Indonesia: New Regulations on State Enterprises
(Legal News Oct-Dec 2005)

New Regulations on State Enterprises

The Government of Indonesia ("GOI") is continuing its policy of reforming state-owned enterprises (Badan Usaha Milik Negara or "BUMN"). Global competition requires that BUMNs should compete with the private sector. Since the 2003 enactment of Law No. 19 of 2003 Regarding State-owned Enterprises (the "BUMN Law"), many efforts have been made to tighten up the organization of BUMNs, including implementation of good corporate governance and a program to privatize and restructure BUMNs to make them financially sound and able to contribute more to the country. To make BUMNs more competitive, the BUMN Law reduced them to only two types: state-owned limited liability companies or Persero (with at least 51% state capital participation) and public service companies or Perum (which are entirely owned by the state). As a consequence, all departmental enterprises (Perusahaan Jawatan or Perjan) had to be converted to Persero or Perum.

In this spirit, on October 25, 2005, the GOI issued three government regulations ("GRs") to implement the BUMN Law, namely, (i) GR No. 43 of 2005 Regarding Merger, Consolidation, Acquisition and Change of Form of State-owned Enterprises ("GR 43"), (ii) GR No. 44 of 2005 Regarding Procedure for Participation and Administration of State Capital in State-owned Enterprises and Limited Liability Companies ("GR 44") and (iii) GR No. 45 of 2005 on the Establishment, Management, Supervision and Dissolution of State-owned Enterprises ("GR 45").

GR 43 sets out the basic rules for business combinations of BUMNs by way of merger, consolidation and acquisition. A merger is defined as a legal action undertaken by one or more BUMNs to merge with another existing BUMN, with the merging company being dissolved. In a consolidation, two or more BUMNs combine to form a new BUMN, while the consolidating companies are dissolved. In neither case is a liquidation required beforehand. This regulation only covers mergers or consolidations conducted between BUMNs. In case of a merger or consolidation between a BUMN and a limited liability company ("PT"), the PT should presumably follow the general procedures for the business integration of PTs as set out in GR No. 27 of 1998 Regarding Mergers, Consolidations and Acquisitions of Limited Liability Companies ("GR 27"). In respect of an acquisition, GR 43 covers the acquisition by a BUMN of the majority shares of another BUMN or PT.

GR 43 requires that a business combination of BUMNs be stipulated in a GR after the proposal prepared by the Minister of State-owned Enterprises (the "BUMN Minister") has been discussed with other relevant ministers, e.g., the Minister of Finance and other technical ministers related to the business of the particular BUMN, and approved by the Indonesian president. A business combination also has to be approved by a general meeting of the shareholders ("GMS") (for a Persero) or by the BUMN Minister (for a Perum). A business combination should not be detrimental to the interests of the BUMN, minority shareholders, employees (i.e. it should avoid mass terminations), creditors, business competition or the public. In addition, a Persero should also follow the applicable procedures for the merger, consolidation and acquisition of ordinary PTs (GR 27). This means that the directors of the BUMN must prepare a joint proposal and plan for the business combination, notify creditors and publish a newspaper announcement, and perform other actions required under GR 27 for the business combination to take effect. The procedures applicable to a Perum are similar to those for a Persero.

In case of a business combination between a Perum and a Persero, they must be converted into the same form of entity before commencing the process. So either the Perum should convert to a Persero, or vice versa.

GR 43 also deals with the change of form of an entity from a Persero to a Perum, and vice versa. No liquidation is required for a change of form. All assets, rights and obligations of the previous entity become the assets, rights and obligations of the entity resulting from the change. In effect, this only causes a change in the legal form, not in the legal subject. The change of form should be stipulated in a GR using a similar process to that for a business combination (i.e., a proposal from the BUMN Minister to the Indonesian president, preceded by discussions among the relevant ministers).

The Directors of a BUMN are required to prepare a proposal for the change of form containing similar information to that contained in the proposal required for a merger, consolidation or acquisition. The procedures for corporate approvals, announcements, creditors’ objections and other procedures will also be similar. A change from a Persero to a Perum will require approval from the GMS of the Persero, while a change from a Perum to a Persero will require a Decree of the BUMN Minister.

The conversion from a Perum to a Persero will take effect when the Minister of Law and Human Rights issues his approval for the establishment of the Persero, while the conversion to a Perum will be effective upon the issuance of the GR establishing the Perum.

GR 44 distinguishes between state capital participation in BUMNs and ordinary PTs derived from three different sources, namely (i) the state budget or APBN (e.g., fresh funds, projects financed by the APBN, state receivables and/or other state assets), (ii) capitalization of reserves, and (iii) other sources (e.g. asset revaluation and capital surplus/agio).

Under this regulation, the purpose of the capital participation shall be limited to (i) the establishment of a BUMN or ordinary PT, (ii) new participation in an ordinary PT that had no previous state capital participation in order to safeguard national economic purposes, and (iii) increased participation in a BUMN or ordinary PT in order to improve its capital structure or enhance its business capacity.

GR 44 requires that capital participation funds derived from the APBN should be stipulated in a GR. If the funding source is capitalization of reserves or another source, then approval from a GMS is required for a Persero while a Decree of the BUMN Minister is required for a Perum. Similar procedures to those for a business combination are required at the ministerial level, prior to approval being granted by the Indonesian president through the issuance of the GR.

Under GR 44, state capital participation may be reduced by way of (i) privatization, (ii) the transfer of a BUMN’s assets to another BUMN or to an ordinary PT as new participation, or as participation in a newly-established BUMN, or as state assets that are inseparable from the APBN, (iii) the spin-off of a BUMN subsidiary to become a new BUMN, or (iv) a corporate restructuring (including a quasi-reorganization or dilution).

For a capital reduction to take effect, a GR must be issued. The reduction must also comply with the provisions of the applicable law and the articles of association of the BUMN concerned. The reduction should not be detrimental to the interests of the BUMN, PT or creditors. The procedure for obtaining presidential approval through the issuance of a GR is similar to that for a business combination. In addition, for a privatization, the BUMN must also follow the procedures set out in the BUMN Law, i.e. consult with the Indonesian parliament (DPR).

GR 45 covers the establishment of a new BUMN, the conversion of a business unit, a change of legal form, and the creation of a new entity resulting from a consolidation. The BUMN’s establishment should be formulated in a GR that also sets out the standard form of the articles of association of the BUMN. The dissolution of a BUMN must also be stipulated in a GR.

Candidates for positions as directors of a BUMN should pass the fit-and-proper test and enter into a management contract. There is no similar requirement for the commissioners of a Persero or the supervisory board of a Perum. GR 45 prohibits the directors and commissioners of a BUMN from holding double positions as directors in other BUMNs or companies, from holding any conflicting positions, and from becoming officials (pengurus) of any political party or members of parliament (DPR).

The GOI may assign a BUMN to perform "specific duties" by providing public services in line with the business activities of the BUMN, with the approval of the GMS (for a Persero) or the BUMN Minister (for a Perum). A BUMN is entitled to receive compensation from the GOI if it suffers losses as a result of performing such duties.
By Md. Kadri

The Indonesian banking sector is still in the recovery process. On September 22, 2005 the GOI established the Savings Guaranty Institution (Lembaga Penjamin Simpanan or "LPS") to take over the duties of the Government Guarantee Implementation Unit (Unit Pelaksana Penjaminan Pemerintah or "UP3"). UP3 had itself assumed the duties of the Indonesian Bank Restructuring Agency (IBRA) after IBRA’s dissolution in April 2004, in respect of the ‘blanket guarantee’ provided to Indonesian commercial banks by the GOI.

LPS, which has been established to restore public trust in the Indonesian banking industry, is an independent, transparent and accountable legal entity that is directly accountable to the President of Indonesia, in line with Law No. 24 of 2004 Regarding LPS (September 22, 2004) which took effect on September 22, 2005..

LPS has two functions: (i) to guarantee the savings of customers, and (ii) to actively participate in maintaining the stability of the banking system, in particular to work together with Bank Indonesia to handle banks facing financial problems.

A bank participant in the savings guaranty program is required to submit a statement from its board of directors, board of commissioners and controlling shareholders containing declarations on the following:

The types of savings that are guaranteed by LPS are limited to bank savings in the form of current accounts, time deposits, certificates of deposit, savings accounts and the like, up to certain maximum values per bank customer, as specified below.

On September 26, 2005, LPS issued Regulation No. 1/PLPS/2005 Regarding the Savings Guaranty Program, which sets out certain transition periods for the coverage provided under the guaranty. The amount that is guaranteed will gradually be reduced over time, as follows:

The savings guaranty excludes: (a) unregistered savings, (b) unreasonable benefits provided to the depositor, and (c) depositors that cause the bank to collapse. All banks operating within Indonesia, including banks operating under Syariah (Islamic banking) principles, are required to participate in the savings guaranty program, except for rural credit agencies (Badan Kredit Desa). Savings that are not covered by the guaranty will be settled when the bank is liquidated.

Banks are required to fulfill the requirements of and deliver the reports specified by LPS, including payment of their participation contributions and guaranty premiums. If any banks fail to comply with these requirements, while they will not be disqualified from continued participation, they may face administrative sanctions, fines and criminal sanctions. Administrative sanctions may take the form of penalties and/or interest. Fines may range from two to three billion rupiah (US$200,000-300,000). Criminal sanctions consist of imprisonment for between one and three years.
By Denny Rahmansyah & Kaprinanto I. Dwiatmojo

On January 13, 2005 the GOI issued Government Regulation in Lieu of Law No. 1 of 2005 Regarding Postponement of the Enactment of Law No. 2/2004 to postpone the effective date of Law No. 2 of 2004 Regarding Settlement of Industrial Relations Disputes ("Law No. 2") by one year, from January 14, 2005 to January 14, 2006. The issuance of Law No. 2 reflects the GOI’s desire to establish an institution and a mechanism to settle industrial relations disputes quickly, accurately, fairly and cheaply.

In general, Law No. 2 describes the various types of industrial relations disputes, explains the tripartite method to be used to settle industrial disputes, and gives a general overview of the industrial relations court ("Labor Court"). The industrial relations disputes contemplated by Law No. 2 include disputes over existing rights, interests (i.e., breakdown in negotiations of rights) and employment terminations as well as disputes between labor unions at the same company.

Law No. 2 provides three basic methods for settling industrial disputes:

The Labor Court is a special court set up within the District Court. The procedural law that applies to the Labor Court consists of the civil procedures applicable for the District Court, except for those matters specifically regulated by Law No. 2. The Labor Court hearing will be chaired by a judge, with one ad hoc member judge nominated by a labor union and one ad hoc member judge nominated by an entrepreneurs association.
By Moh. Fajar Yanuardi

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