A transaction of transfer of shares by sales and purchase of shares between a Foreign Nationals and/or foreign legal entity with a limited liability company where all of its shares were owned by Indonesian Citizens or it is bearing a status of Domestic Investment Company (PMDN), will raise a question whether such sales and purchase of shares with the foreign party is allowed, and how is the status of the target company after the occurrence of sales and purchase of shares between the mentioned Indonesian Citizens and the Foreign Nationals.
Whether the sales and purchase of shares between the domestic parties with foreign parties are allowed or prohibited, it must observe the provisions of Law Number 25 of 2007 concerning Capital Investment (“Law 25/2007”). The reason is such sales of shares by the domestic parties to the foreign parties will give effect to the structure of ownership that is regulated by Law 25/2007.
Law 25/2007 and Presidential Regulations of the Republic of Indonesia Number 44 of 2016 concerning List of Business Fields Closed to Investment and Business Fields Open, with Condition, to Investment (“PR 44/2016”) specify the limitation to a foreign ownership in a company that is entirely owned by the domestic party. That limitation applies to the certain business field as specified in the Attachment of PR 44/2016.
Article 12 paragraph (1) of Law 25/2007 concerning Capital Investment stated that generally, any field of business is open to capital investment, except for business fields or business types that are declared to be closed and open with requirements. Those requirements are further stipulated in PR 44/2016. The PR itself is well known as Negative Investment Lists or DNI. Furthermore, if we look back to the example of the case above, the percentage of shares that could be purchased by the Foreign Nationals is limited to a set of the amount specified for foreign investor ownership of the relevant business fields of such domestic investment company.
Then, if there is any domestic investment company, whereas its shares to be purchased by a Foreign party (either by individuals or legal entities), it will change the status of such domestic investment company to become a Foreign Direct Investment (Penanaman Modal Asing/PMA). This due to the foreign capital participation into the PMDN as stated in Article 1 Point 8 of Law 25/2007, i.e: Foreign Capital means capital that is owned by a foreign state, a foreign national, a foreign business entity, a foreign legal entity, and/or an Indonesian legal entity, of which the capital is in part or in whole is owned by a foreign party. Afterward, in Article 25 Paragraph 1 of Regulation of the Chairman of Investment Coordinating Board Number 14 of 2015 on Guidelines and Procedures for Principle Licensing of investment, the PMA or PMDN which makes any changes in capital, including changes in:
- Total capital and shareholding percentage
- Name of shareholder; and/or
- Country of origin of shareholders,
shall apply for a change of principle licensing.
Hence, according to these provisions, the sales and purchase of shares between the domestic parties and foreign parties in a company in Indonesia are allowed, as long there is no prohibition to such transaction.
In addition, we need to note that any sales and purchase of shares by foreign parties in a domestic investment company will automatically convert the status of such domestic investment company/PMDN to become a Foreign Direct Investment/PMA.
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