The Indonesia Investment Coordinating Board (Badan Koordinasi Penanaman Modal – BKPM) recently issued 3 new regulations: Regulation No. 3/2021 on the Electronic System of Integrated Risk-Based Licensing (Reg. 3), Regulation No. 4/2021 on the Guidelines and Procedures for Risk-Based Licensing and Investment Facilities (Reg. 4) and Regulation No. 5/2021 on the Guidelines and Procedures for Supervision of Risk-Based Licensing (Reg. 5), all of which will come into force on 2 June 2021.
In this edition of our newsletter, we focus our discussion only on Reg. 4 and Reg. 5 and skip over Reg. 3, for it is mostly concerned with the features and technical aspects of the online single submission (OSS) system.
As further discussed below, Reg. 4 and Reg. 5 introduce a few important changes to foreign investment requirements in Indonesia that we believe are of interests to you.
Minimum Required Issued and Paid-up Capital for Foreign Investment (PMA) Companies
The most significant change introduced by Reg. 4 is the four-time increase in the minimum required issued and paid-up capital of a new PMA company, from at least IDR2.5 billion (approximately USD180,000) to at least IDR10 billion (approximately USD715,000). From our discussions with the authorities, the rationale behind the higher minimum capital requirement is the recent liberalization on the negative list (see our previous analysis here).
With more business sectors being opened and greater flexibility given to foreign investments in choosing the sectors that they would like to invest in, the authorities try to be more consistent in directing foreign investors to invest in large scale investments, reserving investments below the threshold for local companies. This new paid-up capital requirement is certainly unfavorable for new start-ups or greenfield investments. Reg. 4 is silent on whether the new minimum capital threshold for PMA companies would be retroactively applied to existing investments. In theory any rule that applies retroactive must be expressly written and therefore given there is no express provision on this in Reg. 4, we believe the new rule should not retroactively apply.
Minimum Investment Value for Foreign Investment (PMA) Companies
Although the general rule about the minimum total investment over IDR10 billion (excluding land and building) remains the same, BKPM re-introduced a more relaxed requirement for PMA real estate companies by allowing them to include land and building as a component of the minimum total investment value. This relaxation, however, is only applicable to PMA companies engaged in real estate development in the form of (i) a whole building or (ii) an integrated housing complex.
Requirement for Subsidiaries of PMA Companies to Convert into PMA Companies
Reg. 4 makes it clear that any subsidiary of a PMA company that has a status as a domestic investment (PMDN) company must convert its status to a PMA company within 1 year by updating its data through the OSS system.
As a consequence of the change in status, if the relevant subsidiary is conducting any activity that is closed or restricted for foreign investments, it must cease such activity immediately. Nevertheless, we believe that this new rule should not materially impact foreign investments given the negative list has significantly been cut down in the recent investment liberalization by the Government.
Historically the enforcement of divestment requirement has been ‘on and off’. Reg. 4 re-affirms that PMA companies are bound to divest if the divestment requirement is required under their investment licences that have been issued before Reg.4.
Notwithstanding, Reg. 4 also allows exemptions from the divestment requirement, provided:
- the company’s existing local shareholders do not require a divestment; or
- in the case of a 100% foreign-owned PMA company, all shareholders have no commitment or agreement with any domestic party to divest their shares.
As an implementing regulation of Government Regulation 5/2021 (see our previous newsletter here), Reg. 4 sets the procedures and technical guidelines for risk-based licensing through the OSS system.
Requirement to Submit Investment Periodic Reports (LKPM)
Reg. 5 emphasizes the requirement for PMA companies to submit LKPM to BKPM. The report includes report on investment realization and, if any, issues that are faced by the company in implementing its investments. The submission is made through the OSS system which is now also integrated with the system of the relevant governmental institutions (e.g., sectoral ministries or institutions, regional governments, or administrators of special economic zones). The integrated system would ideally simplify the reporting procedures which previously needs to be submitted with each relevant government offices separately.