INVESTMEN LAW

OBLIGATION OF FOREIGN INVESMENT IN

MINING SECTOR

ROHAJI RIANSYAH WIDODO

031311133083

Faculty of Law
Airlangga University
2015

BACKGROUND
Economist mainstream believes that prosperity of the society of a country can be
reached by capitalism and neo liberalism, through the principal strategy of Foreign Direct
Investment (FDI), Free Trade, Privatization and Deregulation. Developing Country generally
practices neo liberalism strategy as a blue print (copy paste) from economic theory and
practiced which run by Developing Country. In Indonesia case, investment policy is much
more encouraged by foreign aid allocated for Law/ Bill that supports: foreign investment,
rights to control land in big scale done by investor, tax haven, transfer and repatriation
flexibility. All the regulations open chance to neocolonialism in Indonesia. Long before FTAs
were signed, investment in Indonesia has been occurred widely and most of them were
foreign investment covered all sectors of economy : agriculture, plantation, gas and oil
mining, finance, trade and service. Comprehensive agreement of FTAs including investment
and trade that will increase foreign capital to natural resources, trade, and finance in
Indonesia, and in the end will make a big problem faced by peoples.
INVESTMENT HISTORY IN INDONESIA
Historically, investment is associated as colonial investment which stretched in
(1) previous investment for exploitation of resources and agriculture, (2) new investment for
mastering local market also raw material and cheap worker so that become more competitive
on international market. On the past, investment from one country to the others can be
happened on the practice of colonialism. Colonialism have been open the gate for the
investment on the colony. The colony will follow investment scheme which characteristic by
exploitation and domination from the colonial countries then bring back Home (taking the
economics surplus to the maximum). Investment as a part of International Regime
Investment ruled by or at least part of international trade agreement. So that investment and
trade basically rule by the same regime that is multinational capital.1

1Indonesian Investment, accessed on

http://www.indonesiainvestments.com/business/commodities/coal/item236

Feasibility Studies
The capability study apart is one of the normative obligations that must be met and a
prerequisite for obtaining IUP (Mining Permit) Operating Produksi.Sesungguhnya, properly
understood, the feasibility study is an important document that is useful for various parties,
especially for businesses, governments, and investors or perbankan.Dengan so, document the
feasibility study is not just a pile of a pile of papers in which includes the concept, the
calculation of the figures and the pictures alone, but it is a very useful document for
management in making strategic decisions whether the mine continued or not. Another thing
that must be understood is reviewing the feasibility study is not only technically, or make
predictions / projections of economical, but also examines other nonteksnis aspects, such as
social, cultural, legal, and environmental.
The Capability study besides useful in making decisions whether or not the mining
business plan was executed, is also useful when the activity be carried out, namely;
1) The Cpability study document serves as a reference implementation of activities, both
reference work in the field, as well as a reference for management staff in the office;
2) serves as a control device and controls the passage of the work;
3) as the basis of evaluation of the job performance measures, so that if found to technical or
non-technical obstacles, can be addressed or find a way out;
4) for the government, a feasibility study document is a guideline in conducting surveillance,
both concerning the actual production control, safety control and safety, control control
environmental aspects, and others
As for the aspects to be studied in the Capability study are
1) Aspects of technical study, include:
a) assessment of exploration results, related to aspects of geology, topography, test wells,
trench testing, drilling, sediment quality, and the amount of reserves;
b) results of exploration data such as technical data in determining the choice of mining
system, whether open pit, underground mine or a mixture.
2) The non-technical aspects of the study include:

a) review of legislation relating to aspects of employment, the rule K3 (Occupational Health

and Safety), systems of taxation and levies, administrative rules mining activity reporting,
and others;
b) study the social aspects of the culture and customs of the local community, including the
study of aspects of customary laws, behavior patterns and habits of local people.
3) Study the market, with regard to supply and demand, can be analyzed from the character of
the market, potential, and market competitors.
4) economic feasibility study, is the calculation of the economic feasibility of such estimates
by using several methods of approach. In general, the approach is usually through the
analysis of the Net Present Value (NPV), Benefit Cost Ratio (BCR), Profitability Index (PI),
Internal Rate of Return (IRR), and Payback Period.
5) environmental feasibility study, in the form of the EIA (Environmental Impact A
ssessment) and the UKL-UPL (Sustainable Management Plan Environmental Monitoring). It
also related with Enviromental Management Law in Indonesia.
FOREIGN INVESTMENT ON MINING SECTOR IN INDONESIA
Direct investment
Foreign investors, whether individuals or corporations, subject to the applicable Indonesian
Investment Negative List, may establish a foreign investment company (usually known as a
PMA company) in Indonesia. As a general rule, partnerships, branch offices and sole
proprietorships are not available as investment vehicles for foreigners and while a number of
different types of representative office can be established in Indonesia, depending on the
business activity of the foreign company, this is not applicable to the mining sector. 2
A PMA company is a limited liability company established under Law No 40 of 2007 on
Limited Liability Companies (the "Company Law"). A PMA company may be a joint venture
company established by a foreign investor and an Indonesian partner or (where 100% foreign
shareholding is permitted) a wholly foreign-owned company. For the mining sector, the
current Indonesian Investment Negative List allows all shares of a PMA company engaged in
2 Oentong Surya & Partner, Investing In Mining in Indonesia accessed at
http://www.oentoengsuria.com/wp-content/uploads/2010/11/14809-PUBInvesting-in-an-Indonesian-mining-project-08-11-web2.pdf

mining to be held by foreign investors. However, note that the Company Law requires a
private limited liability company (PMA or local) have at least two shareholders.
The government agency overseeing foreign investments in Indonesia is the Capital
Investment Coordinating Board (Badan Koordinasi Penanaman Modal - "BKPM"). The
BKPM acts as the prime regulator of foreign investments into Indonesia. However,
specifically for mining, the regional government issuing the IUP and the MEMR also play an
important role in dealing with certain foreign investment matters.
To establish a PMA company engaged in the mining sector, a company must obtain prior
BKPM approval for the foreign investment in the company and the Ministry of Law and
Human Rights approval for the legal entity status of the company. Subsequently, approval
from the regional government or the MEMR in the form of an IUP or IUPK will be needed as
the operating license of the company (after winning the bid, as applicable).
Share Acquisition
Generally, new direct foreign investment in Indonesia is conducted either by acquiring an
existing company or by establishing a new PMA company (as explained above).
Please note that according to the New Mining Law, an IUP/IUPK cannot be transferred, but
ownership or shares in a company holding an IUP/IUPK can. According to Article 93 of the
New Mining Law, the transfer of ownership and/or shares on the Indonesian stock exchange
is allowed so long as (i) the company has found two prospective areas during the exploration
period, and (ii) prior notification is conveyed to the MEMR, governor or regent/mayor in
accordance with their authorities and the transfer is not contrary to the prevailing laws and
regulations. The New Mining Law does not specifically address a transfer of shares among
unlisted/private companies. However, in practice, a recommendation from the relevant local
governments may need to be obtained by the IUP holders before a transfer of shares in the
company can be done.
Further, under the Company Law, if the acquisition of shares in a company results in a change
of control over the company, the proposed transaction may need to observe the direct
acquisition rules prevailing under the Company Law. Commonly, a 'change of control' is
deemed to have occurred if more than 50% of the shares of the company are acquired by
other parties. Therefore, if foreign investors wish to acquire more than 50% of the shares of
an Indonesian company holding an IUP/IUPK (the "target company"), this rule will apply.

Under the rules, certain procedures must be completed by the target company and the
purchaser, before the purchaser can acquire the company's shares from the existing
shareholders, such as to announce it in the newspaper(s) and to notify the creditors and
employees of the target company of the proposed acquisition (no later than 30 days prior to
the summons to the General Meeting of Shareholders of the target company to approve the
acquisition), as well as to obtain approval from the General Meeting of Shareholders of the
target company and the BKPM. If the target company is currently a local company, approval
from the BKPM for the conversion of the target company's status to a PMA company will be
required before the acquisition process can be finalized. This acquisition process usually
takes at least two months, subject to cooperation among the parties,
approvals/recommendations that must be obtained and the resolution of issues (if any) related
to the transaction, such as objections from creditors or employment issues.
Employment issues need to be considered in acquisition. In the event of employment
termination (whether initiated by the employer or the employee), the company must provide
the payments (severance package) required under the Manpower Law, taking into account
any specific contractual matters that may be governed by the company regulations, collective
labour agreement or employment agreement. A termination of employment initiated by the
target company will without doubt be relatively costly.3
However, if the foreign investors will purchase minority part of the target company's shares
(eg. below 50% of the paid up capital of the company), the direct acquisition rules explained
above will not be applicable. Therefore, upon approval from the General Meeting of
Shareholders of the target company to approve the acquisition and other necessary approvals
(as explained in item 3.1 below) have been obtained, the seller and the purchaser may transfer
the shares by signing a share transfer deed.
In general, the conversion of the status of a mining company to a PMA mining company
involves:
i.

prior written approval from the BKPM for the conversion and proposed foreign
investment in the company. For this a specific BKPM application is submitted to the

3 Oentong Surya & Partner, Investing In Mining in Indonesia accessed at

http://www.oentoengsuria.com/wp-content/uploads/2010/11/14809-PUBInvesting-in-an-Indonesian-mining-project-08-11-web2.pdf

BKPM. In practice, the BKPM approval takes 2 to 10 working days as of its receipt of
the complete application;
ii.

a recommendation/approval from the MEMR, governor or regent/mayor issuing

IUP/IUPK held by the target company. This may be required by the BKPM before it
issues its approval in (i) above. The timeframe for obtaining this
recommendation/approval varies depending on the relevant government institutions;
and

iii.

approval from the Ministry of Law and Human Rights for the changes to the Articles
of Association of the company to reflect its (PMA) status. The MLHR approval takes
2 to 3 weeks. This change will also need to be notified to the Ministry of Trade.

Share Acquisition through the Indonesian Capital Market

Currently, Indonesia only has one stock exchange, the Indonesian Stock Exchange (the
"IDX"), where publicly owned companies list their shares. Activities involving or conducted
by publicly owned companies are supervised by the Indonesian Capital Markets and
Financial Institutions Supervisory Board ("BAPEPAM-LK").
To acquire shares in a listed mining company ("Listco"), investors (foreign or local) may buy
shares in the Listco through the market or directly from the relevant shareholders. Please see
our note regarding Article 93 of the New Mining Law in item 2.3 above. For share
transactions in the IDX, investors need to appoint an Indonesian licensed securities company
or custodian bank for the settlement of transactions on the stock exchange.4
Note that if investors purchase shares in the Listco from shareholders whose names are stated
in the Articles of Association and BKPM licenses (if any) of the Listco specifically (and
therefore, their shares are not 'public' shares), the Listco will need to satisfy additional
requirements, such as to obtain approval from the BKPM and regional government (if
applicable) before the share transfer can become effective and notification of the Ministry of
Law and Human Rights (due to the changes to the shareholders as stated in the Articles of
Association). Otherwise, transfer of 'public' shares is fairly straight forward and can be done
without approvals from or notifications to any government institutions.
4 Oentong Surya & Partner, Investing In Mining in Indonesia accessed at
http://www.oentoengsuria.com/wp-content/uploads/2010/11/14809-PUBInvesting-in-an-Indonesian-mining-project-08-11-web2.pdf

Under BAPEPAM-LK Regulation No.X.M.1 regarding the Disclosure Requirements for

Certain Shareholders, any party holding 5% or more of the issued shares of a publicly owned
company is required to report its ownership or any subsequent changes thereto to the
BAPEPAM-LK within 10 days of the share purchase taking place. Therefore, if the shares
purchased by an investor amount to 5% of the total issued shares of the Listco, the relevant
investor will be required to report its share ownership (and any changes thereto) to the
BAPEPAM-LK (with a copy to the IDX). The report should provide at least the name of the
purchaser/seller, its citizenship and domicile, the number of shares purchased/sold and the
price, transaction date and purpose of the transaction.5
If an investor acquires shares in the Listco and its ownership in the Listco reaches more than
50% of the paid-up capital of the Listco, or less than 50%, but the investor is able to directly
or indirectly, determine the management and/or policy of the Listco, the investor may be
subject to BAPEPAM-LK Regulation No.IX.H.1 regarding The Acquisition of Public
Companies ("Regulation IX.H.1"). Under Regulation IX.H.1, if the investor is subject to this
regulation, it will be deemed to be a new Controlling Party of the Listco and therefore subject
to the mandatory tender offer for the remaining shares of the Listco held by certain
shareholders, which must be made within 2 working days of the completion of the
acquisition, unless exempt under Regulation IX.H.1. In certain cases, the acquisition rule
under the Company Law may also apply to an acquisition involving a Listco.
Conclusion
Law No. 11 of 1967 and consisted of a strong nationalism ideology that provided
rights for the state to control all resources in Indonesia. This law also limit operating
regulation (established by the old order regime), which hampered the development of mining
within Indonesia. The consequence pf centralised mining administrative system that proved
ineffective in administering the mining sector. After decentralisation and political reform
resulted in significant changes to the Indonesian mining regulatory framework, Law 4 of
2009 reflects the political reform and decentralisation that has taken place within Indonesia
and the greater role of sub-national government. The most significant change provided by
Law 4 of 2009 is that sub-national governments have greater authority in the issuing of
5 Oentong Surya & Partner, Investing In Mining in Indonesia accessed at
http://www.oentoengsuria.com/wp-content/uploads/2010/11/14809-PUB-Investing-in-anIndonesian-mining-project-08-11-web2.pdf

mining licenses. Together with ineffective fiscal decentralisation policy, mining licenses (in
particular IUPs) have been used to increase local revenues as well as to fund local elections.
This has caused a fast proliferation of IUPs as well as PERDAs that require mining
companies to provide further local taxes and revenue.
Decentralisation has encouraged a paradigm of localism in natural resources and
economic wealth for local communities. At the local level, many communities now see
themselves as local shareholders of nearby mining activities. As shareholders, local
communities surrounding mining operations believe that they should be the first priority to
receive benefits from mining including direct employment and business opportunities, and as
recipients of CSR programs. In many cases, this sense of localism has triggered tension and
conflict between mining companies and communities. Therefore, it is crucial for mining
companies to prepare and promote a benefit-sharing agreement with the local communities.
Companies are required to obtain relevant environmental approvals as well as the
new environmental license as part of an Environmental Impact Assessment Environmental
approvals are essential for mining in Indonesia. This is done by conducting an Environmental
Impact Assessment (AMDAL). For mining, this is mandated by GR 23/2010 and
subsequently, all mining exploration and extraction projects need to meet the legal
requirements of environmental approvals as highlighted by Law 32/2009. The recent GR
27/2012 requires mining operations to obtain an environmental license or permit. This recent
regulation is believed to provide more protection for communities and NGOs that file legal
claims against mining activities, but puts an extra burden on companies to obtain an
additional environmental permit besides the existing long list of other permits required. It is
well-known that the enforcement of those permits has been problematic in Indonesia.6
Social and Environmental Responsibility has been legally mandated in Indonesia;
however, the outcomes of its implementation have been mixed. Article 74 of Law 40/2007
provides that companies doing business in the field of and/or in relation to natural resources
must put into practice Environmental and Social Responsibility. In the mining sector, mining
license holders have been required to maintain a program of Community Development and
Empowerment CDE (Articles 106109 of Law 23/2010) as part of their CSR. The process
of implementing CDE requirements is currently unclear, as no additional regulations have
been issued. A draft decree for CDE was issued by the MEMR in March 2011; however, at
6 Taylor & Francis, Indonesian Regime of Regulation in Mining Sector , accessed
on http://www.tandfonline.com/doi/abs/10.1080/02646811.2015.1057028?
journalCode=rnrl20

the time of this report there had not been any further information on the enactment of this
draft.
In recent times, companies have conducted CSR programs with many variations in practice.
Evidently, many state-owned companies have different principles and rules in conducting
CSR in comparison to private local and foreign companies.7
It is commonly found that the intention of CSR activities has been abused by many
companies (e.g. CSR budgets tend to be used for bribing and entertaining local elites). On the
other hand, local communities have sometimes been too demanding for the implementation
of activities that are not directly related to CSR/CD programs and have often utilised the
funds for their own individual/group benefits. It is recommended that CSR programs are
developed with a clear structure/approach and are part of a widespread positive organisational
culture that genuinely promotes sustainable communities in which they operate, rather than
simply responding to pressure/conflicts due to their activities. CSR programs should be part
of the cost of mine site establishment and operation and presented clearly within a company
business case.
IM4DC, in cooperation with the Indonesian institutions of higher education (e.g. Trisakti
University and LabSosio UI) as well as support from UQ/UWA, could develop training
programs to educate mining companies operating in Indonesia about the business case for
CSR in mining. This could ensure that local communities are aware of the likely benefits
from mining and will improve the probability of those communities providing their support
once those benefits are communicated early in the process.

7 Indonesian Investment, accessed on

http://www.indonesiainvestments.com/business/commodities/coal/item236