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Thursday, March 8, 2012

Indonesia tightens mining law to limit foreign ownership

Thursday, 08 Mar 2012

Under new rules announced on the energy ministry's website, Indonesia will force foreign firms to sell down stakes in mines by the 10th year of production and increase domestic ownership to at least 51%.

The Indonesian Government recently issued Government Regulation No.24 of 2012 which amended Government Regulation No.23 of 2010 on the Implementation of Minerals and Coal Mining Activities (GR 24/2012). In brief Government regulation No. 24 of 2012 issued on 21 February 2012
1. Implements divestment requirements for foreign investors in Indonesian mining projects.
2. The prohibition on transfer of Indonesian mining licenses (IUPs) has been overturned (with limitations).

The significant change brought about by GR 24/2012 is a requirement for foreign investors in the Indonesian mining sector to divest a minimum of 51 per cent of the equity in the mining licence (IUP) holding entity by the tenth year of production, in accordance with a divestment schedule. This requirement applies to IUP licence holders with any level of foreign shareholding.

Five years after the commencement of production, a foreign IUP Holder is required to divest shares in accordance with the divestment schedule set out below so that at the end of the tenth year a minimum of 51 per cent of the shares in the PMA IUP holder are owned by an Indonesian Participant.

The following types of entity comprise an ‘Indonesian Participant’ for the purposes of GR 24/2012
1. The central government
2. The provincial, regency or municipal government
3. SOE or a Regional Owned Enterprise (ROE)
4. A private national business entity

The divestment shares are to be offered to entities in the order of priority listed above by way of auction.

Divestment schedule
The shareholding percentage of the foreign shareholder for each year after the fifth year of production must divested in accordance with the divestment schedule below:
1. 20% (of total) on the sixth year of production
2. 30% on the seventh year
3. 37% on the eighth year
4. 44% on the ninth year
5. 51% on the tenth year

Transfer of IUP
Prior to the issuance of GR24/2012, IUPs could not be transferred or assigned from one entity to another. GR24/2012 provides that an IUP may be transferred to another entity on the basis that the transferor holds a minimum of 51 per cent of the shares in the assignee.

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