(Not So) New Regulation on Divestment
In our previous Client Alert, we reported on the roll out of Government Regulation No. 1 of 2017 (GR 1/2017) and its ancillary regulations. These are designed to enable the government to ease the export ban on mineral ores, while at the same time requiring all mineral mining companies, including Contract of Work holders, to develop smelters, and to divest foreign-owned shares. Contract of Work holders that need to export ore in the meantime, notwithstanding what the terms of their contracts might say, are required to give up their COWs and convert them into IUPKs.
Minister of Energy and Mineral Resources (MEMR) Regulation No. 9 of 2017 further regulates the divestment process, in particular with regard to the price at which the government will pick up shares. It also clarifies when the divestment process must begin, and permits companies spurned by Indonesian Participants to issue shares on the stock exchange.
The regulation replaces MEMR regulation No. 27 of 2013 to the extent of the divestment provisions.
Who Needs to Divest and When?
MEMR 9/2017 applies to holders of both coal and mineral IUPs and IUPKs.
The regulation clarifies the position that was previously thought to apply - i.e., that IUP and IUPK holders must begin the process of divesting their shares from the fifth year of production. As the wording of GR 1/2017 suggests that this process commences from the issuance of the production license, this is a welcome clarification. Although there remains some tension between the two regulations, and MEMR 9/2017 is the more junior regulation, in practice we would expect it to apply.
The regulation provides a further welcome clarification — holders of IUP and IUPK companies that already have a 51% local shareholding by the fifth year of production are not required to divest further.
MEMR 9/2017 also makes it clear that PMA smelting companies (holding production operation IUPs for processing and refining) are not subject to the divestment requirements, which clarifies the vaguer wording in GR 1/2017 (which refers to holders of IUPs and IUPKs needing to divest shares).
The divestment shares must be offered to Indonesian participants in the following order:
- Central government
- Relevant provincial and regency governments
- BUMN and BUMD (national and provincial/regional state-owned companies)
- National private entities
failing which, divestment may be carried out through an IPO on the Indonesian stock exchange.
Following the divestment of any shares, any change of shareholding in the IUP and IUPK holders will need MEMR approval. This provision simply reiterates what is already required in respect of PMA mining companies. Also maintained is the obligation to provide the MEMR with the sale and purchase agreement and the share transfer documents.
In order to prevent the establishment of nominee/quasi-nominee relationships, IUP/IUPK holders and/or their affiliates may not finance the acquisition of divestment shares by Indonesian participants.
Where the shareholders make any changes (increases) to the capital of a company, they will need to maintain the relevant Indonesian participation, even where the original Indonesian participant declines to acquire any more shares.
Divestment Shares and "Market Price"
Perhaps the key change made by the regulation is the price at which divestment shares must be offered. The regulation states that this will be determined based on fair market value, but excluding the (value of) coal/mineral reserves. Further clarity is needed around this definition. On one interpretation, it is simply referring to sunk cost/capital. However, recent reports suggest that what the government meant was that currently mined reserves should be included, but that future mine development should be excluded. It is unclear how we should apply this distinction in practice. All reserves not yet sitting in a stockpile can be viewed as "future" development reserves. At what stage, therefore, will currently mined/mineable reserves be excluded?
The government may engage an independent appraiser to evaluate and negotiate the share price. If the parties are unable to reach agreement, the government will determine the price.
The price determined in accordance with the preceding provisions forms a cap on the price that the central, provincial and regency governments will pay, and forms the floor price for any tender to BUMN/BUMD and private national entities.
Implications for COW and CCOW companies
Notwithstanding their contractual terms, or any subsequent amendments/MOUs agreed with the government, COW and CCOW holders are required to comply with MEMR 9/2017.
Given the terms the government is offering, we would expect most mining companies that have the luxury of doing so to co-venture with a local majority shareholder on B2B terms before the fifth year of production. Accordingly, the companies that are most likely to be caught by these provisions would seem to be those that have already had a Production Operation IUP for more than 5 years of production but have no local shareholder, or Contract of Work or Coal Contract of Work holders that have not begun the divestment process.