Compliance Road Map for Companies in Indonesia

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By Andini H. Dewi and Christina N. Soela

Compliance is an important issue for foreign investment companies doing business in Indonesia. As international organizations, foreign investment companies are not only required to comply with the laws and regulations of the country of origin of their parent companies but also with relevant laws and regulations in Indonesia. Due to the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM), which supervises all foreign investment activities in Indonesia, foreign investment companies are often more strictly scrutinized than wholly owned Indonesian companies in terms of compliance with Indonesian laws and regulations.

Foreign investment companies are required to obtain BKPM approval before carrying out certain actions such as share transfers, capital increases and business expansions. Foreign investment companies must also submit an investment activities report to the BKPM. This report must be submitted quarterly for companies that have not obtained a Business License (i.e., they have not yet commenced commercial production or operations) and each semester for companies that have obtained a Business License (i.e., they have commenced commercial production or operations).

There is no unifying legal instrument governing compliance in Indonesia. Various laws and regulations contain provisions on compliance. Article 4 of Law No. 40 of 2007 regarding Limited Liability Companies (Company Law) stipulates that in addition to the Company Law, companies are required to comply with the Articles of Association (AOA) or bylaws of such companies and other applicable laws and regulations of Indonesia.

Article 15 of Law No. 25 of 2007 regarding Investment (Investment Law) sets forth requirements for companies operating in Indonesia. Those requirements are to (i) implement the principle of good corporate governance; (ii) carry out corporate social responsibility programs; (iii) submit investment activities reports to the BKPM; (iv) honor the cultural traditions of the communities where the companies operate; and (iv) comply with all applicable laws and regulations.

The Capital Market Supervisory Board (Badan Pengawas Pasar Modal or Bapepam), whose functions are now being carried out by the Financial Services Authority (Otoritas Jasa Keuangan or OJK), issued Circular Letter No. SE-03/PM/2000 regarding the Formation of Audit Committees by Issuers and Public Companies. This requires that all listed companies in Indonesia have an Audit Committee within their organization, whose duties include reviewing a company’s compliance with all laws and regulations that are relevant to the company’s activities.

A related compliance issue in Indonesia is the implementation of good corporate governance principles. Similar to compliance, good corporate governance principles have not been compiled into a single legally binding instrument. In 2006, the National Committee of Governance Policy (Komite Nasional Kebijakan Governance or KNKG) issued the General Guidance on Indonesian Good Corporate Governance. This is not a binding legal regulation but merely offers guidance for companies in implementing the principles of good corporate governance in Indonesia. Furthermore, it does not provide sanctions or penalties for non-fulfillment of the recommendations provided thereunder.

The non-existence of a legal instrument listing all the compliance obligations of companies in Indonesia requires businesses themselves to identify the compliance regulations to which they must adhere. It is not easy for companies to build such a general list of compliance regulations they must follow. While such a list must include sectoral laws and regulations, most foreign investment companies in Indonesia will first focus on, among others, the Investment Law, the Company Law, anti-corruption regulations, tax laws and labor regulations.

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