Foreign Investment-Negative List

After a long waited and discussion, the Government of Indonesia has finally issued the new negative list through Presidential Decree No. 36 Year 2010 Regarding Business Sector that are Closed for Investment and Opened for Investment Under Certain Conditions (“Perpres 36/10”). Perpres 36/10 revoked the previous negative list regulation number 77 of 2007 as amended by Presidential Decree No. 111 of 2007. Under Perpres 36/10, all lines of business are principally opened for foreign investment except for those lines of business that are listed in this new negative list. However, it is advisable for the investor to consult to Indonesian Investment Coordination Board (“BKPM”) if they find their line of business is not listed in this regulation. BKPM and other related government institutions will further decide whether that line of business are opened or closed for foreign investment. In addition, other related regulation may affect to the determination whether certain business sectors are opened or closed for foreign investment. In this case, policy from BKPM is still play a part.

Summary of the New Negative List

The Perpres 36/10 have 12 articles contained of 5 new articles and 7 articles which have the same content with the previous one. The Perpres 36/10 contained 40 business sectors that are more open to the foreign investors and 10 business sectors that are more restrictive. The new negative list is expectedly to attract more investors as the provisions stipulated is considerably liberalization toward some strategic sectors among others in forestry, energy and mineral resources, health services, manpower, information technology, telecommunication, culture and tourism, as well as marine and fishery. Culture and tourism are among the toppest business sectors that are more opened for foreign investor.

Business expansion : The investor is not obliged to establish a new legal entity or to obtain new license for expanding its business in the same field but in the different location. All they need is to fulfill the location requirement unless otherwise stipulated by the laws. This policy would expectedly to provide flexibility for the investor in expanding their business.

In the event that the foreign investor intends to expand its business within the same business line and the expansion needs additional capital through rights issue, and the local investor can not participate in its expansion scheme, then pre-emptive rights[1] applicable for foreign investor. In the event that the share ownership for foreign investor exceeds the maximum limitation as stated in the approval letter, the foreign investor should adjusted that exceeding within 2 (two) years. The Perpress 36/10 provides certain mechanism on how to adjust the exceeding shareownership as stated on article 6 (six) Paragraph 2 (two). The mechanism are (i) the foreign investor sell the exceeding shares to the local investor (ii) The foreign shareholder sell its exceeding shares through Initial Public Offering (IPO) carried out by the respective company through local capital market or (iii) The respective company which the foreign investor has exceeding his shareownership buys the exceeding shares and threated it as treasury stocks. The treasury stock is further stipulated in Indonesian Company Law No 40/2007.

Applicability of the new negative list to the Public Listed Company: This new negative list is not applicable for indirect investment or portfolio investment that the transaction carried out through local capital market. However, referring to the Director of Deregulation BKPM, Mr, Indra Darmawan, this provision is not applicable for those public listed companies which have foreign controlling shareholder that getting their shares through local capital market. In short, the new negative list will remain applicable for this situation. This policy is actually restatement of the investment law 25/2007 article 2. On its elucidation, the law stated that the investment law is applicable in all sectors in the territority of the Republic of Indonesia which means direct investments, not including indirect investment or portfolio investment.

Change of company ownership : In the event that the capital ownership changed due to merger, acquisition, or consolidation within the investment company engganges in the same line of business, limitation for foreign capital ownership applied as described below:

a. In the case of merger, the limitation of capital ownership for the surviving company is in accordance to the approval letter of its company;

b. In the case of acquisition, the limitation of capital ownership for the acquiring company is in accordance to the approval letter of its company;

c. In the case of consolidation, the limitation of capital ownership for the new company as is the provisions currently applicable for the new company resulted from consolidation in question.

Granfathering clause : Article 8 of Perpres 36/10 stated that this regulation is not applicable for those approved investment in certain business line issued prior to the enactment of Perpress 36/10. However, the provisions will remain applicable if deemed benefited to the investor. This provision is very important for the investor to protect them from uncertainty especially on the regulatory issue that tend to change. It is commonly known that the regulation is tend to change and this is somehow will hamper the investor in getting legal certainty while they’re doing their business in Indonesia. Even the granfathering clause has clearly expressed by the Perpress, some uncertainty still many left. The biggest concern is how far this protection extends, that is negative list is only a Presidential Decree which the level in Indonesian regulation system is under the law (undang-undang). How if the new law (undang-undang) which is higher level then Presidential Decree is issued and conflicting to the negative list. If the law (undang-undang) is applied, the protection againts uncertainty is considerably weak because granfathering clause will only applicable for the same level of regulation or lower. There are still many questions surrounded within granfathering clause other than changing regulation like business expansion, domestic investment company (PMDN), public listed company issue, and etc. Therefore BKPM should anticipated this issue and the policy will continue to play a part.

Asean Economic Community, Amid the pressure to the globalised economy, the new negative list has showed government’s commitment toward ASEAN Economic Community by providing higher foreign percentages in certain sectors for investor from ASEAN countries. In addition, in the even that a business line contained in the Indonesia commitment toward ASEAN Economic Community is not listed in the attachment of the new negative list but listed in other attachment, that the investor from ASEAN countries may invest in accordance to the requirement provided by that attachments.

New Format : A very welcomed change of this new negative list is the format that is now simpler and much easier to understand. The new format covering 17 general business areas composed based on the sectors under the ministry or related government institution. The new negative list has already used the newest Business Clasification (KBLI 2009) as the reference code of business line in Indonesia.

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[1] A privilege extended to select shareholders of a corporation that will give them the right to purchase additional shares in the company before the general public has the opportunity in the event there is a seasoned offering. A preemptive right is written in the contract between the purchaser and the company, but does not function like a put option

Asian Roundtable on Corporate Governance: Ten Years from Now

Asian Roundtable on Corporate Governance is established in 1999, serves as a regional forum for exchanging experiences and advancing the reform agenda on corporate governance while promoting awareness and use of the OECD Principles of Corporate Governance. The Asian Roundtable on Corporate Governance (ARCG) gathers the most prominent, active and influential policy makers, practitioners and experts on corporate governance in the region, from OECD countries and relevant international institutions.

The goal of ARCG is to support decision makers in their efforts to improve corporate governance in the region. This is achieved through informal peer review of corporate governance policy frameworks and practices in the region, benefitting from international experiences. Participants seek to raise awareness of major developments and challenges, evaluate implementation and enforcement as well as discuss and analyze policy options to support viable and effective corporate governance.

Forum for Corporate Governance in Indonesia (FCGI) along with Indonesian Institute for Corporate Directorship and Indonesian Capital Market Supervisory Board (Bapepam) attended the prestigious meeting of ARCG in Manila 9-10 September 2009. In commemorating ten years ARCG since it’s established in 1999, the conference took “Asian Roundtable of Corporate Governance: Ten Years from Now” as the meeting topic. The meeting was expectedly became the major turning point for good corporate governance implementation in the next decade. The meeting was a milestone with three key features: First, the meeting is designed to review and evaluate implementation of corporate governance standards and practices as a vital step to reinforcing market integrity. Second, the meeting will launch Guideline on Fighting Abusive related Party Transaction in Asia, an issue that has been much debated. Asian decision-makers collectively developed this Guide through a Task Force formed in 2008. In this meeting, the participants will also discuss on how to implement the guide. Third, the conference also spent some time to reflect on what next decade of corporate governance in Asia may look like, new priorities, obstacles and how OECD can help.

As the conference aimed to review and evaluate implementation of corporate governance within 10 years, there are some significant achievements that have had by ARCG and OECD namely:

a. Broad range of corporate governance reforms in many economics;
b. Globally compatible rules and regulations are introduces such as enhancing transparency and accountability;
c. Most of emerging market economies adopted outside director and audit committee as part of mandatory requirement.
d. Convergence of corporate governance regulations in Asian Economics
e. Improvement quality of corporate governance around Asian Countries.

There also significant role that has been played by ARCG within 10 years to the implementation of Corporate Governance is Asia countries namely:

a. Provide podium to share and exchange experiences and ideas on corporate governance implementations
b. Set current critical agenda for the region
c. Build positive influence across economies through supports as well as through pre assure
d. Share director training knowledge and experiences
e. Build connected cooperation among business, academics and regulators, etc.

In this meeting, OECD launched new corporate governance series of guideline on fighting abusive related party transactions in Asia. This guideline is developed by the Task Force, seeks to provide policy makers, enforcement authorities, private institutions, shareholders and other stakeholders with key recommendations and analysis of core issues. The Guide focusing on publicly listed companies in Asia which may also be useful to technical assistance agencies working on this issue. The recommendations covering legal definition and framework of related party transactions, highlight on several experiences in some countries in Asia regarding related party transactions, board oversight and approval as well as some case studies on how to assess Related Party Transactions.

The last key feature of the conference is to reflect on what next decade of corporate governance in Asia may look like, new priorities, obstacles and how OECD can help. The participants were divided into some groups discussing about what the possibility issues and actions can be taken in the next decade. The result mostly concern on implementation of the OECD standards and guidelines as well as enforcement on the laws and regulations containing corporate governance principles.

Even some achievements have been reached and significant role has been played, some huge homework on implementations and practices of good corporate governance within Asian countries still be a greatest barrier for the next decade. There are still large disparity between practices and regulations. These may happen because of the weakness of enforcement and inactive stakeholders. Therefore, it needs continued effort to strengthen the enforcement capabilities of regulators and involving all stakeholders to support the implementation.

The Role and responsibilities of the board is also reviewed as their value of role and responsibilities needs to be increased. The effectiveness of a board in directing and controlling a company to ensure that all actions are in the interest of shareholders has again been the subject of scrutiny. In particular, their failure on the ability to provide effective stewardship and to ensure risk management is allegedly related to the current global financial crisis.

To empowering shareholders with the ability and willingness to take governance factors into account when making their investment decisions and to actively participate at general meetings and make their voices heard is key to keeping management and board vigilant and ensuring that they act in the interest of shareholder. This also being the focus of the corporate governance in the next decade.

In the last session of the meeting, Mr. John Lim, the Chair of Asia State Owned presented an updated on the Roundtable Meeting of Asia State Owned Enterprises. The last Asian Roundtable on SOEs was held in Bangkok 20-21 May 2009. The SOEs Roundtable has developed guideline of corporate governance in SOEs and developed some important comparative publications on key issues such as “Enforcement of Corporate Governance in Asia: Unfinished Agenda” and also “Asia: Overview of Corporate Governance Frameworks in 2007”.