Foreign Investment and Restriction of Foreign Ownership in Mining Sector

Foreign investors must have an Indonesian vehicle to conduct mining business activities in the form of an Indonesian limited liability company established in the framework of foreign investment to Law No. 25 of 2007 on Investment (known as Foreign Investment Company / Perusahaan Penanaman Modal Asing or “PMA”). Although mining sector is generally open to foreign investors, its investment procedure is highly regulated. There are restrictions that foreign investors must be aware of prior to start their investment activities in Indonesian mining sector.

A. Special divestment rules regarding foreign-owned companies in mining sector
The Government Regulation on Mining (“Mining GR”) further draws a distinction in relation to the divestment obligation, between (i) the holders of Production Operation IUP/IUPK for metal minerals who undertakes processing and refining themselves domestically, and (ii) the holders of Production Operation IUP/IUPK for metal minerals that employs third parties to do the processing and refining domestically on their behalf. Although the Mining GR uses the word “done by”, we believe that the regulator meant that the smelting facilities have to be “owned and operated by”, not just “operated by” as the term suggests.

For the holders of IUPOP and IUPKOP which conduct their own processing and/or refining :

Mining GR explains that Share Divestment Obligation for the holders of IUPOP and IUPKOP which conduct their own processing and/or refining must be made after the end of the fifth year of production at least :
foreign-investment-in-mining-sector1

For the holders of IUPOP and IUPKOP which do not conduct their own processing and/or refining (the processing and/or refining may be made in cooperation with other IUPOP holders and IUPKOP holders, or IUPOP holders specifically for processing and/or refining smelting) :

Mining GR also explains that Share Divestment Obligation for the holders of IUPOP and IUPKOP which do not conduct their own processing and/or refining must be made after the fifth year of production at least :
foreign-investment-in-mining-sector2

Minimum divestment means the number of shares owned by foreign shareholder from the total shares of the company that is mandatory to be transferred to an Indonesian entity. The divestment schedule is calculated since the date when the company started commercial production.

Divestment Offering Priority

The shares held by foreign shareholders must be offered to the Indonesian participant(s), within 90 calendar days since the lapse of the 5 years period (calculated from the date of commercial production), in the following sequential order:

i. First, to the Central Government, and to the Provincial Government, together with the Regency/City Government. If both parties interested, then the Central Government gets the priority as the purchaser. The interested potential buyers must respond within 60 calendar days since receiving the offer;
ii. Second, to the State-owned Company (“BUMN”) and the region-owned Company (“BUMD”) by way of auction. The interested potential buyers must respond within 60 calendar days since receiving the offer; and
iii. Third, to the wholly Indonesian owned-companies by way of auction. The interested potential buyers must respond within 30 calendar days since receiving the offer in a sealed envelope. All the offers will be opened in front of all the interested potential buyers on the 30th calendar day.

Should no sale occurs, the same process would be repeated the following year.

Pricing in Divestment Obligation

The divested shares are valued based cost replacement principle. That is all the cumulative costs incurred until the year of the mandatory divestment minus (i) amortization and depreciation (inflation adjusted), and (ii) liabilities due at the end of the respective year of the divestment obligation. The pricing can be determined by an independent appraiser.

The determined price shall be:

i. the highest price to be offered to the Central Government, and to the Provincial Government, together with the Regency/City Government; and
ii. the base price for the auction to the BUMN, BUMD and the subsequent wholly Indonesian-owned companies.

No Divestment Obligation for PMA Smelter Company

Mining GR provides that in the event the IUP-OP holders do not undertake the activities of: (i) transportation and sale, and/or (ii) processing and refining, then the said activities may be performed by other parties that hold, respectively, the:
a. IUP-OP specifically for transporting and selling (“IUP-OPK”);
b. IUP-OP specifically for processing and/or refining (also “IUP-OPK”); or
c. IUP-OP who also owns and operates processing and refining facility.

B. The Share Divestment Obligation’s Exception

Based on Mining GR there is an exception of share divestment obligation for the holders of IUPKOP specifically for processing and/or refining in the scope of foreign investment, that the holders of IUPKOP specifically for processing and/or refining in the scope of foreign investment shall not be required to divest shares.

The spirit of the Mining GR is actually to promote processing and refining done domestically in Indonesia. The Government encourages PMA companies holding Production Operation IUP/IUPK to undertake the processing and refining process themselves, hence such company is allowed to hold a maximum of 60% foreign ownership as oppose to PMA companies that hold an IUP/IUPK but choose to use third parties to undertake the processing and refining on their behalf (i.e., maximum 60% foreign ownership versus maximum 49% foreign ownership). However at the same time, Mining GR confirms that there is no divestment obligation applicable to PMA companies that hold IUP-OPK for processing & refining.

C. Restriction in change of ownership to foreign investor
Ministry of Energy and Mineral Resources Regulation (“MEMR Reg”) provides that any change of shareholding in a mining company can only be conducted if:
1. the foreign share ownership shall not be more than 75% for a company holding an Exploration IUP (refers to Category 1 in Table 14 above); and
2. the foreign share ownership shall not be more than 49% for a company holding a IUP-OP.
The change of shares ownership, including the change of control (acquisition), can only be conducted with prior approval from the respective government authority (depending who has the authority to issue the IUP).

In the event of a change of status from a wholly Indonesian-owned company to PMA has been approved by the BKPM and the MOLHR, then copies of such approval must be submitted to the MEMR through the Directorate General of Mineral and Coal to amend its IUP/IUPK status.

Although it is not very clear in the explanation, according to MEMR Reg, holder of IUP exploration or IUP-OP that has amended the company’s status to PMA with foreign share ownership that is more than 49% prior to this regulation is still required to follow the prescribed divestment obligation. Further, it also stipulates that for such PMA companies, it is not allowed to do further increase in the foreign share percentage until the divestment obligation becomes effective.

In general, any change in a PMA company must be approved by BKPM. More specific and depending on the business sector, any change of ownership must obtain prior approval from relevant authorities. MEMR Reg stipulates, change in the following aspects of a mining company are allowed with prior approval from the Minister, Governor or Regent/Mayor:
a. Change in investment or source of funding;
b. Change of status from local Indonesian company to PMA company and vice versa;
c. Change in company’s AoA;
d. Change in management structure (Board of Directors/BoD or Board of Commissioner/BoC); or
e. Change in share ownership (through transfer of shares, merger, acquisition, consolidation or segregation).

Author:

Marini Sulaeman
Managing Partner – m.sulaeman@legisperitus.co.id

Alamo D. Laiman
Partner – a.laiman@legisperitus.co.id

Marizca Rachel Poluan
Junior Associate – m.poluan@legisperitus.co.id

 

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