Laws and regulations: An overview of the current legal environment

MINING LAW: Mining permits (IUP), Small-scale mining permits (IPR) and special mining permits (IUPK) constitute the mining permit regime under the new Law No. 4 of 2009 concerning mineral and coal mining. The mining industry is now classified into:

• mineral mining, which includes radioactive mineral mining, metals mining, non-metals mining and stone quarrying; and

• coal mining.

Unlike its predecessor, Law No. 4 of 2009 welcomes foreign capital to enter the mining industry through a limited liability company (LLC) in the framework of foreign investment. The company will then apply for an IUP or bid for an IUPK.

An IUP is granted to Indonesian legal entities, cooperatives, joint ventures and individuals, and involves two stages. The first is an exploration IUP, which includes a general survey, exploration, and feasibility study. The maximum period for an exploration IUP is:

• eight years for metals mining;

• three years for non-metals mining;

• seven years for certain non-metals mineral mining;

• three years for stone quarrying;

• and seven years for coal mining.

The second stage is a production-operation IUP, which includes construction, mining, processing and/or refining/smelting, transportation, and sales. The maximum period for a production-operation IUP is:

• 20 years for metal mineral mining, which may be extended twice for two 10-year periods;

• 10 years for non-metal mineral mining, which may be extended twice, for five years each;

• 20 years for certain types of non-metal mineral mining, which may be extended twice, 10 years each;

• five years for rock mining, which may be extended twice, five years each;

• and 20 years for coal mining, which may be extended twice, for 10 years each.

There are several types of areas granted to an exploration IUP and a production-operation IUP. They are:

• metals mining, with an exploration IUP for an area between 5000 and 100,000 ha, and a production-operation IUP, up to a maximum 25,000 ha;

• non-metals mining, with an exploration IUP for an area between 500 and 25,000 ha, and a production-operation IUP, up to a maximum of 5000 ha;

• stone quarrying, with an exploration IUP for an area between 5 and 5000 ha, and a production-operation IUP, up to a maximum of 1000 ha;

• and coal mining, with an exploration IUP for an area between 5000 and 50,000 ha, and a production-operation IUP, up to a maximum of 15,000 ha.

An IPR is a small-scale mining permit granted to individuals, up to a maximum of 1 ha, community groups (5 ha) and cooperatives (10 ha) for a maximum of five years and is extendable. An IPR may be issued for metal mineral mining, non-metal mineral mining, rock mining and coal mining.

An IUPK is a permit that is granted to Indonesian state-owned entities, Indonesian local-government-owned entities and Indonesian private entities. The entities that are granted and IUPK permit will use the permit to conduct mining activities in special mining permit areas, with priority being given to state-owned and local-government-owned entities; while private entities are required to enter a bidding process.

When an IUPK is issued, due consideration of the region’s interests should be given. An IUPK is currently only issued for metal mineral mining and coal mining. Like an IUP, an IUPK involves two stages. The first stage is an exploration IUPK. The maximum time period for an exploration IUPK is:

• eight years for metal mineral mining;

• and seven years for coal mining.

The second stage involved in an IUPK is a production-operation IUPK. The maximum period is:

• 20 years for metal mineral mining, which may be extended twice, 10 years each;

• 20 years for coal mining, which may be extended twice, 10 years each.

Areas granted to an exploration IUPK and a production-operation IUPK are:

• metal mineral mining, with an exploration IUPK for an area up to a maximum of 100,000 ha, and a production-operation IUPK, up to 25,000 ha.

• coal mining, with an exploration IUPK for an area up to a maximum of 50,000 ha and a production-operation IUPK, up to a maximum of 15,000 ha.

Learning from the problem of overlapping authorities on mining areas in the past five years, Law No. 4 of 2009 makes a clearer and more exhaustive distinction of the duties and authorities of each level of the government: central, provincial, and city/district. The law even goes as far as laying down provisions of administrative and criminal sanctions for local governments and/or government officers issuing an IUP, IPK and/or IUPK in contravention to their authority.

Certain rights and obligations are attached to a holder of an IUP, IPR and IUPK. Rights include the use of public infrastructure and transfer of shares. Obligations include those of land issue, dispute settlement, refining/smelting, increased tax and fees/contributions, which, generally speaking, are heavier than they were under the previous law’s regime.

In regard to dispute settlement, Law No. 4 of 2009 only recognises the Indonesian court of law and domestic (Indonesian) arbitration, thereby not acknowledging foreign arbitration.

IUP and IUPK alone do not confer a right over land. Exploration IUP and exploration IUPK holders may only start executing the permits after there is approval from the land-title holders. Therefore, before entering the production-operation phase, IUP and IUPK holders must already settle their title to the land.

IUP and IUPK holders are allowed to engage mining services companies, provided that the holders remain the ones responsible for their mining activities. The mining services companies engaged must be locally or nationally owned, unless no locally or nationally owned one is available, for which reason IUP and IUPK holders may then engage foreign-owned mining services companies that have an Indonesian legal entity.

Mining services companies can be a legal entity, cooperative, or sole proprietorship. Services that may be provided by such companies include:

• consultation, planning, implementation and equipment testing in general survey, exploration, feasibility study, mining construction, transportation, mining environment, post-mining activities and reclamations, and/or occupational safety and health;

• consultation, planning and equipment testing in mining, processing and refining/smelting.

The transitional provisions of Law No. 4 of 2009 provide that, upon the law taking effect, work contracts (KK) and PKP2Bs — or contracts of work for coal mining — that already existed before the law takes effect will remain valid until their expiration. However, KK and PKP2B provisions must be adjusted to the regulations of Law No. 4 of 2009 within one year of the law taking effect. This seems to be an attempt at compromising the principle of sanctity of the contract with the regime of this new law. However, in reality, since the law substantially amends several principle provisions to the extent that it in effect establishes a new mining business system, in many cases the KK and PKP2B cannot help but be modified in almost the entirety of their provisions.

The Law mandates the government to:

• produce an appropriate and comprehensive standard draft of KK and PKP2B;

• negotiate with all parties of the KK and PKP2B within a maximum of one year.

Government Regulation No. 23 of 2010 provides that once domestic needs for mineral and coal have been satisfied, licence holders will be permitted to export their mineral and coal, but the price should be subject to the government’s approval.

The regulation provides that the debt management offices for IUP and IUPK holders cover the obligation to prioritise:

• employing local human resources; and

• utilising mineral- and coal-mining-related goods, equipments, raw materials, supporting materials, and imported goods sold in Indonesia.

Among others aimed at maintaining national mineral and coal price stability, the Regulation vests in the Minister of Energy and Mineral Resources the power to control the production and sale of mineral and coal. To this effect, the Regulation of the Minister of Energy and Mineral Resources No. 34 of 2009 on Prioritising the Supply of Mineral and Coal for the National Interest has been issued.

INVESTMENT LAW: To create a more conducive investment climate and to accelerate an increase in capital investments in Indonesia, in 2007 Law No. 25 of 2007 on Investment was adopted. Later, Presidential Regulation No. 27 of 2009 was issued. This regulation was expected to reduce licensing and non-licensing fees; to improve legal certainty, accountability, openness, equal treatment of investors, and overall efficiency of the process; and to promote better services to investors. Also in place is a mechanism to lodge complaints when the services do not meet the expected standard of quality. To this end, a help desk is to be established.

Under the new law, foreign capital investment must take the form of an LLC, incorporated under Indonesian law and domiciled within the country. However, there are also other laws that currently allow foreign businesses to set up representative offices, branch offices, or to operate through licensing or franchising agreements without establishing an LLC.

Except in those declared closed and open with certain requirements, both domestic and foreign capital investments are allowed to invest in all sectors, pursuant to the law and to Presidential Regulation No. 76 of 2007. The regulation prohibits investment in sectors that are closed for either domestic or foreign capital investment, including casino, museum, historical and ancient inheritance, monuments, sacred places, public broadcasting institutions (radio, television), certain transportation businesses, and certain businesses involving hazardous chemicals, alcoholic beverages and marijuana cultivation. Sectors specifically closed to foreign investment include the production of weapons, ammunition and explosive devices.

Business sectors that are declared open with certain requirements include the following:

• reserved for micro, small, medium-scale businesses and cooperatives;

• requiring partnership;

• requiring certain capital ownership;

• requiring certain location;

• requiring special licensing.

A full list of business sectors declared closed and open with certain requirements can be found in the Presidential Regulation No. 36 of 2010, which is significantly different from the previous regulation. It not only modifies the extent to which foreign investment is permitted, but also introduces new provisions to streamline processes and increase legal certainty to cultivate a more attractive investment environment.

On investment licensing, the Regulation of the Head of BKPM No. 1/P/2008 provides that an investor, be it domestic or foreign, must submit an application to the head of the Indonesia Investment Coordinating Board (BKPM). Once approved, the investor should further secure additional licences, permits and approvals for its investment’s implementation, including local government permits such as location permit, land title and building permit. Before commencement of commercial operation/production, a domestic/foreign capital investment company also needs to secure a business licence/permanent business licence.

For eligible investors, the investment law provides tax or financial incentives, ranging from a reduction of income tax, exemption or relief of import duty, exemptions or deferment of value-added tax, to land-building tax relief for some sectors in certain regions.

If there is any unsettled legal liability of an investor, an investigator or the Finance Ministry may request banks or other institutions to defer the right to transfer and/or repatriate certain concerned funds, and the court has the right to issue an injunction for the deferment of the right to transfer and/or repatriate.

As for dispute settlement forum, the investment law recognises various Indonesian courts and arbitration (both domestic and international).

COMPANY LAW: Law No. 40 of 2007 on Limited Liability Company (Company Law) was also adopted, revoking its predecessor: Law No. 1 of 1995.

Under the Company Law, an LLC is defined as a legal entity constituted by a capital association established by an agreement, to conduct business activities, with authorised capital entirely divided into shares. Shareholders of the company are not personally liable for agreements made on behalf of the company nor are they liable for the losses of the company in excess of the value of the shareholders’ shares.

An LLC must have at least two shareholders. Its deed of establishment contains its articles of association, drawn up before a notary after securing the proposed name of the LLC at the Ministry of Law and Human Rights (MOLHR). Application for approval for establishment of the company is submitted electronically to the MOLHR. If the application and supporting documents are in accordance with the relevant regulations, the MOLHR will immediately deliver electronically its non-objection to the application.

Within 30 days from the date of the non-objection letter, the applicant must physically deliver the application and supporting documents to the MOLHR. If all requirements are satisfied, the MOLHR will issue an approval decree, after which the company’s data will be entered into the Company Registry, followed by announcement in the supplement to the State Gazette.

Except for certain business sectors requiring higher capital based on regulations of the relevant sector, an LLC must have a minimum authorised capital of Rp50m ($6000), 25% of which must be issued and paid. The initial issued capital must be paid at the time of the establishment of the company. Further issuance of shares must be paid in full at the time of issuance.

A share gives its owner the right to (i) attend and vote in the general meeting of shareholders (GMS); (ii) receive payments of dividends and assets remaining after liquidation; and (iii) exercise other rights given by the Company Law. Shares of the company, however, may be issued in one or more classifications, such as shares with or without voting rights, or shares with special right to nominate members of the board of directors and/or the board of commissioners, or shares with preferred rights for the holders to receive assets remaining after the company’s liquidation, prior to holders of other classes of shares.

All LLCs must have:

• a board of directors that is responsible for the day-to-day management of the company;

• a board of commissioners that supervises and advises the board of directors; and

• a GMS, meaning any other authorities not delegated to the board of directors or commissioners.

The board of directors and board of commissioners must perform their tasks and duties in good faith and with full responsibility. Each member of the boards shall be personally liable if he or she commits wrongdoing or negligence in performing tasks or duties.

The GMS is the supreme organ of the company and is categorised into (i) an annual GMS and (ii) other GMSs (extraordinary GMSs). An annual GMS must be held, at the latest, six months after the end of the financial year, while an extraordinary GMS may be held any time deemed necessary for the interest of the company. Among the GMS’s powers are to appoint new members of both boards, to accept resignation of boards’ members of the previous period, and to receive submission of the annual report — including a financial report — of the company prepared by the board of directors. For certain types of companies, the financial report must be audited by a public accountant.

Each member of the respective boards should sign the annual report, unless he states in writing his reason for not doing so. If a financial report is incorrect or misleading, members of the boards shall be held jointly and severally liable to the parties suffering losses, unless they can prove it is not their fault.

The law obliges an LLC to set up a reserve fund of 20% of the issued and paid-up capital, which is allocated from its net profit in each financial year. The remaining profit will be distributed to shareholders as dividends. However, an LLC may only distribute dividends if it has a positive balance sheet. So, if the net profit of the current financial year does not cover the accumulated losses of the previous year, an LLC may not distribute dividends to its shareholders, as it still has a negative net-profit balance.

A new development in the legal environment governing companies in Indonesia in 2010 is Government Regulation No. 57 of 2010. In a nutshell, the regulation provides that all mergers and acquisitions:

• may not result in a monopoly or unhealthy business competition practices, such as in the form of prohibited agreements, prohibited activities or abuse of a dominant position. The Indonesian Business Competition Supervisory Commission (KPPU) conducts an assessment on mergers and acquisitions suspected of resulting in monopoly or unhealthy business competition practices. If after the assessment the KPPU opines that the concerned merger or acquisition is, in fact, a monopoly or unhealthy business competition practice, the KPPU has the authority to impose sanctions that are provided in Law No. 5 of 1999:

• that result in assets value of Rp2.5trn ($300m) and/or a sales value of Rp5trn ($600m) must be notified to the KPPU, after which the KPPU will assess and subsequently declare its opinion on whether or not the concerned merger or acquisition is suspected of being a monopoly or unhealthy business competition practice. Failing to make this notification to the KPPU will result in administrative fines from a minimum of Rp1bn ($120,000) up to a maximum of Rp25bn ($3m). But this obligation of notification does not apply in the case of mergers and acquisitions among affiliated companies. However, those who plan to do mergers and acquisitions may consult with the KPPU regarding the plan before it materialises. Nonetheless, opinion given by the KPPU under such consultation is not to be construed as the KPPU’s approval or refusal of the plan, nor does it deprive the KPPU of its authority to conduct an assessment on the merger or acquisition after it materialises.

LABOUR: Law No. 13 of 2003 concerning manpower (Manpower Law) is the principal regulation that governs labour in Indonesia.

Based on the Manpower Law, an employment relationship arises from an agreement that is made between the employer and the employee. There are two types of employment agreements. The first is an employment agreement that is set for a definite period, but only for certain jobs, which are to be completed in a specified time, such as construction. Agreements such as these may only last for a maximum of two years with the possibility of an extension for another one year. However, 30 days after the expiration date of the previous agreement, a renewal may be made for one time only for a period of two years; totalling five years in maximum. This agreement must be made in writing and done so in the Indonesian language.

The second type of employment agreement in Indonesia is for an indefinite period of time. This agreement is for jobs that are of a permanent nature. The agreement between employer and employee may be made orally or in writing. If it is made orally, however, the employer must provide the newly appointed employee with an appointment letter.

Manpower outsourcing is permitted by the law, but only for jobs that support the main business activity of a company. If the jobs are directly related to the main activity of the company, outsourcing is not permitted. Outsourcing a supply of manpower may only be provided by licensed manpower-supplying companies.

Every employee has the right to establish or become a member of a labour union, and every employer has the right to establish or become a member of an employers’ association. A company employing 50 or more employees must set up a bipartite forum between the company and its employees to discuss and consult on the company’s employment matters.

A company that employs 10 or more employees is obliged to create a company regulation, unless the company already has a collective labour agreement (CLA). A company regulation is a set of rules that contains the rights and obligations of the employer and employee, working conditions, the company rules of conduct, and terms of the company regulation. It is issued by the company after considering suggestions and opinions of employees. A CLA is an agreement made by the company and the labour union which must contain at least the same set of rules as the regulation.

Minimum wage is determined per province and per sector. Each province’s governor determines what the minimum wage of the province will be after considering recommendations of the Provincial Wage Council and/or district heads/mayors within the province.

An employer and its employees and labour union must make every effort to prevent termination of employment. Failing to do so, the intention for such termination must be negotiated between the relevant parties. If the negotiation fails, the employer may only terminate the employment after receiving a decision to that effect from the Industrial Relations Court.

In practice, however, the court will grant the employer’s request for termination if the employer has fulfilled all entitlements of the dismissed employee, which include severance pay, term-of-service reward, and/or compensation that is based on the formula that is stipulated in the Manpower Law and/or the company regulation/CLA.

However, this court decision is not necessary if the employee resigns, is still in the probationary period, has reached retirement age, or dies.

INTELLECTUAL PROPERTY: Success in a global economy depends more and more on intellectual property assets. Businesses based on intellectual property drive much of the economic growth in Indonesia.

Indonesia has joined the World Trade Organisation and its Trade Related Aspect Intellectual Property Rights, and has ratified the Paris Convention, Patent Cooperation Treaty, Trademark Law Treaty, Berne Convention, and WIPO Copyright Treaty. And thus its intellectual property regime is one that is harmonised with those conventions and treaties.

The prevailing IP Laws are (Law No./Year):

• 30/2000 concerning Trade Secret;

• 31/2000 concerning Industrial Design;

• 32/2000 concerning Design of Integrated Circuits;

• 14/2001 concerning Patents;

• 15/2001 concerning Marks;

• 19/2002 concerning Copyrights; and

• 29/2000 concerning Plant Variety.

Protection of intellectual property is also found in other laws, such as (Law No./Year):

• 10/1995 concerning Customs; and

• 18/2002 concerning the National System of Research Development and the Application of Science and Technology; and

• 5/1999 concerning Prohibition of Monopoly and Unhealthy Business Competition Practices.

With the exception of disputes under the Trade Secret and Plant Variety laws, the judicial authority for intellectual property disputes is the Commercial Court, which has a definite time limit. A new procedure is now introduced in the court, such as provisional injunction.

In 2006 the government set up a national team that was aimed at combating infringements of intellectual property rights and solving problems arising from implementation of the Indonesian intellectual property regime. The government and other intellectual property stakeholders also actively create awareness of intellectual property rights. All these have born some fruit: after a high rate of infringement in 2006, it has gradually decreased year after year since 2007.

OBG would like to thank Lubis, Santosa & Maramis – Law Offices for its contribution to THE REPORT Indonesia 2012

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This article is from the Legal Framework chapter of The Report: Indonesia 2012. Explore other chapters from this report.