Indonesia s New Negative Investment List What It Means For Foreign Investment

Transcription

1 Indonesia s New Negative Investment List What It Means For Foreign Investment Introduction Indonesia s Negative Investment List ( NIL ) is a key regulatory instrument for parties investing in Indonesia. It lays out the business sectors that are partly or fully closed to foreign investment, and thus establishes the extent to which foreign entities or individuals can invest in a given business sector. The NIL is periodically updated to keep pace with the changing economic landscape. The latest edition of the NIL was released to the public on 2 May 2014 (although the presidential regulation incorporating the NIL was issued and entered into effect on 24 April 2014), with the stated objective of attracting greater foreign investment to Indonesia. In line with the treaties on the ASEAN Economic Community, the revised NIL allows higher caps for foreign direct investment ( FDI ) from ASEAN-based investors in certain sectors, such as healthcare and motion picture advertising. However, greater limits were imposed in a number of sectors such as retail, agriculture and energy, indicating that the move towards openness in foreign investment would not be overarching. Significantly, the NIL expressly provides that any sector not stated to be closed or partly closed to FDI will in fact be 100% open to FDI (Article 3). Though the scope of this development is subject to certain limitations, which will be discussed below, it is nevertheless an important step forward as this issue was previously the subject of much debate and conjecture. In this Update, we take an overview of the revised NIL and examine the changes made to the limits of FDI across the various sectors, as well as the implications of these developments. Liberalisation of FDI In keeping with the aim of increasing the flow of foreign capital, the revised NIL has increased the limits for the amount of FDI allowed in certain sectors. This means that foreign investors may now play a greater role in these industries. 1 Rajah & Tann LLP

2 The main advancements in permitted FDI include the following areas: (iv) ASEAN investment - The NIL relaxes the FDI caps on a number of sectors for ASEAN investors, primarily the tourism, cultural/media, and healthcare arenas. For example, motion picture advertising was previously closed to FDI, but is now open up to 51% if the investor is a natural or legal person from another ASEAN country. Power Sector Public Private ships ( PPP ) As with the previous NIL, the latest version allows up to 95% foreign ownership in certain key infrastructure sectors, such as power generation (more than 10MW), transmission and distribution. In a positive move, the ownership restrictions have now been abolished for PPP schemes, allowing for full foreign ownership in power sector PPP projects. If the investor wishes to maintain an interest after the end of the PPP period, it will be subject to the normal foreign ownership caps. Port Infrastructure PPPs The foreign ownership limit for port infrastructure (wharfs, port buildings, container terminals, bulk terminals, dry bulk terminals and Ro-Ro terminals) has been raised to 95% for PPP projects, compared with 49% for non-ppp projects. Pharmaceuticals The FDI cap for the pharmaceuticals industry has been raised from 75% to 85%. As stated above, Article 3 of the revised NIL also clarifies that any sector not stated to be closed or partly closed to FDI will in fact be 100% open to FDI, settling any previous confusion over the issue. This means that the NIL is now characterised as an exhaustive list of restrictions on FDI, providing greater security for those who wish to invest in sectors not listed in the NIL. However, it should be noted that classifications of business sectors in the NIL tend towards the general, meaning that the Investment Coordinating Board of Indonesia (Badan Koordinasi Penanaman Modal or BKPM ) retains a significant amount of discretion in determining which industries fall within each restricted sector. Therefore, even where a particular industry is not specifically mentioned in the NIL, it is possible that the BKPM may rule that it falls within the ambit of one of the restricted sectors. As such, potential investors are advised to consult with their legal counsel and/or the BKPM before making any investment in a field which may be related to any restricted sectors. 2 Rajah & Tann LLP

3 Tightening of Foreign Ownership Restrictions in Certain Sectors Whilst a number of sectors have been liberalised, the revised NIL has also demonstrated a degree of regression in certain areas. Notably, the foreign ownership limit has been raised across a number of sectors, including: (iv) (v) (vi) (vii) (viii) (ix) Distribution Save for a few specific business lines, this sector was previously open to 100% foreign ownership. Under the revised NIL, this sector is now subject to a 33% FDI limit. Cold storage While previously unregulated, the cold storage sector is now subject to a 33% FDI limit in Sumatra, Java and Bali, and a 67% FDI limit in other provinces. Online retailing Online retailing is now 100% closed to FDI, where it was previously unregulated. Telecommunications The operation of a telecommunications network integrated with a telecommunications service was previously unregulated but is now subject to a 65% FDI cap. Horticulture The horticulture sector was previously unregulated but is now subject to a 30% FDI cap. Alternative trading Alternative trading (including alternative trading system providers and participants) was previously unregulated, but is now 100% closed to FDI. Electrical installations Construction of electrical utilization installations, as well as the testing and analysis of electrical installations, is now 100% closed to FDI, where the sector was previously subject to a 95% FDI cap. Energy Certain oil and gas construction and support services were previously unregulated but are now 100% closed to FDI. Futures Futures brokerages were previously unregulated but are now subject to a 95% FDI cap. 3 Rajah & Tann LLP

4 General Provisions Despite a number of changes, whether progressive or otherwise, certain key provisions remained unchanged in this latest version of the NIL. First, the revised NIL maintains in Article 5 that portfolio investments (i.e., indirect investments made through share purchases in the stock exchange) are exempted from foreign ownership restrictions. Second, Article 6 of the revised NIL maintains the position regarding changes in foreign ownership resulting from a merger, takeover or consolidation involving foreign direct investment companies ( PMA ) operating in the same sector. It provides that: Maximum foreign ownership of the surviving PMA after its merger with another PMA must not exceed the limit stated in its FDI license. Maximum foreign ownership of a PMA that acquires another PMA must not exceed the limit stated in its FDI license. Maximum foreign ownership of a new company created as the result of a consolidation must be in accordance with the regulations prevailing at the time of the new company s establishment. Third, Article 7 maintains that if a PMA wishes to expand in the same sector as it currently operates and conducts a rights issue to fund such expansion, and local investors subsequently fail to exercise their rights, then the foreign investor will have a pre-emptive right in accordance with normal company law rules. Should the increase in capital resulting from the rights issue result in the FDI component of the venture exceeding the maximum permitted under the approval issued by the BKPM, then the excess must be divested within a period of 2 years. Such divestment may be carried out in the following ways: Sale to a local investor; Public offering by the PMA; or The PMA repurchases the excess shares from the foreign investor and treats them as treasury stock in accordance with Article 37 of the Companies Act. 4 Rajah & Tann LLP

5 Concluding Words The NIL represents a complex balance of factors for Indonesia on the one hand, there is the need to protect the interests of local businesses as well as to maintain control in certain sensitive industries; on the other hand, there is the need to increase foreign investment in Indonesia, particularly in light of the slowing rate of foreign investment growth and infrastructural development. In light of this, it is perhaps unsurprising that the reaction to the revised NIL has been mixed. The amendments to the NIL have indeed liberalised foreign ownership in certain industries, opening the door for greater foreign investment. However, it is also evident that the amendments have affected certain sectors in a converse manner, whether by reducing the amount of FDI allowed or imposing caps where the sector was previously unregulated, thus reinforcing the protectionist outlook suggested by other recently enacted Indonesian laws and regulations. It remains to be seen how the enforcement and regulation of the foreign investment framework will proceed under the BKPM, especially considering how the NIL is renewed periodically. Currently, investors wishing to partake in business in Indonesia should familiarise themselves with the new NIL, and with the permitted FDI caps in each sector. 5 Rajah & Tann LLP

6 Contacts Assegaf Hamzah &s Ahmad Fikri Assegaf D (62) (21) ahmad.assegaf@ahp.co.id Eko Ahmad Ismail Basyuni D (62) (21) eko.basyuni@ahp.co.id Tunggul Purusa Utomo D (62) (21) tunggul.utomo@ahp.co.id Eri Raffaera Budiarti D (62) (21) eri.budiarti@ahp.co.id Assegaf Hamzah & s is a full service Indonesian law firm that has expanded rapidly since its establishment in Representing both Indonesian and international clients operating in a broad cross-section of industries, the firm is committed to providing apt and timely legal advice, and to offering comprehensive and holistic solutions to clients legal and business needs. Ranked as a top-tier firm in many practice areas by The Asia Pacific Legal 500, Chambers Asia and other respected legal publications, both AHP and its lawyers have regularly been recognized as leading firm and leading individuals in various practice areas. 6 Rajah & Tann LLP

7 Rajah & Tann LLP Cheng Yoke Ping D (65) F (65) Paul Ng D (65) F (65) paul.tan@rajahtann.com Daniel Leonardo Lubis Foreign Lawyer D (65) F (65) Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is the largest law firm in Singapore and Southeast Asia, with regional offices in China, Lao PDR, Vietnam, Thailand and Myanmar, as well as associate and affiliate offices in Malaysia, Cambodia, Indonesia and the Middle East. Our Asian network also includes regional desks focused on Japan and South Asia. As the Singapore member firm of the Lex Mundi Network, we are able to offer access to excellent legal expertise in more than 100 countries. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 7 Rajah & Tann LLP