On May 1, 2012, the Minister of Trade (“MOT”) issued MOT Regulation No. 27/M-DAG/PER/5/2012 regarding Importer Identification Numbers (“API”) (“MOT Reg 27”). For a full English translation of MOT Reg 27, click here. For MOT Reg 27 in Bahasa Indonesian, click here.

This regulation revokes the previous MOT Regulations i.e.  (i) Minister of Industry and Trade Decree No. 134/MPP/Kep/6/1996 regarding Import Activities and the Domestic Trade of Complementary Goods by Foreign Companies in the Field of Production and (ii) MOT Regulation No. 45/M-DAG/PER/9/2009 regarding API, as lastly amended by MOT regulation No. 20/M-DAG/PER/7/2011 (the “Previous MOT Regulations”).

In general, the rules on API under MOT Reg 27 are similar with the Previous MOT Regulations which are as follows: importation can only be conducted by an importer who has an API, namely (i) a General Importer Identification Number (“API-U”) or (ii) a Producer Importer Identification Number (“API-P”).  An importer is only allowed to have one type of API, either API-U or API-P.

API-U and API-P Requirements

While MOT Reg 27 has made other changes to the regulatory regime, the provision on API-U is the most significant change.  Similar with the Previous MOT Regulations, MOT Reg 27 also provides that an API-U is granted to companies importing certain products for trading purposes.

However, unlike the Previous MOT Regulations, the MOT Reg 27 limits the imported goods that can be imported by API-U holders.  An API-U shall only be used to import one group or type of goods covered in one section of the Goods Classifications System (Sistem Klasifikasi Barang) as attached to the MOT Reg No. 27.  There are twenty one sections under the Goods Classification System.

For an API-P, its use remains the same with the Previous MOT Regulations.  MOT Reg 27 provides also that an API-P shall only be granted to companies that import goods for its own use as capital goods, raw materials, supporting materials, and/or for supporting production process and are prohibited to be traded or transferred to other parties.

Importation of “Certain Industrial Goods”

The API-P holder is allowed to import finished goods which were governed under MOT Regulation No. 39/M-DAG/PER/10/2010 regarding Provisions on the Finished Goods Importation by Producers (“MOT Reg 39”).  MOT Reg 39 has been revoked by Supreme Court Decision No. 19/P/HUM/2011 and officially by MOT Regulation No. 24/M-DAG/PER/4/2012 (April 30, 2012).

The provisions governing the API-P holder which is allowed to import finished goods are now included in MOT Reg 27.  MOT Reg 27 also covers the importation of “certain industrial goods” by producers which was governed under MOT Reg 39.

Unlike MOT Reg. 39, MOT Reg 27 stipulates more restrictions for the importation of “finished goods” by producers. Companies holding an API-P may import “certain industrial goods” to the extent that such goods are required to develop their business and investment. The imported industrial goods may not be used in the production process but shall only be used for the purpose of market testing or if the imported goods are complementary to those it produces.  Such imported industrial goods may be traded and/or transferred to other parties.

The MOT is now using the term “certain industrial goods” instead of using the term “finished goods” that was referenced in MOT Reg 39.  The importation of “certain industrial goods” mentioned above shall only be conducted by companies holding an API-P which has been stipulated as Importer Producer (Importir Produsen).

MOT Reg. 27 further provides that “certain industrial goods” considered as complementary shall be produced by a company who has a special relationship with the APIP holder.  Special relationship is defined under MOT Reg. 27 if a party has the ability to control the other party.

Will MOT Reg 27 be applied retroactively?

The existing API-P or API-U issued before MOT Reg 27 is still valid until the end of 2012.   MOT Reg 27 requires that the API-P or API-U issued prior the issuance of MOT Reg 27 must be adjusted with the provisions under MOT Reg 27 by December 31, 2012.

Uncertainties Created by MOT Reg 27

Based on our initial analysis, we have identified a number of uncertainties created by MOT Reg 27.

1.          One API-U can be used to import trading goods within only one group or type of goods covered in one section of the Goods Classifications System. However, there is a lack of clarity toward API-U holders currently engaging in a variety of import activities where the goods are included in more than one section.

2.         The definition of “special relationship” and the requirement that certain industrial goods that are imported as complementary goods must be produced by a company overseas which has a special relationship with the company holding the API-P.  There is a lack of clarity of the implications for a company if the finished goods imported to Indonesia are not manufactured by a company within the same group (i.e. an affiliated company)

3.         It is not clear what “certain industrial goods” are as classified as complementary goods under MOT Reg 27. For example, if the API-P holder imports spare parts as part of an after-sales service to their customers, would such spare parts be classified as complementary goods and therefore a company holding an API-P could import such spare parts?

It remains to be seen how the implementation of the MOT Reg 27 will unfold. As the regulation has caused some uncertainty within the industry, we expect the MOT can respond to some of the open issues immediately in order to provide legal certainty for trading and manufacturing activities in Indonesia.

For more information, please contact Ira Eddymurthy, Tengku Almira or see below:

• English Translation of Minister of Trade Regulation No. 27 of 2012
• Minister of Trade Regulation No. 27 of 2012 (Bahasa Indonesian)
• Importer Identification Number (API) Update
• Indonesian Law: 2011 Year in Review

Foreign companies continue to mull investment in Indonesia by the establishment of joint venture companies with local Indonesian entrepreneurs.

However, foreign and Indonesian parties tend to focus all their time and attention on the creation of hefty joint venture agreements, making sure that nothing is left behind in terms of provisions, representations & warranties and also covenants.

Once the joint venture agreement is signed, the parties usually consider that the struggle is over and that the deal should be able to go forward smoothly.

Articles of Association are as important as Joint Venture Agreements

However, this is not always the case. In order to establish a foreign investment joint venture company under Indonesian law, investors should pay as much attention to the Articles of Association as to the joint venture agreement. After obtaining the approval of the Capital Investment Coordinating Board, the preparation, finalization and execution of the Articles of Association of the company represents the underlying document for the establishment of the body unifying the parties of the joint venture agreement to become shareholders of the Indonesian limited liability company.

The parties to the joint venture agreement, who are now shareholders to the newly established Indonesian limited liability company, tend to consider the joint venture agreement sufficient grounds to regulate the relationship between the parties. They further view the Articles of Association as required only to satisfy Indonesian law. As long as the bare minimum provisions required by law are reflected in the Articles of Association, both parties often feel that the document is sufficient.

A comprehensive Articles of Association minimizes risk

However, in our experience and over the long run, there is a possibility that disputes may occur amongst shareholders due to a wide range of reasons, such as allegations of mismanagement, improper accounting or reporting, amongst others.  If the joint venture agreement did not bind the Indonesian limited liability company, unfortunately, the provisions of the joint venture agreement will not be applied against the company.

This may worsen the situation, especially when parties start using the powers that are vested in the organs of the limited liability company, namely the General Meeting of Shareholders (“GMS”), the Board of Directors (“BOD”) and also the Board of Commissioners “(BOC”), such as the creation of certain amendments to the Articles of Association that benefit only one of the shareholders of the company.

As a solution, it is advisable to create a more comprehensive version of the Articles of Association of the Indonesian limited liability company and to designate a substantial amount of time to negotiate its entirety upfront. This can be done by first incorporating the provisions of the joint venture agreement, and then followed by a review of the rights and obligations of each shareholder, the respective members of the BOD and the respective members of the BOC as provided for under the Indonesian Company Law (Law No. 40 of 2007 Regarding Limited Liability Companies).

Best Practices for Articles of Association in Indonesia

Based on our experience, the main points that may be considered to be specifically regulated in the Articles of Association of an Indonesian limited liability company include, amongst others:

1. Issuance of additional authorized capital should be subject to a pre-emptive right to subscribe for the shares to be issued.
2. Make certain that there is no limitation on foreign ownership of the shares.
3. The provision on the transfer of shares should provide that any assignment should be pre-approved by any one of the GMS, the BOC or the BOC and that the transfer is subject to the right of first refusal by the existing shareholders.
4. Each of the shareholders should have a right to nominate members of the BOC and members of the BOC. The majority shareholder(s) should have the right to nominate more strategic positions, such as the President Director and a majority of the number of the members of the BOC.
5. A GMS should be able to be called at a shorter period of time in the event of an urgent matter. The regular notification period is at least 14 calendar days, excluding the day of the notification and the day of the meeting.
6. The limitations to the actions which representation is to be done by the BOD should be clearly provided for in the Articles of Association. Actions such as borrowing or lending money, rendering the company’s assets as collateral or incorporating a new company, should be with the prior approval of either the GMS or the BOC.

The examples above may seem simple. However, when the honeymoon period has passed and the differences between the shareholders start to arise, these provisions are often the most important solution to resolve all matters. Exhausting all alternatives on what can be provided for in the Articles of Association is a very important step to undertake at the beginning of the business venture.

As previously noted, the Indonesian Government has issued Government Regulation No. 24 of 2012 (“GR 24”) as an implementing regulation of Law No. 4 of 2009 Regarding Minerals and Coal Mining. GR 24 now requires foreign shareholders of Indonesian mining companies holding izin usaha pertambangan (IUPs) to divest 51% of their shares starting five years after commencement of production and ending ten year thereafter. This is a significant departure from the previous divestment rule under Government Regulation No. 23 of 2010 (“GR 2010”), which required foreign shareholders to divest only 20% of their shares after the fifth year of production.

There is a draft Ministerial Regulation on mining shares divestment released on the website of the Ministry of Energy and Mineral Resources (available here).  The draft Ministerial Regulation was prepared for implementation of Government Regulation No. 23 Year 2010 — i.e., when the divestment requirement was 20%.  This is only a draft regulation and is not legally effective.  We understand that the regulation is being revised in light of Government Regulation No. 24 Year 2011 — i.e., with the divestment requirement at 51%.  We are told informally by the Ministry of Energy and Mineral Resources that the new regulation is expected to be released by the end of the year.

Here are some highlights:

•       The divestment process only applies to companies which do not already have a 20% Indonesian shareholder at five years after production (the figure “20%” reflects the requirement under GR 23 before GR 24 came into effect)

•       Divested shares must be voting shares (some industry practitioners have previously proposed divesting non-voting shares as a means to share economic benefits without ceding control)

•       Shares offered in a listing (i.e., a public offering) do not constitute divestment (and the fact that a company has gone public and obtained a listing does not appear to exempt it from the divestment requirement; that said, the draft Ministerial Regulation makes clear that foreigners holding shares in the public float are not subject to the divestment requirement)

•       The Minister sets an offering price based on investment less depreciation/amortization, which is offered to the central and local governments as the initial stage of the divestment process

•       If a government does not elect to buy the shares, they are then offered by auction to eligible Indonesians, first state-owned enterprises and then private entities

•       The auction process is run by a committee of government representatives appointed by the Minister

•       The 20% Indonesian interest may not thereafter be diluted (and that’s all it says on the topic — there’s no mention in the draft Ministerial Regulation of what happens if the Indonesian interest cannot fund its share of additional capital)

•       There are detailed provisions regarding the auction and payment process

Again, this is only a draft Ministerial Regulation and it will be interesting to see how the Ministry of Energy and Mineral Resources may revise some of its terms in light of the different economics and other practicalities of a 51% share divestment as opposed to a 20% share divestment.

For more information on mining in Indonesia, please contact Michael S. Carl or see below:

• New Indonesian Mining Divestment Requirements
• Full English Translation of Government Regulation No. 24 of 2012
• 2011 Indonesian Law Review: Mining
• 2011 Indonesian Law Review: Environmental Protection & Management
• A due diligence shortcut for mining rights in Indonesia
• Two years after Indonesia’s new Mining Law: What has been achieved?

Please find attached the latest Legal Alert for March 2012.

SSEK’s Legal Alert is a monthly survey designed to keep you up to date with the latest legal developments in Indonesia.

Click here: Legal Alert_March_2012

All the articles are listed below:

1. Overview of Gas Regulation (GR 79, Pertamina, CBM, etc)

2. Development & PSCs

3. Transportation

4. LNG

5. Foreign Investment

For more information, please contact SSEK’s partner Fitriana Mahiddin and Senior Associate Syahdan Aziz.

All of the articles are listed below:

1. Types of Land Titles

2. Registration of Land Titles

3. Recent Trends in the Industry

4. Foreign Investment in the Industry

5. Commercial Leases

For further information, please feel free to contact SSEK’s partners Dyah Soewito and Denny Rahmansyah.

Visas on Arrival & Business Visas

We would like to inform our clients that the Director General of Immigration (“DGI”) has adopted a new unwritten policy that Visas on Arrival (“VOAs”) can now only be used for tourism even though the relevant regulation – still in effect – provides that VOAs can be used to hold business discussions and for other activities that are allowed under a Business Visa.

The DGI has said this is a new policy and is currently applicable, notwithstanding that it contradicts existing written regulations.

The DGI has also determined that visitors entering Indonesia under Business Visas, whether single or multiple, are not permitted to provide training but can only receive short term training.  Such Business Visa visitors, however, are allowed to attend meetings.  This is not a new policy but represents the DGI’s interpretation of current regulations. The DGI has recently detained business visitors who enter Indonesia under Business Visas to provide training and has threatened possible sanctions against their Indonesian sponsors.

This interpretation would also seem to prohibit speakers from attending conferences in Indonesia, if the purpose is to educate, instruct or train.

A more liberal interpretation of this ambiguous rule, or a different rule altogether, seems desirable. It would seem to be in Indonesian’s interest to encourage shareholders to provide training to employees of their Indonesian companies, and for foreigners to be permitted to entirely enter Indonesia for training purposes generally, particularly if they are not paid for such efforts. Efforts are being made to discuss this interpretation with the DGI. We will revert if there is a change in interpretation concerning this position.

We emphasize that different ports of entry may apply these rules differently, according to their own interpretation.  The above unwritten policy on VOAs, however has been provided by the main office of the DGI.

Pending further clarification, we recommend that business visitors not use VOAs for business visits and that business visitors using Business Visas avoid stating their purpose is to provide training. However, Business Visa Visitors may enter Indonesia for meetings.

Foreign Investment

Upstream oil and gas business can be carried out directly by foreign entities.  Foreign companies may not directly engage in downstream activities, although they may establish subsidiaries to engage in these activities, the establishment of which requires the approval of the BKPM and obtaining the requisite downstream business licences.

If the acquisition is made by acquiring an interest in an existing Indonesian company, then it would require the approval of the BKPM.  The conditions for obtaining the BKPM’s approval of either the establishment or acquisition of an Indonesian company will depend on the regulations and policies in effect.

BKPM’s current internal guidelines seem to indicate that it will permit maximum foreign ownership of 100 per cent in a company engaged in downstream gas business activities in the natural gas sector.  Furthermore, there are no special requirements or limitations imposed on foreign companies.

Law 22, however, restricts companies from engaging in both upstream and downstream activities at the same time and provides that a company (whether foreign or domestic) may hold an interest in only one cooperation contract.

The most recognized treaties that would affect the regulatory policy are those tax treaties to which Indonesia is a party.  Multinational agreements may also affect the regulatory policy where these agreements have been ratified by the Indonesian government.

Dispute Resolution

PSCs provide the dispute resolution procedures and forum.  The parties are free to elect the forum for dispute resolutions.  Parties are free to choose the venue and submit their claims to Indonesian courts or to foreign courts, or to elect arbitration as the means for dispute resolution.

For services contracts, the recent applicable BP Migas Guidelines for procurement provides that any disputes arising out of or in relation to service contracts that are subject to arbitration must be settled by a reputable Indonesian arbitration institution that is held in Indonesia.

This is the fifth post in our Legal Guide to Gas Regulation in Indonesia. Fitriana Mahiddin and Syahdan Z. Aziz will address a new topic each week.

For more information on Oil & Gas issues, see also:

• A Legal Guide to Gas Regulation in Indonesia: Overview
• A Legal Guide to Gas Regulation in Indonesia: Development & PSCs
• A Legal Guide to Gas Regulation in Indonesia: Transportation
• A Legal Guide to Gas Regulation in Indonesia: LNG
  
• 2011 Indonesian Law Review: Oil & Gas
• Changes to Indonesia’s Oil & Gas Cost Recovery Regime

Leases

Indonesian laws and regulations do not stipulate any maximum term for neither a lease of land nor a commercial building lease in Indonesia; the parties are free to decide the number of years that the lease agreement will be effective.

The parties to a lease must, however, take into account the duration of the lessor’s relevant title over the land, except for Hak Milik title which is of unlimited duration.  For example, if the right over the land to be leased is HGB, the term of the lease should take into account the term of the HGB.

An original HGB term is 30 years, which may be extended for 20 years and then be renewed again for up to 30 years.  The term of the lease must be consistent with the term of the underlying title, such that if the parties agree to a lease term of 50 years for land with HGB title, such lease term must be made subject to an agreed obligation of the lessor to obtain the necessary extension of his underlying title.

As for land with Hak Milik title, since there is no restriction on the duration of Hak Milik title, the land can be leased indefinitely, with no maximum term. There is a possible exception to this rule, however: while there are no restrictions on the length of leaseholds in Indonesia, it is possible that the state could take the position that a leasehold longer than the original term plus a renewal of the underlying title, or so long, in the case of Hak Milik title, that it is equivalent to outright ownership, is against public policy on the grounds that the lease is an attempt to circumvent the restrictions on foreign ownership of property.

For example, in the case of a Hak Milik title, if the lease period was 100 years with an option to renew for an additional period of 100 years, the GOI could conclude that a 200 year lease is the same, in economic terms, as a Hak Milik title.

In the case of a HGB title, if the lease was for 50 years with an option to renew for 50 years, the leasehold might be regarded as equivalent economically to a HGB title itself, which foreigners are not permitted to own.  While this is theoretically possible, there appear to be no instances of this argument having been upheld.

Under Indonesian law, the lessee is protected should the lessor wish to sell or transfer the land to another party while the lease is still effective.  Article 1576 of the Indonesian Civil Code provides that leases as a matter of law survive the sale of property unless the lease agreement specifically states otherwise.

This is the fifth post in our Legal Guide to Land & Real Estate issues in Indonesia. Dyah Soewito and Denny Rahmansyah will address a new topic each week.

For more information on land & real estate issues, see also:

• A Legal Guide to Land & Real Estate in Indonesia: Foreign Investment
• A Legal Guide to Land & Real Estate in Indonesia: Recent Trends
• A Legal Guide to Land & Real Estate in Indonesia: Registration
• A Legal Guide to Land & Real Estate in Indonesia: Titles
• Halt to New Hotel Development in Bali?

LNG

The broad ownership, organisational and regulatory framework in relation to LNG facilities depends on how the LNG business is carried out.

If, under the applicable contractual arrangements, the natural gas is to be sold as LNG, then the owner of the LNG will be the government until the point of delivery or sale and the facilities would be developed within the framework of the cooperation contract.  If the natural gas to be liquefied has been purchased by a private party, then the LNG and related processing and other facilities would be owned by the purchaser.

Currently, Indonesia has three main LNG export facilities: the Arun; Bontang; and Tangguh facilities.

Governmental authorisations

If conducted within the framework of a cooperation contract, the chief approval required will be the approval of the development plan by either the Minister or BP Migas.  If conducted outside the framework of a cooperation contract, the processing entity will need one or more downstream business licenses, depending on the scope of its operation.

To establish and operate private LNG facilities, the approval of Indonesia’s Capital Investment Coordinating Board (BKPM) is required if the project is to be undertaken by a processing company with foreign ownership.  In addition to these approvals, other technical, safety and environmental licenses are required to be obtained from the Ministry of Energy and Mineral Resources, the other departments having jurisdiction over major construction projects, as well as from the relevant regional and provincial governments.  Depending on the structure of the project, financing could also be subject to government approval.

Price Determination

There are no regulations concerning the determination of the prices and terms of service in the LNG sector.  The price of LNG will vary depending on the contractual arrangements between the sellers and buyers.  If the LNG is sold within the framework of a cooperation contract, its sale and pricing will be subject to the provisions of the cooperation contract and the regulations of the government and BP Migas applicable to the sale of natural gas.

This is the fourth post in our Legal Guide to Gas Regulation in Indonesia. Fitriana Mahiddin and Syahdan Z. Aziz will address a new topic each week.

For more information on Oil & Gas issues, see also:

• A Legal Guide to Gas Regulation in Indonesia: Overview
• A Legal Guide to Gas Regulation in Indonesia: Development & PSCs
• A Legal Guide to Gas Regulation in Indonesia: Transportation
  
• 2011 Indonesian Law Review: Oil & Gas
• Changes to Indonesia’s Oil & Gas Cost Recovery Regime