Session timeout

Sorry, your session timed out after a long time of inactivity. Please click OK and Sign In again.


OK

Prepare to give up half of your coalmine

New regulations from the Indonesian government require foreign investors in mining companies to divest 51% of their shares by the tenth year of production, but uncertainties remain over applicability and pricing.

Released in February of this year, Government Regulation 24 (GR24) is the implementing regulation to Law 4 Regarding Mineral and Coal Mining.

“GR24 essentially means by the tenth year of production, foreign shareholders go from a majority position in their mine to a minority stake,” said Haydn Dare, Foreign Counsel at Soemadipraja & Taher at the Coaltrans Asia conference in Bali, Indonesia.

Foreign shareholders of Indonesian mining companies who possess a mining license (IUP) or a special mining license (IUKP) have to divest 51% of their shares starting after five years of production and finishing by the tenth year.

GR24 is a significant change from previous legislation, which saw foreign shareholders divest only 20% of their shares after five years of commercial production.

During a panel discussion at Coaltrans, Lars Schernikau of InchorCoal NV noted, “this is a significant pullback for Indonesia’s coal mining industry and creates a larger appetite for foreign shareholders to invest elsewhere, like South Africa.”

The interactive response system at the conference allowed the audience to share their views. When asked whether GR24 will discourage foreign investors, 43% said it would have a significant impact, with 51% saying it will have some impact but investors will still participate in the sector.

Under the Regulation, the minimum percentage of shares held by Indonesian participants steadily increases between the fifth and tenth years. It must not be less than 20% in the sixth year, 30% by the seventh, 37% and 44% in the eighth and ninth years, with the full 51% divested in the tenth year.

Shares must be offered to different parties under a pyramid-like system. They must first be offered to the Central Government. If they do not purchase all the shares, regional and provincial governments then have the chance to buy.

If the regional or provincial governments are not interested or cannot reach a consensus on how to divide all or some of the shares, the auction process begins with state-owned or regionally-owned enterprises. Finally, national private business entities that are fully owned by domestic investors have the opportunity to purchase any left over shares.

While GR24 lays out specifics for what percentage and which entities may purchase shares, the regulation is silent on offering prices to governments or how the auction process for enterprises will work.

This lack of transparency over pricing casts uncertainty for many in the industry. Edward Gustely, Senior Advisor to Indonesia’s Ministry of Finance was confident at Coaltrans that, “there will be a valuation procedure in place and the Indonesian government is not out to harm investors, they are not trying to nationalise assets.”

Other requirements under GR24 are that divestment shares must be voting shares. Shares already held by Indonesia parties are classed as divested, but shares on the stock exchange do not count.

The large increase in domestic ownership has led many to question whether there is enough capital to make up for the shortfall in foreign ownership. “There will be an expansion of capital markets to broaden domestic capital as well as creating new vehicles for investors to participate in the market,” said Gustely.

The full effects of the regulation have yet to be felt, but it seems future investors will be more likely to consider short-term investments, allowing them to exit before or during the divestment period.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

Related Insights