Court Nullifies English Language Contract

On June 20, 2013, the District Court of Jakarta Barat nullified a Loan Agreement executed only in English, concluding that contracts involving Indonesian parties must be written in Bahasa Indonesia, under Decision No. 451/Pdt.G/2012/PNJkt.Bar.

The District Court based its decision on Law No. 24 of 2009 on Flag, Language and Coat of Arms and National Anthem (“Law 24/2009”). Under Law 24/2009, Indonesian language is required in any MOU or agreement involving Indonesian parties. The District Court interpreted that provision to mean that an agreement not using Bahasa Indonesia is void as a matter of law.

The District Court decision was affirmed on May 7, 2014, by the Jakarta High Court in Appellate Decision No. 48/Pdt/2014/PT.DKI. In its considerations, the High Court opined that the lower court decision was legally sound, and because there were no new contrary facts submitted by the appellant, the High Court affirmed the decision entirely.

The appellate decision was notified to the parties on September 1, 2014, and the appellant filed for appeal with the Supreme Court on September 11, 2014. As of the time of writing, the case is ongoing at the Supreme Court.

♦ BACKGROUND OF THE CASE

In the District Court case, the court nullified a loan agreement between PT Bangun Karya Pratama Lestari (“BKPL”) and NINE AM Ltd (“NINE”). Under the loan agreement, NINE provided a loan to BKPL in the amount of US$4,422,000. The choice of law provision designated Indonesian law to govern the agreement, which was written only in English. A deed of fiduciary security executed in Bahasa Indonesia was concluded to secure the loan.

Starting from December 2011, BKPL discontinued repayment, resulting in BKPL defaulting on the loan. According to the District Court decision, up until that date, BKPL had repaid US$4,306,460.

After issuing a demand letter (somasi), and receiving no response, NINE petitioned the court seeking payment of the overdue principal plus interest, to which BKPL responded with a tortious act claim challenging the loan agreement under Law No. 24/2009, because it was made only in English language.

♦ LEGAL BASIS

Laws and Regulations on Language

Article 30 of Law No. 24/2009 provides that Indonesian language must be used in any MOU or agreement involving the State agencies, Indonesian government institutions, Indonesian private entities, or individuals of Indonesian nationality. Any MOU or agreement involving foreign parties may also be written in the national language of the foreign party and/or English. Indonesian does not have to be selected as the governing language, but Indonesian text is required if the agreement includes an Indonesian party, including Indonesian legal entities that are foreign-owned, such as PMA companies.

Article 40 of Law 24/2009 stipulates that further provisions on the use of Indonesian language shall be governed by a Presidential Decree, and Article 73 states that any regulations required to implement the law shall be promulgated within two years after enactment of the law (July 9, 2009).

We note that the Minister of Law and Human Rights (“MOLHR”) issued an informal guidance letter in 2009, which principally expressed that the use of English language in an agreement does not violate the formal requirement provided under Law 24/2009, at least until such time that a Presidential Decree  is issued on the subject. To date, no Presidential Decree has been issued. Nevertheless, the MOLHR’s informal guidance was not binding on the District Court, and it should not be relied upon to justify execution of English-only agreements.

Recently, Government Regulation No. 57 of 2014 on Development, Guidance, and Protection of Language and Literature, as well as Improvement of Indonesian Language Function (“GR 57/2014”) was issued to implement certain provisions of Law 24/2009. As provided under Article 5(2) point (e) of GR 57/2014, one of the functions of Bahasa Indonesia as the state language is to facilitate transactions and commercial documentation. Although there is no provision in GR 57/2014 that explicitly requires Indonesian language in a contract, this provision can be perceived as affirming the District Court’s position that Indonesian language should be used in agreements involving an Indonesian party.

Indonesian Civil Code (“ICC”)

Under Article 1320 of the ICC, an agreement must satisfy the following conditions in order to be valid:

  1. consent of the parties to be bound;
  2. legal capacity to enter into an obligation;
  3. specific subject matter; and
  4. permitted cause.

Article 1335 provides that any agreement without a permitted cause, or concluded pursuant to a fraudulent or prohibited cause, shall not be enforceable. A prohibited cause is any cause prohibited by law or that violates the moral or public order, as provided under Article 1337. We commonly understand a prohibited cause to mean that the object of the agreement itself is illegal, such as gambling. A more appropriate basis would have been Article 1338 of the ICC, which provides that an agreement not executed in accordance with the law (such as Law No. 24/2009) cannot bind the individuals concerned.

♦DISTRICT COURT JUDGMENT

In the District Court decision, the court granted the request of BKPL; hence, the Loan Agreement entered between BKPL and NINE was declared null and void, with considerations as follows.

  1. Under the ICC, non-fulfillment of the conditions of consent and legal capacity (items 1 and 2 of Article 1320) causes an agreement to be voidable, while non-fulfillment of a specific subject and a permitted cause (conditions 3 and 4) causes an agreement to be void by law;
  2. Pursuant to Articles 1335 and 1337 of the ICC, an agreement that constitutes a prohibited cause or a violation of law causes an agreement to be declared void by law;
  3. As provided under Law 24/2009, Indonesian language must be used in any MOU or agreement involving Indonesian parties; therefore, an English-only agreement involving Indonesian parties executed after the date the law was enacted is in violation of Law 24/2009;
  4. Neither the absence of an implementing regulation Presidential Regulation, nor the issuance of informal guidance by MOLHR, can exempt Article 31 of Law 24/2009, which requires the use of Bahasa Indonesia for any agreement involving Indonesian parties, because within the hierarchy of Indonesian laws and regulations, a Law (undang-undang) is of higher authority than any Presidential Regulation or subsequent implementing regulation;
  5. As a consequence, the Loan Agreement violates Law 24/2009, causing non-fulfillment of the conditions for a valid agreement, i.e., the condition of a permitted cause under the ICC; therefore, the Loan Agreement shall be declared null and void; and
  6. As the Loan Agreement is void and cannot be enforced, the deed of fiduciary guaranty as the derivative agreement (accesoir) of the Loan Agreement shall also be declared null and void.

In the District Court decision, the court ordered BKPL to repay the remaining loan principal in the amount of US$115,540, as the consequence of voiding the agreement, i.e., had the agreement never been entered, the principal amount never would have been loaned.

While we may have a different view about the legal basis for revoking the loan agreement, we note that the court was at least consistent in its decision, insofar as it required the borrower to repay the principal amount.  Having nullified the agreement, the court did not address any interest owed or lost profit that the lender may have suffered during the loan term.

♦ CONCLUSION

Although the decision is not yet final and binding (pending the decision on appeal), in the meantime, any party contracting with an Indonesian counter-party, be it in a cross-border or domestic transaction, needs to anticipate the applicability of Law 24/2009 in this regard. A bilingual agreement (or separate versions in each language) is preferable. For any English-only agreement involving Indonesian parties concluded after the enactment of Law 24/2009 (July 9, 2009), it is advised to re-execute the agreement in Indonesian (or bilingual) version so as not to leave it vulnerable to challenge. It is also advised to state the effective date expressly in the English version of the agreement, so that re-execution of the Indonesian (or bilingual) will follow the effective date of the initial English version.

Note also that although Law 24/2009 requires the use of Indonesian language, the law does not require Bahasa Indonesia to be the governing language. Accordingly, English can prevail as the governing language, so long as an Indonesian language version is also executed and the execution of the contract is not subject to any other particular formalities required under the regulations.

(updated) June 16, 2015

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BI Sets July 1 Deadline for Mandatory Use of Rupiah for Transactions in Indonesia

The obligation to use Rupiah in Indonesian transactions has long been established under the Currency Law (Law No. 7 of 2011 on Currency). Recently, however, Bank Indonesia took major steps to accelerate compliance by issuing Regulation No. 17/3/PBI/2015 on Mandatory Use of Rupiah within the Territory of the Republic of Indonesia (“BI Regulation”), which was issued on March 31, 2015, and its accompanying Circular Letter No. 17/11/DKSP, dated June 1, 2015 (“BI Circular”). In summary, Rupiah must be used in all financial transactions in Indonesia, except for certain exemptions, which are described below.

For purposes of immediate implementation, agreements on payment or settlement of obligations in foreign currency that were executed prior to July 1, 2015, will remain valid until expiration, along with any derivative (or subsequent) agreements, such as delivery or purchase orders. After July 1, 2015, all new transactions, as well as any extension or amendment of an existing agreement, will be subject to the new provisions.

♦ Mandatory Use of Rupiah

In order to encourage the use of Rupiah, the BI Regulation obliges businesses to state the price of goods and services only in Rupiah. The BI Circular strengthens this obligation by prohibiting dual quotation in Rupiah and foreign currency. All parties are prohibited from rejecting payment in Rupiah, unless the authenticity of Rupiah banknotes is in doubt or the use of foreign currency has been stipulated in certain limited types of agreements (described below).

The Currency Law and the BI Regulation require that Rupiah must be used (and cannot be refused) in almost all types of transactions, as follows:

  • transactions with the purpose of making payment;
  • discharge of any obligation with money; and
  • any other financial transaction (which is defined as including deposit of cash into a commercial bank).

♦  Exemptions

Strategic infrastructure projects¹ sanctioned by the relevant ministry or agency and approved by Bank Indonesia are exempted from the mandatory use of Rupiah, as is the ongoing sale of goods or services produced by the project, if such has been agreed in advance. For example, we understand this to mean that an Independent Power Producer (IPP) project can stipulate a long term feed-in tariff in currency other than Rupiah.

Other exempted transactions are:

  • certain transactions in the framework of the state budget;²
  • gifts/grants made to or from overseas;
  • international trade transactions;³
  • bank savings in foreign currency; and
  • international financing transactions, such as offshore loans from banks or private parties.

 In addition, the obligation to use Rupiah will not apply to transactions “based on the provisions of laws,” which are:

  • foreign currency activity performed by banks based on the Banking Law or the Syariah Banking Law;
  • bonds issued by the Government in foreign currency; and
  • other transactions based on laws that regulate transactions in foreign currency, such as the laws on Bank Indonesia, capital investment and export financing institution.

♦  Examples of Application of the Policy

  • Capital injection

Because there is an exemption for transactions based on investment laws, capital injection for issuance of shares or other securities, such as convertible bonds, can be made in foreign currency.

  • Payment of wages

Rupiah must be used for payment of wages. Under Government Regulation No. 8/1981 on Wage Protection, an employment contract may stipulate a salary in foreign currency, but payment shall still be in Rupiah, according to the applicable exchange rate on the day of payment. Under the Currency Law, the BI Regulation, and the BI Circular, this is still the case, and the employee may not refuse payment in Rupiah.

However, according to the BI Circular, expert staff assigned by a foreign home office to work in Indonesia can be paid in foreign currency.

  • Import-export

Payment in Indonesia for goods imported from overseas may be in foreign currency, because it is an international trade transaction. However, this requirement presents difficulty to importers who buy goods from overseas to resell in Indonesia, if the price to the overseas supplier must be paid in foreign currency, while the price for the Indonesian customer must be stated and received in Rupiah.

♦  Policy Exceptions Available from Bank Indonesia

Impacted businesses may apply for a policy exception from BI if they face problems relating to using Rupiah for non-cash transactions. BI will assess the request based on the readiness of the business, continuity of business, investment, and growth of the national economy.

♦  Sanctions

The following sanctions are regulated under the Currency Law:

  • Violation of the obligation to use Rupiah is subject to imprisonment of up to one year and fine of up to Rp200,000,000.
  • Refusal to accept Rupiah is subject to imprisonment of up to one year and fine of up to Rp200,000,000.
  • Companies are subject to the same monetary fines, but the maximum amount of the fine is increased by 1/3. In addition, violators may suffer revocation of business licenses. If the company cannot pay the fine, the assets of the company or the management can be seized.

The BI Regulation regulates the following sanctions:

  • Failure to use Rupiah for non-cash transactions shall be imposed with administrative sanctions:
    1. warning letter;
    2. obligation to pay 1% of the transaction value, up to Rp1,000,000,000; and
    3. prohibition from participating in payment transactions.
  • Failure to state the price of goods or services in Rupiah shall be imposed with administrative sanction in the form of warning letter.
  • Bank Indonesia may also recommend revocation of the business license or cessation of business activity to the relevant agency.
  • Applicants for a policy exception or strategic infrastructure exception whose applications are denied will be subject to administrative sanctions (as applicable) effective July 1, 2015.

Mandatory Use of Rupiah.pdf - Nitro Reader 3

 

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June 16, 2015



Outsourcing Licenses to Be Processed by BKPM; Only Granted for Single Line of Business

On January 26, 2015, the Minister of Manpower issued Reg. No. 6 of 2015 on Standard Operational Procedure for Outsourcing Business License Issuance through the One-Stop Integrated Services in the Investment Coordinating Board (“MOM Reg. 6/2015”), which delegates to BKPM (the Investment Coordinating Board) the authority to issue outsourcing licenses to PMA (foreign capital investment) companies and companies with cross-provincial scope.

MOM Reg. 6/2015 stipulates Standard Operational Procedures for the issuance of new outsourcing business licenses, as well as procedures on extension, amendment, filling and reporting by companies.

Under the regulation, outsourcing licenses may only be granted for one type of outsourcing, i.e., cleaning services, catering, security, oil & gas and mining services, or transportation.

Outsourcing licenses are now supposed to be granted within one business day after the required documentation is verified and certified complete by BKPM. Once issued, the license is valid for 3 years and may be extended.

Although BKPM issues the licenses, the Manpower Service Office remains responsible for inspection and compliance, and thus, has authority to issue recommendations to BKPM to revoke the licenses of companies that fail to comply with their licenses or other requirements under prevailing labor laws.

This delegation is aimed at streamlining the licensing procedures for PMA companies in the outsourcing business.

 May 13, 2015

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MEMR Announces 35,000MW Power Plant Construction Program

AKSET Translation, May 5, 2015

PRESS RELEASE
Launching of the 35,000 MW Power Plant Construction Program
MONDAY, MAY 04, 2015 12:48 WIB

MINISTER OF ENERGY AND MINERAL RESOURCES
OF THE
REPUBLIC OF INDONESIA
PRESS RELEASE
NUMBER: 25/SJI/2015
Date: May 4, 2015

LAUNCHING OF THE 35,000 MW POWER PLANT CONSTRUCTION PROGRAM

The President of the Republic of Indonesia, Joko Widodo, along with the Minister of Energy and Mineral Resources (MEMR), Sudirman Said, on Monday (4/5) launched the 35,000 MW Power Plant Construction Program in Samas, Bantul Regency, Special Region of Yogyakarta Province. This 35,000 MW Program is a leading program to achieve one of President Jokowi’s 9 Priority Agenda items (“nawacita”), which is to realize economic independence by stimulating strategic sectors, particularly energy sovereignty.

Launching of the 35,000 MW Power Plant Construction Program is the government’s commitment in responding to the issues of the nation and the state to create energy sovereignty. Launching of this program was marked by the execution of Power Purchase Agreements (PPA) and Letter of Intent (LoI) for the Engineering, Procurement and Construction (EPC) as well as Groundbreaking for some power plants. Those schemes will be undertaken for these power plants:

  1. Execution of PPA of Wind Power Plant (PLTB)  Samas (Yogyakarta), with capacity of 50 MW;
  2. Execution of PPA of Steam Power Plant (PLTU) Kendari-3 (Southeast Sulawesi), with capacity of 2 x 50 MW;
  3. Execution of PPA of Wind Power Plant (PLTB)  Samas (Yogyakarta), with capacity of 50 MW;
  4. Execution of PPA of Steam Power Plant (PLTU) Kendari-3 (Southeast Sulawesi), with capacity of 2 x 50 MW;
  5. Execution of PPA of PLTU Jeneponto Ekspansi (South Sulawesi), with capacity of 2x125  MW;
  6. Execution of PPA of Hydro Power Plant (PLTA) Malea (South Sulawesi), with capacity of 2x45 MW;
  7. Execution of LoI for EPC PLTU Grati (East Java) with capacity of 450 MW;
  8. Groundbreaking of PLTA Jatigede  (West Java) , with capacity of 2 x 55 MW;
  9. Groundbreaking of PLTU Takalar (South Sulawesi), with capacity of 2 x 100 MW.
  10. Groundbreaking of PLTU Pangkalan Susu unit 3 and 4 (North Sumatera), with capacity of 2 x 220 MW;

In the same scope, Natural Gas Sale and Purchase Agreements (PJBG) were executed for electricity projects, as follows:

  1. PJBG between Conoco Phillips Grissik Ltd. and PT. PLN with contract period of 3 (three) years and revenue for the government in the amount of US$ 201 million.
  2. Amendment of PJBG between Petroselat and PT.PLN with contract period of 5 (five) years and revenue for the government in the amount of US$ 15.7 million.
  3. HoA between Petrochina and PT. Bumi Samudra Perkasa with contract period of 7 (seven) years and revenue for the government in the amount of US$ 82.6 million.

PLTB Samas and PLTA Jatigede are expected to be able to increase the total supply of 120 MW until the end of 2019 to strengthen the Jawa-Bali system. PLTU Kendari, PLTU Takalar, PLTU Jeneponto and PLTA Malea with an additional 640 MW total supply are expected to increase supply in the Sulawesi system. Currently, the electricity system in Sulawesi is one of the systems which has the most rapid growth. Whereas PLTU Pangkalan Susu unit 3 and 4 are intended to strengthen the Sumatera system, which is currently interconnected and being made to increase its interconnection capacity, planned to be completed in 2017. These electricity infrastructure projects will boost investment opportunities and economic growth in those areas and will also directly create job opportunities.

To succeed in the 35,000 MW program, the Government encourages the role of the private sector to participate in the electricity supply business through EPC projects; Independent Power Producer (IPP) scheme; Public Private Partnership (PPP); Build, Lease and Transfer; and Private Power Utility (PPU) or stipulation of business areas.

The Government has issued regulations to encourage and provide certainty for private investment. Related to the freeing up and procurement of land, the Government promulgated Law No. 2/2012. To speed up licensing, the Government formed the One Stop Integrated Service (PTSP) which is coordinated by BKPM.

The Government also issued MEMR Regulation Number 03 of 2015 Regarding Power Purchase Procedures and Benchmark Prices for Power Purchase from Mine Mouth Power Plants, Coal-fired Power Plants, Gas Power Plants (PLTG)/ Gas Machine Power Plants (PLTMG) and Hydropower Plants (PLTA) by PT PLN (Persero) through Direct Selection and Direct Appointment. This regulation was created to build a more conducive investment climate, accelerate the price approval procedure between PLN and IPPs, and to guarantee certainty/assurance for PLN in the execution of electric power purchase.

As we all know, in the next five years, Indonesia needs at least 35,000 MW of additional electricity- excluding the existing power plant projects of approximately 7,000 MW that are currently under construction. If the realistic economic growth of around 5-6% per year is taken into account, then throughout 2015-2019, the average annual capacity required is 7,000 MW.

The nature of energy is the driving force for socio-economic growth. Not only for the industry and investment, but also for job opportunities and uptake of domestic components. Not less than 650,000 direct workers and 3 million indirect workers will benefit. Meanwhile, the uptake of domestic components is expected to reach 40%, which is equivalent to 440 trillion Rupiah.

May 5, 2015

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Restrictions on Expatriates in Mining Sector

Since the issuance of the Labor Law (Law No. 13 of 2003), the Minister of Manpower (the “MOM”, formerly the Minister of Manpower and Transmigration—the “MOMT”) has issued 12 regulations regulating or re-regulating positions that are open for expatriates in 12 specific business sectors and one regulation on restricted positions in all business sectors, as set out in MOMT Decree No. 40 of 2012 on Certain Positions Restricted for Expatriates (“MOMT Decree No. 40/2012”).

Positions restricted under MOMT Decree No. 40/2012 are as follows:

2015-05-28 08_27_19-Newsflash on Opened and Restricted Positions for Expatriate in Mining Business S

* Under the Manpower Law, expatriates are not permitted to occupy positions “in charge of personnel.” MEMR has on at least one occasion interpreted this restriction to mean that all companies must have at least one Indonesian Director, because if not, an expatriate director will be indirectly in charge of personnel issues. We are of the view that this is an overly broad interpretation, which does not reflect the position of the MOM itself. In practice, as long as human resources functions are properly delegated to an Indonesian HR Manager, this should be sufficient to satisfy the manpower requirements.

**The reference to “Chief executive officer” created confusion for employers because many of them in practice use the term “Chief executive officer” to describe positions like President Director or similar top management in their organizations.  Although the MOMT never issued any official clarification or circular letter on this, the Minister at the time went on record stating that as long as a chief executive officer did not perform personnel or other restricted functions, the position could be occupied by an expatriate.

Specifically for the mining sector, there have been no new regulations on positions for expatriates since MOMT Decree No. KEP-61/MEN/1983 on Limitation of Expatriate Usage in Mining and Energy Sector, Sub Sector of General Mining (“MOMT Decree No. 61/1983”), which remains in effect pending proposed amendments that we learned about in November 2014.

The following table sets out the positions that are open or closed to expatriates under MOMT Decree No. 61/1983:

2015-05-28 08_27_49-Newsflash on Opened and Restricted Positions for Expatriate in Mining Business S

We understand that there is a plan that the MOM will issue a new regulation on positions that are restricted and open for expatriates in the mining sector as follows:

2015-05-28 08_28_08-Newsflash on Opened and Restricted Positions for Expatriate in Mining Business S

Until the new regulation is issued, positions for expatriates in mining shall still refer to MOMT Decree No. 61/1983 and MOMT Decree No. 40/2012.

In accordance with Government Regulation No. 57 of 2014 on Development, Management, and Protection of Language and Literature as well as Increasing the Function of Indonesian Language, expatriates will be required to be able to communicate in Indonesian prior to being employed in Indonesia.  In practice we understand that this requirement has not yet been implemented.

February 11, 2015

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Minister of Manpower Clarifies Statute of Limitation for Employee Claims

The Minister of Manpower (MOM) has finally issued a directive on the statute of limitations for employees to file claims for payments allegedly owed by employers, which was revoked in September 2013, when the Indonesian Constitutional Court granted judicial review of Article 96 of the Manpower Law (Law No. 13 of 2003).

On January 17, 2015, the MOM issued Circular Letter No. 1/MEN/I/2015, which interprets the Constitutional Court’s decision to mean that there is no statute of limitations whatsoever for employees to claim against their employers in respect of the employment relationship.

For purposes of implementation, the Circular Letter sets an absolute bar on claims for events prior to September 19, 2011, which is two years before the date of the Constitutional Court decision, because before Article 96 was stricken, the statute of limitations on employee claims was two years after the right to payment arose.

Although the unlimited time for employees to file claims poses a serious challenge for employers going forward, at least for now, they will not be vulnerable to an onslaught of claims relating to the distant past. In addition, the Indonesian Civil Code (ICC) and other manpower laws and regulation may provide specific statutes of limitation which remain in force, for example ICC Article 1603t, which provides a one year statute of limitation for claims of wrongful termination.

To reduce the risk of unexpected litigation, we recommend obtaining a full waiver of claims from outgoing employees whenever employment is discontinued, whether by mutual agreement, resignation, or termination in the Industrial Relations Court.



New Regional Government Law Consolidates Authority to Issue Mining Licenses in Central and Provincial Governments

Law No. 23 of 2014 regarding Regional Governance (2014 Regional Law) was enacted on October 5, 2014, to redefine, yet again, relations between, and authorities among, the Central, Provincial and Local Governments, as previously stipulated under Law No. 32 of 2004 on Regional Governance, as lastly amended by Law No. 12 of 2008.

 The 2014 Regional Law contains detailed provisions on the relationship between the different levels of government and clear-cut divisions of authority between the Central and Regional Governments over 32 different sectors, including:

  1. Food
  2. Transportation
  3. Cooperatives, and micro, small and medium enterprises
  4. Investment
  5. Marine and fishery affairs
  6. Agriculture
  7. Forestry
  8. Energy and mineral resources
  9. Trade and industry

♦  IMPACT ON THE MINING SECTOR

The Appendix of the 2014 Regional Law divides authorities between the Central Government and Provincial Governments over mining. The most notable change is that Regency and City Governments are now excluded from having any authority over mining activities. Under the 2009 Mining Law, domestic mining companies operating in a single Regency obtained their IUP from the Regent; this licensing authority now belongs to the Governor. Foreign-owned (PMA) mining companies continue to be under the jurisdiction of the Central Government, as was the case under existing mining regulations.

The New Regional Government Law and Mining 1

The New Regional Government Law and Mining 2

♦  GOVERNMENT CONFIRMS IMPACT ON LOCAL GOVERNMENT

On December 16, 2014, the Directorate General of Minerals and Coal of the MEMR held a public forum to socialize the new law, in which they clarified that after issuance of the Regional Law, the Regency and City Governments are no longer authorized to issue IUP. Such Governments will continue processing IUP applications that were submitted before the enforcement date of the 2014 Regional Law (October 2, 2014) and will have authority to issue technical recommendations for IUP that will be granted in the future by the Provincial and Central Governments.

Local governments also retain supervisory authority over all licenses issued by them prior to the 2014 Regional Law, until expiration.

However, pending the issuance of implementing regulations by the Ministry of Home Affairs and MEMR or the transfer of documentation from the Regency and City Governments to the Provincial Government (or to the MEMR, for PMA companies), the Regency and City Governments should remain authorized in issuing approvals for extending and upgrading IUP.

The Regional Law requires that such a transfer must be completed within two years, by October 2016.

  • CONCLUSION

There are significant differences between the 2014 Regional Law and the 2009 Mining Law, although as previously mentioned many of the provisions contained in the 2014 Regional Law were already in place pursuant to the most recent implementing regulations of the Mining Law. We have been advised that an upcoming amendment to the 2009 Mining Law will rectify many of the inconsistencies.

January 14, 2015

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OJK RE-REGULATES MULTI - FINANCE SECTOR

On November 19, 2014, the Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) issued 20 regulations governing banking, capital markets, and non-bank financial institutions. Four of the regulations relate to the multi-finance sector (considered a non-bank financial industry), which was previously regulated by the Ministry of Finance (“MOF”).

The new regulations cover:

  1. Arrangement of Multi-Finance Company Business (Reg. No. 29/POJK.05/2014)
  2. Licensing and Organization of Multi-Finance Companies (Reg. No. 28/POJK.05/2014)
  3. Good Corporate Governance for Multi-Finance Companies (Reg. No. 30/POJK.05/2014)
  4. Arrangement of Sharia Multi-Finance Business (Reg. No. 31/POJK.05/2014)

(collectively, “New Regulations”)

The multi-finance sector was previously regulated under Presidential Regulation No. 9 of 2009 on MultiFinance Institutions and MOF Regulation No. 84/PMK.012/2006 on Multi Finance Companies (“Old Regulations”). The New Regulations elaborate more detailed requirements in response to the rapid growth in the multi-finance sector in recent years.

♦  ARRANGEMENT OF MULTI-FINANCE BUSINESS

OJK 29/2014 defines a multi-finance company as an entity that finances the procurement of goods or services. Permitted business activities include: (i) investment financing; (ii) working capital financing; (iii) multipurpose financing; and/or (iv) any other financing business subject to OJK approval. Investment, working capital and multipurpose financing can be provided in various ways (subject to the regulations for each type), such as finance leasing, sale and leaseback, and factoring.

Unlike the Old Regulations, which classified multi-finance company operations as leasing, factoring, credit card, and consumer finance, the New Regulations allow a multi-finance company to provide operating leasing and fee-based activities (subject to OJK reporting obligations). Fee-based activities include marketing financial services products, such as mutual funds and micro-insurance.

Multi-finance companies are prohibited from engaging in banking, issuing promissory notes, or providing security, and they must maintain financial soundness at all times, including an equity ratio (comparison of adjusted capital and adjusted assets) of 10%, calculation of which will be further governed by OJK .

Several general requirements under the New Regulations are the same as under the Old Regulations:

  • maintaining a receivables to assets ratio of at least 40%
  • minimum equity of a multi-finance company in the form of PT is Rp100 billion and in the form of
    cooperative is Rp50 billion
  • submitting monthly reports and audited annual financial report to OJK

♦  LICENSING AND ORGANIZATION

A multi-finance company must be established in the form of a cooperative or a limited liability company (PT),  in which the shareholding can be owned by (i) Indonesian citizens; (ii) Indonesian business entities; (iii) Indonesian legal entities; (iv) foreign entities or foreign institutions (v) Indonesian state government; and/or (vI) regional government. The maximum foreign shareholding (either direct or indirect) is 85% of the paid-up capital. Wording relating to financing (pembiayaan) must be included in the name of the company.

In order to commence operations, a multi-finance company must apply for a Multi-Finance Business License from OJK (“OJK License”). The application review period has been reduced from 60 days (under the Old Regulations) to 30 days (under the New Regulations). Upon issuance of the OJK License, the company must commence operations within two months.

A multi-finance company’s organizational structure must at least have the following functions: (i) administration and bookkeeping; (ii) marketing, financing feasibility analysis and collection; (iii) risk management, including internal control; and (iv) application of know-your-customer principles.

♦  GOOD CORPORATE GOVERNANCE

Multi-finance companies must follow basic principles of good corporate governance, including transparency, accountability, responsibility, independence and fairness. A guideline and standard operating procedure must be made in order to implement these principles.

In addition, the primary parties of the multi-finance company, i.e., controlling shareholders, directors, commissioners, foreign manpower, and sharia supervisory body (if applicable) are required to pass the OJK Fit & Proper test prior to holding their positions. Provisions on the Fit & Proper test come from OJK Regulation No. 4/POJK.05/2013 on Fit and Proper Test for the Primary Parties of Insurance Companies, Pension Funds, Multi-Finance Companies and Underwriting Companies.

A multi-finance company having assets of more than Rp200 billion to have, among others: (i) at least three Directors; (ii) two Commissioners and at least one Independent Commissioner; (iii) audit committee; (iv) a function assisting the Commissioners in monitoring and ensuring the effectiveness of the internal control system and the implementation of internal and external auditors’ duties. For multi-finance companies having assets less than Rp200 billion, the New Regulations only require them to have at least two Directors.

Multi-finance companies having foreign ownership (whether direct or indirect) must have at least 50% Indonesia-citizen directors. In the event there is an odd number of directors, the number of Indonesian-citizen directors must be greater than the number of foreign-citizen directors.

♦  SHARIA FINANCING BUSINESS

One of the substantial developments is a new separate regulation on sharia multi-finance business. General provisions on company establishment, equity requirements and restrictions are essentially the same as for general multi-finance companies; nevertheless, sharia-based principles are provided in details under the New Regulations, especially as relates to operations of sharia financing companies.

December 10, 2014



Minimum Wage for DKI Jakarta Province Increased to Rp2,700,000 for 2015

The Governor of DKI Jakarta has determined a new Provincial Minimum Wage (“UMP”) that applies to every employer in DKI Jakarta, except those covered by special sectoral minimum wages. The UMP is stipulated under Governor of DKI Jakarta Regulation No. 176 of 2014 regarding Provincial Minimum Wage for 2015, dated November 17, 2014 (“Governor Regulation”).

Based on the Governor Regulation, the UMP for DKI Jakarta Province in 2015 will be Rp2,700,000/month, starting from January 1, 2015. This is an increase of almost 11% over the 2014 UMP of Rp2,441,301/month, which was stipulated under Governor of DKI Jakarta Regulation No. 123 of 2013 regarding ProvincialMinimum Wage for 2014.

The increase is lower than that for surrounding regions, such as Banten and Jawa Barat, where the UMP will increase almost 21% and 18%, respectively. In the event an employer believes it is unable to pay the new UMP, the employer may request a suspension from the relevant manpower service office no later than 10 (ten) days before the UMP becomes effective on January 1, 2015.

December 1, 2014



New Law on Halal Product Assurance

The House of Representatives has enacted Law No. 33 of 2014 on Halal Product Assurance (“Halal Law”), which regulates the materials, processing, and certification of halal products, as well as international cooperation with foreign halal certification agencies.

Previously, halal certification was not set under any law and was implemented by the Indonesian Islamic Clergy Council (Majelis Ulama Indonesia – “MUI”). MUI was specifically appointed by the Minister of Religious Affairs (“MORA”) for halal certification of food under MORA Decree No. 519, dated November 30, 2001.

Within the MUI, halal certification of food was implemented by MUI’s Food and Drugs Supervisory Agency (Lembaga Pengawasan Pangan Obat dan Makanan Majelis Ulama Indonesia – “LPPOM MUI”).

♦  Obligation for Halal Certification and Identification of Non-Halal Products

The Halal Law requires all products that meet the halal requirements and enter, are circulated, or sold within Indonesia to be halal certified within the next five years (by October 17, 2019).

Certification is exempted for businesses that produce products from non-halal materials, but these must be labeled to indicate that they are non-halal.

♦  Definition of Halal

The Halal Law defines “Halal Products” as products that have been determined halal in accordance with sharia principles. The materials and production process of a product are the considerations in determining its halal status. Animal derivatives are considered to be haram (not halal) if they include carcass, blood, swine, and/or animals that are slaughtered not in accordance with sharia.

Plant derivatives may be deemed haram if they cause intoxication or harm the consumer. Other materials are deemed haram if mixed or contaminated with haram substances. The location and tools used in processing Halal Products must be separated from locations and tools used in slaughtering, processing, storing, packing, distributing, selling, and serving non-halal Products.

Unlike MORA Decree No. 518 on Procedures for Inspection and Determination of Halal Food, which only applied to food, products regulated under the Halal Law include goods and services related to food, beverages, drugs, cosmetics, chemicals, biological products, genetically modified products, and other consumable goods.

Biological products are produced by living organisms (human, animal, or microorganism), for example vaccines, antitoxins, and allergens. Genetically modified products are produced using organisms whose genetic materials have been altered; for example, fruits and vegetables modified to be resistant to viruses or pests.

♦  New Agency to Be Established

The Halal Law mandates the Government to establish a new agency, the Halal Product Assurance Agency (Badan Penyelenggara Jaminan Produk Halal – “BPJPH”) within three years after promulgation of the law.

BPJPH will be authorized to implement Halal Product assurance, including but not limited to halal certification. BPJPH will also cooperate with relevant ministries and/or agencies, Halal Inspection Institution (Lembaga Pemeriksa Halal – “LPH”), and MUI. This provision indicates the transition of halal certification from MUI to BPJPH. However, MUI still has a significant role in the process of Halal Product assurance.

Halal certificates are valid for four years and subject to extension.

♦  International Cooperation

The Government may conduct international cooperation in Halal Product assurance, including recognition of foreign halal certificates. Imported products bearing a halal certificate from an accepted certification agency will be automatically acknowledged as a Halal Product in Indonesia, after being registered by BPJPH. If the business does not register the halal certificate, the product will be subject to withdrawal from circulation.

♦  Transitional Provisions

Existing Halal Certificates are deemed valid until expiration. MUI has the authority to conduct halal certification until the establishment of BPJPH.

♦  Sanction

Failure to identify non-halal products or to keep separate halal and non-halal production facilities is subject to administrative sanction. Criminal sanctions will be imposed upon the following conditions:

  • Failure to maintain the halal status of a product that has obtained a Halal Certificate is punishable by imprisonment of up to 5 years or fine of up to Rp2 billion.
  • Any person involved in the implementation of halal assurance process who does not maintain the confidentiality of the formula of the product provided by the business is punishable by imprisonment of maximum 2 years or fine of maximum Rp2 billion.

November 5, 2014

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