Foreign mining investors to be stripped of majority ownership

Foreign mining investors will be required to divest majority ownership in companies holding mining business permits under a new Presidential Regulation issued recently.

On February 21 this year, the Indonesian Government implemented a forced divestment framework to capture and ultimately control mining projects.  This new regulation, Government Regulation No.24, deals with a number of issues including the procedures for the extension of Contracts of Work and Coal Contracts of Work but the provisions that are getting most attention are those requiring an increased compulsory divestment of ownership to Indonesian Participants.

The new Indonesian Mining Law enable foreign investors to hold mining business permits for the first time.  But here’s the kicker – foreign investment companies that hold licences for a producing mine of 5 year maturity are required to divest 20% of the mine to Indonesian Participants, and after ten years the shareholding percentage held by Indonesian Participants must be not less than 51% (it goes up incrementally from 5 years).  There is also stipulation on which Indonesian Participants have priority.  Shares must be offered to the Central Government and if it is not interested, then to the Provincial Government or Regional Governments; State owned and regional owned enterprises; and finally to national private business entities that are 100% owned by domestic investors.

Shares offered to State and regional owned enterprises or  to national private business entities must be offered by way of auction, but it is not yet clear how this process will work. Others areas of concern are that the regulations are yet to provide any details on the pricing of offers made to the a Government.

There are of course a number of technicalities around what happens to existing Contracts of Work and Coal Contracts of Work including how and whether they can be extended – but what is clear is that companies operating in this area need to familiarise themselves with these laws, and quickly as they are already in effect!