INVESTING IN INDONESIA (AN INTRODUCTION) Daniel Pardede, Partner Hadiputranto, Hadinoto & Partners

Transcription

1 INVESTING IN INDONESIA (AN INTRODUCTION) Daniel Pardede, Partner Hadiputranto, Hadinoto & Partners

2 TOP CONSIDERATIONS BKPM (Capital Investment Coordinating Board) Issues Foreign Investment Negative List Structuring against Negative List Establishing Presence in Indonesia Establishment of Company Acquisition Process Representative Office Contractual Business Arrangements (Distribution Arrangements) Employment Issues Anti-monopoly Debt Others

3 Foreign Investment Negative List Investment Issues Restrictions under the Negative List certain business lines are closed or have foreign ownership limitations informal consultations with BKPM to clear potential issues and obtain certain clarifications may be needed proposed update of Negative List BKPM increasing focus on enforcement October 2015 regulations compliance driven Investment plan based minimum capital investment IDR10 billion equivalent regardless of industry loan and equity ratios changing must realize investment otherwise no operating license

4 Foreign Investment Negative List Investment Issues Acquisition of Companies Process driven and generally administrative Unlevel playing field (historical approvals and exceptions) Grandfathering clause may be applicable Negative List language not clear policy driven However new requirements to meet minimum capital requirements and minimum shareholding for second shareholder Be careful of prior existing divestment obligations o can divest and buy back if no Negative List restriction

5 Foreign Investment Negative List Investment Issues Conversion of Indonesian Owned Companies Must convert status to permitted foreign activities Sometimes articles and licensing may need to be changed prior to BKPM approval a trust issue Certain sectors require presentations to BKPM Must meet minimum capital requirements o can be challenging in joint venture scenario Indonesian partner needing to subscribe to maintain percentage shareholding o BKPM s simplistic view on percentages shareholder contribution divided by aggregate contributions

6 Foreign Investment Negative List Investment Issues Conversion of Group Companies likely requirement Conversion of subsidiaries into PMA if the parent company is PMA (recent MOLHR requests, new BKPM regulation) Currently there are PMA companies that have subsidiaries which are non PMA companies (may be involved in restrictive business, or shareholder composition does not comply with Negative List) please be cautious

7 Investment Issues Structuring Against Negative List (Market Practice) Local Shareholder Arrangments (Structured Finance) Convertible Debt Instrument Exchangeable Bonds Other Alternatives (e.g. class of shares)

8 Establishing Presence Establishing a Limited Liability Company (Key Issues) Indicative timeline: 8-12 weeks (although BKPM has enacted the 3 hours investment license service that meet certain requirements) Check negative list whether there is any restriction on the intended line of business. Preparation, e.g. (i) investment principle license application to BKPM, (ii) presentation to BKPM (if required), (iii) POAs to parties given powers to attend the establishment, (iv) Deed of Establishment, (v) office lease, (vi) Domicile Letter, (vii) Tax Number, (viii) bank account, (ix) Approval of Establishment from Ministry of Law.

9 Timeline Establishing Presence Prepare BKPM application for establishment of PMA Company Submit BKPM application and presentation / receipt of BKPM approval Execute DOE before Indonesian notary Interim Process - licensing, registrations and bank account Submit DOE for MOLHR approval/ receipt of MOLHR approval Post MOLHR approval issues Approx. 4 weeks Approx. 4 weeks 4 days Approx. 4-5 Approx. 1-2 weeks weeks

10 Establishing Presence Establishing a Limited Liability Company (key issues) Shareholding: Minimum 2 shareholders Capital: Paid up at least IDR2.5 billion. However, to obtain a business permit, BKPM will require a minimum paid up capital of IDR10 billion (policy) Selecting office space: a. No virtual office service office still accepted b. Area at least 50m 2 Bank account: Start early (various banks have different requirements) Local director: Preferred from beginning (getting through licensing requirement will be easier)

11 Establishing Presence Acquisition Change in Control Change in control by way of a subscription of shares Directors prepare and resolve to adopt an acquisition proposal Commissioners should approve acquisition proposal Directors prepare an acquisition plan Notice of acquisition plan must be published in one newspaper (information, including financial information, is published) and a notice to employees (new requirement) must be given 30 days prior to calling a shareholders meeting to approve the transaction Formal closing shareholders meeting Similar but simplified process where share purchase transaction

12 Establishing Presence Acquisition Change in Control Timing issues above adds to process but not necessarily time if well planned If necessary pay off small creditors and obtain consents from large creditors prior to making announcement in newspaper Preliminary shareholders resolutions required to support an application to BKPM for change in shareholders resolutions should be made subject to BKPM approval and compliance with Articles 125/127, as appropriate Requirement in Company Law that all shareholder resolutions to be filed with the MOLHR must be reduced to a notarial deed within 30 days and thereafter submitted to the MOLHR within 30 days otherwise void

13 Timeline of Acquisition Through BoD of the Target Deadline for creditors of the Target to file an objection to the Target with respect to the Acquisition. If there is no objection during the period, the creditors shall be deemed to agree with the Acquisition EGMS of the Target to approve the Acquisition Plan Approval of MOLHR on the Deed of Acquisition Max 14 days Min 16 days Max 30 days Preparation Period EGMS of the Acquiror (125 (4) - only for PT). The Target changes status to PMA with circular resolution (BKPM approval) if applicable. Letter of proposal/notice on the Acquisition to BoD of the Target (125 (5)). Execution and approval of the Acquisition Plan (125 (6)). Identification on the negative covenants in the existing contracts of the Target and the Acquiror. Min 30 days i. Announcement of the Abridged Acquisition Plan by the Acquiror and the Target in 1 national newspaper; and ii. Written notice by the Target to its employees Notice for the EGMS of the Target 13 (i) Execution of Deed of Acquisition in a notarial deed, which should be in line with the Acquisition Plan (ii) Injection of capital for increase of authorized and paid up capital of the Target, in line with the Articles of Association EFFECTIVE BoD of the Target announces the result of the Acquisition in one national newspaper

14 Timeline of Acquisition Directly from the Shareholder D - 32 Deadline for creditors of Target to file an objection to the Target with respect to the Acquisition. If there is no objection during the period, the creditors shall be deemed to agree with the Acquisition Signing of Deed of Transfer EGMS of the Target BoD of the Target announces the result of the Acquisition in 1 national newspaper Max 14 days Min 16 days D Preparation Period Signing of CSPA i. Announcement of the planned Acquisition by the Acquiror and the Target in 1 national newspaper; and ii. Written notice by the Target to its employees D - 45 Min 30 days EGMS Notice of the Target D - 15 Max 30 days Notification on the change of the shareholders composition to MOLHR D + 30 Notes: * Must observe the covenants in the agreements with third parties/creditors, if there is any obligation of prior notice to the creditors or approval from the the creditors. ** If there is an objection from a creditor, this must first be settled prior to the EGMS of the Target. If this objection cannot be settled by the BoD of the Target prior to the date the EGMS is held, the objection should be conveyed at the EGMS to seek for approval on how to settle the objection. If the settlement has not been reached, the Acquisition cannot be conducted. 14

15 Representative Office Types Establishing Presence a. Representative Office (General outside finance sector) b. Foreign Trade Reprentative Office (Trade) c. Contruction Representative Office (Construction) Permitted Activities a. Managing the interest of a company or affiliated companies b. Preparing for the establishment and development of a business of a foreign company in Indonesia c. Promoting and improving the marketing of goods produced by its principal offshore d. Conduct market research e. Concluding contracts

16 Representative Office Establishing Presence Prohibited activities: a. Prohibited from engaging directly in trading and selling activities from the earlier stages until the end, such as submitting tenders or bids, signing contracts, or settling claims. b. Prohibited from engaging in import activities. The importation must be conducted by an Indonesian company and/or an investment company with a proper import license. c. Prohibited from seeking any income from sources in Indonesia. d. Participating in any form whatsoever in the management of a company in Indonesia.

17 Establishing Presence Contractual Business Arrangements (e.g. Distribution Arrangements) Breaking Supply Chain: Indonesian regulation effectively mandates the break up of the supply chain to ensure that small companies are involved and receive the benefit of economic activity (even for Indonesian companies, so that a distribution company cannot retail, and vice versa). Foreign Involvement in Retail Restricted: There is a general prohibition on PMA companies being engaged in retail activities (except for large scale retailers like supermarkets, department stores and hypermarkets). Requirement to use intermediaries (local distributors).

18 Establishing Presence Contractual Business Arrangements (e.g. Distribution Arrangement) Distributor: is a local trading company that acts on its behalf based on an agreement to purchase, store, sell and market the goods and/or services which it owns or controls. A distributor is required to register its agreement with its principal (either a principal manufacturer or a principal supplier) at the Ministry of Trade ( MOT ) failure to register may be subject to revocation of SIUP (Trande License), which would be done after written warnings (up to 3 written warnings). Upon registration, the MOT will issue a Registration Certificate ( STP ) to the registering distributor. The STP will be valid for 2 years from the date of issuance, unless agreement provides for a shorter appointment period.

19 Establishing Presence Contractual Business Arrangements (e.g. Distribution Arrangement) After registration, the distributor is required to submit a business activity report every semester to the Directorate of Business Fostering and Company Registration (Directorate) of the MOT. The distributor is also required to notify the MOT of any change in its registration data. A distribution agreement must include at least (i) name of parties, (ii) purpose and objective, (iii) status of distributorship, exclusive or not exclusive, (iv) products to be distributed, (v) rights and obligations of each party, (vi) authority of distributor, (vii) term and termination of the agreement, (viii) dispute settlement (can be arbitration), (ix) choice of law (no requirement to be Indonesian law)

20 Key Employment Issues (M&A) Employees cannot terminate except in limited circumstances (e.g. merger) then 2 x payment Employees right to demand termination (share sale, 1 x payment : asset sale 2 x payment (no deemed employee transfer) No obligation to re-hire Negotiations with employees on favorable terms an industrial relations plan is fundamental Termination documents must be registered with labour courts Target company s cost but cost can be apportioned by contract if provisions not available

21 Key Employment Issues (M&A) Avoid protracted disputes ongoing pay while dispute being heard at labour courts Cash flow issues if payments need to be made Good people take advantage and leave Employment contracts for key employees paramount Structured program if purchaser demands work force restructuring pre-closing (avoid if seller) What are the purchaser s subsequent transactions Claims for 30 years (Constitutional Court overturned 2 year claim limit)

22 Key Employment Issues (M&A) Streamlining Employee Entitlements (asset sales) Employee salaries and certain benefits cannot be cut Integration required over a certain period Company regulations/collective labor agreements to be harmonised Expectations that higher level employees may be problematic in future if entitlements do not increase invariably there is salary creep Involvement of unions/employees as required

23 Commission assertive Anti-monopoly (M&A) Government Regulation/Guidelines Requiring post-transaction notification for mergers, share acquisitions, consolidations long determination period difficult to unscramble a transaction Pre-closing voluntary consultations non binding but will adhere to if no material change Excluding affiliate and asset transactions Prohibiting mergers, acquisitions and consolidations that cause unfair competition or monopolistic practices Introducing lessening of competition as the standard for review No grandfathering of past transactions Thresholds first step in any transaction analysis

24 Significant focus on debt DEBT BKPM PMA companies implied debt to equity ratio Concept of loan and equity capital Policy excludes working capital loans Bank Indonesia regulation Liquidity requirements, hedging requirements and rating requirements of lenders name and shame regime Focus on foreign debt reporting Tightening up on funds transfer substantiation of underlying transaction Thin capitalization rules introduced effective 1 January 2016 Debt to equity 4:1

25 Others - Common Business Errors Capacity of Parties Signatories as authorized representative of the entity entering into the contract Check the Articles of Association Power of Attorney Authority granted by authorized person Stamp Duty Tax purpose Does not affect validity of the Contract

26 Others - Common Business Errors Unwritten Agreement Purchase Order-based Transaction Risk of concept of unwritten agreement under the Indonesian Civil Code The parties conduct is perceived as establishing an unwritten agreement Agreement or Contract through written correspondence (e.g. e- mail)

27 Others - Common Business Errors Langugae Law When one of the parties is Indonesian (individual or entity): Contracts should use Indonesian language, or in dual-language form Can be translated after execution/agreement Failure of which may cause the Contract declared null and void Still applicable even if the Contract is not governed under Indonesian law

28 Others Economic Stimulus Packages: So far there are 13 economic packages issued so far (between September 2015 August 2016). Implementing regulations are still in process. Use of Rupiah: Mandatory use of Rupiah for transactions within Indonesia.

29 THANK YOU FOR ATTENDING Presentations will be made available in two weeks time at presentations