Indonesia: Mining for opportunities

Author: | Published: 1 Apr 2012
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Four years after the enactment of Law No. 4 of 2009 on January 12 2009, the Government of the Republic of Indonesia introduced a new licensing regime in the Indonesian mining sector. This New Mining Law replaced the previous one, which had reigned for the past 40 years, whereby foreign investors had to sign so-called contracts of work (kontrak karya) or coal contracts of work (perjanjian karya pengusahaan pertambangan batubara) with the government in order to conduct mining activities.

The New Mining Law does not differentiate licensing structure between domestic and foreign investors. All investors must have either a mining business permit (izin usaha pertambangan, or IUP), a people's mining permit (izin pertambangan rakyat, or IPR) or a special mining business permit (izin usaha pertambangan khusus, or IUPK) to engage in mining activities. IUPs and IUPKs are issued to private companies with requirements as explained below, and are divided into exploration and production operations IUPs or IUPKs. Exploration IUPs or IUPKs cover general surveys, exploration and feasibility studies, while production operations IUPs or IUPKs cover construction, mining, processing and refining activities as well as transportation and sales. Each type of IUP or IUPK has its own duration and area limitations. IPRs are only issued to individuals (for up to one hectare), groups of people (for up to five hectares) and cooperatives (for up to 10 hectares).

Existing contracts of work or coal contracts of work under the previous Mining Law regime will remain valid until they expire. However, the New Mining Law requires that contract terms and conditions of contracts of work or coal contracts of work must be adjusted to the provisions of the New Mining Law within one year as of the issuance of the New Mining Law (January 12 2010), except for matters related to state revenue. Further, mining authorisations (kuasa pertambangan, or KP) which are held by local companies (100% owned by Indonesian parties) before the issuance of the New Mining Law will remain valid, but subject to certain conditions. These include that a KP must be converted to an IUP or IPR by the latest on May 1 2010, and the holder of a KP must submit its activities plan for the entire mining area until the end of the term to the Minister of Energy and Mineral Resources, governor or regent/mayor according to their authorities.

Acquisition of unlisted or private mining companies


Under the New Mining Law, an IUP or IUPK cannot be transferred. Recently, the government has issued Government Regulation No. 24 of 2012 Regarding the Amendment of Government Regulation No. 23 of 2010 on Implementation of Mineral and Coal Mining Business Activities (GR 24/2012) which provides further explanation on the aforesaid restriction. Pursuant to GR 24/2012, a company holding an IUP or IUP is not permitted to transfer the IUP or IUPK to another party, unless the holder of the IUP or IUPK owns 51% or more of its shares of the other party.

The New Mining Law, however, does not restrict transfer of ownership or shares in a company holding an IUP or IUPK. Further, the New Mining Law does not specifically regulate a transfer of shares among unlisted or private mining companies. In practice, however, a recommendation from the relevant government institutions may need to be obtained by the IUP or IUPK holders before a transfer of ownership or shares in the company can be conducted.

Furthermore, under Law No. 40 of 2007 Regarding Limited Liability Companies (the Company Law), if the acquisition of shares results in a change of control over the company, the direct acquisition rules may need to be observed under the prevailing the Company Law. In practice, a change of control is considered to have occurred if more than 50% of the paid up capital of the company is purchased by other parties. Therefore, if foreign investors wish to purchase more than 50% of the paid up capital of the company holding an IUP or IUPK (in other words the target company), the direct acquisition rules under the Company Law will apply.

Under the Company Law and its implementing regulations, certain procedures must be completed by the target company and the purchaser, before the purchaser can purchase the target company's shares from the existing shareholders. The procedures, among others, are: (i) to announce the proposed acquisition in at least one Indonesian daily newspaper; (ii) to notify creditors and employees of the target company of the proposed acquisition (no later than 30 days before the notice to the general meeting of shareholders of the target company to approve the acquisition); (iii) to obtain approval from the general meeting of shareholders of the target company; (iv) to obtain a recommendation or an approval from the Minister of Energy and Mineral Resources, governor or regent/mayor issuing IUP or IUPK held by the target company; and (v) to obtain an approval from the Capital Investment Coordinating Board (BKPM) if the target company is a local company and its status must be converted into a foreign capital investment mining company as the result of acquisition of its shares by foreign investors.

Further, acquisition of the target company will trigger certain rights among others employee rights. Under Law No. 13 of 2003 Regarding the Manpower, as amended, employees of the target company should have the right to choose whether to continue or end his or her employment with the target company as a result of the change of ownership. An employee choosing to terminate his or her employment with the target company is entitled to severance pay, long-service pay and other compensation in the amount of 15% of the aggregate amount of the severance pay and long-service pay as required under Law No. 13 of 2003, taking into account any specific contractual matters that may be governed by the company regulation, collective labour agreement or employment agreement.

In addition, if foreign investors only purchase below 50% of the paid up capital of the company), the direct acquisition rules explained above will not apply. Therefore, upon approval from the general meeting of shareholders of the target company to approve the acquisition and other necessary approvals (as explained below) have been obtained, the seller and the purchaser may transfer the shares by signing a share transfer deed. The share transfer deed must be submitted to the Minister of Law and Human Rights together with any amendments to the Articles of Association of the target company. Amendments to the Articles of Association must be approved by or notified to the Minister of Law and Human Rights as applicable. The result of the acquisition should be announced in at least one Indonesian daily newspaper within 30 days as of the effective date of the acquisition.

The acquisition process usually takes at least two months, subject to cooperation among the parties, approvals or recommendations that must be obtained and the resolution of issues (if any) related to the transaction, such as objections from creditors or employment issues.

In general, the following are approvals or recommendations that must be obtained from the relevant government institutions with regard to the conversion of the local mining company's status to become a foreign capital investment mining company:

  • Prior written approval from BKPM for the conversion and proposed foreign investment in the target company. For such purpose, a specific BKPM application is submitted to BKPM for approval. In practice, BKPM approval takes at least 10 working days as of its receipt of the complete application;
  • A recommendation or an approval from the Minister of Energy and Mineral Resources, governor or regent/mayor issuing IUP or IUPK held by the target company. The aforementioned recommendation or approval may be required by BKPM before it issues its approval in point (i) above. The time estimation for obtaining this recommendation or approval varies depending on the relevant government institutions; and
  • An approval or receipt of notification, as applicable, from the Minister of Law and Human Rights for the amendments to the Articles of Association of the target company to reflect its status as a foreign capital investment mining company. The Minister of Law and Human Rights approval takes two to three weeks. Such amendment will also need to be reported to the Minister of Trade.

Acquisition of publicly-owned mining companies


The New Mining Law stipulates that the transfer of ownership or shares in a publicly-owned mining company holding an IUP or IUPK is allowed so long as: (i) the company has found two prospective areas during the exploration period; (ii) the company has notified the transfer to the Minister of Energy and Mineral Resources, governor or regent/mayor in accordance with their authorities; and (iii) the transfer is not contrary to the prevailing laws and regulations.

Indonesia has only one stock exchange, namely the Indonesian Stock Exchange, where publicly-owned mining companies list their shares. Activities involving or conducted by publicly-owned mining companies are supervised by the Indonesian Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK).

To acquire shares in a publicly-listed mining company, investors (foreign or local) may buy shares in the publicly-listed mining company through the stock exchange or directly from existing shareholders. For share transactions on the stock exchange, investors need to appoint an Indonesian licensed securities company or an Indonesian licensed custodian bank for the settlement of transactions.

Pursuant to Regulation No. X.M.1 as attached to Chairman of Bapepam-LK Decision No. Kep-82/PM/1996 Regarding the Disclosure Requirements for Certain Shareholders, any party holding 5% or more of the total paid up capital of a publicly-owned mining company is required to report its ownership or any subsequent changes thereto to Bapepam-LK within 10 days as of the occurrence of the transaction. Consequently, if the shares purchased by an investor are more than 5% of the total paid up capital of the publicly-listed mining company, the relevant investor is required to report its share ownership (and any changes thereto) to Bapepam-LK (with a copy to the stock exchange). The report should provide at least the name of the purchaser or seller, its domicile and citizenship, the number of shares purchased or sold and the purchase price and the selling price of shares, the transaction date and the purpose of the transaction.

Further, if an investor acquires shares in the target company and its share ownership in the target company achieves more than 50% of the total paid up capital of a publicly-owned mining company or the investor is able to directly or indirectly determine in any way whatsoever the management and/or policy of the publicly-owned mining company, the said investor is subject to Regulation No. IX.H.1 as attached to Chairman of Bapepam-LK Decision No. Kep-264/BL/2011 Regarding the Acquisition of Open Companies. Under this Regulation, an investor subject to it will be considered as a new controlling party of the publicly-owned mining company and will therefore be subject to a mandatory tender offer for the remaining shares of the publicly-owned mining company held by certain shareholders. The tender offer must be made within two working days as of the completion of the acquisition, unless it is exempted under Regulation IX.H.1. The direct acquisition rules under the Company Law may also apply to an acquisition involving a publicly-owned mining company.

In addition, if investors acquires shares in a publicly-owned mining company from shareholders whose names are stated in the Articles of Association and BKPM licences (if any) of the said company specifically (in other words such shares are not considered as public shares), the publicly-owned mining company will need to comply with additional requirements, such as to obtain approvals and/or recommendations from the BKPM and relevant government institutions (if any) before the acquisition of shares. If the shares are considered as public shares, however, their acquisition will be straightforward and can be done without approvals and/or recommendations from the BKPM and any relevant government institutions.

The key issues


There are four important key issues that must be considered by foreign investors in acquiring a mining company in Indonesia.

The first is the divestment requirement. Under the New Mining Law and its implementing regulations, unlisted or private foreign capital investment mining companies holding an IUP or IUPK are required to divest any shares owned by foreign parties to Indonesian parties after five years of production. Indonesian parties may include the central/regional government, state/region-owned enterprises or local companies. At least 20% of the total paid up capital of the company must be divested to be held by Indonesian parties. The offering to Indonesian parties must be made within 90 calendar days of the fifth anniversary of the date of the production operations IUP or IUPKs for the mining phase.

With the issuance of GR 24/2012, there is a further Indonesianisation divestment requirement imposed in the mining sector. GR 24/2012 requires that an unlisted or private foreign capital investment mining company holding an IUP or IUPK within five years of production must divest its shares gradually to Indonesians (either in the form of legal entity or individual), so that in the tenth year the Indonesians' shares is at least 51% of the total paid up capital of the company. Ownership by Indonesians in each year after the end of the fifth year as of its production must not be less than 20% in the sixth year, 30% in the seventh year, 37% in the eighth year and 44% in the ninth year.

For a publicly-owned mining company (such as a publicly-listed mining company), arguably it will not be subject to the 20% divestment requirement as explained above provided that the public shares of the publicly-owned mining company are at least 20%. However, if an investor (foreign or local) purchases shares of a publicly-owned mining company and is considered as a new controlling party under Regulation IX.H.1, the investor will need to transfer its shares in the publicly-owned mining company to the public within two years as of the completion of the tender offer so the public will hold at least 20% of the issued capital of the publicly-owned mining company and the said company will have at least 300 shareholders, if the tender offer results in the new controlling party holding more than 80% of the issued capital of the publicly-owned mining company.

Alternatively, if the acquisition results in the new controlling party holding more than 80% of the issued capital of the publicly-owned mining company, the investor will have to transfer its shares in the publicly-owned mining company to the public within two years so that the public will hold at least the same percentage of shares as that acquired by the new controlling party during the tender offer exercise and the publicly owned mining company will have at least 300 shareholders.

The second key issue involves overlapping area and land ownership issues, which commonly take place in acquisition of a mining company. A mining area of a company holding an IUP or IUPK may overlap with another mining area, plantation or forestry rights area. Mining rights may be granted on an area with other concession rights, such as forestry right, which have been granted by the relevant government institutions to other parties or used by other parties. The overlapping area and land ownership issues are often have a sensitive impact to foreign investors.

Under the basic principle of the New Mining Law, mining rights granted by the government only grant the right to extract minerals from the ground including the management of the extracted minerals. The land use above must be settled with either the owner of the land (if privately owned, including owners of plantation land) or the forestry concession holder. Pursuant to the New Mining Law, holders of an IUP or IUPK can only commence their exploration activities after they obtain approvals from the owner of the land. In practice, it is possible that certain mining activities are performed before the parties execute a final arrangement on the use of the overlapping land area.

Government Regulation No. 24 of 2010 and Minister of Forestry Regulation No. P.43/Menhut-II/2008 stipulate that a mining company may only conduct mining activities in a production forest designated area or, subject to certain exceptions, a protected forest designated area, once it has obtained a borrow-to-use permit (ijin pinjam pakai) from the Ministry of Forestry. In other words, a mining company can only conduct mining activities in a mining area which overlaps a forest designated area once it has obtained a borrow-to-use permit for the overlapping area from the Ministry. Obtaining a borrow-to-use permit, in some cases, can take at least two years.

In addition, the government has made some progress to solve the problem of overlapping area by preparing a list, which purports to list IUPs or IUPKs which have been found not to have overlapping and related problems. In the future, investors can obtain such list to ensure that the mining area of the company holding the IUP or IUPK that they intend to acquire will not have any overlapping issue with other mining area, plantation or forestry rights area.

The third key issue for foreign investors to bear in mind is that, in order to reduce greenhouse gas emissions, the government has instructed various government institutions to take all necessary actions to support a moratorium on the issuance of new licences for the use of primary natural forests and peat lands. This excludes among others: (i) the implementation of vital national development, such as geothermal, oil and gas, electricity, rice and sugar cane fields; (ii) existing forest utilisation business licence extension and/or forest area utilisation permits (such as a borrow-to-use permit) provided that the relevant business licences (IUPs) are still valid; and (iii) ecosystem restoration. The moratorium is valid for two years starting from May 20 2011.

Similarly, and fourthly, the government has alerted all levels of administration to make sure that mining activities do not harm the environment. To achieve such purpose, the government issued Regulation No. 78 of 2010 Regarding the Reclamation and Post Mining Activities (GR 78/2010) on December 20 2010. GR 78/2010 basically stipulates four principal elements to mining environment protection and management: (i) a reclamation plan and post mining activities plan must be prepared by mining companies; (ii) the plans must be reviewed by, and approval obtained from, relevant government institutions; (iii) mining companies are to fund and carry out the plans; and (iv) there must be an alternative means for carrying out the plans if the mining companies fail to do so.

It can be seen, then, that acquisition of a publicly-owned mining company in Indonesia is more complex than acquisition of an unlisted or private mining company since the new acquirer must conduct a tender offer to certain shareholders if the acquisition is considered to be changing the control of the publicly-owned mining company. In acquiring mining companies in Indonesia, investors must fully aware on the acquisition steps and procedures as well as key issues that they will face during the process..

Enrico Iskandar
  Enrico Iskandar is one of the founding partners of Bastaman Enrico Bagus. His main expertise is in the areas of corporate commercial, M&A, real estate and hotels, mining and natural resources transactions and pharmaceutical practice. For the last three years, he has been heavily involved in many significant transactions in the energy and natural resources sector as well as plantations projects.

Iskandar previously practiced with one of the largest and most well-established Indonesian law firms for eight years and later joined a leading boutique law firm as a partner for five years before setting up his own firm in 2009. In 2008, the Asia Pacific Legal 500 noted and recognised him as one of the leading individuals in the real estate category. In addition, since the establishment of his firm in 2009, Legal 500 has continuously recognised Bastaman Enrico Bagus as one of the leading corporate and commercial firms in Indonesia.

Bastaman Enrico Bagus
Plaza Asia, Zone 12C
Jl. Jend. Sudirman Kav. 59
Jakarta 12190
Indonesia

T: +62 21 514 01 380
F: +62 21 514 01 379
E: enrico@beblaw.co.id
W: www.beblaw.co.id

Meiny Meirany Rasmin
  Meiny Meirany Rasmin is one of the partners of Bastaman Enrico Bagus. Her main expertise is in the areas of corporate commercial, M&A, capital markets, insurance, consumer goods, pharmaceutical, debt and corporate restructurings and mining and natural resources transactions.

She previously practised with one of the most prominent and largest Indonesian law firms for two years and thereafter joined an independent firm for 14 years where she was a partner for four years.

In 2003, Rasmin was recognised by Asia Law & Practice as one of the leading capital markets lawyers in Indonesia. In 2010, Chambers & Partners quoted that she is one of Indonesian lawyers who is gaining respect in the market for her work on acquisition on behalf of large public companies, and on finance and insurance transactions.

Bastaman Enrico Bagus
Plaza Asia, Zone 12C
Jl. Jend. Sudirman Kav. 59
Jakarta 12190
Indonesia

T: +62 21 514 01 380
F: +62 21 514 01 379
E: meing@beblaw.co.id
W: www.beblaw.co.id