On Mei 2010, the Government of Indonesia issued Presidential Regulation of the Republic of Indonesia Number 36 of 2010 Concerning List of Business Fields Closed to Investment and Business Fields Open with Conditions to Investment (“PR 36/2010”). This PR 36/2010 contains a Negative List Investment (Daftar Negatif Investasi – “DNI”) updating lists of business fields that are closed to investment, and those that open to investment but subject to certain prerequisite requirements. One salient provision that can be found therein is the “Grandfather Clause” as referred to in Article 8 of PR 36/2010 that allows the old rule to continue applies to an existing investment whilst a new rule will apply only to future investment.
Article 8 of PR 36/2010 stipulates that provisions as contemplated in Articles 1 and 2 of PR 36/2010 are not applicable for an investment that has been approved in certain business sectors prior to the enactment of the PR 36/2010, as contained in the Approval Letter, unless if such provisions are more beneficial to the said investment.
General Overview of Grandfather Clause
This Grandfather Clause which asserts that PR 36/2010 applies prospectively, not retroactively, constitutes one instance of an actualization of the legal certainty principle in Indonesia’s investment regime as mandated by Article 3 (1) of Law Number 25 of 2007 on Investment.
Considering the dynamic development of Indonesia’s investment law that often subject to sudden changes, a protection against detrimental effects and regulatory risks arising from new provisions in the new rule becomes indispensable for the investors.
One example on the application of the Grandfather Clause is when there is a foreign entity that engage in the oil and gas service business sector by forming a joint venture company with a local shareholder where it owns the maximum allowed foreign shareholding of 100% under the DNI but later on is facing a newly issued DNI superseding the old one that detract the said foreign shareholding to only 95% in maximum, and further requires the obtaining of special permit. In this respect, the Grandfather Clause entitles the foreign entity being a shareholder therein to retain its previously approved 100% shareholding as set forth in its approval later thus is exempted either from having to divest the 5% shares to a local shareholder or to obtain the mandatory special permit. However, such foreign entity will be required to comply with the aforesaid new DNI should the new DNI benefits them.
Implications of Grandfather Clause
The foregoing example reiterates the importance of legal certainty to be provided to the investors in order to enable them reaching their business objective and thus is manifested within this Grandfather Clause. Notably, in term of a sensitive investment requirement such as the maximum foreign shareholding, since without such Clause they will obviously face continuing instability when doing business due to rapid changes of Indonesia investment law that must be complied with.
If you have any questions relating to this article, please contact:
Cornel B. Juniarto
Partner, Hermawan Juniarto
T +62 21 5795 7095
Posted in News and Media on Sep 01, 2013