Friday, October 18, 2013

Divestment in the Mining Industry - Are We Ready ?

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Ferdinand Jullaga Tambunan[1]

To respond to the anxiety of the mining investors related to the divestment obligation that has been introduced since the 2009 Mining Law, the Minister of Energy and Mineral Resources (“MEMR”) issued the long-awaited regulation No. 27 of 2013 on Procedures and Price Determination in Divestment and Change of Investment in Mineral and Coal Mining (“MEMR Reg 27/2013”).

While the divestment is highlighted as a significant obligation for foreign investors in the mining industry, there are actually other obligations that may also significantly affect the foreign investment in the mining industry.

Government Regulation No. 23 of 2010, as amended by Government Regulation No. 24 of 2012 on the Implementation of Mineral and Coal Mining Business Activity (“GR 24/2012”) required the foreign investment company (locally known as “PMA Company”) to divest foreign ownership in a mining company.

The divestment must be conducted in stages starting from the sixth year until the tenth year following the commencement of the operation production stage. It also stipulates the priority for the shares to be offered starting with the Central Government, Regional Government, State Owned Enterprises, until eventually being offered to private parties.

MEMR Reg 27/2013 stipulates that the price of divested shares shall be based on the book value of the mining company, which is the investment value deducting the depreciation and amortization of the assets and also the debt of the company until the end of the ongoing year.

It may be worrying for investors, as the book value does not take into account the commercial considerations of the mine project, such as the reserve amount, mining site location and others, which surely would be considered if the sale price was based on the market value.

Many believed beforehand that the offering of the shares to the public in the capital markets may be regarded as a divestment obligation fulfillment under the GR 24/2012. The reasoning is that the divestment obligation is intended to encourage domestic participants in the mining industry which is very likely to occur in the capital markets since investors range from financial companies to individual. However, that is not the case since MEMR Reg. 27/2013 excludes shares offering in the capital market as fulfillment of divestment obligation.

As GR 24/2012 specifies the divestment obligation for a PMA Company, there are concerns from the Government side that contractual arrangements (nominee arrangements), as frequently done prior to the 2009 mining law, may be conducted by investors to avoid the divestment obligation.

That is why MEMR Reg 27/2013 prohibits a mining company and its affiliated party from financing the purchase of divested shares. However, there is uncertainty since the regulation do not specify to what extent another party shall be deemed to be an affiliate. Instead, MEMR Reg 27/2013 prohibits the pledging of the shares which are included in the divestment obligation.

There is no further provision concerning the period and/or timing of the restriction related with the pledging of the shares. If the restriction is to be applied generally, which means before the divestment period until the completion of divestment, investment in the mining industry may be hampered, as pledging of shares is typically done in the mining business, especially in order to obtain financing for projects.

Another issue raised in MEMR Reg 27/2013 is the limitation of foreign ownership in the event of a change of status of the mining company from a domestic investment company into a PMA Company. For a mining company that holds an exploration mining license, the shares that may be acquired by a foreign party is limited to 75% of the total issued shares.

As for a mining company holds an operation production mining license, regardless how much of the operation production phase has elapsed, the shares that may be acquired by a foreign party is limited to 49% of the total issued shares.

Disparate limitation for foreign ownership for those types of mining license could raise an issue since in practice mining company divides its working area into several blocks with difference phase. This limitation is also a new requirement introduced by MEMR Reg 27/2013. There is no such requirement under GR 24/2012 as the principal regulation of the MEMR regulation.

There is not even such requirement under the Presidential Regulation No. 36 of 2010 which sets out the foreign ownership limitation in general for all industry. It is interesting to see that the MEMR create a new requirement in his regulation without any mandate from the Government or any higher regulation.

MEMR Reg 27/2013 also provides the requirement of MEMR approval in the event of a change of status from the domestic investment company into a PMA Company. It provides that prior to applying for an approval from the Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”) with regard to the change of status, the applicant shall already obtain the approval from MEMR.

In practice, prior to MEMR Reg 27/2013 the BKPM already required the applicant to obtain approval from the MEMR with regards to the change of status. Following the change of status, the Governor/Mayor who issued the mining license of such company is required to release the mining license to the MEMR as the new authorized administrator concerning such mining license.

The Governor/Mayor is also required to deliver the existing mining license which is held by the PMA Company to the MEMR at the latest 1 (one) year following the promulgation of MEMR Reg 27/2013, i.e. 13 September 2013. There is, however, no provision concerning the sanctions and/or validity status of such mining license if the Governor/Mayor fails to deliver such mining license to the MEMR during such transition period.

The divestment obligation in the mining industry as well as other obligations that must be complied by the foreign investor will certainly considerably affect the inflow of foreign investment to Indonesia mining industry.

The recent economic tremors in Indonesia due to the current account deficit highlight the need for Indonesia to attract more direct foreign investment. It is needed to keep encouraging Indonesia economic growth as well as to prevent even more weakening rupiah. As the recent change of policy by the Government which conceivably restrains the foreign investment in the mining industry, it is questionable whether the Government is ready and will be consistent in traversing the difficult economic road ahead.

[1] Ferdinand Jullaga Tambunan is an associate at Mochtar Karuwin Komar Law Firm. The views expressed in this article are author's own and do not reflect the view of any institution.

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