Foreign Ownership Restrictions and Negative Investment List

How much of the shares can you own in a company in Indonesia? Are foreigners allowed to hold shares in an Indonesian company?

All foreign ownership restrictions are regulated by Law of Investment (25/2007) and  presidential decree (36/2010) called the Negative Investment List (DNI). Latest update on 2014 Negative Investment List can be found here.

Note that one of the biggest myths that foreign investors have is that every company must have at least 5% local owners. This was overruled already years ago and is not correct!

Legal entity formats open to foreign investors

According to Law of Investment (Article 5/2), foreign citizens are only allowed to have shares in limited liability companies (PT PMA). All other legal entities, such as non-corporate or individual  businesses, are reserved to domestic investors.

Business activity classification

Foreign ownership restrictions are regulated based on their Standard Classification of Indonesian Business Sectors (KBLI) and/or International Standard for Industrial Classifications (ISIC). Any sector is open to foreign investors as long as it is not included to the Negative Investment List (DNI).

The sectors included to the Negative Investment List are either closed or open with certain conditions to foreign investors. Therefore before you start planning your business activities, make sure to check the DNI to see whether you need to involve a local partner or whether adjusting your activities can allow you to have a bigger foreign ownership.

Grandfathering principle

Foreign investors are often concerned about the legal certainty in Indonesia – what if my industry will fall under stricter regulation in the future?

When it comes to Negative Investment List, a “grandfathering” principle applies. Foreign companies that were approved under the previous DNI will not have to comply with the future DNIs and therefore won’t have to divest or sell their shares. This is an important principle to understand as it gives you the certainty as a foreign investor.

Nominee arrangements to comply with Negative Investment List

Sometimes foreign investors see nominee arrangements as a way around DNI. While it is quite commonly used, be sure to understand the risks you are undertaking. There are plenty of stories of ex-wives or business partners who through nominee arrangement obtained complete control over the company and foreign investor had to leave the country empty-handed.

Be especially careful about nominee arrangement involving people you don’t know or trust. Remember that by the law you have no rights over the nominee shares.

photo credit: Adam Foster | Codefor