New Obligation for Borrowers of Offshore Loans

On October 28, 2014, Bank Indonesia issued Regulation No. 16/20/PBI/2014 on Implementation of the Prudential Principle in the Management of Offshore Loans for Non-Bank Corporations (“Regulation”). This Regulation reflects the Government’s concern about offshore borrowing and its impact on the financial health of borrowers, particularly with respect to currency risk, liquidity risk and overleverage risk.

The Regulation may impact investment structuring by foreign investors, who often combine equity capital and loans when capitalizing their investments.

♦  Prudential Principle

According to the Regulation, non-bank corporations that receive loans in a foreign currency must implement the “prudential principle,” which includes obligations to fulfill a minimum hedging ratio, minimum liquidity ratio and minimum credit rating. Hedging ratio is defined as the ratio of total hedged value and negative margin to foreign exchange assets and foreign exchange liabilities. Liquidity ratio is the ratio of foreign exchange assets to foreign exchange liabilities. Credit rating is a valuation conducted by a rating agency to portray the financial condition or credit worthiness of a company.

The Regulation will enter into force on January 1, 2015, with minimum ratios and phases as follows:

Implementation of Prudential Principle in the Management of Foreign

The prudential principle obligations do not apply to foreign exchange loans in the form of trade credits, and the credit rating obligations do not apply to foreign exchange loans used for refinancing and foreign exchange loans from international creditors for the purpose of financing infrastructure projects.

♦  Obligation to Report and Sanctions

Borrowers shall submit a report and supporting documents including audited financial year reports or quarterly financial reports to Bank Indonesia on the implementation of the prudential principle. Failure to report will lead to administrative sanctions in the form of written warning starting from the third quarterly financial report in 2015. Bank Indonesia will circulate the warning letters to interested parties, such as foreign creditors, Ministry of State Owned Enterprises, Ministry of Finance c.q. Directorate General of Tax, Financial Services Authority, and Indonesia Stock Exchange (for listed companies). The credit rating obligation applies to offshore loans signed or issued by January 1, 2016.

November 4, 2014



Impact of the New Insurance Law on Insurance Supporting Businesses

As discussed in our recent newsflash, the new Law on Insurance (“New Insurance Law”) passed by the House of Representatives on September 23, 2014, will bring about major changes for the insurance sector. A number of regulations are expected to be issued to implement provisions of the New Insurance Law and to accommodate the shift of authority over the insurance sector from the Minister of Finance (“MOF”) to the OJK, which occurred as of December 30, 2012, in accordance with Law No. 21 of 2011 on the Financial Services Authority (“OJK Law”).

♦  STATUS OF “INSURANCE SUPPORTING BUSINESSES” UNDER THE NEW INSURANCE LAW

Under the previous law on insurance, Law No. 2 of 1992 on Insurance Business (“Old Insurance Law”), parties providing auxiliary or support services for insurance businesses were classified as “Insurance Supporting Businesses”. The term Insurance Supporting Business is no longer used in the New Insurance Law. Instead,

  1. Insurance and reinsurance brokerage firms and claims adjuster companies are now categorized as Insurance Business Entities (along with insurance and reinsurance companies), whereas
  2. Insurance agents and actuarial consulting companies are no longer considered part of Insurance Business, and are only addressed with minimum provisions.

Because insurance agents and actuarial consulting companies are excluded from Insurance Business, they are only subject to provisions that explicitly refer to them. This has the legal consequence that none of the implementing regulations of the Old Insurance Law will apply, absent specific reference. We understand that OJK will continue to process applications that were filed prior to enactment of the New Insurance Law under the former regulatory regime.

♦  BROKERAGE FIRMS

The New Insurance Law distinguishes between insurance brokerage firms and reinsurance brokerage firms. Insurance brokerage firms provide consultation or intermediary services relating to insurance coverage and act on behalf of policyholders in settling claims, whereas reinsurance brokerage firms provide similar services regarding reinsurance placements and act on behalf of insurance, guarantee and reinsurance companies.

Licensing

All brokerage firms are required to obtain a business license from the OJK in accordance with MOF Decree No. 425/KMK.06/2003 on Licensing and Implementation of Business Activities of Insurance Supporting Business Companies (“Licensing Regulation”).

Ownership

Considering that brokerage firms are classified as Insurance Business Entities under the New Insurance Law, the ownership rules under the New Insurance Law apply.

According to the New Insurance Law, Insurance Business Entities must be owned entirely by Indonesian individuals or legal entities, or can be jointly owned by Indonesian individuals/entities in partnership with foreign legal entities. Note that the New Insurance Law defines Indonesian legal entities as those directly or indirectly owned entirely by Indonesian citizens, meaning that a PMA company that is ultimately 100% owned by Indonesian shareholders can qualify as a local shareholder.

For a foreign legal entity to hold shares in an Indonesian Insurance Business Entity, it must be in the same line of business, or hold a subsidiary in the same line of business, as the target company. Foreign individuals are limited to acquiring shares through stock exchanges.

The exact percentage of permitted foreign ownership will be further stipulated under a Government Regulation, but for the time being, Government Regulation No. 73 of 1992 on Organizing Insurance Business, as amended (“Insurance Regulation”), caps foreign ownership at 80% at the time of establishment, with a minimum initial investment of IDR 1 billion, which must be entirely paid up. We understand that the foreign ownership cap may be significantly reduced in the forthcoming Government Regulation.

Fit and Proper Test

Under OJK Regulation No. 4/POJK.04/2013 on Fit and Proper Test of Primary Parties in Insurance Companies, Pension Funds, Financing Companies, and Credit Insurance Companies, the following parties of a brokerage firm are required to pass the fit and proper test upon being nominated, periodically to maintain their position, and at any time required by the OJK:

  1. Directors;
  2. Commissioners;
  3. Members of the representative body;
  4. Controlling shareholders; and
  5. Experts and foreign workers.

Good Corporate Governance

To implement good corporate governance under OJK Regulation No. 2/POJK.05/2014 on Good Corporate Governance for Insurance Companies (“Corporate Governance Regulation”), brokerage firms are required to appoint at least two directors and two commissioners if the annual income derived from providing intermediary services exceeds IDR 10 billion. There are also provisions that specifically apply to directors, commissioners and shareholders of brokerage firms, which cover:

  1. Composition and obligations of the board of directors and board of commissioners; and
  2. Requirements and prohibited conduct applicable to directors, commissioners and shareholders.

In addition, brokerage firms are obligated to follow rules under the Corporate Governance Regulation on:

  1. Remuneration and wage policies for directors, commissioners, and employees;
  2. Public information disclosure;
  3. Relations with stakeholders and insurance agents; and
  4. Business ethics.

OJK Levies

Brokerage firms are obligated to pay levies imposed by the OJK based on Government Regulation No. 11 of 2014 on Levies by the Financial Services Authority, covering:

  1. Direct service fee of IDR 5 million for each business license application; and
  2. Annual fees amounting to 1.2% of their total business revenue for the respective year.

No Composite

The New Insurance Law prohibits composite brokerage firms, and consequently, insurance brokerage firms are only allowed to carry out insurance brokerage activities, while reinsurance brokerage firms are limited to providing reinsurance brokerage services.

♦  CLAIMS ADJUSTER COMPANIES

Claims adjuster companies are those that provide services to appraise claims and consultation services on insured objects (such as property, motor vehicles and personal liability).

With the exception of the mandatory minimum initial investment, the same provisions that apply to brokerage firms also apply to claims adjuster companies. There is no minimum initial investment for claims adjuster companies.

♦  INSURANCE AGENTS

Insurance agents can be either sole proprietorships or employees of an agency that provide marketing services on behalf of insurance companies. They may also receive premium payments from policyholders on behalf of their insurance company partner.

Applicable Provisions under the New Insurance Law

Because insurance agents are not included in the definition of Insurance Business Entities under the New Insurance Law, only specific provisions under the New Insurance Law apply to insurance agents, including requirements to be registered with the OJK, possess sufficient competence regarding insurance matters, and follow good corporate governance provisions.

♦  ACTUARIAL CONSULTING COMPANIES

In providing services to insurance and reinsurance company clients, actuarial consulting companies provide reserve analyses and calculations, issue actuarial reports, evaluate risks and design insurance programs. While actuarial consulting companies are now excluded from regulation as Insurance Business Entities, individual actuaries that are employed by Insurance Business Entities continue to be subject to OJK oversight and must undergo the fit and proper test, while non-employee actuaries that intend to provide services to Insurance Business Entities must be registered with the OJK.

Applicable Provisions for Actuarial Consulting Companies

The most notable provision under the New Insurance Law is the return of supervisory authority over actuarial companies from the OJK to the MOF. Under MOF Decree No. 210/KMK.01/2013 on Implementation of Duties and Functions of the Former Capital Market and Financial Institutions Supervisory Agency, the Accountant and Appraiser Supervisory Center (Pusat Pembinaan Akuntan dan Jasa Penilai – “PPAJP”) assumed regulatory authority over actuarial consulting companies, although in practice, OJK has continued to act as the regulator  since assuming oversight of insurance businesses at the end of 2012.

Now that the implementing regulations of the Old Insurance Law no longer apply to actuarial consulting companies, the MOF plans to issue its own regulations to govern the sector. We understand that a draft regulation has been prepared and issuance is pending official delegation from the MOF. For now, the transitional provisions of the New Insurance Law allow actuarial consulting companies to continue operating under existing business licenses.

October 27, 2014



New Comprehensive Umbrella Law for the Insurance Sector

One of the most anticipated draft laws circulating in recent years was finally passed by the House of  Representatives (“House”) on September 23, 2014. The Bill on Insurance will replace the current o bsolete legislation governing the insurance sector – Law No. 2 of 1992 on Insurance Companies (“1992 Law”) – when it becomes a law and receives a number after being signed by the President (or by operation of law 30 days after being passed by the House).

The Bill aims to facilitate the constantly growing insurance sector, which can no longer be accommodated by  the 1992 Law. To this end, the Bill extends to additional insurance businesses previously unregulated under the 1992 Law and provides a generally broader scope of provisions compared to the 1992 Law.

Aspects under the Bill that are discussed below include:
1. Scope, definition, and permitted legal forms of insurance companies under the Bill;
2. Ownership provisions, which include new restrictions for controlling shareholders;
3. Controllers;
4. Insurance policyholder guarantee program;
5. Statutory administrators;
6. Fit and proper test of key individuals;
7. Mandatory separation of sharia units to become separate companies;
8. New provisions for professions providing services to insurance companies; and
9. Sanctions.

♦  Scope and Definition

“Insurance business” as regulated under the Bill includes insurance and reinsurance, whether operated based  on conventional or sharia principles, as well as insurance and reinsurance brokerage and loss adjusting. The inclusion of sharia insurance companies is a step forward for the insurance sector, considering that the 1992 Law did not address them, although they were addressed as business units attached to conventional insurance companies in Government Regulation No. 73 of 1992 on Organizing Insurance Business, as lastly amended by Government Regulation No. 81 of 2008 (“GR 73”).

While the Bill expands the definition of “insurance business,” the concept of “insurance supporting business”  has been abandoned. As such, insurance agents and actuarial consulting companies are no longer regarded as  part of insurance business.

Insurance Company Classifications

The Bill recognizes two types of insurance companies, both of which can be conventional or sharia:

1. General insurance companies; and
2. Life insurance companies.

General insurance companies can provide health and accident insurance products for losses, damages, costs,  lost profits and third party liability. General insurers can also provide reinsura nce for insurance companies.

Life insurance companies can provide health and accident insurance and annuities.

Apart from these insurance company types, the Bill also governs:

1. Reinsurance companies, whether conventional or sharia, which can only provide reinsurance services;
2. Insurance brokers, who provide consulting and intermediary services for policyholders and act on  their behalf when purchasing insurance and settling claims;
3. Reinsurance brokers, who are act on behalf of insurance companies, underwriters or other  reinsurance companies in settling claims; and
4. Insurance loss adjustors, who evaluate claims and provide consultation regarding insured objects, such as property and motor vehicles.

Insurance business entities are required to be established as a limited liability company or cooperative. Mutual organizations are also acknowledged by the Bill as a valid legal form, but only for those already in existence as of the Bill’s enactment.

♦  Ownership

An insurance company must be owned entirely by Indonesian individuals or legal entities, or jointly owned by  Indonesian individuals or legal entities together with foreign legal entities. Indonesian legal entities can include foreign investment (PMA) companies, as long as they are ultimately directly or i ndirectly owned entirely by Indonesian citizens.

Only foreign legal entities that are in the same line of insurance business, or hold a subsidiary in the same line  of insurance business, may hold shares in an Indonesian insurance company, and foreign individuals are limited to acquiring shares of insurance companies through stock exchanges.

The exact percentage of permitted foreign ownership will be further stipulated under a Government Regulation, but for the time being, GR 73 caps foreign ownership at 80 percent at the time of establishment/initial investment, and foreign ownership of an insurance company can be increased subsequently by means of dilution as long as the total capital invested by Indonesian shareholders remains the same.

Controlling Shareholders

The Bill introduces new rules for controlling shareholders. Under Financial Services Authority (Otoritas Jasa  Keuangan – “OJK”) Regulation No. 4/POJK.05/2013 of 2013 regarding Fit and Proper Test of Primary Parties in  Insurance Companies, Pension Funds, Financing Companies, and Credit Insurance Companies (“Fit and Proper Regulation”), a controlling shareholder is an individual or entity that fulfills any of the following conditions:

1. Owns more than 25 percent of issued shares; or
2. Owns less than 25 percent of issues shares but has direct or indirect control over the company.

A single shareholder can be a controlling shareholder of only one of each of the following companies:

1. Life insurance company;
2. General insurance company;
3. Reinsurance company;
4. Sharia life insurance company;
5. Sharia general insurance company; and
6. Sharia reinsurance company.

Parties that exceed this limitation are given 3 years from the enactment of the Bill to comply. Procedures and sanctions will be regulated by the OJK.

♦  Controllers

“Controller” (pengendali) is a new concept introduced by the Bill. Controllers are different from controlling  shareholders, as the Bill defines Controller as a party who possesses the power to appoint or influence the directors or commissioners, whether directly or indirectly.

Every insurance or reinsurance company must appoint at least one Controller, who must be notified to the OJK. The OJK will appoint the Controller, if the company does not do so. Once appointed, Controllers are prohibited from withdrawing from their position without the prior approval of the OJK.

♦  Guarantee Program

Insurance companies must become members of a policyholder guarantee program, which is similar to the insurance provided to bank deposit holders by the Deposit Insurance I nstitution. The policyholder guarantee program will be provided for under separate legislation within 3 years of the Bill becoming effective.

♦  Statutory Administrator

A statutory administrator is an official appointed by the OJK to take over the management of an insurance company if the company in question is:
1. Sanctioned with business activity restrictions;
2. In financial distress or unable to meet outstanding obligations; or
3. Carrying out activities in contradiction to prevailing laws and regulations, which includes facilitating financial crimes and money laundering.

♦  Fit and Proper Test

The following parties under an insurance company must pass the Fit and Proper Test held by the OJK before  being appointed and to maintain their position:

1. Directors (or equivalent);
2. Commissioners (or equivalent);
3. Sharia supervisory board members;
4. Internal actuaries and auditors; and
5. Controllers.

The Fit and Proper Test is elaborated in detail under the Fit and Proper Regulation.

♦  Separation of Sharia Business Units

The Bill requires sharia business units to be separated from the main entity to form a separate company under alternative circumstances:

1. If the sharia insurance and investment capital reaches 50 percent of the insurance and investment capital of the main entity; or
2. Within 10 years of the Bill coming into force.

♦  Professions Providing Services to Insurance Companies

In addition to insurance companies, the Bill covers professions that provide services for insurance companies, including actuaries, public accountants, and appraisers.

Individuals working in these professions must register with the OJK prior to providing services for insurance  companies. Other professions may also be determined as being subject to this obligation by the OJK. Details on the requirements and procedures for registration will be further regulated by the OJK.

♦  Sanctions

The Bill incorporates additional varieties of administrative sanctions for the OJK to impose, as well as more strict criminal charges for severe violations. The different types of administrative sanctions include:
1. Written warning;
2. Partial or total business activity restriction;
3. Marketing prohibition;
4. License revocation;
5. Registration revocation (specifically for brokers, agents, actuarial consultants, public accountants, and
appraisers);
6. Approval revocation (specifically insurance mediation institutions and insurance associations);
7. Administrative fine; and
8. General prohibition to hold a managerial position in an insurance company or to become a controller
or controlling shareholder of an insurance company.

October 17, 2014



BI Regulates Foreign Exchange Export Proceeds and Loans

Bank Indonesia (“BI”) has updated Bank Indonesia Regulation No. 14/25/PBI/2012 regarding Receipt of Foreign Exchange Export Proceeds and Withdrawal of Foreign Exchange External Loans with the issuance of PBI No. 16/10/PBI/2014 dated May 14, 2014 (the “PBI”).
The PBI governs the supervision of export proceeds in the form of foreign exchange and the withdrawal of foreign exchange loans through Indonesian banks. Aspects of the PBI are further specified in BI Circular Letter No. 16/9Dsta, dated May 26, 2014, regarding Receipt of Foreign Exchange Export Proceeds (the “SEBI”), which replaced BI Circular Letter No. 15/9/DSM.

♦  Obligation to Receive Foreign Exchange Export Proceeds through Foreign Exchange Banks

The PBI requires that all foreign exchange export proceeds must be received by a foreign exchange bank no later than the end of the third month after Notification of Exported Goods (Pemberitahuan Ekspor Barang - “PEB”) is registered. This obligation does not apply to government foreign exchange export proceeds paid in cash in Indonesia and received through BI.

For payment made through letter of credit, consignment, open accounts or collection of which the due date exceeds or is equal to three months after PEB registration, the time limit is 14 days after the payment due date.

Neither the PBI nor the SEBI specify any period of time that the foreign exchange export proceeds must be kept in the foreign exchange bank. The PBI and SEBI also allow the foreign exchange export proceeds to be received in foreign currency, meaning that they do not have to be converted to Rupiah first.

This is in line with Law No. 7 of 2011 regarding Currency, which prohibits the use of physical bills of foreign currency for domestic transactions but does not prohibit the use of foreign currency for other transactions (such as bank transfer).

♦  Obligation to Report

Exporters must submit their PEB to the foreign exchange bank by the fifth day of the followingmonth. If payment is received in cash in Indonesia, exporters must submit supporting documents directly to BI on the fifth day of the month following PEB registration. The obligation to submit information and documents to BI only applies to export transactions valued greater than USD 10,000 or its equivalent.

Moreover, exporters that receive payment through letter of credit, consignment, open account or collection must provide supporting documents for the transaction to the foreign exchange bank to be forwarded to BI by the fifth day of the month following PEB registration.

♦  Discrepancies between Proceeds and PEB

Under the PBI, the actual amount of export proceeds must fit the amount stated in the PEB. The value of export proceeds is considered appropriate, and exporters do not have to submit supporting documents, if it is less than the PEB with discrepancy less than IDR 50 million.

If the discrepancy exceeds IDR 50 million, the exporter shall submit a written clarification explaining the reasons for the discrepancy, which may result from:

  1. exchange rate discrepancy, discounts/rebates, administration fees, and/or other related international trade fees, in which case the discrepancy between foreign exchange exportproceeds value and PEB value can be maximum 10% of the PEB value; and/ or
  2. toll manufacturing, repair services, operational or financial leasing, price fluctuations, as well as composition, quantity and quality differences in goods.

Specifically for mining products (oil and gas, minerals and coal), a written clarification does not need to be submitted for discrepancies up to 10% of the PEB value. The provision on export of mining products was not regulated in the previous versions of the PBI and the SEBI.

♦  Courier Service Companies and Oil and Gas Exports

If export is conducted through a courier, the obligations relating to receipt of foreign exchange export proceeds adhere to the owner of the goods. The courier company must provide PEB information to the owner of the goods.

For exports of oil and gas, the obligation to report receipt of foreign exchange export proceeds adheres to the exporter and/or the parties in the oil and gas contract.

♦  Obligation to Withdraw Foreign Exchange Offshore Loans

Debtors are obliged to withdraw offshore foreign exchange loans through a foreign exchange bank. The obligation applies to all cash loans that derive from non-revolving loan agreements that are not used for refinancing, facility margin between refinancing and previous offshore loans and debt securities in the form of bonds, medium term notes, floating rate notes, promissory notes and commercial paper.

The withdrawal of offshore foreign exchange loans shall be reported to BI along with supporting documents no later than the 15th day of the following month.

♦  Sanctions

2014-11-13 09_31_55-Newsflash - Receipt of Foreign Exchange Export Proceeds

♦  Transitional Provisions

Foreign exchange export proceeds resulting from PEB issued until the end of May 2014 are still governed by PBI No. 14/25/PBI/2012 and SEBI No. 15/9/DSM.
Withdrawal of offshore loans signed prior to January 2, 2012, may be conducted other than through a foreign exchange bank.

October 15, 2014



Constitutional Court Decides Employee Wages Get Priority over Secured Creditors in Bankruptcy / Liquidation

Continuing the ongoing series of judicial reviews against the Labor Law,¹ the Constitutional Court rendered Decision No. 67/PUU-XI/2013 on September 11, 2014, with the result that payment of wages now receives top priority during bankruptcy or liquidation of an employer—even over satisfaction of secured creditors.

The Decision revises Labor Law provisions that initially stipulated that wages and other employee rights are “prioritized” over “other payables” when a company is bankrupted or liquidated. The applicants for judicial review argued that Article 95(4) of the Labor Law failed to provide sufficient detail about what “other payables” are preceded by payment of wages and other employee rights. In its Decision, the Constitutional Court declared that Article 95(4) shall now be read as follows:

The payment of outstanding wages of workers/laborers shall take precedence over all other types of creditors, including secured creditors’ claims and claims of states’ rights, auction houses and public institutions established by the Government, whereas the payment of other rights of workers/laborers shall take precedence over all claims, including claims of states’ rights, auction house, and public institutions established by the Government, except for claims by secured creditors.

In amending the provision, the Constitutional Court reasoned that employee wages and rights are part of the rights to life and livelihood, as contained in Article 28A of the 1945 Constitution, which cannot be reduced under any circumstance. Despite the constitutional basis for protecting employees’ livelihoods, the Decision poses serious implications for secured creditors.

♦ Types of Creditors

Ordered based on priority, there are three types of creditors:
1. Secured creditors (kreditur separatis);
2. Preferential creditors (kreditur preferen); and
3. Concurrent creditors (kreditur konkuren).

Secured Creditors
Secured creditors are those holding security over movable or immovable assets, such as pledge, hypothec, mortgage, fiducia, and warehouse receipt. In bankruptcy and liquidation, secured creditors may immediately execute the collateral and receive repayment of their loans prior to other creditors.

Preferential Creditors
Preferential creditors are those given the right by law to precede other creditors. Examples of preferential creditors include those with the following receivables:
1. Court fees;
2. Lease payments for immovable property;
3. Unpaid movable property; and
4. Insurance policy holders in the bankruptcy of a general loss or life insurance company.

Concurrent Creditors
Concurrent creditors are those not classified as either secured or preferential creditors. As such, concurrent creditors receive the lowest priority in bankruptcy and liquidation.

♦  Debts to the Government

The rights of the Government in bankruptcy and liquidation are set out under the General Taxation Law, which requires outstanding tax payments of the entity to be paid prior to liquidating the assets and settling with preferential and concurrent creditors. As such, outstanding tax payments are disposed after secured creditors are satisfied, but take precedence over preferential and concurrent creditors.

♦  Implementation Unclear

The most significant issue raised by the Decision is the impact on the status of secured creditors that are now subordinated to employee wage claims, as the source of wage payments may in some cases require the sale of secured assets. Prior to the Decision, wages and other employee rights were classified under preferential creditors, as affirmed under the ICC. As a consequence of the Decision, employee wages are now prioritized over all other creditors, including secured lenders and the Government, whereas other employee rights are positioned after secured creditors.

“Other employee rights” was not defined by the Constitutional Court, but we infer that such rights cover severance, unclaimed annual leave, compensation for housing allowance, medical and health care costs, and other compensation stipulated in the Labor Law, company regulation, collective labor agreement (if applicable) and individual work agreements

Another critical issue is the clash between the new definition provided in the Decision and the provisions of the Bankruptcy Law. As the Decision prioritizes wages over every other debt, will secured creditors be required to wait for the bankrupted company to pay the wages of their employees, or even obtain approval from the court or the receiver, before executing their securities? Under the Bankruptcy Law, secured creditors are given the right to execute their collateral (as though the debtor was never declared bankrupt) during the first 90 days after the bankruptcy decision. Will this right now be sidelined by the obligation to prioritize the wages of employees? The Constitutional Court did not address any of these issues in the Decision.

The Ministry of Manpower and Transmigration subsequently issued Circular Letter No. SE.7/MEN/IX/2014, announcing the Decision to the regional governments, but the letter offered no guidance on how to interpret or implement the Decision.

We will continue to seek confirmation regarding the implementation of the Decision. If there are inquiries regarding the impact of the Decision on a particular legal matter, we will gladly facilitate and discuss them with you.

Legal Basis
The legal bases used in this article are as follows:
1. Indonesian Civil Code (“ICC”)
2. Indonesian Trade Code (“ITC”)
3. Law No. 6 of 1983 on General Tax Provisions and Procedures, as lastly amended by Law No. 16 of 2009 (“General Taxation Law”)
4. Law No. 2 of 1992 on Insurance Companies (“Insurance Law”)
5. Law No. 4 of 1996 on Mortgage on Land and Property Affixed on Land (“Mortgage Law”)
6. Law No. 42 of 1999 on Fiducia Security (“Fiducia Law”)
7. Law No. 13 of 2003 on Labor Affairs (“Labor Law”), as amended
8. Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payments (“Bankruptcy Law”)
9. Law No. 9 of 2006 on Warehouse Receipt Systems, as amended by Law No. 9 of 2011 (“Warehouse Receipt Law”)
10. Law No. 17 of 2008 on Shipping (“Shipping Law”)
11. Law No. 1 of 2009 on Aviation (“Aviation Law”)

Jakarta, October 13, 2014

1 Previous judicial reviews of the Labor Law include: 1) Constitutional Court Decision No. 27/PUU -IX/2011, dated January 17, 2012, 2) Constitutional Court Decision No. 100/PUU -X/2012, dated September 19, 2013, 3) Constitutional Court Decision No. 115/PUU-VII/2009, dated November 10, 2010, 4) Constitutional Court Decision No. 37/PUU-IX/2011, dated September 19, 2011, 4) Constitutional Court Decision No. 012/PUU -I/2003, dated October 28, 2004, 5) Constitutional Court Decision No. 19/PUU-IX/2011, dated June 20, 2012, and 6) Constitutional Court Decision No. 58/PUU-IX/2011, dated July 16, 2012.



New Plantation Law – No Foreign Shareholding Limit, Yet

On the night of Monday, September 29, 2014, the House of Representatives and the Government approved a draft bill on plantations, which will revoke Law No. 18 of 2004 on Plantations when it is signed by the president and given a number (becoming the “New Plantation Law”). In addition to laying a new general legal framework for the sector, the New Plantation Law will serve as the basis for further implementing regulations and policies. As of the date of writing, the bill had not yet been signed and numbered; however, we have the  latest copy of the bill, which we believe is the same content that will be ratified as the New Plantation Law.

♦  LIMITATION ON FOREIGN INVESTMENT STILL PENDING

Under the current Negative Investment List, foreigners may hold up to 95% of shares in a plantation company. The controversial draft bill most recently in circulation imposed a 30% foreign shareholding limit, with no grandfathering of existing PMA companies, who would have had only five years to divest their shares to an Indonesian party. (A similar structure was adopted in the 2010 Horticulture Law.) Transfer of shares to a foreign shareholder would have been subject to the approval of the Minister of Agriculture.

In the form passed by the House, however, the New Plantation Law is silent on the percentage of shares that a foreign party may hold. Instead, foreign shareholding limitations can be implemented through a future Government Regulation on the basis of: (i) type of plant, (ii) business scale, and (iii) certain area conditions.

♦  LAND UTILIZATION AND LICENSING

The minimum and maximum areas of land that may be licensed for plantation will also be stipulated in a  future Government Regulation. Currently, only the maximum holding of a company or group has been governed, through Minister of Agriculture Regulation No. 98 of 2013, (e.g., maximum of 100,000 hectares for oil palm plantations). It will be fascinating to see whether the area limits will be the same under the forthcoming Government Regulation.

Plantation companies must plant 30% of their estate within three years after receiving the Right to Cultivate (Hak Guna Usaha or “HGU”) and plant all technically plantable areas within six years. The Government has the right to acquire any unutilized (unplanted) estate if a company fails to fulfil the utilization requirements. Companies are prohibited to transfer HGU if it will cause them to fall below the minimum area.

Plantation companies must facilitate the establishment of at least 20% of their estate for local communities within three years after obtaining HGU; however, it is not clear whether such area must be within and/or outside the estate. The community area will be managed by the plantation company.

Plantation companies must obtain a plantation business license and subsequently HGU. Prior to obtaining the license “and/or” HGU, companies cannot conduct any plantation activities. This provision is ambiguous, as it is widely understood that the business license should precede HGU, and HGU should precede plantation activities. The use of “and/or” opens the possibility for land clearing to begin prior to obtaining HGU. The issuance of plantation business licenses must be in line with the spatial layout plan.

♦  TIMEFRAME FOR COMPLIANCE

Domestic plantation companies will have five years to adjust their businesses with the New Plantation Law. Foreign-owned companies, on the other hand, are not required to adjust with the new provisions until after  the HGU period expires, meaning, theoretically at least, that even if the Government decides to impose a foreign shareholding restriction, it will not apply to existing PMA companies holding HGU until the expiration of the land rights. It is unclear what is required for foreign-owned companies who have not obtained HGU.

♦  SANCTIONS

Violations can be imposed with administrative sanctions, fines, and/or imprisonment.

October 2, 2014



Entering the New Era of E-Money

In a globalized era, there is nothing more convenient than electronic payment when it comes to choosing among available payment options. A form of electronic payment currently gaining momentum is electronic money, commonly known as e-money.

To facilitate this momentum, Bank Indonesia (“BI”) issued Regulation No. 16/8/PBI/2014 of 2014 (“Amendment”) to amend Regulation No. 11/12/PBI/2009 of 2009 on Electronic Money (“Regulation”). To implement the Amendment, BI recently issued Circular Letter No. 16/11/DKSP of 2014 on Implementation of Electronic Money (“2014 Circular”) to be in accordance with the changes introduced by the Amendment.

♦  What is E-Money?

Article 1 (3) of the Amendment defines e-money with a fixed set of criteria. Firstly, e-money is a payment method (whether card or software based) with a nominal value that is equivalent to the cash deposited in advance by the holder in the issuing institution. The nominal value is then stored electronically in a server or chip to be spent by the holder.

Another criterion of e-money is acceptance by multiple merchants other than the issuer. From this specific  element, we can infer that a company issuing gift cards to store nominal value that can only be spent for goods and services provided by their branches will not be considered e-money.

Lastly, if the issuing institution is a bank, the management of e-money must be separated from bank savings  as defined under Law No. 7 of 1992 on Banking, as amended (“Banking Law”), which include deposits and deposit certificates, checking accounts, savings and the like.

Types of E-money

The Amendment expands e-money into 2 different types: identified e-money and anonymous e-money. Identified e-money contains information on the identity of its holder, whereas the holder of anonymous emoney is not registered with the issuer.

 The types of e-money also differ in terms of the services they provide. Issuers of identified e-money are allowed to provide the following services:

  1. Top ups of other credit accounts, such as prepaid phone and electricity plans;
  2. Transactions with merchants accepting the respective e-money;
  3. Bill payment, which includes electricity, water, telephone and other routine or periodic bills;
  4. Fund transfers, covering person-to-person transfers, and transfers from and to a bank account;
  5. Cash withdrawals;
  6. Government aid programs, such as the Jakarta Smart Card (Kartu Jakarta Pintar); and
  7. Other services approved by BI.

Issuers of anonymous e-money on the other hand may only provide top ups and transaction and bill payment services. In order to provide other services, the issuer of anonymous e-money must first secure BI approval. The classification of e-money into identified and anonymous e-money was not previously stipulated under the E-Money Regulation.

Parties

There are a total of 7 parties involved in an e-money framework:

  1. Principal, which is a bank or non-banking institution responsible for managing the system and member network (comprising issuers and acquirers), whereby the cooperation among members is based on a written agreement;
  2. Issuer, which is a bank or non-banking institution issuing e-money;
  3. Acquirer, which is a bank or non-banking institution that is in cooperation with merchants to process transactions using e-money issued by parties other than the acquirer;
  4. Holder, which is an individual or entity that owns or uses e-money;
  5. Merchant, which is the goods or services provider that receives payment using e-money;
  6. Clearing house, which is a bank or non-banking institution that calculates the rights and liabilities of each issuer and acquirer involved in an e-money transaction; and
  7. Financial settlement service provider, which is a bank or non-banking institution that conducts the final settlement after calculation by the clearing house.

The requirements, necessary documents, and procedure for issuers to secure a license from BI are provided under the 2014 Circular. Note that the licensing procedure for issuers also applies to principals, acquirers, clearing houses and financial settlement service providers. The requirements and necessary documents for these parties to secure a license from BI are provided under the Annex to the 2014 Circular.

♦  Licensing Issues

As a consequence of the fixed criteria of e-money as elaborated above, there may be issues regarding certain service providers that are essentially carrying out e-money services but do not fulfill all the elements prescribed by the Amendment.

According to BI’s website, operators of electronic payment systems that do not fulfill all the criteria of emoney stipulated under the Amendment are nevertheless required to submit a report detailing information on their products, business processes, cooperation with third parties, and transaction reports. The response to the report provided by BI will provide greater clarity on what must be observed by the operators that do not satisfy all the elements prescribed by the Amendment.

September 30, 2014



MOT and MEMR Regulate Coal Export

On July 15, 2014, the Minister of Trade (“MOT”) issued Regulation Number 39/M-DAG/PER/7/2014 on Provisions on Export of Coal and Coal Products (“MOT Regulation”), which comes into force on October 1, 2014.1 One of the purposes of this regulation is to prevent overexploitation and ensure the domestic supply of coal and coal products, including anthracite, bituminous, subbituminous, lignite, coking coal, coal gas and other derivative products. To enable implementation of the MOT Regulation, the Directorate General of  Minerals and Coal (“DGMC”) of the Ministry of Energy and Mineral Resources (“MEMR”) issued Regulation Number 714.K/30/DJB/2014 on Procedures and Requirements for Granting Recommendations for Registered Exporter of Coal.

The regulations require coal companies to obtain a recommendation from the MEMR and recognition as a Registered Exporter of Coal (Eksportir Terdaftar Batubara – “ET-Coal”) from the MOT’s Directorate General of Foreign Trade (“DGFT”) in order to be permitted to export coal or coal products. The new requirements yielded considerable criticism from coal companies due to the narrowness of the September 1, 2014, deadline, so the MEMR extended the deadline to October 1.

♦ Registered Exporter Status to Export Coal and Coal Products

Coal companies who intend to export coal or coal products must apply to the DGFT for recognition as ET-Coal by submitting (i) a copy of the mining license (IUP or IUPK)2 or Coal Contract of Work (“CCOW”), (ii) basic corporate documents,3 and (iii) a recommendation from DGMC., The recognition as ET-Coal is valid for 3 years.

To obtain an ET-Coal recommendation from the DGMC, the applicant must submit (i) copies of clear and clean certificate and coal mining license, special mining license or MEMR Decree concerning stages of production operation for CCOW holders, (ii) approval letter of the current year work plan and budget (RKAB), (iii) proof of payment of non-tax state revenue (PNBP), and (iv) certification that the company will pay production fees (DHPB) at the point of sale FOB before the shipment is transported across the regency/city/province/country. The recommendation will be issued within 5 working days and is valid for 3 years.

♦ Verification and Technical Examination

The MOT Regulation reiterates that every export of coal or coal products must be administratively verified  and technically examined by a licensed surveyor appointed by the MOT. Verification and technical examination considers:

  1. region of origin of coal/coal products
  2. quantity, type, and tariff (Pos Tarif/HS Code) of coal/coal products
  3. calorific value of coal
  4. shipping time
  5. port of loading
  6. country and port of destination
  7. proof of payment of production fee/royalties

The costs incurred for verification and technical examination are to be paid from public funds, but the government reserves the right to shift the costs to the exporter if public funds are not available.

♦ Reporting and Sanctions

The results of verification and technical examination are compiled in a Surveyor Report (laporan surveyor -“LS”), and surveyors must report monthly recapitulations to the MOT. Evidence of ET-Batubara and LS are used as supporting documents for Export Declarations (Pemberitahuan Ekspor Barang – PEB). Companies holding ET-Coal are required to report export activity monthly to the DGFT, with copies to DGMC, by the 15th of the following month. Export activity reports must also be submitted online through http://inatrade.kemendag.go.id.

Failure to meet reporting obligations can lead to revocation of ET-Coal or appointment as a Surveyor. Other sanctions can be imposed in accordance with applicable laws and regulations. In addition, the DGMC can evaluate the ET-Coal recommendation annually and can propose revocation of ET-Coal if it detects violations.

1 MOT Reg. No. 49/2014 amended Art. 21 of the MOT Regulation to extend the effective date to Oct. 1, 2014.
2 Production Operation IUP, Production Operation IUPK, Production Operation IUP specifically for transportation and sale, or Production Operation IUP specifically for processing and refining.
3 Taxpayer registration number (NPWP) and company registry (TDP).



New Presidential Regulation on Utilization of Foreign Workers and Training for Indonesian Workers

For almost 20 years, Presidential Decree No. 75 of 1995 on Foreign Worker Utilization (“PD 75/1995”)  governed the status and procedures for employing foreign workers in Indonesia. In July 2014, Presidential Regulation No. 72 of 2014 on Foreign Worker Utilization and Implementation of Education and Training of  Indonesian Workers as Associates for Foreign Workers (“PR 72/2014”) was issued to better align government  practice with the requirements under the Labor Law (Law No. 13 of 2003 on Labor) and the latest Minister of  Manpower and Transmigration (“MOMT”) Regulation No. 12 of 2013 on Procedures for Foreign Worker  Utilization (“MOMT Reg. 12/2013”).

One significant change in PR 72/2014 is that purely domestic companies may now freely employ foreigners as Directors and Commissioners, except for in human resources and certain other positions that are generally  restricted to foreigners under MOMT Reg. 12/201 3 and other MOMT regulations. Previously, foreign Commissioners could only be employed by foreign capital investment (PMA) companies.

Also in July 2014, the Government issued Government Regulation No. 57 of 2014 on Development,  Management, and Protection of Language and Arts, as well as Enhancement of the Function of Indonesian Language (“GR 57/2014”), which augments the foreign worker language requirements in MOMT Reg. 12/2013. MOMT Reg. 12//2013 states that foreign workers recruited to work in Indonesia must be able to communicate in the Indonesian language. GR 57/2014 stipulates that the ability to communicate in Indonesian shall be in accordance with the skills required for the relevant position, and that if the foreign worker is unable to meet the required standards, he/she shall be required to participate in language training.

In conjunction with the Labor Law and MOMT Reg. 12/2013, PR 72/2014 also requires a company that recruits foreign workers in Indonesia to have an Expatriate Manpower Utilization Plan (RPTKA) and the relevant Expatriate Work Permit (IMTA). Other than for Directors and Commissioners, PR 72/2014 requires employers to appoint an Indonesian worker as an “associate” (pendamping) to each foreign worker for education and training in the interest of technology transfer and enhancing expertise. Foreign worker utilization and education and training of companion workers must be reported to the manpower office every six months.

PR 72/2014 contains no sanctions for violation of its provisions; however, sanctions regulated in the Labor  Law, such as administrative sanction, revocation of business license, and criminal sanction, may be imposed for employing foreign workers without a proper working permit and failing to report implementation of foreign workers and education and training of the companion worker.



Raw Mineral Export Duty Dramatically Reduced to Incentivize Smelter Construction

On July 25, 2014, the Minister of Finance (MOF) dramatically reduced export duties on unrefined metal minerals for companies that are taking concrete action toward building smelting facilities.

MOF Regulation No. 153/PMK.011/2014 (“MOF 153/2014”) was drafted to address concerns raised by mining companies who are required to build smelting facilities while at the same time paying escalating export duty. Companies had argued that paying high export duty both undermined the profitability of their operations and drained potential funding for smelter investment.

♦ Past Export Provisions

Under the current set of regulations on mineral export,¹ metal minerals must be refined to a very high standard before they can be exported, but eight specific mining products (concentrates of copper, zinc, lead, and manganese, iron sand, iron ore, anode slime and copper telluride) are allowed to be exported with minimal processing. Mining companies who continue to export unrefined minerals must demonstrate their progress in developing a smelting facility to the Ministry of Energy and Mineral Resources (MEMR) and Ministry of Trade (MOT), and must also pay progressive export duties, with tariffs increasing from 20-25% in the first semester of 2014 to 60% on December 31, 2016,² after which all export must cease.

♦ Export Duty Reduced to 7.5%, 5% and 0% for Companies Developing Smelters

Under MOF 153/2014, export duty will be dramatically reduced in accordance with the stage of
project development:³

- Stage 1 = 7.5% export duty for progress up to 7.5%, including deposit of a “seriousness guarantee” of 5% of the project value

- Stage 2 = 5% export duty for progress of 7.5% - 30%

- Stage 3 = 0% export duty for progress beyond 30%

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August 15, 2014,