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19 January 2021 (closed)
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The obligation for foreign companies to perform a divestment of part their shares to Indonesian companies has raised already much discussion among foreign investors. Before the enactment of BKPM regulation number 5/2013 on Guidelines and Procedures on Licensing and Non-licensing of Capital Investment as amended by BPKM regulation number 12/2013 (BKPM Regulation), divestment was required for all foreign companies (PMA) in Indonesia. The new regime of the BKPM Regulation removes this obligation, even though there are still sectors in Indonesia which require foreign companies to divest, such as the mining sector.
The Old Divestment Regime in Indonesia
Government regulation number 20/1994 on Investments requires foreign companies in Indonesia to sell part of their shares to Indonesian citizens or legal entities within 15 years after it commenced commercial activity. The regulation does not regulate the required percentage or amount to be divested to Indonesian parties. In practice this was decided on case-by-case basis by BKPM. The divestment requirement of the individual company under the old divestment regime was usually stated in the Principle License (Izin Prinsip) and/or in the Business License (Izin Usaha).
The New Divestment Regime in Indonesia Under the BKPM Regulation
Companies established in Indonesia after enactment of the BKPM Regulation
The BKPM Regulation does not require foreign companies (PMA) anymore to divest part of their shares to Indonesian citizens or legal entities. Therefore a foreign company (PMA) established after enactment of the BKPM Regulation is not required to divest part of its shares anymore within 15 years of commercial operation. This general rule does however not apply to companies which have a divestment requirement based on specific legislation, such as mining companies.
Companies established in Indonesia before enactment of the BKPM Regulation
In the event a foreign company (PMA) is established before the enactment of the BKPM Regulation, it will remain subject to the obligation to divest as stated in the Principle License (Izin Prinsip) and/or in the Business License (Izin Usaha). For those companies, the divestment obligation remains binding and must be carried out in accordance with a predetermined time period. The foreign company (PMA) has the possibility to apply for an extension of the divestment period for a maximum period of two years.
Fulfilling Divestment Requirement Through Temporary Divestment: Sale-and-Buy-Back
A foreign company can fulfill its divestment requirement through a sale-and-buy-back of shares construction, which will be discussed in our column next week.