Exploring the Indonesian Legal Landscape

Deal News

To what extent has Indonesia been successful in attracting foreign investment in recent years? Fahrul S. Yusuf, a partner with SSEK Legal Consultants in Jakarta, recently spoke with LexisNexis about Indonesia’s legal landscape.

How is the legal landscape in Indonesia changing? Why are companies more willing to try to enter the Indonesian market? What are the risks associated with doing business in the region?

Despite attempts at liberalization with the aim of promoting capital inflow, the Indonesian market remains quite unpredictable given the nature of the country’s changing political landscape. The investment process is now much easier with the availability of online application submissions, faster approval issuance and simplified requirements for other corporate approvals, which perhaps is mainly the result of preparations for the upcoming implementation of the ASEAN Economic Community (AEC).

On the other hand, the negative investment list (NIL), pursuant to which foreign direct investment is regulated, is regularly reviewed and amended. Though some business sectors have been relaxed in terms of foreign direct investment, certain sectors of interest were made even more limited for foreign direct investment in the latest NIL, issued in 2014, and this may create uncertainty for potential investments.

Another example is the issuance of regulation by the Capital Investment Coordinating Board (BKPM) – the government agency responsible for foreign investment in general. In 2013, the BKPM attempted to address a legal issue that has long been a subject of debate: whether the foreign investment restrictions of the NIL should be applied to foreign non-portfolio investments made in Indonesian publicly listed companies. Less than six months after issuing that regulation the BKPM revoked it, so we are left with the same basic question: whether foreign investment restrictions apply to Indonesian publicly listed companies. This is just an indication that Indonesia is still some way from the legal and regulatory stability that is very much needed by domestic and foreign investors alike. However, Indonesia is without doubt still an attractive market. Given Indonesia’s significant GDP growth and its improving investment grade, interest in the country is likely to remain strong because of the growing middle class and the economic purchasing power they represent.

In terms of the risks associated with doing business in the region, the continued uncertainty surrounding the regulatory framework remains the biggest risk. Depending on the type of business, the feasibility of potential investments, as well as the certainty of the business going forward, may not be well secured.

What does this mean for in-house counsel? What is their role in risk assessment and scoping out new jurisdictions? What difficulties do they face when entering new regions and markets?

Much of this will depend on the business field in which the company is engaged. Certain business sectors are protected by the government to promote domestic industry (for example, tobacco and retail) and for these particular sectors, government influence is typically stronger.

In addition, when entering Indonesia, in-house counsel must be knowledgeable on the requirements, procedures and policies of the relevant government institutions. That may be the key challenge when advising the management, as the jurisdiction is a continually evolving regulatory environment.

The Indonesian business environment is becoming more sophisticated and corporate governance has improved in recent years. However, newcomers still face the following challenges:

  • legal uncertainty due to constant policy changes and bureaucracy
  • lack of coordination between the central and local governments
  • changes of law and provisions in Indonesian laws that are not clear

Are companies primarily outsourcing work to local law firms? What does external spending for transnational businesses operating in Indonesia look like?

A large number of companies, including multinational corporations and state-owned companies, retain outside counsel for day-to-day work that is not their core business, but is necessary to support it. The outsourced work typically requires dealing with the government, both central and regional, which, given the current legal landscape, can be difficult and time-consuming.

Outside counsel is also needed for stand-alone projects such as M&A work, typically for due diligence work and negotiations with counterparties, as well as litigation work.

Does this place a huge amount of pressure on local counsel in the region? Is this in itself a risk–to rely primarily on local counsel?

We do not see the high level of dependency placed on local counsel as burdensome. As professionals, we believe our key role includes guiding newcomers through the regulatory environment and familiarizing them not only with the system but also with the cultural aspects of doing business in Indonesia. Yes, the process can be frustrating since we still encounter unpleasant surprises and high levels of unpredictability and uncertainty, which typically occurs when dealing with the government. When this happens, it is not rare for clients to ask questions about our work, which can be a challenge on its own.

What are your predictions for the future?

We are aware of the increasing number of companies hiring in-house counsel to reduce external spending. However, we do not see this as competition because we believe that external counsel involvement will remain necessary in a legal environment like Indonesia, which continues to evolve, particularly where companies may be entering Indonesia for the first time.

Fahrul S. Yusuf is a partner with SSEK in Jakarta, Indonesia. His practice areas include mergers and acquisitions, corporate and commercial law, capital markets, and antitrust matters. Since joining SSEK in 2002, he has been heavily involved in helping clients establish corporations, and with foreign investment deals, mergers and acquisitions and various restructurings.

This article was first published on Lexis®PSL In-House.

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