A Good Look into the Regulatory Framework on Investing in Indonesia
13 November, 2017
Indonesia is the largest economy in Southeast Asia. Its abundance of natural resources such as minerals, coal, metals, oil, and gas has been one of the main factors of its recent growth. As a result, the inward foreign direct investment (FDI) has quadrupled from US$4.9 billion to US$20 billion just between years 2006 and 2015. It is expected that this trend will continue and even more businesses from abroad will be attracted to enter the Indonesian market.
However, Indonesia is famous for its legal restrictions that have an intimidating effect and distract future investors. Moreover, an effort of the Indonesian government to leave the label of a "developing country" and become one of the important global economies has faced a substantial obstacle – insufficient finance. Consequently, the Indonesian Government has invited the private sector to participate in developing Indonesian infrastructure and consequently contribute to the development of the whole economy of the country.
However, the investors are confused.
The Investment Law defines "foreign investment" as an investment activity to do business in Indonesia that is carried out by a foreign investor. Under the same law, any form of direct foreign investment in Indonesia must be in the form of a limited liability company. Therefore, it can be either a domicile company (PT) or a company that is owned by a foreign investor even only by 0.01% (PMA).
Due to common local partnership requirements, foreign investment is usually made through the establishment of a PMA company in the form of a joint venture with a domestic investor or the acquisition of part of the shares in an existing company. Nevertheless, we strongly recommend finding a trustworthy local nominee in order to minimise all potential risks which might occur later.
Cekindo is here to assist you with this process and help you find a suitable partner; thanks to our vast network of contacts.
The Investment Law also defined business fields that are declared to be closed or conditionally open to investment. Thus, all future investors must pay special attention to the Negative List that specifies all these sectors. Note that investors coming from ASEAN Member States are not that strictly limited as the Negative List opened up certain sectors or increased the foreign shareholding limits for them.
Whether you are thinking about merging, acquisition, or consolidation, the Negative List is the first place to which you should refer as it states the maximum foreign shareholding in all the aforementioned cases.
Foreign Investor Protection
Likewise, the Investment Laws contains several provisions that protect foreign investors. The government is forbidden to take measures of nationalisation or expropriations against the proprietary right of investors unless provided by law. If the event that nationalisation of PMA happens, the government is obliged to compensate foreign investors. The investment is based on the market value of all nationalised assets. Unfortunately, the law does not state any details on how to calculate the so-called market value.
Indonesia has a rather unpredictable regulatory environment that can change any time even in contradictory directions. Thus, it is advisable to have a deep knowledge of laws and regulations that can influence your business in order to prevent any unpleasant events.
An assistance from professionals at Cekindo can help you run your business efficiently and in accordance with the Indonesian law.
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