Omnibus Bill Set to Reform Indonesia’s FDI Regime but How Far Will Gov’t Go?
This is the fourth in our series of ABNR Legal Updates on the Job Creation Bill that was passed by Indonesia’s House of Representatives on Oct. 5 and sent to President Joko Widodo for signing on Wednesday, Oct.15. Today, we look at the changes it makes to the rules on foreign direct investment.
Currently, foreign direct investment (“FDI”) and restrictions thereon are governed by the 2007 Investment Law (“Investment Law”). However, it is important to note that the rules contained in the Investment Law do not apply to equity investments in publicly listed companies as they are expressly exempted from foreign ownership restrictions.
The JCB’s provisions on FDI address various issues, the most important of which is the Negative Investment List, a key feature of the current FDI regime and the focus of this update.
JCB also makes changes to the array of incentives available to foreign investors and amends the rules governing special economic zones (Kawasan Ekonomi Khusus / “KEK”) and free-trade zones and ports (Kawasan Bebas / Pelabuhan Bebas). However, these aspects will be discussed in separate updates.
B. What is the Negative Investment List?
The Negative Investment List (Daftar Negatif Investasi / “DNI”), which is mandated by Article 12 Investment Law, constitutes a fundamental aspect of Indonesia’s investment regime (both domestic investment and FDI). From the FDI perspective, the DNI sets out a long and fairly exhaustive list of business lines that are either 100% closed to FDI or open to FDI subject to conditions (most significantly, foreign ownership caps in particular business lines).
Thus, consulting the DNI is the one of the first things that a foreign investor needs to do when planning an FDI venture in Indonesia.
The current iteration of the DNI is incorporated in Presidential Regulation No. 44 of 2016, which entered into effect on 18 May 2016.
C. Changes to DNI under JCB
JCB appears to make some significant changes to the Investment Law’s provisions on the DNI. We use the word “appears” advisedly here as the precise extent and significance of these changes will not become known until the necessary ancillary / implementing regulation has been issued.
In particular, JCB introduces a potentially important change to the Investment Law’s Article 12(1), which currently reads as follows:
All lines or types of business are open to direct investment, save for those that are designated as closed to investment or open subject to conditions.
By contrast, the (amended) Article 12(1) reads:
All business lines are open to direct investment, save for those that are designated as closed to investment or which constitute activities that are reserved to the central government.
Thus, the (amended) Article 12(1) no longer incorporates the phrase “open subject to conditions.” This is potentially very significant as it is this phrase that currently affords the Government the power to impose ownership caps on FDI ventures. So, its removal could be interpreted as heralding big changes ahead. Precisely how big is the key question, however.
The most optimistic interpretation is that virtually all foreign ownership restrictions will be lifted. However, we feel that this is unlikely to happen. Given Indonesia’s history of tightly regulating foreign investment, strong public opposition, and the powerful vested interests that will be lined up against any wholesale liberalization of the FDI rules, the most likely outcome is that while the Government will relax foreign ownership restrictions, it will continue to impose at least some in order to protect local business interests and small and medium enterprises and cooperatives. Such restrictions are made possible by the amended Article 12(3) Investment Law, which provides that “further provisions on direct-investment requirements shall be established by Presidential Regulation.”
As to which of the above interpretations will turn out to be correct, this is something that will not become clear until the relevant ancillary regulation has been issued.
Overall, while it is certainly clear that JCB will liberalize Indonesia’s FDI regime, it is too early to predict just how significant such liberalization will be. Like so many other implications of the new legislation, its impact on FDI will only become apparent after the necessary ancillary regulation has been issued. While JCB requires all of its ancillary regulations to be issued within not more than three months of the legislation’s promulgation, President Widodo has instructed the relevant ministries and agencies to get them on the statute book even quicker -- within just one month. This is, of course, a tall order given the technical complexity and scope of the regulations that are required.
Should you have any queries on the above or require legal advice as to how you can best protect your interests during this time of uncertainty, please contact the persons below, call us on +6221-2505125 or email us at email@example.com.
Mr. Emir Nurmansyah (firstname.lastname@example.org)
Mr. Nafis Adwani (email@example.com)
Mr. Agus Ahadi Deradjat (firstname.lastname@example.org)
 Law No 25 of 2007 on Investment (Undang-undang No. 25 Tahun 2007 tentang Penanaman Modal)
 Presidential Regulation No. 44 of 2016 on Business Sectors that are Closed or Conditionally Open to Investment (Peraturan Presiden No. 44 Tahun 2016 Tentang Daftar Bidang Usaha Yang Tertutup dan Bidang Usaha Yang Terbuk Dengan Persyaratan di Bidang Penanaman Modal)
This edition of ABNR News and the contents hereof are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained herein. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.