What were the most important legal developments in the last 12 months and how might they affect businesses?
The Indonesia Investment Coordinating Board's data (Badan Koordinasi Penanaman Modal or BKPM) shows that the total combined realisation of foreign and domestic investments was in the region of IDR721.3 trillion for January-December 2018, increasing by 4.1 % when compared to 2017. In the first quarter of 2019, despite certain foreign investors' "wait-and-see" tendencies due to the 2019 presidential election, BKPM still records IDR195.1 trillion in investment, which represents a 5.3% growth when compared to the same period in 2018.
According to the data of the Indonesian Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha or KPPU), Indonesian M&A in 2018-19 focused more on private rather than public M&A, with 69 M&A deals recorded in 2018 that are subject to merger notifications at a total value of approximately IDR150 trillion ($10 billion). One of the reasons for the concentration on private M&A owes to the complex regulatory framework and procedures for public M&A, which often leads to lengthier deal times and costlier transactions.
A few notable developments:
i) Licensing procedures: two significant regulatory updates include the new Government Regulation No. 24 of 2018 on Electronically Integrated Licensing Services and BKPM Regulation 6 of 2018. Through the issuance of those regulations, the government of Indonesia continues its commitment and efforts to create more transparent and efficient environments by implementing the Online Single Submission (OSS) system, whereby companies can now obtain their various business licences electronically rather than through the previous complicated manual applications.
ii) Antitrust law: following the conclusion of the 2019 parliamentary and presidential elections, it is now expected that the new antitrust law will be enacted in 2019 or 2020. Two significant changes include the amendment of the merger notification requirement from postnotification to prior approval, and the introduction of a lemency programme.
iii) Multi-finance business: the Indonesia Financial Services Authority (Otoritas Jasa Keuangan or OJK) issued the long awaited OJK Regulation No.
35/POJK.05/2018 on multi-finance activities that provides the possibility for multi-finance companies to extend cash loans directly to borrowers. This new business feature has induced the interest of some potential investors to rejuvenate the multifinance business market in Indonesia.
iv) Equity crowdfunding: following the vigorous growth of peer-to-peer lending businesses in Indonesia towards the end of 2018, OJK issued new regulations on equity crowdfunding providing companies — particularly start-ups — with an alternative for fundraising by way of offering equity securities directly to investors via an online platform operated by equity crowdfunding.
What are the main restrictions on foreign investment?
Foreign investment in Indonesia is regulated under certain investment laws and regulations, with the BKPM being the government authority responsible for handling general investment through the OSS system. There are some exceptions in certain sectors — such as banking, financial institutions, insurance, mining, and oil and gas — that are subject to separate regulatory regimes.
The government from time to time issues the so called "negative list", which sets out certain classifications of lines of business — also known as Klasifikasi Baku Lapangan Usaha Indonesia or KBLI — that are either prohibited, or subject to greater scrutiny and restrictions. These include businesses reserved for small and mediumscale enterprises, or opened for investment with certain conditions. This includes limitations on foreign ownership, requirements for local partnership, limited permitted locations, and requirements for special licences. Under the prevailing negative list, a "distributor not affiliated with production" is limited to a maximum 67% foreign ownership (previously 33%) and Freight Forwarding is limited to 67% foreign ownership (previously 49% ). E-commerce is now open for 100% foreign investment with a partnership scheme. It has been reported that Indonesia's government is planning to amend the current negative list so as to allow full foreign ownership — or at least a higher threshold of foreign ownership — in a greater number of business sectors.
What key structuring and other considerations should be highlighted to potential investors/businesses looking to enter this market?
• Indonesian law requires foreign investment to be conducted through the establishment of an Indonesian limited liability company (PT), with an exception of upstream oil and gas and construction services, which can be done through a joint operation.
• Foreign investment is subject to the negative list.
• Indonesian law permits transfer and repatriation in foreign currency against, among others, capital (including shares), profit, and dividends.
What are the typical structure and pricing mechanism used for Private M&As?
The tools and techniques used in private M&As really depend on the characteristics of the business of the target and the negotiating circumstances of the parties:
• A locked-box mechanism is more common for transactions that involve companies with dynamic business activities and a wide range of customer portfolios, such as banks or multi-finance companies.
• An escrow is common for specific deals where certain conditions or procedures are to be fulfilled by the buyer and seller within the same timeframe, or in interconnected deals which require payment to be fully paid up/made before the other connected deal is completed, or where there is a price adjustment agreed by the parties after the completion.
• A price adjustment mechanism, allowing the parties to adjust the purchase price after completion if, for example, the valuation of the assets/shares decreases.
Fundamental pre-closing conditions, depending on the characteristics of the deal and business line, include government approvals (if required by specific regulations); the internal corporate approval of the parties and acquired company; creditors' consent; and announcements to the creditors and employees.
Post-closing conditions are more administrative requirements by nature and include a notification to the authorised government, creditors, and a newspaper announcement. This includes a merger notification report to the KPPU when the threshold set under the regulation is met. Other contractual conditions between shareholders include a non-competition clause — between the business of the shareholders and the acquired company — and price adjustment conditions. It is common that a sale and purchase agreement of shares is subject to a foreign law, although Indonesian law must govern the implementing deed of transfer.
What anti-bribery/anticorruption laws are in place and how strictly are they enforced?
Indonesian anti-bribery law is mostly focused on gratification to civil servants and government officials. The law imposes obligations on the recipient of gratification to report its receipt to the anti-bribery supervisory commission (Komisi Pemberantasan Korupsi or KPK) who will then determine whether the gratification belongs to the recipient or the state. Recently, as can be seen in some major highlighted cases, KPK has been expanding its focus to watch-over private-led business projects, which are potentially exposed to corruption/bribery risk involving government officials.
Is there a competition law in place and how strictly does it control M&A or other activity?
Indonesia introduced competition law in 1999 through the enactment of Law No. 5 of 2009 on the Prohibition of Monopoly Practices and Unfair Business Competition. In 2010, the implementing regulation on merger reports came into force, requiring mandatory postmerger notifications for transactions meeting certain thresholds set under the KPPU Guidelines.
Luky I. Walalangi
Founding Partner and Managing Partner
Walalangi & Partners
Practice area/industry focus: M&A, banking and finance, real estate
Career highlights: Mr Luky I. Walalangi is an Indonesian qualified lawyer, an expert and a leading lawyer in M&A, banking and finance and real estate transactions with almost two decades' experience. Mr Walalangi has been assisting various foreign companies in their complex investments and acquisitions, including assets and portfolio loan acquisitions, and corporate restructurings in Indonesia. He has also been representing global leading banking and financial groups on major finance transactions, bond issuances, sophisticated fundraising projects as well as a number of major electricity projects in Indonesia.
Chambers Global 2019: Leading Individual in M&A and Corporate.
Chambers Asia Pacific 2019: Leading Individual in M&A and Corporate.
Asia Business Law Journal 2079: The A-List: Indonesia's Top 100 Lawyers.
Asialaw 2079 Asia/aw Profiles Research: 5 Best Lawyers.
IFLR1000 2019: Leading Lawyer — Highly Regarded.