This content is from: Local Insights

New Investment Negative List

Freddy KaryadiOene Marseille, Ali Budiardjo Nugroho Reksodiputro

The Indonesian government has finally published the long awaited new Investment Negative List. The new list, issued on May 25 2010 under Presidential Regulation No. 36 of 2010 (2010 Negative List), sets out the lines of business that are closed to investment as well as those that are open to investment under certain conditions. The 2010 Negative List still uses the same classification as the old one, except for the one additional classification of: business fields that are subject to capital ownership limitation (foreign investments) and/or subject to certain locations for capital investors from ASEAN Countries.

Other remarkable structural changes are as follows:

In the event of a shareholding change which is the result of a merger, acquisition, or consolidation of investment companies having the same line of business, the maximum foreign shareholding is:

  • in the case of a merger, as stipulated in the investment license of the surviving entity.
  • In the case of an acquisition, as stipulated in the investment license of the target company.
  • In the case of a consolidation, as stipulated in the investment license of the new company being the result of the consolidation.

The new 2010 negative list deals with protection of the domestic ownership percentage for rights issues transactions by requiring a foreign investor to divest any shares it earns by exercising rights to subscribe new shares from a domestic shareholder, if the rights issue causes any breach of the maximum foreign participation portion. However, it does not specify whether it is only addressed to private companies or should include public companies. The investment law and the new negative list stipulate that those regulations do not impact indirect or portfolio investment, however, the press release of the investment co-ordinating board (BKPM) and the explanation of the chairman of BKPM limit the definition of indirect investment or portfolio to an investment which does not involve a foreigner as the controller of a company. Having said this, the BKPM does not clarify the definition of controller, thus it is possible to argue that more than one foreign investor who are affiliated but respectively not a controller may collectively own certain ownership percentages which are higher than the maximum allowable ownership of a foreign investor.

Further it is impossible for the BKPM to retrieve any data from a public company that was a pure local company before it went public since it was never even registered with the BKPM.

Capital markets law and regulations do not distinguish the nationality of the investors. The differentiation of the investors is based on their ownership percentages (controlling shareholders, main shareholders, five percent shareholder), control (ie, ability to influence management of a public company), vested interests and affiliation relationship. Although the Jakarta Automated Trading System always has a record of the nationality of the investors, such records are used for determining the withholding tax rate on dividends and bonuses that a public company distributes to its shareholders. Foreign investors can also invest in a mutual fund that subsequently invests in various shares of a public company, therefore the public will consider the mutual fund to be the domestic shareholder. Capital market regulations on public offerings, rights issues, issuance of new shares without a rights issue (conversion of debt to equity) and buybacks which we believe may increase the shareholding percentage of foreign investors, do not mention anything about foreign investment portion limitations.

In the event the 2010 Negative List impacts on public companies, a public company and its shareholders can create an interposing company sitting between them. This receives the shares of such public company from the shareholders of such public company in exchange for the shares of the interposing company. As such, the newly established public company will merely act as a holding company instead of operating company, all the while holding business licences that are subject to foreign investment limitation. The existing public company will be converted into a private company which is wholly owned by the interposing company which in turn becomes a public company.

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