With a history spanning more than 30 years, Japanese investment in Indonesia is a strong example of successful foreign investment. In 2008, Indonesia and Japan signed the Indonesia-Japan Economic Partnership Agreement, with a protocol to amend it issued in 2023, and expected to take effect in 2025. To give a glimpse of the significance of Japanese investment in Indonesia, Japan ranked fifth in investment value in Indonesia in the fourth quarter of 2024 alone, totalling USD900 million.
With a population of about 280 million, including 90 million aged between 20 and 40, Indonesia remains one of the top global investment destinations, particularly for Japanese investors due to Indonesia's familiarity with Japanese products.
In addition to the classic investment mechanism of foreign direct investment (FDI) by establishing business in Indonesia, recent years have seen a significant increase in foreign acquisitions of domestic companies, including by Japanese firms. It is quite understandable that some would be of the view that entering a mature business by acquiring its shares would promise a safer approach to ensure investment outcome, although it is more expensive and complex.
FDI and business incorporation
FDI in for-profit businesses in Indonesia can only be made through a limited liability company pursuant to Indonesia's Investment Law.
Choosing your business. Before starting the incorporation process, foreign investors would need to assess at least two key matters: (1) identifying the intended business under the Indonesian Standard Business Fields Classification (Klasifikasi Baku Lapangan Usaha Indonesia, or KBLI) and getting the precise KBLI code for the business; and (2) ensuring whether the intended business is open to foreign investment.
For the latter, a reference can be made to the recently issued positive list where, as opposed to the previous negative list, most of the businesses are now fully open for foreign investment, except for those reserved for micro, small and medium enterprises, or national strategic businesses (e.g. electricity or water).
Incorporation of your company. After selecting the appropriate KBLI, the incorporation of a limited liability company may commence. The incorporation process starts with choosing founding shareholders that consist of at least two shareholders, pursuant to the Indonesian Company Law. The founding shareholders would then need to prepare the deed of incorporation, which is commonly known as the articles of association (AOA).
If the founding shareholders are non-affiliated parties, a joint venture or shareholders' agreement is drafted to govern the company's organisation and management, and serve as the basis for the AOA. In such cases, in a non-affiliated transaction, the preparation of the AOA usually involves an Indonesian notary and legal counsel who also assists in preparing the joint venture or shareholders' agreement.
The chosen KBLI will be reflected in the AOA as the business and purpose of the company. Foreign investment companies must have a minimum issued and paid-up capital of IDR10 billion (about USD610,000), which must be paid in cash or in-kind contribution. The company's capitalisation will be stated in the AOA.
Upon finalising the AOA, the founding shareholders or their proxy must execute it before an Indonesian notary. The incorporation is completed through submission to the Minister of Law (MOL) after certain actions and documents have been provided, such as a statement for capital injection.
Once the MOL approves the incorporation, the company is considered fully incorporated as a legal entity with limited liability and separate assets.
Applying for licences. The company would need to complete the licensing process through the online single submission (OSS) system, an integrated online licensing platform established by the government as a one-stop service for all businesses in Indonesia.
The first step is obtaining a business identification number (Nomor Induk Berusaha, or NIB), often referenced as the company's master identity, before securing other technical licences.
After obtaining an NIB, the required licences that need to be obtained by the company are subject to the chosen business (KBLI), given that Indonesia's current licensing regime adopts a risk-based licensing. For instance, a manufacturing business requires a more complex licensing framework than a service business, except for financial services, which are strictly regulated businesses under supervision of Indonesia's financial services authority (Otoritas Jasa Keuangan, or OJK).
For further illustration, a manufacturing business would usually be required to obtain a location licence (KKPR or PKKPR), environmental licences, building construction approval and a certificate of worthiness for its factory building.
Investment through acquisition
Another increasingly common investment mechanism is investment through acquisition. While acquisitions cover a broad range of topics depending on the object of acquisition, this section focuses on the acquisition of shares in an Indonesian company that results in a change of control.
Acquisition of shares in Indonesia may be generally classified into acquisition of private companies and public companies, each subject to different regulatory frameworks, with some overlapping aspects. For the purpose of this article, a public company refers to a company listed on Indonesia's capital market with publicly traded shares, as opposed to a private company.
Acquisition of a private company.Legally, the acquisition of a private company would be preceded by an acquisition plan prepared by the board of directors of the target company, to be reviewed by the board of commissioners. Once the acquisition plan is prepared, an announcement must be made to creditors in a national newspaper and to employees of the target company no later than 30 days before the general meeting of shareholders (GMS) is convened to approve the acquisition.
The GMS then approves the transfer of shares and other related matters, such as the change of the board of directors, amendments of the AOA, and waiver of the rights of first refusal. The process concludes with the signing of a share purchase agreement. Usually, the share purchase agreement is reflected into a notarial deed (Akta Jual Beli, or AJB) before an Indonesian notary as a closing exercise.
Commercially, the acquisition process begins with a term sheet or memorandum of understanding, followed by due diligence, drafting of transactional documents and other processes leading to the closing, including the signing of an AJB. Both the seller and the acquirer are advised by consultants or legal counsel.
Post-closing actions include publishing a newspaper announcement of the completed acquisition and filing with the Indonesia business competition supervisory commission (Komisi Pengawas Persaingan Usaha) upon the fulfillment of a certain value threshold.
Acquisition of a public company.Where the target company is a public company, determining whether the purchase of shares qualifies as a takeover is important, as different regulations apply. As a rule of thumb, a purchase of shares would be considered a takeover if it results in a change of control, either through acquiring more than 50% of shares with voting rights, or by purchasing less than 50% but gaining the ability to influence and direct the management of the company to shift to the acquirer.
During negotiations, the parties can choose whether to disclose the negotiation. If they opt for disclosure, an announcement must be made on the Indonesian Stock Exchange (IDX) website and in a national newspaper. If not, the negotiation must be kept strictly confidential.
For the transfer of scripless shares, both parties must instruct their respective brokers at the IDX to settle the transfer through the custodian of shares. For scripted shares, notification to the administration bureau is required to update records and issue a new shareholder register and share certificate.
For post-closing, a takeover announcement must be published in a national newspaper and on the IDX website, along with the notification to the OJK. Most takeovers of public companies trigger a mandatory tender offer (MTO). If the MTO results in ownership of more than 80% of the total paid-up shares, a divestment is required.
As the largest economy in Southeast Asia by GDP, Indonesia continues to attract investors with its growing market. The government also does not shy away from incentivising foreign investors with privileges ranging from Golden Visa and tax holidays. The introduction of the positive list emphasises the government's positive stance towards foreign investors.
Originally published by Law Asia.
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.
