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.


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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