New Negative Investment List

The long-awaited revision of the 2010 Negative Investment List (2010 Daftar Negatif Investasi, or “2010 DNI”) was issued through Presidential Regulation No. 39 of 2014 on List of Business Fields Closed to Investment and Business Fields Open, with Conditions, to Investment, dated April 23, 2014 (“2014 DNI”), effective as of April 24, 2014. According to the Government, the 2014 DNI is intended to enhance investment in Indonesia and implement Indonesia’s commitment to the ASEAN Economic Community.

♦  The 2014 DNI

The 2014 DNI is grouped into (i) business fields closed to investment, and (ii) business fields open to investment, but subject to certain conditions, such as limitations on foreign shareholding or specifications regarding the type or scale of business that can conduct particular business activities.

Applicability and Grandfather Clause The 2014 DNI revokes the 2010 DNI. Regulations issued to implement the 2010 DNI remain valid as long as they do not conflict.

The 2014 DNI includes a grandfather clause in Article 9, stating that limitations on whether a business is closed or open with conditions (Articles 1 and 2) do not apply to investments approved before the issuance of the new DNI, unless the new DNI is more favorable to the particular investment.

In case of change of shareholding resulting from merger, acquisition or consolidation, Article 6 of the 2014 DNI provides that surviving and acquiring companies can continue to comply with whatever foreign shareholding limits were approved in their original BKPM approval, while new consolidated companies must follow the limitations that prevail at the time the consolidated entity is formed.

Despite the grandfather clause, sectoral laws and regulations can render the grandfather clause dysfunctional. Of particular note, the 2010 Horticulture Law set a maximum 30% limit on foreign capital in horticulture businesses (Article 100(3)) and required existing foreign investors to divest their shares down to 30% within 4 years after the enactment of the law (Article 131(2)). The deadline is approaching on November 24, 2014. Our recent consultation with BKPM indicates that, despite the DNI’s grandfather clause, all existing horticulture companies are required to comply with the divestment requirement; in other words, they will not be grandfathered. We understand that BKPM has suggested to the Agriculture ministry to create a divestment mechanism similar to the stepwise approach applied in the mining industry to make it more practical and less burdensome for horticulture companies; but to date, no mechanism has been announced.

♦  Changes and New Business Fields in the 2014 DNI 

The following is a comparison of maximum foreign shareholding permitted under the 2010 and 2014 DNI’s.

2014-06-09 14_04_29-Document2 - Microsoft Word

♦  Limit on Distributorship: Problem for Wholesale Trading Companies

As indicated above, distributorship (no specific KBLI), which was not listed in the 2010 DNI, is now restricted to 33% foreign shareholding. According to BKPM, wholesale trading (perdagangan besar) is differentiated into (1) export (no foreign shareholding limitation), (2) import (no foreign shareholding limitation), and (3) distributorship (maximum 33% foreign shareholding). This apparently bars majority foreign-owned importers and exporters from carrying on any distributor roles or activities, but what precisely constitutes “distribution” has not been sufficiently explained. For example, does “distribution” refer specifically to transportation, or are wholesalers allowed to deliver their goods to buyers? It is also unresolved at this time whether “distribution” involves transfer of title to goods and the extent to which wholesalers can control third party distribution of their goods for quality control and safety purposes.

We understand that BKPM continues to receive inquiries and feedback from the public and that the question of distributorship will be further discussed between BKPM and the Ministry of Trade (“MoT”), given the substantial confusion surrounding this issue.

♦  Incentives for ASEAN Investors

The 2014 DNI provides several incentives for ASEAN investors, opening up more markets in advertising (51% foreign ownership) and market research, certain healthcare fields (up to 70% ownership of specialist/subspecialist hospitals, specialist clinics, and dental clinics located in most capital cities of eastern Indonesia), and international cargo and passenger shipping (60%), among others.

We understand that the concept of “ASEAN investor” would apply to companies registered in ASEAN countries, regardless of origin of shareholding. Thus, a Singapore-based company owned by Japanese investors would be eligible to enjoy the ASEAN investors’ incentives.

♦  Implications for Public Companies

As with the 2010 DNI, the 2014 DNI explicitly provides in Article 5 that Articles 1 and 2 (whether a business is closed or open with conditions) do not apply to indirect or portfolio investment transactions made through domestic capital markets. Unfortunately, this provision fails to address a number of practical issues, such as whether all listed companies are exempted from the DNI, or only publicly traded shares are exempted. Our recent consultation with BKPM indicates that the exemption is not absolute, and that certain circumstances may trigger DNI application to listed companies, although in practice this is rare. BKPM officers noted that it is unlikely that the DNI will be applied to a listed company unless the company itself informs or submits documents that display foreign shareholding to BKPM.

♦  Potential Conflict of DNI and Sectoral/Regional Regulations

Although the 2014 DNI clearly states that business fields not listed are unconditionally open for investment (Article 3), in reality there are several lines of business not listed in the DNI that have to comply with requirements and restrictions under other regulations.

Apart from the horticulture industry as highlighted earlier, in mining, for example, there are maximum foreign shareholding limits and divestment schedules stipulated in Regulations of the Minister of Energy & Mineral Resources (MEMR), which are not reflected in the DNI and which accelerate upon change of shareholder. Because BKPM requires a recommendation from MEMR before it can approve a transfer of shares in a mining company, MEMR is able to impose the shareholding limitation by virtue of its power to issue or withhold the recommendation.

As with the previous DNI, investors need to be mindful of sectoral or regional regulations that may impose additional requirements or limitations despite the 2014 DNI’s assurance in Article 3.