Exclusive Q&A on Foreign Investment with Mohamed Idwan
Posted: 28th April 2016 09:01What are the main advantages of investing in your jurisdiction?
Consumer-oriented sectors appear to be the most attractive investment opportunities at present. This is due to the rapidly growing middle class, and an overall gradual shift in the Indonesian economy from being an exporter of natural resources to an economy that is increasingly driven by domestic demand. Recently, banking and insurance have been two notable areas that have seen a fair amount of activity due to a market that is presently under-served and the consequent great opportunities for expansion. Longer-term, mineral investments have been significantly under-represented, at least in part due to problematic government policies, however, it is entirely possible that this sector will see a resurgence.
What markets currently provide the best investment opportunities?
Particularly in the natural resources sector the recovery expectations were at times too optimistic, which prevented M&A activity due to a mismatch in expectations, and therefore prospects and valuations between sellers and buyers. This situation is starting to correct itself and we are in fact seeing more activity, including in distressed situations. In other sectors there has been concern over potential for a more significant downturn that would also significantly affect the Indonesian market. The market is working through these issues, and we expect to see growth in the M&A over 2016.
Are there any compliance issues investors need to be aware of?
Compliance with regulatory requirements, such as licensing, is certainly an important point to consider, especially considering that Indonesia has a highly bureaucratic administrative state with at times insufficiently circulated regulatory requirements that are inconsistently enforced. Another is security of ownership of assets, this includes both movable and immovable assets (de jure and de facto, as land disputes are common while the land registry office often lacks capacity), security interests (which need to be carefully verified), and most importantly licenses (particularly in the natural resource sector).
Can you outline the main laws and regulatory authorities relating to oversight and review of foreign investment in your jurisdiction?
All non-portfolio investment into Indonesia is subject to the approval of the Investment Coordinating Board of the Republic of Indonesia (BKPM), which licenses investments on the basis of the Negative Investment List. The Negative Investment List sets out business sectors that are subject to restrictions, or outright prohibition, on foreign ownership, typically expressed in maximum percentage terms, investment size, and further industry-specific license requirements. Additionally, the Commission for the Supervision of Business Competition (KPPU) has the purview to review M&A transactions that cross certain thresholds and those that result in potentially anticompetitive outcomes.
Have there been any recent regulatory changes or interesting developments?
Regulatory changes sometimes pose a challenge in Indonesia, with the implementation of the new Indonesian Negative Investment List that sets out foreign ownership limits, expectations that it, and the boarder approaches to foreign investment, will once again be revised in the near future. And the substantial uncertainty that we have seen in the natural resources sector – both regulatory and in terms of market prices. The natural resources sector, and certain aspects of other sectors have seen a number of policy changes that appear spurred on by populist sentiment, a trend that is expected to continue in the near future.
Can you outline the process of an M&A with foreign investors?
The first step is the approval of the Investment Coordinating Board of the Republic of Indonesia (BKPM), which licenses investments on the basis of the Negative Investment List. The Negative Investment List sets out business sectors that are subject to restrictions, or outright prohibition, on foreign ownership, typically expressed in maximum percentage terms, investment size, and further industry-specific license requirements. Afterwards, either a new company is established and subsequently the necessary licenses are applied for and obtained, or an M&A transaction takes place, with 30 day prior newspaper notification in case of a change of control, and a notarial share transfer that is then registered with the Ministry of Law and Human Rights.
Why is it important to consider the tax issues and implications of a possible deal at the very outset?
Due to the current economic downturn the Indonesian tax office has experienced a significant shortfall in 2015 and is expected to meet similar difficulties in 2016. As a result, tax collection has become a significant political issue, and the tax office has become increasingly aggressive in its approach to interpretation of transactions, tax laws and regulations, and particularly tax audits. In light of this it is advisable to very carefully structure and review any transaction structures, not only in relation to tax non-compliance, but also in relation to potential alternative interpretations that could be advanced by the Indonesian tax officials.
How can an organisation effectively measure the economic and political risk before entering a new jurisdiction?
Retaining lawyers with a combination of experience in the Indonesian market and of working with International firms is the critical element, as well as lawyers’ international experience and ability to work with clients and counterparts from other jurisdictions, which usually means different legal systems and different expectations than those prevalent in the home market of the investors.
In this regard, we have entered into an association with Clyde & Co., an international law firm based in the United Kingdom with offices throughout the world. The goal of the association is to provide a seamless service to foreign investors entering the Indonesian market, to serve our clients throughout Indonesia and to cater to Indonesian businesses that conduct business abroad.
Mohamed Idwan (‘Kiki’) Ganie is the Managing Partner of Lubis Ganie Surowidjojo (LGS). He graduated from the Faculty of Law of the University of Indonesia and holds a PhD in Law from the University of Hamburg, Germany. Dr. Ganie has more than 30 years of legal experience, and specializes in commercial transactions and commercial litigation, including alternative dispute resolution and has acted as an expert in a number court and arbitration proceedings. His expertise covers general corporate/company law, banking law, finance, bankruptcy and restructuring, mining, investment, acquisitions, infrastructure projects/project finance, antitrust, and shipping/aviation, with a particular focus on corporate governance and compliance.
Mohamed can be contacted on (62-21) 831 5005, 831 5025 or by email at firstname.lastname@example.org