Challenges for Foreign Investors in Indonesia
    Category: Column By : Eddy Leks Read : 1876 Date : Saturday, October 12, 2013 - 07:15:27

    The foreign investment (PMA) company rules have been revised several times since the promulgation of the investment law in 1967. Previously, a PMA company was established after registering at the Indonesia Investment Coordinating Board (BKPM). However, a new regulation, BKPM No. 5/ 2013, promulgated in late May 2013, says that a PMA company is established only after it has obtained a principle license issued at the latest three business days after all documents are submitted.

    A principle license may be applied before or after a limited liability company obtains its status as an Indonesian legal entity. Nevertheless, a notary may not agree to establish a company before the principle license is obtained. One notary says that a regulation by the minister of law and human rights requires BKPM's approval before a company can be legalized. Clearly, coordination between government bodies is vital to ensure that the new regulation by BKPM can be implemented.


    The required investment amount for a PMA company has to be over Rp 10 billion or its equivalent value in U.S. dollars, excluding land and building. Issued and paid-up capital has to be at least Rp 2.5 billion or its equivalent value in U.S. dollars. Investment is different from capital. Capital consists of authorized, issued and paid-up capital as set out in the company's articles of association, while investment comprises capital and loans as well as retained earnings (for a company with commercial production and earned profits).

    Accordingly, if the investment is over Rp 10 billion, a PMA company is only required to have issued and paid-up capital of Rp 2.5 billion. The BKPM may often interfere by determining what it deems to be the proper ratio for capital and loans. As provisions on minimum capital had not been formerly regulated, the new regulation shuns PMA companies with a low equity.

    In fact, provisions on capital structure are regulated under the limited liability company law. Under the law, a limited liability company may be established with Rp 50 million in authorized capital, 25% of which has to be deposited as issued and paid-up capital. Under the new BKPM regulation, the ruling on capital structure of a PMA company is totally different, and is specifically by the BKPM. Therefore, it is commendable if the capital structure ruling for a PMA company is regulated under the general law and not based solely on BKPM regulation.


    Another interesting fact under the new regulation is the project's time frame as set out in the principle license. Formerly, it was not made clear how long a foreign investor is required to complete the project as described in its business plan. Under the new regulation, the time frame is no more than three years though certain business fields are allowed a longer period of time.

    If the period has elapsed and the project is still not ready, the BKPM will perform a field audit, after which it may either grant a substitute principle license with another three-year period or revoke the principle license. If after the extension the project is still not ready, the principle license will be revoked. PMAs are also not allowed to directly compete with small and medium enterprises. The government's position is clear: SMEs need to be protected as they are the backbone of Indonesia's economy. Furthermore, the new regulation also forces international investors to complete approved projects. This is important since many PMA projects are abandoned by international investors for various reasons—this may no longer happen in the future.