a) Limitation of Investment as Part of State Sovereignty
In general, foreign investment activities in a country are limited by the rules of the country of origin of the foreign investor (governance by the home nation), the host country where the foreign investor invests (the governance by the host nation) and also the relevant international law (governance by multi nation organizations and International Law).
Arrangements including restrictions on foreign investment by the host country are essentially the authority of the country derived from its sovereignty. However, the host country’s sovereignty is also limited by international law, including international conventions in which it is a party, such as the World Trade Organization deals in the field of Trade Related Investment Measures.
Such investment limitation may be made at the time of entry of the foreign investment (entry requirements) as well as during the operational activities of the foreign investment (operational requirements). In Indonesia, such restrictions are manifested through, among other things, the regulation of a list of closed business fields and open business fields with requirements in the field of investment or often called an investment negative list or negative list of investments (negative list).
To overcome the limitation of foreign capital ownership in an enterprise in Indonesia as defined in the negative list or for other purposes, it is often found that there is a nominale ownership or stock ownership practices in an enterprise in Indonesia. Although the nominal ownership of shares is unknown in the Indonesian legal system, it is even expressly prohibited in Article 33 paragraph (1) and (2) of Law no. 25 of 2007 on Investment (Investment Law), the practice of nominale share ownership is still only found.
b) Regulation of Negative List of Investment in Indonesia
Negative list is generally regulated in Article 12 of the Capital Investment Law whereby paragraph (1) of the said provisions stipulates that all business fields or types of business are open to investment activities, except for business or business activities which are declared closed to the requirements.
The explanation of the provisions stipulates further that the business field and type of business is closed and open with the requirements stipulated through the Presidential Regulation, prepared in a list based on the classification of the business sector or the type of business sold in Indonesia, which is classification based on the classification of Indonesian Business Standard (KBLI ) and/or International Standard for Industrial Classification (ISIC).
Therefore, to be able to further understand what areas of business are applicable in Indonesia, particularly those listed in the negative list, investors before investing in Indonesia need to examine in more detail what is contained in the KBLI Regarding the field of business to be lived.
KBLI which is currently valid is KBLI 2015 as stipulated in Regulation of Head of Central Bureau of Statistics no. 95 of 2015 on Indonesia Standard Field Classification (KBLI 2015) as amended by Regulation of the Head of Central Statistics Agency Number 19 of 2017 regarding amendment to the Regulation of the Head of the Central Bureau of Statistics.
In the past, to identify and understand a business field that is prohibited or open to investment, investors should also pay attention to technical guidance on the implementation of investment issued by the Investment Coordinating Board (Badan Koordinasi Penanaman Modal/BKPM). The technical guidance of such investment also revised time-to-time according to current economic developments.
Determination of closed business fields for investment is based on the following criteria: (1) health; (2) moral, (3) culture; (4) the environment; (5) national defense and security; and (6) other national interests. While the determination of open business field with requirements is done based on the criteria of national interest, namely: (1) protection of natural resources, (2) protection and development of micro, small, medium and cooperative (UMKMK); (3) Supervision of production and distribution; (4) improvement and capacity of technology; (5) partial domestic capitalization; and (6) cooperation with a business entity appointed by the Government.
In reality, within a period of less than half a year since the enactment of Presidential Decree No.77/2007, the Presidential Regulation has been amended by Presidential Decree No. 111/2007 on the amendment to Presidential Regulation no. 77/2007 on the List of Closed Business Fields and Opened Business Fields with Requirements in the Field of Investment (Presidential Regulation 111/2007) and the latest by Presidential Regulation No. 44/2016 on the List of Closed Business Fields and Opened Business Fields with Requirements in the Field of Investment.
In determining the closed and conditionally open business fields, the Government shall pay attention to the following basic Principles:
- Simplification, that the Negative list should apply nationally and be simple and limited to business fields related to the national interest so that it is a small part of the overall economy and a small part of every sector in the economy.
- Compliance, that negative list is not contrary to the obligations of Indonesia contained in international agreements or commitments that have been ratified.
- Transparency, that negative list must be clearly detailed can be measured and not multiple interpretations and based on certain criteria.
- Legal Certainty, that the negative list can not be changed except by Presidential Regulation.
- Unity of Territories, that the negative list does not impede the freedom of the flow of goods, services, capital, human resources, and information within the territory of the Republic of Indonesia.
However, to understand what is meant by “Indirect investment or portfolio in which transactions are conducted through the capital market”, it is necessary to review what is stipulated in Article 37 and 38 of BKPM Chairman Regulation no.12 Year 2009 on Guidelines and Procedures for Investment Application.
Under this provision, PMA and PMDN companies are required to have a change principle permit if there is a change: (i) business, including type and production capacity, (ii) equity participation in the company; and (iii) the project completion period. In the context of the change in open company capital participation (PT Tbk), the principle change permit is not required if the change is above the ownership of shares in the public shareholders, whereas if the change occurs to the founder/controlling shares owned at least two years and conducted on the domestic capital market, the change principle permission shall be owned by the relevant public company.
In a company’s stock or investment permit, a shareholder categorized as an investment portfolio is often referred to as a “public shareholder” or often considered a non-return shareholder. In the event of any transfer of ownership of shares in the “public” category in the capital market, the transfer of ownership of shares in such public company does not require the approval of the Shareholders General Meeting (RUPS) and also does not need to be offered to other shareholders as stipulated in Articles 58 and 59 Law No.40 of 2007 on Limited Liability Company (Limited Liability Company Law). Thus, the liquidity of the open company’s stock trading in the stock exchange is not interrupted.
c) Nominee Arrangement Practice in Indonesia
In discussing the problem of negative list, it is necessary to discuss the problem of nominee arrangement practice in Indonesia. Considering that such practice is often exploited in the facing restrictions on foreign capital ownership. As known to the law in Indonesia is basically not familiar with the concept of trust and trustee as known in the common law system.
In the Indonesian legal system there is no recognition of the difference between the beneficial owner and the legal owner, although in some cases particularly in collective custody as regulated in Article 56 of the Capital Market Law or other Capital Market Practices such as a trustee in the issuance of a bond, the concept of the trustee is already known in legislation in the field of capital market.
The provisions of Article 33 paragraph (1) and (2) of the Investment Law regulate the nominee prohibition as follows:
“(1) Domestic investors and foreign investors who make investments in the form of a limited liability company are prohibited from entering into agreements and/or statements confirming that the ownership of shares in a limited liability company for and on behalf of others.”
“(2) In the event that domestic investors and foreign investors enter into agreements and/or statements as referred to in paragraph (1), such agreements and/or statements shall be declared null and void.”