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INDONESIA: An Introduction to Corporate/M&A

Trends and Developments

Contributed by Walalangi & Partners.

Overview of Indonesian Market and Economy Development

2020 has been a uniquely challenging experience for nations across the globe, including Indonesia, and the unprecedented COVID-19 pandemic will inevitably have an adverse impact on global economic growth. Indonesia’s Minister of Finance, Sri Mulyani Indrawati, forecast Indonesia’s gross domestic product (GDP) growth for the entirety of 2020 to be between −1.7% to −0.6%, compared to 5.02% in 2019.

Despite the challenges, Schroders’ Q2 2020 report indicates that the Indonesian market remains attractive to investors, particularly in the healthcare and energy sectors. Indonesia has also successfully maintained its sovereign credit rating at investment grade with stable outlook per Fitch (BBB−). A further testament to this optimistic outlook is the official record issued by the Investment Coordinating Board of Indonesia (BKPM) exhibiting 14,439 new foreign direct investments in Q2 2020 alone with an aggregate value of USD6.8 billion.

Foreign Investment – M&A 

Indonesian law requires foreign investment to be conducted through an Indonesian limited liability company (PT), with certain exceptions, including for upstream oil and gas and construction services, which can be conducted through a direct joint operation between foreign entities and local entities. General foreign investment in Indonesia is regulated under investment laws and regulations, with BKPM having the authority and responsibility to supervise these investments. Investment in certain sectors – such as banking, financial institutions, insurance, mining, and oil and gas – is subject to separate regulatory regimes.

From time to time, the Indonesian government issues the so-called “negative list,” which categorises foreign investments into certain lines of businesses (also known as KBLI) as either prohibited or subject to greater scrutiny and restrictions. An exemption to the limitations set out under the negative list applies for indirect or portfolio investments made through the Indonesian Stock Exchanges. Portfolio investment is not defined by the regulation but, in practice, it is generally accepted that it means minority investment through capital markets without control, and where only intended for capital gain.

Funding - Increasing Opportunities for Venture Capital Investments

The traditional funding alternatives are bank loans, shareholder loans, corporate bonds, warrants or initial public offering. For early stage (start-up) companies, the recent trend of funding alternatives includes investments from ultra-high net worth individuals and crowdfunding platforms. Prominent sources of funding for growth-stage companies include large cap private equity houses and other tech giants, investing directly or indirectly through venture capital (VC) funds.

VC funds remain relatively active in Indonesia, with several new funds closing throughout 2020. Examples include MDI Ventures, the VC arm of Telkom Indonesia (state-owned telecommunications company), which closed a USD500 million fund to be deployed into tech start-ups in South-East Asia, and East Ventures, which rounded up the first close of its eighth fund, uniquely aimed towards digital companies emerging in the aftermath of COVID-19 lockdown. Some notable VC deals include Bangkok Bank’s investment in Indonesian decacorn Gojek, and SoftBank’s USD100 million investment in logistics start-up Waresix.

Closing Structure of Private M&A 

The tools and techniques used in foreign direct investment (private M&A) depend on the characteristics of the business of the target and the negotiating circumstances of the parties. A locked-box mechanism, escrow account and price adjustment mechanism are more common alternatives in Indonesia, supported by certain fundamental pre-closing standard conditions, including internal corporate approvals and public announcements. Post-closing conditions are more administrative in nature, including a merger notification report to the Indonesian Antitrust Supervisory Commission (KPPU) when the transaction meets the qualification threshold set under the regulation.

COVID-19 Aftermath: Satellite Cities, Telecommuting, and Digital Transactions

COVID-19 has showcased how urban cities cannot easily cope with disruptions brought about by highly infectious diseases. With the majority of countries being under a form of lockdown, people are forced to rethink the ways of working, connecting, and moving. The Indonesian government has embraced telecommuting as it released multiple regulations to provide more flexibility and to support businesses during the outbreak, including:

(1) KPPU now allows the use of the electronic media, including video conferencing and email, to handle existing and new antitrust cases during the outbreak, aimed to significantly help KPPU in accelerating the antitrust proceedings and assessment of merger notifications.

(2) The Indonesian Financial Services Authority (OJK) now allows fit and proper tests for primary parties of non-bank financial institutions to be conducted virtually through videoconference.

(3) OJK enacted 2 new regulations to allow for (i) GMS of publicly listed companies to be virtually held (e-GMS) and (ii) the shareholders to grant their respective proxies an electronic power of attorney to attend physical GMS (e-Proxy).

(4) The government introduced a new regulation to accelerate the processes of registration, assignment, rectification, amendment and deregistration of mortgages by utilizing an electronic system (e-mortgage).

In addition to telecommuting, smart satellite cities utilizing information technology to improve efficiency and convenience are gaining momentum in South-East Asia. In relation to this, we have assisted a joint venture company of Mitsubishi Corporation and Temasek-backed Surbana Jurong to build a high-tech satellite township in Bumi Serpong Damai, a suburban area in the outskirts of Jakarta, all planned around the Transit Oriented Development concept.

Indonesians are also more attuned to digital transactions. It was reported that Indonesians are connected to the mobile internet for approximately 4 hours daily, beyond the global average of 3 hours and 13 minutes. Powered by purchases off the internet, the Indonesian internet economy is predicted to grow to USD130 billion (out of a global USD300 billion) by 2025, for which E-commerce, ride hailing, and digital payments are the main contenders.

The Indonesian government has released multiple regulations to provide better clarity to the existing regulatory framework on digital transactions:

(1) Effective as of November 2020, each offshore e-commerce platform providers (e.g. Amazon) will be required to appoint a local representative office in Indonesia (KP3A) once it has exceeded a threshold of (i) concluded transactions with 1,000 customers in Indonesia or (ii) 1,000 packages shipped to Indonesia.

(2) The government has also commenced the preparation and socialization of a draft personal data protection bill, providing more detailed data protection requirements to balance the significant growth of cross-border e-commerce business with the Indonesian market.

Other Major Regulatory Updates 

On 5 October 2020, the Indonesian government together with Indonesia’s parliament (house of representatives) passed the so-called Omnibus Law on Job Creation (Omnibus Law), which according to the Indonesian government offers solutions to tackle various overlapping and contradictory provisions in existing legislation. The Omnibus Law is intended to serve as a “super-integrated” regulation to harmonize existing regulations, provide more attractive investment facilities, and cut the red tape bureaucracy so as to continuously promote more transparent procedures in Indonesia. Some of the significant changes introduced by the Omnibus Law are as follows:

(1) The Omnibus Law offers more flexibility to investors by reducing the number of fully prohibited business sectors from 20 to 6. The following are among the business sectors that are now open for investment: alcoholic beverages industry, land-based transportation terminal operation, flight navigation services, and radio frequency spectrum and satellite orbit monitoring station operator.

(2) The Omnibus Law abolishes multi-layered licensing requirements and, instead, streamlines and categorizes licensing requirements based on risk assessment of the relevant business activities. This is expected to significantly reduce costs and time for businesses.

(3) The Omnibus Law eases hiring of expatriates, including by affirming the abolition of work-permit requirement (IMTA) and exempting the manpower utilization plan (RPTKA) requirement for employment of expatriates in emergency circumstances, vocational activities, technology-based start-up businesses, business visits, and research purposes.

(4) The Omnibus Law omits the previous limitation set by Law No. 13 of 2003 on Manpower whereby only non-core supporting activities could be outsourced, which leads to a possible interpretation that the scope of outsourcing works is now expanded without limitation.