Jurisdiction - Indonesia
Reports and Analysis
Indonesia – New Mandatory Divestment Obligation.

 10 November, 2012



In brief
  • From 21 February 2012, companies holding a Mining Business Licence or a Special Mining Business Licence in Indonesia are required to increase their Indonesian participation to a 51% shareholding by the tenth year following the company entering the production phase.
  • The transfer of ownership to Indonesian participants is to occur incrementally, commencing on the company’s fifth year of production. The shares being divested also have to be offered in a strict order to specific Indonesian participants.
  • This is a significant shift from the previous regulation, which stated that shareholders in companies holding Mining Business Licences had to divest a total of 20% of their shares within five years after production.
The mining industry in Indonesia plays a significant role in Indonesia’s economic growth. According to PricewaterhouseCooper’s publication Mining in Indonesia: Investment and Taxation Guide (4th edition, 2012), it has contributed approximately 4 to 5% to Indonesia’s total GDP.
Additionally, Indonesia regained its investment grade status earlier this year (see the Indonesia Investment Coordinating Board website, www5.bkpm.go.id/contents/general/4/sound-economy). According to the Indonesia Investment Coordinating Board, this ratings upgrade reflects Indonesia’s persistence through the global financial crisis, its efforts to improve government regulation and its ability to manage domestic political challenges while implementing reform.
One such reform is the new mandatory divestment obligation in relation to mining. The Indonesian Government has issued Government Regulation No.24 of 2012 regarding the Amendment of Government Regulation No.23 of 2010 (“GR 23/2012”) regarding the Implementation of Coal and Mineral Mining Activities (“GR 24/2012”) as an implementing regulation of Law No.4 of 2009 regarding Minerals and Coal Mining (the “Mining Law”). This is the most recent example of the Government trying to balance the encouragement of foreign investment with ensuring that Indonesians are given a long-term, sustainable share of the economic benefits of the mining boom. GR 24/2012 has clearly been implemented in order to provide more protection and opportunities to the Indonesian people, as it significantly increases the level of compulsory shareholdings held by Indonesian participants in mining. As is often the case in Indonesia, the gains on this side of the ledger are offset by the inevitable reduction in regulatory certainty for foreign investors.
Under GR 24/2012, companies holding a Mining Business Licence (an “IUP”) or a Special Mining Business Licence (an “IUPK”) are required to increase their Indonesian participation to a 51% shareholding by the tenth year following the company entering the production phase. This transfer of ownership to Indonesian participants is to occur incrementally, commencing on the company’s fifth
year of production, with set targets for each year leading up until the tenth year of production, where Indonesian participants must hold a minimum 51% shareholding in the company.
This is a significant shift from the previous regulation which was in place until 20 February 2012. Under theprevious regulation, Government Regulation 23/2010, shareholders in companies holding Mining BusinessLicences (being IUPs, not Coal Contracts of Work (“CCOW”) or Contracts of Work (“COW”)) had to divest a total of 20% of their shares within five years after production. This meant that under the previous regulation, most foreign companies investing in Indonesia invested at an 80% level and sought Indonesian partners at an early stage. 
GR 24/2012 specifically applies to IUP or IUPK holders, and not to CCOW or COW holders. However, there is some uncertainty in this regard, and as there is a very broad requirement under the Mining Law, the CCOW or COW holders should adjust their CCOW or COW to conform to the Mining Law’s principles. The philosophy behind this is that CCOWs and COWs in general are contracts giving a special deal to their holders and the Mining Law is intended to ensure that all parties play on a level playing field. Therefore, CCOW or COW holders could in theory be required to comply with this new divestment obligation if the requirement to conform the contracts was interpreted as extending to the 51% divestment obligation. However, up until now, the previous 20% divestment obligation has not been raised as an issue in the bilateral negotiations the Government has been conducting with CCOW and COW holders around the adjustment obligation. Therefore, the expectation is that the 51% divestment obligation will not form part of the adjustment package required by the Government. However, where a CCOW or COW expires and the relevant contract is converted to an IUP, the divestment requirement should apply as at the date of the conversion (as IUPs are subject to the new divestment requirements).
Another requirement under GR 24/2012 is that the shares being divested must be offered in a strict order to specific Indonesian participants. First, the shares must be offered directly to the Indonesian central government (Article 97(2) of GR 24/2012), then directly to the provincial government or to the regency/municipal government. Following these stages, the shares must be offered in strict orderthrough a tender process to state-owned companies and regional-owned enterprises and finally offered to private Indonesian companies. At each stage, the offerees have 60 days in which to respond. The company must also allow a total of 300 days to elapse without any declaration from an offeree. However, informal feedback from the Government is that if a selected Indonesian holder holds the shares before the divestment obligation must be effected, then that Indonesian holder can continue holding the shares. This means that foreign owners can select their Indonesian partners in advance.
Once the shares are divested, GR24/2012 requires that the Indonesian shareholding be maintained at the mandatory level at any given year. In the event that there is anincrease in the company’s capital, the capital ownership of an Indonesian party cannot be diluted to less than the relevant minimum divestment percentage (Article 98 of GR 24/2012).
There is a recognised practice in Indonesia of treating an Indonesian public company as a domestic entity for the purposes of assessing levels of foreign ownership. Thispractice therefore provides a potential structure underwhich a majority foreign owned Indonesian listed company could hold a majority stake in an Indonesian mining company. However, we are aware that the limits of this exception are being specifically discussed in the context of a new regulation to further govern this divestment process.



For further information, please contact:


Sean Prior, Ashurst

[email protected]


Tuning Soebagjo, Ashurst

[email protected]



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