. However, note that the Company Law requires a private limited liability company (PMA or local) have at least two shareholders.
The government agency overseeing foreign investments in Indonesia is the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal - "BKPM"). The BKPM acts as the prime regulator of foreign investments into Indonesia. However, specifically for mining, the regional government issuing the IUP and the MEMR also play an important role in dealing with certain foreign investment matters.
To establish a PMA company engaged in the mining sector, a company must obtain prior BKPM approval for the foreign investment in the company and the Ministry of Law and Human Rights approval for the legal entity status of the company. Subsequently, approval from the regional government or the MEMR in the form of an IUP or IUPK will be needed as the operating license of the company (after winning the bid, as applicable).
2.2 Share Acquisition
Generally, new direct foreign investment in Indonesia is conducted either by acquiring an existing company or by establishing a new PMA company (as explained above).
Please note that according to the New Mining Law, an IUP/IUPK cannot be transferred, but ownership or shares in a company holding an IUP/IUPK can. According to Article 93 of the New Mining Law, the transfer of ownership and/or shares on the Indonesian stock exchange is allowed so long as (i) the company has found two prospective areas during the exploration period, and (ii) prior notification is conveyed to the MEMR, governor or regent/mayor in accordance with their authorities and the transfer is not contrary to the prevailing laws and regulations. The New Mining Law does not specifically address a transfer of shares among unlisted/private companies. However, in practice, a recommendation from the relevant local governments may need to be obtained by the IUP holders before a transfer of shares in the company can be done.
Further, under the Company Law, if the acquisition of shares in a company results in a change of control over the company, the proposed transaction may need to observe the direct acquisition rules prevailing under the Company Law. Commonly, a 'change of control' is deemed to have occurred if more than 50% of the shares of the company are acquired by other parties. Therefore, if foreign investors wish to acquire more than 50% of the shares of an Indonesian company holding an IUP/IUPK (the "target company"), this rule will apply.
Under the rules, certain procedures must be completed by the target company and the purchaser, before the purchaser can acquire the company's shares from the existing shareholders, such as to announce it in the newspaper(s) and to notify the creditors and employees of the target company of the proposed acquisition (no later than 30 days prior to the summons to the General Meeting of Shareholders of the target company to approve the acquisition), as well as to obtain approval from the General Meeting of Shareholders of the target company and the BKPM. If the target company is currently a local company, approval from the BKPM for the conversion of the target company's status to a PMA company will be required before the acquisition process can be finalized. This acquisition process usually takes at least two months, subject to cooperation among the parties, approvals/recommendations that must be obtained and the resolution of issues (if any) related to the transaction, such as objections from creditors or employment issues.
Employment issues need to be considered in acquisition. In the event of employment termination (whether initiated by the employer or the employee), the company must provide the payments (severance package) required under the Manpower Law, taking into account any specific contractual matters that may be governed by the company regulations, collective labour agreement or employment agreement. A termination of employment initiated by the target company will without doubt be relatively costly.
However, if the foreign investors will purchase minority part of the target company's shares (eg. below 50% of the paid up capital of the company), the direct acquisition rules explained above will not be applicable. Therefore, upon approval from the General Meeting of Shareholders of the target company to approve the acquisition and other necessary approvals (as explained in item 3.1 below) have been obtained, the seller and the purchaser may transfer the shares by signing a share transfer deed.
In general, the conversion of the status of a mining company to a PMA mining company involves:
- prior written approval from the BKPM for the conversion and proposed foreign investment in the company. For this a specific BKPM application is submitted to the BKPM. In practice, the BKPM approval takes 2 to 10 working days as of its receipt of the complete application;
- a recommendation/approval from the MEMR, governor or regent/mayor issuing IUP/IUPK held by the target company. This may be required by the BKPM before it issues its approval in (i) above. The timeframe for obtaining this recommendation/approval varies depending on the relevant government institutions; and
- approval from the Ministry of Law and Human Rights for the changes to the Articles of Association of the company to reflect its (PMA) status. The MLHR approval takes 2 to 3 weeks. This change will also need to be notified to the Ministry of Trade.
2.3 Share Acquisition through the Indonesian Capital Market
Currently, Indonesia only has one stock exchange, the Indonesian Stock Exchange (the "IDX"), where publicly owned companies list their shares. Activities involving or conducted by publicly owned companies are supervised by the Indonesian Capital Markets and Financial Institutions Supervisory Board ("BAPEPAM-LK").
To acquire shares in a listed mining company ("Listco"), investors (foreign or local) may buy shares in the Listco through the market or directly from the relevant shareholders. Please see our note regarding Article 93 of the New Mining Law in item 2.3 above. For share transactions in the IDX, investors need to appoint an Indonesian licensed securities company or custodian bank for the settlement of transactions on the stock exchange.
Note that if investors purchase shares in the Listco from shareholders whose names are stated in the Articles of Association and BKPM licenses (if any) of the Listco specifically (and therefore, their shares are not 'public' shares), the Listco will need to satisfy additional requirements, such as to obtain approval from the BKPM and regional government (if applicable) before the share transfer can become effective and notification of the Ministry of Law and Human Rights (due to the changes to the shareholders as stated in the Articles of Association). Otherwise, transfer of 'public' shares is fairly straight forward and can be done without approvals from or notifications to any government institutions.
Under BAPEPAM-LK Regulation No.X.M.1 regarding the Disclosure Requirements for Certain Shareholders, any party holding 5% or more of the issued shares of a publicly owned company is required to report its ownership or any subsequent changes thereto to the BAPEPAM-LK within 10 days of the share purchase taking place. Therefore, if the shares purchased by an investor amount to 5% of the total issued shares of the Listco, the relevant investor will be required to report its share ownership (and any changes thereto) to the BAPEPAM-LK (with a copy to the IDX). The report should provide at least the name of the purchaser/seller, its citizenship and domicile, the number of shares purchased/sold and the price, transaction date and purpose of the transaction.
If an investor acquires shares in the Listco and its ownership in the Listco reaches more than 50% of the paid-up capital of the Listco, or less than 50%, but the investor is able to directly or indirectly, determine the management and/or policy of the Listco, the investor may be subject to BAPEPAM-LK Regulation No.IX.H.1 regarding The Acquisition of Public Companies ("Regulation IX.H.1"). Under Regulation IX.H.1, if the investor is subject to this regulation, it will be deemed to be a new Controlling Party of the Listco and therefore subject to the mandatory tender offer for the remaining shares of the Listco held by certain shareholders, which must be made within 2 working days of the completion of the acquisition, unless exempt under Regulation IX.H.1. In certain cases, the acquisition rule under the Company Law may also apply to an acquisition involving a Listco.
Under the New Mining Law and its implementing regulations, (unlisted) PMA mining companies holding an IUP/IUPK after 5 years of production are required to divest any shares owned by foreign parties to Indonesian parties who may include the central/regional government, state/region owned enterprises or local companies,. At least 20% of the shares of the company must be divested to be held by Indonesian parties. The government regulation sets the priorities for this share offering. The offering to Indonesian parties must be made within 90 calendar days of the fifth anniversary of date of the Production Operations IUP/IUPKs for the mining phase.
For a mining company in the form of a publicly owned company (or the Listco), arguably it will not be subject to the 20% divestment explained above provided that the 'public' shares of the Listco is at least 20%. However, if when the investors (foreign or local) purchasing the shares of the Listco it is subject to Regulation IX.H.1, then as the new Controlling Party under Regulation IX.H.1, the investor will need to:
- transfer its shares in the Listco within 2 years of the completion of the Tender Offer so the public will hold at least 20% of the issued shares of the Listco and the Listco will have at least 300 shareholders, if the tender offer results in the new Controlling Party holding more than 80% of the issued shares of the Listco; and
- transfer its shares in the Listco within 2 years so that the public will hold at least the same percentage of shares as that acquired by the new Controlling Party during the Tender Offer exercise and the Listco will have at least 300 shareholders, if the acquisition results the new Controlling Party holding more than 80% of the issued shares of the Listco.
Overlapping Area Issues and Land Ownership
Overlapping area issues are common in the mining sector. A mining area of a company holding an IUP or IUPK may overlap another mining area, plantation or forestry rights area. Mining rights may be granted on an area with other concession rights, such as forestry right, which have been granted by the government to other parties or utilized by other parties. This overlapping area issue often affects investments by foreign investors.
- Usage of Land
The basic principle of mining law, which derives from the constitution, is that mining rights granted by the Government only grants the right to extract minerals from the ground including the management of the extracted minerals. Usage of the land above must be settled with either the landowner (if privately owned, including plantation land owners) or forestry concession holder). According to Article 135 of the New Mining Law, the IUP or IUPK holders can only commence their exploration activities after they obtain approvals from the landowners. In practice, we understand that it is possible that certain mining activities are conducted before the parties reach a final arrangement (and sign an agreement) on the use of the overlapping land area.
- Forest Designated Area
Under Minister of Forestry Regulation No. P.43/Menhut-II/2008 and Government Regulation No. 24 of 2010, a mining company may only conduct activities in a production forest designated area or, subject to certain exceptions, a protected forest designated area, once it has obtained a borrow-to-use permit (Ijin Pinjam Pakai). Therefore, a mining company can only conduct mining activities in a mining area which overlaps an area designated as forest area once it has obtained a borrow-to-use permit for the overlapping area from the Ministry of Forestry. In practice, it can take a long time to obtain a borrow-to-use permit, in some cases, at least 2 (two) years.
Anti Monopoly and Unfair Business Competition Regulations
Since July 2010, shares acquisition in an Indonesian company must take into account Government Regulation No. 57 of 2010 on Mergers or Consolidations of Business Entities and Acquisitions of Companies' Shares that can Result in Monopolistic Practices and Unfair Business Competition ("GR No. 57/2010") if such 'acquisition' results in a change of control in that entity.
GR No. 57/2010 prohibits entrepreneurs from conducting a merger, consolidation of business entities or acquisition of a company's shares that will result in monopolistic practices and/or unfair business competition.
Any merger, consolidation of business entities or acquisition of a mining company's shares that results in the value of the assets exceeding Rp.2,500,000,000,000 (two trillion five hundred billion Rupiah) and/or sales exceeding Rp.5,000,000,000,000 (five trillion Rupiah), is required to be reported in writing to the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha/KPPU) within 30 (thirty) working days of the merger, consolidation or acquisition of shares being legally effective. This is not applicable if the above transactions are among affiliated companies. This notification is usually referred to as Post-Notification.
Kindly note that the above does not include information about tax, environmental or other technical issues which investors will need to discuss with their advisors in the relevant fields. Issues such as tax on transfers of shares and dividends, or transfer pricing, should be discussed specifically with an Indonesian tax consultant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.