Direct foreign investment in Indonesia is governed by Law Number 1 of 1967 on Foreign Investment as amended by Law Number 11 of 1970 (“Foreign Investment Law”). Under these laws, the Indonesian government requires foreign investors who want to operate in Indonesia to form a limited liability company, which is commonly referred to as foreign investment company or PMA (Penanaman Modal Asing) company. The Investment Coordinating Board (commonly referred to as “BKPM”, Badan Koordinasi Penanaman Modal) is the Indonesian government agency which issues investment licenses. However, other Indonesian government agencies issue import licenses and permits to employ non-Indonesian workers. In addition, BKPM does not issue licenses for investments in banking, financial institutions, insurance, and oil and gas as these are issued by other government agencies under separate legislation. For example, foreign investment in banking, insurance and stock broking is regulated by the Department of Finance, while foreign investment in the oil and gas sector must be approved by the Department of Mines and Energy . Since the bulk of foreign direct investment in Indonesia is regulated by the Foreign Investment Law, the following focuses on the rules and regulations that most investors will encounter under this law. Investment through acquiring shares in a listed company will also be discussed briefly at the close of this section.

An important feature of the Foreign Investment Law is the guarantee that the Indonesian government will not nationalize a foreign investment or revoke the investor’s rights to control a foreign investment, except where it is declared under Indonesian law to be in the national interest to do so and then only upon payment of mutually agreeable compensation determined in accordance with principles of international law. This guarantee is accompanied by assurances that the foreign investor will have the authority to appoint the management of the foreign investment company and the right to repatriate capital in the form of after-tax profits, reimbursements of expatriate manpower expenses, depreciation of fixed assets, and other reasons. The Foreign Investment Law also provides for arbitration of investment disputes that may emerge between investors and the government, allowing for such disputes to be submitted to international arbitration under rules of the International Convention for Settlement of Investment Disputes (“ICSID”).

Business Activities Open for Foreign Investment

Although the Foreign Investment Law is intended to encourage foreign direct investment in Indonesia, it requires that the Indonesian government must regulate the fields of business activity that are open to foreign investment and set the priorities and any special conditions to be placed on foreign investments. The Foreign Investment Law also allows the Indonesian government to determine that certain areas are closed to further investment. It also stipulates that industries relating to national defense are to remain totally closed to foreign investment and that certain sectors that are important to the State and affect the livelihood of the Indonesian population cannot be undertaken by foreign investors alone (i.e., without local participation). These sectors are:
· harbors;
· production, transmission and distribution of electric power to the public;
· telecommuni cations;
· shipping;
· aviation;
· drinking water;
· public railway;
· atomic reactors; and
· mass media.

Based on provisions of the Foreign Investment Law, the Indonesian government from time to time has issued a list of desired investments and a list of fields of business activity which are closed to further foreign investment. The list is commonly called the Negative List for Investment (Daftar Negatif Investasi). In preparing the Negative List, there has been a concerted effort to keep the number of restricted sectors to a minimum and to remove numerous conditions that previously had been imposed. This approach has been welcomed by foreign investors and has significantly opened many sectors of business activity to new investments, both foreign and domestic. The most recent Negative List was issued in 2000.

The Negative List demonstrates the willingness of the Indonesian government to attract more foreign investments, after the substantial declines in investment that followed the financial crisis that hit Indonesia and Asia in general in the late 90s. In addition, the gradual, but steady, process of recovery, improvements in general public security, and other actions directed to make Indonesia more attractive for foreign investment, have contributed to an increasing trend of foreign investment into Indonesia. Indonesia’s successful, democratic elections in 1999 and 2004, including direct election of the President for the first time in Indonesia’s history in 2004, and the growing effectiveness of the national institutional reform movement have also contributed significantly to creating the basis for a more welcoming investment climate in Indonesia.

Based on recent liberalization in the investment sector, all business sectors are to be open to foreign direct investment, with the following exceptions:

• business sectors which are absolutely closed to foreign investment

• fields of activity referred to as “strategic activities” which are significant for the State, which are subject to a maximum foreign shareholding of 95%, including:
  ·public harbors and shipping;
  ·transmission and distribution of electric power for public use;
  ·telecommunications;
  ·aviation, public drinking water;
  ·public railways;
  ·nuclear power generation, etc.

• business sectors open to foreign investment provided that it is made through a joint venture with domestic shareholder(s);

• business sectors open to foreign investment under certain specified conditions,

• business sectors reserved for small-scale businesses, which are closed to foreign investment

• fields of business open to medium and large scale enterprise, are open to foreign investors in cooperation with a small scale enterprise under the so called “partnership (kemitraan) program”.

Divestment Rules

The Foreign Investment Law, as implemented by a Government Regulation enacted in 1994, requires foreign shareholders divest part of their share ownership to an Indonesian citizen or legal entity within 15 years from the date the PMA company obtains its permanent operating license from BKPM. The percentage of divestment required has not been specified by the Indonesian government, but divestments have been approved by BKPM where as little as 1% has been div ested.

Minimum Capital/Investment

BKPM has not set a minimum amount of total investment, capital or equity necessary for a foreign investment project to be approved. BKPM will consider the likely capital requirements for investments in the business sector applied for in determining whether a proposed investment is adequately capitalized. Generally, investments in the service sectors are approved at much lower levels of investment than investments in manufacturing or other industries with high equipment needs.

Establishment of a Foreign Investment Company in Indonesia

In a nutshell, the procedures for establishing a PMA company are as follows:

·the foreign investors first submit a Model I PMA application to BKPM (as attached in Annex 6), or other government agencies appointed by the Indonesian government for processing the investment application;

·the foreign investors execute the articles of association of the PMA company, after having obtained the approval from BKPM. They must also process the articles of association with the Department of Law and Human Rights, and process other administrative procedure under the Company Law;

·the PMA company processes necessary corporate licenses (including domicile permit, company registration, importer licenses, master lists of equipment and raw material for import privileges, taxpayer identification number, work and stay permits for expatriates, specific licenses required for specific business activities, and other licenses).

The whole process ordinarily takes up to 4 – 6 months until the PMA company obtains all the licenses necessary to operate in Indonesia.

Acquiring Shares of an Indonesian Listed Company

Indonesian capital markets are supervised by the Capital Market Supervisory Board (Badan Pengawas Pasar Modal, “BAPEPAM”). The Indonesian Capital Market Law, Law Number 8 of 1995 and its implementing regulations (including Rules of BAPEPAM) provide specific requirements for acquiring shares in an Indonesian listed company.

The acquisition of shares of an Indonesian listed company can be made inside or outside the bourse. Any party who owns 5% or more of the shares of a public company must report to BAPEPAM within 10 days as of the date of the transaction for such ownership.

Any party (including a foreign investor) who wishes (i) to acquire shares for 25% or more, (ii) to control, directly or indirectly, the appointment and the dismissal of directors or commissioners and/or (iii) to control the amendment of the articles of association of an Indonesian listed company (“Target Company”) shall conduct a tender offer for the remaining shares of the Target Company. The tender offer must be made in at least two Indonesian language daily newspapers, one of which must have national circulation.

A prospective controlling shareholder shall regularly inform the Target Company, BAPEPAM, the relevant stock exchange, and the public about all negotiations which could lead to the take-over of the Target Company.

Duration

The Foreign Investment Law provides that a foreign investment license will expire 30 years from the date the PMA company commences commercial production.

However, an Indonesian regulation issued in 1994 states that this 30-year term may be extended so long as the PMA company continues to carry out its business for the benefit of the national economy and development. In the absence of evidences that the PMA Company has continued its business, the provisions of Law Number 6 of 1968 on Domestic Investment will apply. The Domestic Investment Law states that when the 30-year time limit is reached, the foreign investor must transfer its shares to an Indonesian, investor, and will be subject to mandatory liquidation if the foreign investor fails to do so. BKPM began ameliorating this rule by stating that expansion permits and diversification permits granted to existing foreign investment companies would also be valid for 30 years from the date of the permit.