Allens

Asia

Client Update: New rules for foreign ownership of Indonesian mining and coal businesses

13 March 2012

In brief: Foreign investment companies will be required to gradually divest up to 51 per cent of their shares to Indonesian parties after five years of production, under a revision to the regulations on mineral and coal business activities. Partner David Holme (view CV) and Senior Associates Brooke Van Gils and Made Satwika report.

Background

The Government of Indonesia has issued Government Regulation No. 24 of 2012 (GR 24/2012), amending Government Regulation No. 23 of 2010 on the Implementation of Coal and Mineral Mining Business Activities (GR 23/2010). These regulations implement Indonesia's Law No. 4 of 2009 on Minerals and Coal Mining (the new mining law).

Return to top

Key amendment

The key amendment under GR 24/2012 is an amendment to the divestment requirements for foreign investment companies.

Under the new mining law, holders of mining business permits (IUPs) and special mining business permits (IUPKs) whose shares are owned by foreign parties are required to divest a portion of their shares to the central government, regional governments, state-owned enterprises (BUMNs), region-owned enterprises (BUMDs) or national companies (Indonesian participants).

GR 23/2010 required that a minimum 20 per cent shareholding be divested to Indonesian participants after five years of production. GR 24/2012 amends GR23/2010, requiring that a minimum 51 per cent shareholding be progressively divested to Indonesian participants after five years of production, as follows:

  • 20 per cent in the sixth year;
  • 30 per cent in the seventh year;
  • 37 per cent in the eighth year;
  • 44 per cent in the ninth year; and
  • 51 per cent in the 10th year.

The central government has the first priority in the divestment process, followed by the regional governments, BUMNs and BUMDs and national companies.

The mechanisms for the priority divestment procedure, and for determining the share prices for divestment, will be stipulated in further regulations.

Return to top

How it affects you

The full impact of GR 24/2012, particularly in relation to existing IUPs, IUPKs and contracts of work, remains unclear.

The Director General of Minerals and Coal of Indonesia has reportedly stated that GR 24/2012 applies to foreign companies that obtain IUPs and IUPKs after the issuance of GR 24/20121. However, there are no transitional provisions in GR 24/2012 to support this position and this matter needs to be urgently clarified by the Government of Indonesia.

For existing contracts of work and coal contracts of work, whether and to what extent this requirement will be applied remains a matter for negotiation, as part of the ongoing discussions around amendments to existing contracts to align them with the new mining law (to the extent required by the new mining law's transitional provisions). The Director General of Minerals and Coal has publicly announced that these requirements should not automatically be applied to existing contracts.

Foreign investors should proactively plan for the implementation of the divestment requirement upfront before consummating their investment. This would involve, for example, documenting in detail in joint venture agreements the parties' respective responsibilities regarding satisfaction of the divestment obligation. Subject to overarching economic considerations, and given that mandatory divestment processes in Indonesia are notoriously dispute prone and protracted, it could be preferable to look to identify and invite local partners into the project, to satisfy the Indonesian participation requirement before triggering the mandatory divestment process. This can assist in ensuring that the requirement for local Indonesian participation is implemented in an orderly and amicable fashion, and on terms acceptable to all parties.

Footnotes

1. Kontan, 8 March 2012.

For further information, please contact:

Return to top

Share or Save for later

What are these?
 

To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.