Direct Investment and Portfolio Investment
In general, the concept of direct investment often distinguished by the term portfolio investment or portfolio investment. Direct investment is often defined as an investment activity involving: (i) transfer of funds; (ii) long-term projects; (iii) the purpose of obtaining regular income, (iv) partial transfer of funds; and (v) a business risk.
Whereas the portfolio investment is often associated with investments made through the capital market or the stock exchange by securities purchase, so it does not involve the transfer of funds for long-term projects and hence the expected income is also more short-term in the form of capital gains obtained on when the sale of such securities and not the regular income, where the investor is not involved in the management of the company so that it is not directly related to the risk of business activities run by the target company or company where the investment is made, but rather is associated with market risk of securities purchased.
Definition of Investment in the Investment Law
To further understand the meaning of the terminology of foreign investment in Investment Law, it is necessary to describe what is meant by “capital” (capital) and “investor”, and “investment” in the context of foreign investment. Understanding of the above conceptual framework is very important to know the juridical framework of foreign investment arrangements in Indonesia.
“Investment” under article 1 number (1) of the Investment Law shall be defined as any form of domestic investment activity or foreign investment to conduct business in the territory of the Indonesian republic, while “foreign investment” in Article 1 number (3) of the Investment Law Capital is defined as an activity of investing to conduct business in the territory of the Republic of Indonesia conducted by foreign investment, whether using foreign capital entirely or which is made jointly with domestic investment.
Based on the above description it is clear that the meaning of foreign investment does not mean that the capital is from abroad only, but can also the nature of the joint venture, where there is a merger between foreign capital and domestic capital.
Further Article 1 point (4) of the Capital Investment Law shall regulate the conceptual framework of “investment” as an individual or business entity which carries out investments of both domestic investors and foreign investors. What is interesting from the definition of investor above is that the Capital Investment Law defines the investor as an individual entity or business entity, and does not cover non-business entities such as foundations.
Whereas in reality a non-profit organization or non-commercial entity may conduct investment, for example foundation and pension fund. The definition of investment in the Investment Law also does not explicitly state that a state as a legal entity may also be an investor, as is done
 Foundation is a legal entity consisting of wealth separated and destined to achieve certain objectives in the social, religious and humanitarian fields, which have no members (Law No.16 of 2001 on foundations as amended by Law No.28 of 2004 or Act of the Foundation “) and the Pension Fund is a legal entity that manages and operates a program that promises retirement benefits (Article 1 number (1) of Law No.11 of 1992 on Pension Funds or” Pension Funds Act.
“Under Article 7 paragraph (2 ) Of the Foundation Law, a foundation is allowed to participate in various prospective business entities with the provision of such participation at most 25% of the total value of the foundation’s property, while taking into account Article 31 Paragraph (3) of the Pension Fund Act, the actual wealth of pension funds, can be invested in the company’s shares as long as there is no stock ownership of the founders, founding partners, and shunters s, the recipient of a warehouse or union whose member is a pension fund participant in the amount of more than 25%.
By a State-Owned Enterprise (BUMN) or a company that is not a state-owned company but part of its shares owned by the state.
The distinction between foreign investment and domestic investment is clearly linked to the party making the investment and the origin of the capital. Capital is not always in the form of money, but can also in other forms that are not money as long as it has economic value. “Foreign capital” in Article 1 number (8) of the Investment Law is defined as foreign owned capital, foreign citizen company, foreign business entity, foreign legal entity, and/or Indonesian legal entity which is partially or wholly owned by the party foreign.
Further Article 5 paragraph (2) of the Investment Law stipulates that foreign capital investment is required in the form of limited liability company under Indonesian law and domiciled in the territory of the Republic of Indonesia, unless otherwise provided by law.
Should be categorized as foreign capital is capital participation by foreign direct investment directly to PMA company, and does not include foreign equity participation Based on Article 1 number (1) of Law No.19 of 2003 on “State-Owned Enterprises” (BUMN) is a business entity wholly or wholly owned by the state through direct participation derived from state assets.
See the definition of “Capital” in Article 1 number (7) of the Investment Law. Thus the capital can be a technology or Know-how that has economic value. Therefore, in the case of a foreign investor intending to invest in Indonesia, such activities shall be conducted in the form of a limited liability company pursuant to Law no. 40 of 2007 on limited liability company.
However, foreign investment activities may be non-equity or contractual under a specific agreement such as a franchise agreement, license agreement or management agreement with due regard to the prevailing laws and regulations. As explained earlier, the “capital” in the Investment Law may also include assets that are not in the form of money as long as they have economic value.
Which is indirect. The meaning that foreign capital also includes capital owned by Indonesian Legal Entity which is partially or wholly owned by foreign party (PMA Company) can actually cause confusion in determining the status of a company is a PMA company. Foreign capital inflows into Indonesia should be determined when the foreign capital enters directly into an Indonesian company, not indirectly.
Even if the capital participation of the PMA companies in other companies is categorized as foreign investment, it is preferable to determine the minimum percentage value of capital participation by the PMA company. If the percentage of capital participation of the PMA companies in other companies is very small, then other companies should not necessarily be categorized as “foreign capital”.
The peculiarities of the “foreign capital” conseptional framework as set forth in Article 1 number (8) of the Investment Law can be elaborated more clearly when illustrated by the following diagrams and case samples: