This week, Indonesia published its highly anticipated new
foreign investment regulations1 (the
"New Regulations"). The New
Regulations amend Indonesia's list of sectors totally or
partially closed to foreign investment (the
"Negative List") and clarify
the application of foreign ownership rules to listed companies and
companies undergoing mergers and acquisitions.
The New Regulations generally set forth incremental policy changes
rather than wholesale revisions to the foreign investment
framework. The progressive opening up of Indonesian industry to
foreign investment is welcome, as is the additional clarity on the
treatment of public companies. However, the New Regulations stop
short of establishing a single framework for foreign investment,
and there remain potential areas of conflict between foreign
ownership restrictions under the 2007 Foreign Investment Law and
the New Regulations and foreign ownership restrictions under other
laws and regulations.
Revised Negative List
The revised Negative List is significantly more detailed than
the previous version. For the most part, changes entail marginal
increases in permitted foreign ownership percentages, although
there are a few new industry categories which may impose
restrictions where they did not exist previously.
New categories include industries such as Geothermal Power (90%)
and the Sugar Industry (95%). Other categories have been expanded
in scope, such as making the Hospital Industry more generally
available for foreign investment (and raised from 65% to
67%).
A few industries previously closed for foreign investment have
become open, such as Staple Food Plantations (49%) and Film
Services (49%), or open based on special conditions such as
Saccharin or Cyclamate Production. Increases in ownership
thresholds include Construction (up to 67% from 55%), Direct
Selling (up to 90% from 60%) and Art Galleries (up to 67% from
50%).
Additionally, the telecommunications tower industry is now closed
to foreign investment, resolving a long debate between the Capital
Investment Coordination Board
("BKPM") and the Communications
Ministry - see below for more detail.
Also, in accordance with Indonesia's ASEAN Economic Community
commitments, ASEAN investors may be entitled to higher maximum
ownership percentages in certain sectors, such as Cargo Handling
(60%), Vessel Ownership (60%), and Recreation Businesses (100%). A
footnote to the Negative List also provides that Indonesia will
meet its ASEAN Economic Community commitments for investment in
activities subject to special conditions, subject to compliance
with the relevant conditions.
Conflicting Regulations
One significant area of difficulty in determining the Indonesian
foreign ownership regime has been the existence of conflicting
regulations issued by various different regulatory bodies. The most
well known example is the telecommunications tower industry, which
was opened to 100% foreign investment by BKPM under the 2007
Negative List, but which was declared closed to foreign investment
by regulation of the Communications Ministry.
The revised Negative List resolves this particular debate in favor
of the Communications Ministry by closing the telecommunications
tower industry to foreign investment. It was hoped that the New
Regulations would address these conflicts by reconciling all
foreign ownership issues to a single regime. Unfortunately that is
not the case and, based on our reading, we do not think the New
Regulations resolve many of the potential areas for conflict. While
Article 9 does say that existing inferior legislation will only
continue in effect to the extent not conflicting with the New
Regulations, it does not prevent future regulations from doing so.
Additionally Article 7 expressly states that rules set out by
competent ministries, governmental institutions and regional
governments must be complied with. Accordingly, while the New
Regulation may resolve certain conflicts for a period of time, we
see nothing to prevent a conflict similar to the telecommunications
tower issue arising in the future between different governmental
institutions.
In addition, substantive laws (Undang-Undang), such as the Media
Law and the Broadcasting Law are superior legislation to the
Presidential Regulation (Peraturan Presiden) which sets out the
Negative List. Accordingly the (somewhat unclear) restrictions in
these substantive laws will continue to apply.
Listed Companies and Companies Undergoing Mergers and Acquisitions
The New Regulations go some way to addressing the difficult
question of the application of the foreign ownership rules to
listed companies. Prior to Qatar Telecom's
("QTel") investment in PT
Indosat Tbk
("Indosat")—otherwise
known as the QTel case, it was generally considered that an
Indonesian-listed company was treated as a domestic owner for
foreign investment purposes, and there are many examples of
companies that have "grandfathered" foreign ownership
percentages in excess of those permitted under the Negative List.
However, in the QTel case, BKPM held that QTel's ownership of
Indosat was subject to the 2007 Foreign Investment Law and ordered
QTel to divest its stake in excess of the 65% ownership permitted
under the then Negative List.
The New Regulations, together with comments from BKPM head Gita
Wirjawan in a press conference two days ago, confirm BKPM's new
approach to foreign ownership of listed companies. The New
Regulations now expressly contemplate listed companies, with
requirements for divestment in the event that a foreign shareholder
acquires an excess stake through rights issue or other corporate
action. The divestment needs to take place within two years through
private sale to a domestic investor, offering to the public or
purchase by the company as treasury shares. Similar rules apply to
private acquisitions, mergers and consolidations. However, there is
an express grandfather clause in the New Regulations permitting
foreign investors to retain previously approved investments even if
they would not be permitted under the New Regulations.
Gita Wirjawan commented that controlling shareholders of listed
companies would now be treated as subject to the foreign ownership
restrictions, but portfolio investors that purchase their
investment in the public float would be disregarded for this
purpose. It is not completely clear whether a substantial foreign
shareholder which has a non-controlling stake would be counted for
these purposes, although we believe BKPM is likely to take this
approach (a substantial holding declaration is required for holders
of more than 5% in a listed company). For example we think it
unlikely that three unrelated foreign shareholders would be
entitled to each purchase a 20% stake in a company with a 49%
foreign ownership limit. This may cause transactional issues for
foreign investors seeking to make investments in listed companies
that already have substantial minority foreign investors. It is
also not clear whether this approach of BKPM will apply to sectors
in which the foreign ownership restrictions derive from other
legislation, such as the Media Law or Broadcasting Law.
Footnote
1. Presidential Regulation No. 36 of 2010 regarding the List of Businesses Closed or Conditionally Open for Capital Investment (Daftar Bidang Usaha yang Tertutup dan Bidang Usaha yang Terbuka dengan Persyaratan di Bidang Penanaman Modal).
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