Recently Indonesia has been through rapid development in almost every sector. The country has transformed into a key player in the global economy.
This has stimulated a massive foreign investment flow in recent years. Many investors view Indonesia as a promising place for expand their businesses. Although the forging democracy has also helped the growing investment climate, nevertheless Indonesia is not so liberal in terms of investment regulation.
By setting up a business in Indonesia, you will need to follow local rules. Local law in Indonesia regulates and restricts the establishment of a foreign company in Indonesia. The Indonesian Government determines which industries are closed to foreign investment through the Negative Investment List (Daftar Negatif Investasi), which in theory is issued every three years unless revised before then.
The Negative Investment List contains specific business sectors and fields that are entirely closed to foreign investment and those which are conditionally open for foreign investment. It means that if you are a foreign investor who wants to establish a company in a business fields that closed to foreign investment, you will need to establish a local company in form of PT with 100% local shareholders.
Meanwhile, if you want to invest in a business fields that are conditionally open for foreign investment, you will find some restrictions, particularly in shareholding. In this case you can establish a PT PMA/PT Penanaman Modal Asing (Foreign Capital Limited Liability Company). The specific limitations on foreign shareholders depend upon the business field you desire to enter.
For instance, if you want to establish a distribution company in Indonesia, as the foreign shareholder you will only be allowed to hold 67% of the shares. For the remaining 33% of shares, you will have to find a professional shareholder.
A company with professional shareholders/directors/commissioners in Indonesia is standard however not always a safe practice. It’s commonly used when foreign investors wish to invest in business sectors that are either closed or conditionally open to foreign investment (see the Negative Investment List). The idea of a special purpose vehicle in Indonesia is that the foreign investor obtains as much control as possible and is put in a position — in so far as is possible — comparable to that of a registered shareholder.
In this article Cekindo will try to explain you what are the usual risks and mistakes of using special purpose vehicle, how to minimize these risks and mistakes and finally how to operate your company in Indonesia by using professional shareholders/directors/commissioners in the safe way through a special purpose agreement package from Cekindo.
1. The selected professional shareholder/director/commissioner could fully claim the ownership rights of their share and leave the foreign investor without giving them the opportunity to pursue legal action against the professional shareholder/director/commissioner of special purpose vehicle.
This could happen because the foreign investor (if they are investing in a closed business sector and have established a Local Limited Liability Company/PT) is not listed as a shareholder in the company’s structure.
This means their rights in the Company won’t be protected by local law, since based on article 33 of Foreign Investment Law in Indonesia are prohibited any agreements whereby one party declares that it holds shares on behalf of another. This is clearly an attempt to abolish the structure of a special purpose vehicle.
2. In the event of dispute between the foreign shareholder and professional shareholder/director/commissioner, the confidential structure of the special purpose vehicle will be exposed and come under government attention.
3. If you are investing in a conditionally open business sector that only allows a minority share for foreign shareholders, the professional shareholder/director/commissioner as the majority shareholder will have full rights of ownership and run the decision-making process in the company, particularly if the local counterpart is acting as the director.
4. Another common practice a lot of small agencies is to establish the company under different business classification to obtain bigger foreign share and make all registration process more easy however this way will bring you problems latter on once you apply for some licenses such as business license or import licence.
Hence, if you are a foreign investor who wishes to invest in Indonesia and use a professional shareholder/director/commissioner, we suggest you combination some of these solutions:
1. Make a reliable, notarised set of agreements with the local partner to cover all your rights. Cekindo provides you shareholder service using individual and corporate shareholders and appropriate set of agreements to protect your ownership with no breaking any Indonesian laws.
2. You may prefer to establish a Representative Office with 100% of ownership with not requirement for minimal capital however you can only perform research, marketing, and promotion activities. You are not allowed to generate revenue in Indonesia and all revenue have to go directly to the head office.
3. Have more professional shareholders to avoid one person from owning a majority share ( with minimum 2 shareholders based on Indonesian regulation)
4. Withdraw money from the company in a regular basis
Cekindo will help you to combine the above mentioned options and prepare for you several agreements that will ensure the security of the investor’s rights over the company. These should be signed by the investors and the professional shareholder/director/commissioner to limit the authority of the local special purpose vehicle over the company as well as to give more authority for the genuine owner over the company.
As a Market Entry Consultancy firm, Cekindo will provide you set of appropriate special purpose agreements include our individual and corporate shareholders to make sure you choose the safest way to engage a local special purpose vehicle in Indonesia. This service is annually (except the set of special purpose agreements) and will be extended as long as needed by our client.