Singapore: Investment In Indonesia By SGX-ST Listed Companies

Last Updated: 31 July 2017
Article by Gwendolyn Gn
Most Read Contributor in Singapore, December 2018

 In recent years, Singapore had been ranked as one of the top foreign investors in Indonesia. This is not surprising given the proximity of the two countries and also the sizeable population and market in Indonesia. Singapore's investment have been mainly made in manufacturing and services sectors.1 Looking ahead, IE Singapore has identified the following opportunities in Indonesia under the new administration of President Joko Widodo2:

(a) Maritime sector: Investment in key nodal sea ports and its infrastructure

(b) Utilities sector: Investment in power plants

(c) Manufacturing sector: Investment in industrial parks

Another growth area in Indonesia is its property development sector. Despite various incentives and programmes being offered to boost development of mass housing, the Indonesian property development sector is still unable to keep pace with the growing population and demand. Overall, investment opportunities in the property development sector are promising given the backlog and the government's determination to boost the rate of housing development. Going forward, vertical housing development will be more dominant in urban areas. This is a key area where Singapore companies will be able to leverage their expertise and experience in developing and constructing vertical housing developments such as HDB flats and condominiums.

In this article, we will focus on legal and regulatory aspects of investments in Indonesia by public companies listed on the Singapore Exchange Securities Trading Limited ("SGX-ST"). This topic is particularly relevant because of the introduction of S$600 million International Partnership Fund ("IPF") by the Singapore government to help Singapore companies scale up globally. The IPF scheme will be done via equity co-investment. Commentators are of the view that this scheme will have a higher risk exposure and will likely benefit bigger or more established companies that have immense potential but lack capital to grow or scale3. This fits the description of many Singapore companies, which are listed on the Catalist – a sponsor supervised listing platform of the SGX-ST – or even more established Mainboard-listed companies.

Investing in Indonesia

In order to invest in Indonesia, a Singapore investor may either set up a foreign-owned limited-liability Indonesian company ("PT. PMA") or acquire an existing Indonesian company. The first thing that a Singapore investor should do is to check whether its proposed activities or businesses are open for foreign investment in Indonesia – this can be done by ensuring that such business/activities are expressly precluded from foreign investments under the Negative Investment List that catalogues the sectors which are closed to foreign investment and sectors which are open with stipulations. Business sectors that are not listed on the Negative Investment List, are considered open and allow for up to 100% foreign-ownership.

Additionally, it is imperative that a Singapore investor has to learn more about the location of its investment such as the market activity, office location, manpower procurement, and the regulations pertaining to its business sector.

The Indonesian government has established the following framework for foreign investment in Indonesia4:

(a) Initial stage: a foreign investor is expected to submit their investment proposal with business description to the Indonesia Investment Coordinating Board ("BKPM"). The proposal will be screened by BKPM where it will be classified under the appropriate business field as stipulated in KBLI (Indonesian Classification of Business Field) and evaluated to determine whether it is closed or open with stipulations for foreign investment. If the business sector is open or open with stipulations, the foreign investor will be able to apply for an Investment Principal License, to begin the investment process, subject to the stipulations stated in DNI (Indonesia Negative Investment List).

(b) Preparation stage: Once the investment proposal is evaluated and deemed to be allowed under the DNI, the foreign investor will be able to apply for an Investment Principal License from BKPM, and start the process of setting up a legal business entity in Indonesia. Once the Investment Principal License is approved by BKPM, the foreign investor will be able to set up its business entity by engaging any public notary office to draft the deed of establishment of PT. PMA. The deed of establishment will need to be ratified by Indonesian Ministry of Law and Human Rights to be legalized and officially posted in the State gazette. In parallel to establishing PT.PMA's deed of establishment, the foreign investor will also be able to apply for the necessary provincial government licenses, which mainly refer to the regional regulation and certification for operating business entity. PT. PMA will also need to apply for a tax registration number, from the Directorate of Tax, and an immigration license – to enable it to employ foreign workers – from the Directorate of Immigration.

(c) Setting-up stage: In the setting-up stage, the foreign investor will be able to start (i) setting up its business infrastructure and (ii) processing all the required licenses from Technical Ministries. With the establishment of BKPM One-Stop Services Centre ("OSS-C"), high officials from 22 Technical Ministries and government agencies will be positioned in the OSS-C to attend to all investment inquiries and also application of the technical licenses pertaining to their business sector. Investors will be able to apply for the technical licenses with the OSS-C to simplify and expedite the setting-up process, and start the business operations as soon as possible.

(d) Final stage: Once the company is ready for the commercial stage, PT. PMA will be able to apply for its business license from BKPM to start its business operations.

If a Singapore investor decides to acquire a stake in an existing Indonesian company, the above framework and considerations (in relation to foreign-ownership restriction) still applies in relation to the investor's stake in the existing Indonesian company. This is because according to Indonesian Law, any company with any percentage of foreign shareholding is considered a PT. PMA. However, the investor may be able to save significant time in the getting the required licenses from Technical Ministries during the Setting-Up Stage (provided that those licenses do not have any condition which restrict the change of ownership in the Indonesian company from local-owned to foreign-owned) by acquiring an existing Indonesian company.

A Singapore investor should also note that Indonesia adopts a civil law system which was inherited from the Dutch5. Although, Indonesia has enacted law reforms in the recent years to make it easier for foreign investors to make an investment in Indonesia, a Singapore investor may be perplexed that certain corporate actions that can be easily done in Singapore, such as acquisition of shares or transfer of shares in a private company, would require significantly different formality or significantly more time to execute in Indonesia.

The following are examples of peculiar features of Indonesian law for foreign investors:

(a) Law no. 24 year 2009, Article 31 paragraph (1) requires the transaction documents to be in Bahasa Indonesia if a transaction involves Indonesian individuals or business entities. Parties may execute a legally binding  agreement using bi-lingual documents, or parties may execute the agreement in English and proceed with the translation of the agreement shortly thereafter.

(b) If a corporate action, such as merger and acquisition, results in change of control of a company, the corporate action must be advertised in at least one Indonesian national newspaper and the company must announce the merger in writing to its employees. The corporate action may not close within 30 days of the newspaper advertisement.

(c) If such corporate action takes place and the employees of the company being acquired are not willing to continue with their employment, such employees shall be entitled to severance pay.

(d) There is no concept of "trusts" in Indonesia.

Another peculiar feature of the Indonesian legal system is the role of a public notary. An Indonesian public notary is the only public officer who has the authority to issue or make authentic deeds concerning all kind of acts, agreements and arrangements as provided by the law or wished by the parties concerned.

A notarial deed is the most important legal document in Indonesia because it has absolute authenticity by law, and is the best guarantee for foreign investors to safeguard their business and financial interests6. Therefore, Singapore investors are highly encouraged to put any agreement or arrangement that they have in Indonesia into a notarial deed form to prevent any dispute by the parties in relation to the genuineness of such agreement or arrangement.

SGX-ST Regulations and Requirements in Relation to the Acquisition of Assets

Chapter 7 of the SGX-ST Listing Manual or the Catalist Rules requires a public-listed company in Singapore (the "Listco") to announce any acquisition of shares resulting in a company becoming its subsidiary or an associated company. Therefore, if the Listco sets up a subsidiary or an associated company in Indonesia, the Listco ought to make an announcement once the PT. PMA's deed of establishment is ratified by the Indonesia Ministry of Law and Human Rights and officially posted in the State gazette.

Chapter 10 of the SGX-ST Listing Manual or the Catalist Rules sets out the rules for transactions including acquisition of assets by the Listco. In this article, we shall assume that the Listco is acquiring Indonesian companies or assets owned by unrelated independent third parties and such companies or assets are not listed on any stock exchange. Transactions which are in the ordinary course of the Listco's business or of a revenue nature do not fall within the ambit of Chapter 10. Transactions may be classified into the following categories:

(a) Non-discloseable transaction;

(b) Discloseable transactions;

(c) Major transactions; and

(d) Very substantial transactions ("VSA") or reverse take-overs ("RTO").

An acquisition may fall into category (a), (b), (c) or (d) above depending on the size of the relative figures computed on the following bases set out by Rule 1006: (i) the net profits attributable to the assets acquired of, compared with the Listco's net profit; (ii) the aggregate value of consideration given, compared with the Listco's market capitalisation; (iii) the number of equity securities issued by the Listco as consideration for an acquisition (if any), compared with the number of equity securities of the Listco previously in issue.

Depending on the classification of an acquisition, the Listco may be required to immediately announce such acquisition once the terms of the acquisition has been agreed by the parties. Such announcement will contain the following details, inter alia, (i) particulars of the companies or assets acquired; (ii) material conditions attaching to the transaction; (ii) the value (book value, net tangible assets value and the latest available open market value) of the companies or assets being acquired; (ii) the net profit attributable to the companies or assets being acquired; (iv) the financial effects of the acquisition to the net tangible assets and earnings per share of the Listco; and (v) the rationale for the acquisition.

The Listco may also be required to obtain its shareholders' approval if the acquisition amounts to a major transaction or a VSA or an RTO. In such circumstances, it is important for the Listco to make the acquisition conditional upon the shareholders' approval. This should be entrenched as a condition precedent in a legally binding agreement to acquire the companies or assets. The Listco should also be aware that if an acquisition is classified as a VSA or an RTO, it will have to comply with the regulatory framework governing such an acquisition, which extend beyond the requirements of the SGX-ST Listing Manual or Catalist Rules (please refer to our June 2016 article titled "How an RTO Achieves a Win-Win for All" in our Client update section for a brief description of regulatory framework governing an RTO).

Given the above, what does the Listco, which decides to acquire certain companies or assets in Indonesia, need to do in order to comply with the requirements of the SGX-ST Listing Manual or the Catalist Rules? The Listco will typically go through the following process:

(a) First, the Listco will have to consider whether the companies or assets being acquired are in its ordinary course of business. If the companies or assets being acquired are in the Listco's ordinary course of business or of a revenue nature, such acquisition will not fall within the ambit of Chapter 10. However, if such acquisition amounts to a VSA or an RTO (whether or not the acquisition is deemed in the Listco's ordinary course of business), the Listco ought to comply with the regulatory framework for a VSA or an RTO. Further, should the acquisition change the risk profile of the Listco (notwithstanding that the acquisition is in its ordinary course of business), the Listco ought to obtain its shareholders' approval in relation to the acquisition.

(b) Second, if the acquisition is not in its ordinary course of business, a Listco should calculate the relative figures under Rule 1006 and classify the acquisition accordingly. Depending on the classification of the acquisition, the Listco may have to take certain steps in order to comply with regulatory requirements; such steps may include, but are not limited to, making an immediate announcement or making the acquisition conditional upon its shareholders' approval. The Listco should also take note that any acquisition of shares resulting in a company becoming its subsidiary or an associated company should be immediately announced regardless of the classification of the acquisition under Chapter 10.

(c) Third, if the acquisition is classified as a major transaction or a VSA or an RTO, the Listco is required to send a circular to its shareholders and hold a general meeting to obtain its shareholders' approval. The circular should contain relevant information prescribed by the SGX-ST Listing Manual or Catalist Rules, depending on the classification of the acquisition.

(d) Fourth, if the consideration for an acquisition will involve issuance of the Listco's shares, the Listco should make an immediate announcement in relation to the acquisition and the proposed issuance of shares. The Listco should note that it should obtain its shareholders' approval prior to any issuance of securities (i.e. shares or any instrument convertible into shares) to transfer a controlling interest (i.e. 15% or more interest in the voting shares of the Listco's enlarged share capital). Further, if the issuance of the Listco's shares will result in the recipient obtaining more than 30% or more of the voting rights of the Listco, the Listco should also apply for a whitewash waiver from the Securities Industry Council to waive the obligation of the recipient to make a general offer under Rule 14 of the Singapore Code on Take-overs and Merger.

Chapter 10 requirements are also applicable in relation to an option to acquire assets. This is especially relevant in a situation whereby the Listco structures the acquisition as a combination of loans and options to acquire the assets in the future in lieu of the repayment of the loans.

Our Experience

The information above relates to a typical investment process in Indonesia and the corresponding Singapore regulatory compliance regime. Each investment transaction is unique and will involve nuances that require different solutions. Having had extensive experience in advising Singapore companies on their investments in Indonesia, we are able to provide our clients with practical legal solutions and advice specifically tailored to their business' particular requirements. Please feel free to contact us.


 1 See "The pocket book of Investment Guide – Frequently Asked Questions on Investment 2015" by BKPM Indonesian Investment Promotion Centre, foreword by Andri Hadi, ambassador of the Republic of Indonesia to Singapore

2 See IE Insights vol. 21 April 2015

3 See  

4 For further details on the framework, please refer to note 1 above.

5 This is in contrast with the common law system adopted by Singapore and inherited from the British.

6 See "Role of an Indonesian Notary in the Making of Deeds for Foreign Investment Corporations" by Misahardi Wilamarta, Golden Gate University, page 7, 1995.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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