Private equity trends in Indonesia
September 2018 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
September 2018 Issue
Indonesia has become one of the most interesting places to invest for private equity (PE), despite complicated bureaucracy and the uncertainty of laws and regulations. The hot trend for PE is investing in technology companies. The most popular industries at the moment are web portal (platform) and peer-to-peer lending industries. The growing population, rising demand and welfare gap are some of the driving factors behind the popularity of these industries. This has shifted from the trends of the past which revolved around conventional industries, such as mining, healthcare, financial services and retail industries.
Legal framework
Investment in Indonesia is mostly governed by investment regulations relating to business classification number, a negative list governing the maximum amount of foreign ownership in certain industries, procedures for obtaining the required approval from relevant authorities, tax regulations issued by the minister of finance and the directorate general of taxation, including tax treaties between Indonesia and foreign countries, and corporate governance regulation (company law number 40 regarding limited liability companies (2008)).
These regulations have their own role in governing PE investment in Indonesia. While investment regulations will play a major role when investors are foreign or when companies require certain facilities, company law will govern the corporate governance of the investee. Finally, tax regulations will be important for investors in establishing the most efficient structure for their investment with regard to tax.
If the investee has a specific line of business, additional laws and regulations may apply. For example, peer-to-peer lending industries need to comply with regulations issued by the Financial Services Authority (FSA).
Recent changes in laws affecting investments in Indonesia
The Indonesian government recently issued a new regulation which impacts investment in Indonesia – Government Regulation No. 24 of 2018 regarding Business Licensing Services (OSS Regulation). The new regulation brings major changes to licensing regimes in Indonesia, especially for foreign investment companies.
Foreign investment companies were previously under the authority of the Indonesian Investment Coordinating Board (BKPM). After the issuance of the OSS Regulation, authority has shifted to the Coordinating Ministry for Economic Affairs (Menkoekuin). Another major change relates to approval from authorities. While foreign investment previously required prior written approval from the BKPM, the system has now changed so that the approval from Menkoekuin under the OSS system will be issued after foreign investment companies have obtained approval or receipt of notification from the minister of law and human rights (MOLHR).
Pursuant to the OSS system, the licensing requirement of foreign investment companies is to be made in the following order: (i) first, the company needs to sign a deed of establishment before a notary in the Republic of Indonesia; (ii) second, the company needs to obtain approval from the MOLHR for the establishment; (iii) third, it needs to apply for general licences, such as certificate of domicile (SKDP) and taxpayer identification number (NPWP); (iv) after obtaining the SKDP and NPWP, the company can apply for a business registration number – Nomor Induk Berusaha (NIB) – with OSS, which will also function as a company registration certificate, importer registration number and custom identification number; and (v) after obtaining the NIB and fulfilling some required commitment, the company can then apply for a business licence.
Since the OSS regulation is relatively new, it is still uncertain how the implementation will affect foreign investment in Indonesia. The main idea behind the government issuing this OSS regulation is to simplify the entire licensing process, to make it easier for investors.
Structure and governance
PE investors usually pay attention to details when finding the most tax-efficient structure for their investment and provisions governing their relationship with other investors or founders.
The main factors that they consider before deciding on a structure for the investments are: (i) exit options; (ii) the negative list issued by the authorities, where some business activities are closed or restricted for foreign investment; and (iii) dividend repatriation and tax considerations.
Factors (i) and (ii) drive a new trend of setting up a foreign entity for investment purposes. The investors request the founders of the target company to establish a new entity in a country which they consider to be investment friendly for them, with regard to tax treatment and exit options, so that they can achieve their main goal: exit from the investment with optimum upside.
For factor (ii), if the line of business is closed or restricted for foreign investment, then a PE investor cannot easily invest through equity in the Indonesian target company. Therefore, it will use convertible bonds providing the same rights as shareholders in the target company, or use other sophisticated structures such as back door listing, utilisation of venture capital or mutual funds as a holding company.
When drafting agreements governing their relationship with other investors or founders of the target company – which is usually in the form of either a joint venture agreement or shareholders agreement – there are several things that PE investors need to consider carefully, to attain maximum benefit from their investment.
To achieve this, PE investors usually prefer a different class of shares to provide them with the ability to accelerate the return on investment via dividend preference or mandatory initial public offering (IPO), and avoiding higher risk through liquidation preference and anti-dilution protection. Investors also prefer to have representation on the board of directors and board of commissioners. There are also protective investor rights which require that certain actions cannot be taken without the affirmative approval of the investor. This effective veto ensures that no key decisions are entered into without the consent or approval of the investors.
The veto rights for a PE investor which takes a position as a minority shareholder usually include the following: (i) issuance of new shares or a convertible instrument coupled with anti-dilution rights; (ii) transfer of shares of the other shareholders’ combined with tag-along; (iii) change of articles of association and management team; (iv) entry into affiliated parties or material transaction; (v) dividend distribution and buyback shares; (vi) proposed merger, acquisition, liquidation and litigation of the target company; (vii) approval of the business plan; and (viii) a put option.
Additional PE investor rights include right of first refusal and tag-along rights, certain information and audit rights, exclusivity to key personnel, non-compete and non-solicitation provisions (if applicable to the business of the target company) and an exit mechanism which usually also includes mechanisms for deadlock.
Notification and approval requirement
The following are common notifications and approvals for PE investments in Indonesia.
Prior to the issuance of the OSS regulation, approval from the BKPM was required before the investor could invest as a shareholder in the target company. However, after the issuance of OSS, BKPM approval has been replaced by registration with the OSS.
In the event of a takeover or merger, there are a number of notifications that need to be made to creditors, employees and other public disclosures – especially if target companies are public companies. These notices include the company’s creditors, who would need to be notified at least 30 days before the notice of the general meeting of shareholders (GMS). Any objections the creditors have must be submitted at least seven days before the notice of the GMS. The merger cannot proceed until all objections have been resolved. In addition, company employees must be notified at least 14 days before the GMS.
Investment in certain industries, for example financial technologies, telecommunications and transportation, may require additional licensing and notification requirements to relevant governmental agencies. Indonesian competition supervisory commission reporting may also be required in certain takeover situations. When a target is a public company, Indonesia’s capital market regulator, the Financial Service Authority (OJK), may request additional information, and the investor that will be the new controlling shareholder is required to make a tender offer post-closing.
PE investors must pay attention to this notification and approval requirement, especially in calculating the timeline for closing transactions. These notifications often become a major stumbling block for transactions.
Freddy Karyadi is a partner and Anastasia Irawati is an associate at Ali Budiardjo, Nugroho, Reksodiputro (ABNR). Mr Karyadi can be contacted on +62 (21) 250 5125 or by email: fkaryadi@abnrlaw.com. Ms Irawati can be contacted on +62 21 250 5001 or by email: airawati@abnrlaw.com.
© Financier Worldwide
BY
Freddy Karyadi and Anastasia Irawati
Ali Budiardjo, Nugroho, Reksodiputro (ABNR)