Indonesia consists of hundreds of islands with many coal reserves and various mineral resources, such as gold, nickel, manganese, iron ore, copper, bauxite, tin, zircon, etc. Many large foreign companies have operated in the coal and minerals mining industries and enjoyed available investment facilities in accordance with prevailing regulations and strategic policy issued by the Government of Republic of Indonesia. These are reviewed from time to time to fully support and offer more advantages for foreign investors and attract other prospective investors seeking coal and mineral concessions for their investments in Indonesian mining industries.

On the other side, Indonesia applies restrictions in respect of divestment obligatory rules for foreign investors who hold shares in Indonesian mining companies. Divestment is deemed as a ‘domestic sentiment’ merely intended to give more control of operator mining companies from foreign investors to government or local owners. This article outlines requirements for investment and divestment in Indonesia’s mining sector.

General foreign investment overview In principle, foreign investors, either as individuals and/or a company, who wish to conduct investment in Indonesia must have an Indonesian legal entity registered and domiciled in Indonesia. The legal entity must be in the form of a limited liability company (Perseroan Terbatas or PT) duly established under Law No 40 of 2007 regarding Limited Liability Companies (Company Law) and Law No 25 of 2007 regarding Investment (Investment Law), generally called PT PMA. Foreign investment can be made after a minimum of two participants, which may consist of all foreign participants or a joint venture with local partner being founders of the proposed new PT PMA, lodge an application to obtain a Principle Licence of Investment (Izin Prinsip Investasi) from the Indonesian Foreign Investment Coordinating Board (BKPM).

Following issuance of Principle Licence of Investment, the incorporation of a new PT PMA together with its Articles of Association in a notarial deed can be made by the founders and will require the approval of Minister of Law and Human Rights of the Republic of Indonesia. PT PMA may start its production activities after holding a Business Licence (Izin Usaha) issued by BKPM.

Moreover, Article 5 (3) of Investment Law clearly provides that foreign investment can also be performed in PT PMA by the following mechanism - shares acquisition; and other ways in accordance with prevailing regulations, inter alia merger and acquisition.

Prior to the investment, it is very important for foreign investors to examine in detail the proposed business sector for the investment they wish. As described above, Indonesia applies investment restrictions referring to Investment Negative List setting out the type of business sector which is closed or open with certain requirements for foreign investment. The Government of Indonesia reviews provisions in the Investment Negative List from time to time based on regulation or policy, which is intended to open opportunities for foreign investment in Indonesia. Currently, Investment of Negative List is regulated in President Regulation No 36 of 2010 regarding List of Business Sector which is Closed and Opened with Certain Requirement for Investment (Regulation No 36). In addition to examine the required Investment Negative List, it is also important to check the proposed business sector with the classification set out at KBLI (Kelompok Baku Klasifikasi Lapangan Usaha Indonesia/Indonesian Standard for Business Field Classification) which is lastly regulated in the Regulation of Head of Statistic Centre Board No 57 of 2009.

Article 1 of Regulation No 36 provides the list of certain business sectors which is expressly closed for investment covering areas of agriculture; forestry; industry; transportation; communication and information; and culture and tourism. Article 2 of Regulation No 36 provides the list of business fields which are opened with certain requirement, covering 17 business fields including the sector of energy and natural resources. The Government of Indonesia is, however, currently considering reviewing the existing Investment Negative List set out in the Regulation No 36 by proposing to open six business fields formerly closed for foreign investment. These fields will include transportation, industry, and communication and information. It is reported that even though the six business fields will be opened but they will need certain requirements. Further, current minimum value of investment required for PT PMA is expressly determined by BKPM. Pursuant to recent regulation issued by Head of BKPM No 5 of 2013 regarding Guideline and Procedure of Licensing and Non Licensing of Investment (Regulation No 5 of 2013), total investment value for PT PMA must be more than 10 billion Rupiahs or its equivalent in US Dollars.

The investment value is including the stocks equity of PT PMA and optionally can also include loan to be obtained by PT PMA, provided that the minimum of 2 billion 500 million Rupiahs or its equivalent in US Dollars should be paid by shareholders for the issued stocks at the time of incorporation PT PMA. Regulation No 5 of 2013 also provides that the minimum stock ownership of stockholder who has the lowest percentage of ownership must be at the minimum of 10 million Rupiahs or its equivalent in US Dollars.

Mining company divestment requirements

Divestment is generally defined as the transfer of shares owned by foreign shareholder to local shareholder in PT PMA within a certain period of time and requiring minimum level of percentage of shares. In the mining sector, divestment obligatory in PT PMA is specifically regulated in Law No 4 of 2009 regarding Mineral and Coal Mining (Mining Law). Article 112 of Mining Law requires foreign shareholders who own shares in mining companies which hold Mining Business Licence (IUP) and Special Mining Business Licence (IUP-K), to divest their shares five years after commencing mine production. The shares are to be offered to the Government, local government, state-owned enterprises, local state-owned enterprises or private national companies.

The Implementation of the Mining Law, currently regulated under Government Regulation No 23 of 2010 in conjunction with Government Regulation No 24 of 2012 regarding Implementation of Business Activities for Mineral and Coal Mining (Regulation No 24), which provides that the divestment must be made gradually so up to the 10th year, the local ownership must reach the minimum amount of 51% in the mining company. The ownership of local parties in each year after the fifth year must not be less than the following percentage of total issued shares: 6th year 20%; 7th year 30%; 8th year 37%; 9th year 44%; 10th year 51%.

Local owners are protected from the divestment. This is regulated in Article 98 of Regulation No 24, which provides that in the event of any increase of capital in PT PMA, percentage of local ownership must not be diluted, so it becomes less than the above percentage. Procedure of mandatory divestment should comply with right of first refusal mechanism from foreign shareholder to local partner which refers to Article 97 of Regulation No 24 and this is subject to corporate approval for divestment purposes under Company Law.

Based on recent development on this restriction, the Government of Indonesia is discussing through internal mining and industry ministries proposals to review existing Regulation No 24. It is reported that the Director General of Mineral and Coal of the Energy and Mineral Resources Ministry will consider giving more flexibility on divestment requirements for Indonesian mining companies owned by foreign investors carrying on both upstream and also downstream business in a company.

Although the divestment obligation stipulated in the Mining Law and Regulation No 24 is intended only for IUP and IUP-K holders, it should also apply to the Contract of Work (CoW/KK) and Coal Contract of Work (CCoW/PKP2B) made by and between mining companies (including the ones owned by foreign investors) and Indonesian Government before the published date of Mining Law. Such CoW and PKP2B are still in force but obliged to be adjusted with the provisions in Mining Law at the latest one year after the published date of Mining Law. As the adjustment should cover all articles in the CoW and PKP2B, then it can be concluded that the divestment obligation stipulated in the Mining Law and Regulation No 24 should also be applied in the amendment of CoW and PKP2B. The contracts are also required to be adjusted for obtaining IUP through application of IUP no later than six months before the expired date licence of CoW and PKP2B.

Regarding the CoW and PKP2B made by the Indonesian Government and the PT PMA mining company, the adjustment on the divestment obligation can only be made by involvement of the mining company in renegotiation of the contracts.

A current issue of divestment involves PT Freeport Indonesia, a giant US mining company holding gold and copper licences which is planning to go public and have its stocks listed in the Indonesian Stock Exchange (IPO). While the obligation of divestment has not yet been performed completely, the Government is now re-negotiation with Freeport on the required divestment obligation.

Freeport holds CoW from the Government of Indonesia with total concession of 212,000ha. It is reported that Freeport would like to divest 15% of its existing shares, of which 10% will be offerred to the Indonesian partner, cq Government of Indonesia, and the remaining 5% will be released to the Indonesian stock exchange. The Government now holds only 9.36%. If the Government refuses the offer, local government of Papua or State-Owned Enterprise then can hold the offered shares. By the issuance of Regulation No 5 of 2013, the Government of Indonesia should have clearer legal position that the divestment requirement of Freeport will not be effected by its proposed IPO, and the divestment must still comply with the percentage stipulated in Regulation No 24. Another divestment issue in mining also occurs in the CoW between the Government of Indonesia and PT Vale Indonesia Tbk, holder of a nickel CoW covering 190,000ha in Soroako, South Sulawesi. The intensive renegotiation is still in process in which PT Vale Indonesia Tbk has not agreed on the offer from the Government of Indonesia including the divestment obligation of 51% shares into local ownership and the extension of CoW to become IUP.

Conclusion

Divestment obligatory requirement for foreign investors is a must in every PT PMA which holds IUP or IUPK for carrying on mining business in Indonesia as set forth in the Mining Law and Regulation No 24. This also applies for CoW and PKP2B holders, although such obligation must be applied by renegotiation of contracts between the parties of the CoW and PKP2B.

Erwan Sentana is managing partner at ES&P Law Firm Jakarta, Indonesia, holds Advocate Licence from Indonesian Advocate Association (PERADI) and registered as Capital Market Legal Consultant at Indonesian Capital Market Supervisory Agency (BAPEPAM). His areas of practice specialize on mining, corporate restructuring, M&A, capital market and litigation. He has been appointed by a US mining company to acquire coal concessions and also by Australian and European investors to search for mining business opportunities in Indonesia.

Disclaimer - This article is not intended as legal advice or legal consultation on any specific matters. The information contained in this article should not be relied on without first seeking the advice of an eligible attorney.