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.
[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
