Joint‑Venture Investments in Indonesia

Abstract

Foreign investment in Indonesia is governed primarily by the Foreign Capital Investment Law No. 1 of 1967 (as amended by Law No. 11 of 1970) which is intended to facilitate and regulate the direct investment of foreign capital into Indonesian enterprises. Also of importance is Presidential Decree No. 33 of 1981 which, among other things, clarified the responsibilities of the Investment Co-ordinating Board or BKPM (Badan Koordinasi Penanaman Modal)} Rather than being a detailed code, the Indonesian investment legislation sets down broad policy guidelines which may subsequently be elaborated upon by a presidential decree or a Cabinet resolution. A resolution of the Cabinet introduced in January 1974 made it mandatory for foreign investors operating in Indonesia to have local partners. All new foreign capital investment into Indonesia, other than investment totally for export production, must now take the form of a joint venture in which the equity participation of ethnic (pribumi) Indonesian individuals or companies is to increase to 51 per cent within ten years after the start of commercial production.2 The initial Indonesian participation is usually required to be at least 20 per cent. The required Indonesianization of capital can be brought about by selling off shares to an existing Indonesian partner or, with the consent of the latter, by inviting additional pribumi partners to subscribe for capital. In the case of a public company, equity may be sold on the capital market. Where difficulty is encountered in finding suitable Indonesian partners at the outset, it is permissible for certain investment banks to act as the Indonesian partner for a maximum period of five years (subject to limitations on the amount of equity held). At the end of this period, the banks must dispose of their shareholding to local investors.