Acquisition Finance 2024 Comparisons

Financing transactions for the acquisition of shares of Indonesian companies and for the acquisition of assets are dominated by major onshore and offshore banks, whilst private credit and private equity firms took up a minority portion in those transactions. Also of note is the increase in acquisition finance transactions by Indonesian state-owned banks, in both syndicated as well as bilateral financing transactions. International banks, private credit funds and private equity firms would usually lend in US dollars whilst Indonesian banks would lend in either US dollars, Indonesian rupiah or both.

In relation to asset acquisitions, Indonesian banks have been active in providing credit for the acquisition of real estate, telecommunications towers and vessels.

Loan market volumes in the Asia-Pacific (excluding Japan) region in 2023 were 9.3% lower than the previous year. Leveraged loan volumes fell by 25% and the percentage of syndicated loans for acquisition financing dropped from 5% in 2022 to 3% in 2023.

See 1.1 Major Lender-Side Players.

Under Indonesian law, parties to an agreement have the freedom to choose the law which governs their agreement provided that the choice of law does not contradict mandatory provisions under Indonesian law or public order. In the case of cross-border financing, the choice of governing law is often influenced by the preferences of the majority lenders and, in such instances, it is common to see facility agreements governed by English or Singapore law. Conversely, Indonesian law is predominantly chosen for local financing transactions due to local banks’ familiarity with Indonesian laws and dispute resolution mechanisms.

However, please note that, for enforcement purposes, a different approach is taken regarding security or guarantee. Security over assets located in Indonesia as well as a guarantee granted by Indonesian guarantors are typically governed by Indonesian law, while security over assets located outside of Indonesia (even though they are owned by Indonesian) are typically governed by the law of the jurisdiction where such assets are located.

The Asia Pacific Loan Market Association (APLMA) is the equivalent of the LMA in the region, including Indonesia. The APLMA has a set of documents that largely follows the LMA documents. Specifically for Indonesia, APLMA has produced a template facility agreement for cross-border financing involving Indonesian borrowers governed by English law, together with its Indonesian language version (see 2.3 Language for further discussion of language requirements). Facility agreements in cross-border financing for Indonesian borrowers typically use the APLMA form of facility agreement, while facility agreements in local financing use either the local bank’s template facility agreement or the APLMA form of facility agreement, although the use of the APLMA form of facility agreement by local banks for local financing has increased in recent years.

However, for security and guarantee documents, each firm usually has its own standard forms of Indonesian law-governedsecurity and guarantee documents.

Law No 24 of 2009 on the National Flag, Language, Coat of Arms and Anthem and Presidential Regulation 63 of 2019 on the Use of the Indonesian Language require the use of the Indonesian language for any memorandum of understanding or agreement involving an Indonesian party. Moreover, if such memorandum of understanding or agreement is entered into by an Indonesian party with a foreign party, the parties may:

• in addition to the Indonesian language version, also execute the memorandum of understanding or agreement in the national language of that foreign party or in the English language, and both language versions are usually executed simultaneously; and
• elect on the prevailing language of the memorandum of understanding or agreement in the event of inconsistencies between the foreign/English language and the Indonesian language versions.

A legal opinion is usually required as a condition precedent to an acquisition finance agreement and such opinions are typically issued by the lender’s legal counsel. The legal opinion would usually cover:

• capacity and authority of any Indonesian obligor with respect to its entry into the relevant finance document;
• validity and enforceability of any Indonesian law-governed finance document; and
• creation and perfection of any Indonesian law-governed security.

In addition, the legal opinion would also cover, inter alia, opinions on pari passu ranking of payments, choice of governing law and forum (ie, court or arbitration), stamp duty and whether any offshore finance party would be required to be licensed or domiciled in Indonesia as a result of the transaction.

If there is any foreign law-governed document or foreign obligor involved in the transaction, a legal opinion covering similar matters from counsel in the relevant foreign jurisdiction would usually also be required.

Senior loans are commonly used in acquisition finance and the lenders typically require the obligors to provide a security package to secure the loans. Further, given the intricate regulatory environment in Indonesia, it is common to have various features in the structure, such as options, warrants, and equity conversion rights. Choice of structure is typically driven by both commercial agreements and regulatory requirements. It is also common to have a special purpose vehicle to act as both the purchasing vehicle and the borrowing entity.

Documentation typically includes the senior loan agreement, security documents, standalone guarantee, or other agreements (such as warrants or options).

A mezzanine loan in Indonesia is a form of subordinated debt that sits between senior debt and equity in the capital structure. The subordination can be conducted via separate subordination agreements and/or intercreditor agreements.

Mezzanine loans often have characteristics of both debt and equity financing. While they are structured as loans with fixed repayment terms and (higher) interest rates, they may also include equity-like features such as conversion rights.

Mezzanine loans may be secured or unsecured, depending on the negotiations between the senior lenders, the mezzanine lenders and the borrower. However, mezzanine lenders are typically subordinated to senior lenders in the hierarchy of security interests.

The Indonesian Financial Services Authority (Otoritas Jasa Keuangan – OJK) prohibits Indonesian banks from offering payment-in-kind (PIK) loans, and therefore typically such PIK loans are provided by private equity firms, private credit funds or direct lenders.

Short term bridge loans are intended to bridge the gap until longer-term financing arrangements, such as term loans or bond issuances, are available. The tenor of a bridge loan usually lasts up to one year, with certain transactions offering an extension for another one-year term.

Bridge loans are structured to facilitate quick disbursement of funds, allowing borrowers to meet immediate funding needs or take advantage of time-sensitive opportunities, such as acquisitions or investments. Bridge loans are structured with an exit strategy in mind, which may involve refinancing with longer-term debt, asset sales, or other means of repayment. Borrowers are expected to have a clear plan for repaying the bridge loan within the agreed-upon timeframe.

Bonds are typically issued by Indonesian companies via public offering and private placement. While issuance via public offering, and public offerings to professional investors, are subject to OJK review and approval, issuance via private placement only requires the filing of the prescribed issuance documentation with the OJK prior to issuance (see 3.5 Private Placements/Loan Notes).

In order to conduct the bond offering, an issuer will need to obtain a credit rating for each of the debt securities or sukuk issued and publish such rating in the prospectus and include such rating in the trust agreement between trustee and issuer. If the issuer decides to obtain more than one credit rating, all such credit ratings will have to be shown in the issuance documentation accordingly. Credit ratings may only be issued by a credit rating agency licensed by the OJK.

The bonds’ documentation would typically include certain prohibitions and restrictions that issuers may need to comply with during the tenure of bond. The bondholders will be represented by a trustee in such bond documentation. The most standard covenants place limitations on issuers ability to (i) incur or raise additional debt, (ii) provide security and (iii) conduct certain investment or divestment or dividends.

In November 2019, the OJK introduced new criteria for private placements, including definitions for eligible issuers and purchasers and the procedures that govern the process. Given the regulatory requirements, private placements are not the preferred option to fund an acquisition.

Securities obtained through a private placement may only be sold to entities capable of purchasing securities and conducting risk analysis on the investment, as stipulated in the relevant OJK regulations concerning professional investors. Additionally, the OJK requires that the purchasers provide a statement affirming their status as professional investors to the issuer or arranger (if applicable). If the trading is conducted through a broker, the broker is also subject to this requirement. Alternatively, if the trading is not conducted through a broker, the custodian will be responsible for fulfilling this obligation.

Private placement requires an arranger and a monitoring agent to be appointed, with exemptions given to private placements conducted by publicly listed companies, collective investment contracts or private placements issued only to limited participation mutual funds. Both the arranger and the monitoring agent must be registered with the OJK.

The OJK requires the issuer to submit offering documentation to the OJK, which includes an information memorandum. If an arranger has been appointed, the arranger can handle the submission on behalf of the issuer. The offering documentation contains comprehensive information similar to that of a prospectus for a public offering.

The structure of asset-based financing in Indonesia follows the structures commonly used in other countries within the region. In the context of acquisition finance, the secured assets may also include the financed assets, assets owned by the target, or other assets of the borrower (such as receivables or rights to a bank account). Certain financial covenants – such as security coverage ratio or loan-to-value – would usually apply in addition to the typical cashflow-based financial covenants. In certain transactions, a cure right by the borrower may be available to cure such breach of financial covenants within a certain agreed timeline.

In addition for asset acquisition finance, security over the financed asset would usually be taken as a condition subsequent, once title over the financed asset has legally and administratively changed to the borrower – ie, once the title certificate over the financed asset (eg, a property or a vessel) has been updated to reflect the borrower as the new title-holder.

An intercreditor agreement usually has the following features:

• Subordination – where certain classes of creditors agree to subordinate their claims to the other classes of creditors.
• Security interest ranking – this is a crucial feature given that, under Indonesian laws, assets can generally only be secured once (ie, no multiple rankings can exist over the same asset), except for land and vessels with a gross tonnage of seven tons or over.
• Priority of claims – where the priority of claims among different classes of creditors is determined based on their seniority (eg, senior creditors, subordinated creditors, junior creditors) in the event of an insolvency or a default.
• Enforcement procedures, payments, and distributions – where the intercreditor agreement outlines (i) the procedures for enforcing security interests and recovering debts in an event of default; and (ii) the waterfall for fund distribution on how the payments will be made to the different classes of creditors, including the allocation of enforcement proceeds.

In Indonesia, intercreditor agreements on bond structure are not common because bondholders would be represented by a trustee or trust agent in entering certain documentation with the issuer. However, Indonesian bond schemes would typically feature an underwiring agreement involving the underwriter(s) covering:

• the portion of underwriting for each underwriter;
• syndication of the underwriting – if any; and
• commitments of the underwriters of the bonds.

Hedge counterparties are involved in more complex financing structures involving derivatives or hedging arrangements. They manage the risks associated with currency exchange rate movements and other market variables. Hedge counterparties would usually be deemed and treated as creditors under the intercreditor agreement and hence benefit from any lender’s rights and protections under such an agreement.

If the loan comes from offshore lenders, the central bank (“Bank Indonesia” – BI) requires the Indonesian borrower to implement prudential principles which comprise, inter alia, a minimum hedging ratio of 25% from:

• the negative difference between foreign currency assets and foreign currency liabilities that will fall due up three months from the end of the preceding quarter; and
• the negative difference between foreign currency assets and foreign currency liabilities that will fall due three to six months from the end of the preceding quarter,

provided that the negative difference exceeds USD100,000.

The minimum hedging ratio is satisfied through hedging with Indonesian banks (ie, hedging with non-Indonesian banks will not be counted towards satisfaction of the minimum hedging ratio requirement).

Currently, Indonesia’s security system is asset-based and therefore the type of security instrument to be used depends on the type of assets to be secured thereunder.

The types of Indonesian law security typically used in a financing transaction in Indonesia are set out below.

Fiducia Security

This is a security right over moveable assets (both tangible and intangible) and immoveable assets that cannot be secured using a land mortgage or hypothec, where the assets remain under the possession of the fiducia grantor, as collateral for settlement of certain debts, and which provides priority to the fiducia grantee vis-à-vis the other creditors. The usual fiducia security objects include inventories (both raw materials and manufactured goods), trade products, receivables, insurance claim proceeds, machineries and equipment, vehicles, buildings owned by the fiducia grantor over a plot of land owned by another party and vessels with a gross tonnage of seven tons or over. The same fiducia security objects cannot be used as security more than once and therefore there can only be one rank (instead of multiple ranks) of fiducia security. Different sets of lenders intending to have security over the same fiducia security objects must enter into a security-sharing/intercreditor arrangement and have a common security agent hold the fiducia security on their behalf.

Pledge

This is a security right obtained by a lender over moveable assets which is delivered to the lender (or the pledgee) by the borrower (or the pledgor) or another party on behalf of the pledgor, which entitles the lender (or the pledgee) to full repayment from such moveable assets and with priority over the other lenders, with the exception that auction costs and the costs to maintain such assets during the pledge period will be prioritised ahead of the pledgee. The usual pledge objects include shares and the rights of the owner of a bank account to money standing in the balance of that bank account. The same pledge objects cannot be used as security more than once and therefore there can only be one rank (instead of multiple ranks) of pledge. Similarly, different sets of lenders intending to have security over the same pledge objects must enter into a security-sharing/intercreditor arrangement and have a common security agent hold the pledge on their behalf.

Land Mortgage (Hak Tanggungan)

This is a security right over land, which may include objects that are attached or affixed and therefore inseparable to the land (such as buildings and plants) owned by the same party. Land mortgage provides priority right to a lender vis-à-vis other lenders. The same land (and any other assets attached or affixed to it) can be used as security more than once and therefore there can be more than one rank of land mortgage, and they are ranked according to the order of their registration dates.

Hypothec Over Vessel

A hypothec over a registered vessel is a security right to be used to securevessels with a gross tonnage of seven tons or over. They can apply to vessels of any shape or engine type and whether floating or fixed, as long as they are owned by an Indonesian individual or company. A hypothec over vessel provides priority rights to a lender vis-à-vis the other lenders. The same vessel can be used as security more than once and therefore there can be more than one rank of hypothec over vessel, and they are ranked according to the order of their registration dates.

Conditional Assignment

Conditional assignment over contracts is an assignment under the Indonesian Civil Code (ICC) that is made conditional and will only be effective upon the occurrence of a triggering event – eg, an event of default. Accordingly, it is a quasi-security that does not provide any priority right and it is only a contractual arrangement that ranks pari passu with all other unsecured and unsubordinated claims of the assignor.

Fiducia security, land mortgages and hypothecs over vessels are required by law to be made in a deed form and in the Indonesian language. However, pledges and conditional assignments over contracts can be made in a notarial deed or privately executed and, depending on the nationality of the parties involved, they can be executed in English and/or in the Indonesian language.

Fiducia Security

The creation and perfection process of a fiducia security is as follows:

• the fiducia grantor and the fiducia grantee enter into a deed of fiducia security in Indonesian before an Indonesian notary;
• the fiducia grantee (through the notary) registers the fiducia security with the online system of the fiducia security registration office;
• the online system of the fiducia security registration office will register the fiducia security into the online registry of fiducia security on the same day that the online registration is submitted and the fiducia security becomes perfected on that date, with a fiducia security certificate issued as evidence of such registration and perfection; and
• if fiducia security is taken over intangible assets such as receivables or insurance claim proceeds, a notice of fiducia security should be delivered to, and an acknowledgment should be obtained from, the relevant third party or insurer/reinsurer.

Pledge

The creation and perfection process of a pledge is as follows:

• the pledgor and the pledgee enter into a pledge agreement, which can be in a notarial deed or privately executed;
• if the pledge object is:
1. a tangible asset, delivery of the pledge object to the pledgee is required to perfect the pledge; or
2. an intangible asset, notification of the pledge to the party against whom the pledge will be enforced (eg, the company if the pledge is over shares) is required to perfect the pledge; and
• additional step(s) may be required to perfect the pledge, which depend on the pledge object – eg, annotation of the pledge in the register of shareholders of the company is required in relation to pledge over shares.

Land Mortgage

The creation and perfection process of a land mortgage is as follows:

• a power of attorney to install a land mortgage may be granted from the mortgagor to the mortgagee in certain scenarios – eg, in a property acquisition financing where the land certificate is still in the administration process to be updated to reflect the purchaser’s (mortgagor’s) name;
• the mortgagor (or the mortgagee using the power of attorney to install a land mortgage) and the mortgagee enter into a deed of grant of a land mortgage (in the Indonesian language) before a land deed official having jurisdiction over the land;
• the land deed official will register the land mortgage under the deed of grant of a land mortgage within seven days from the date of such deed via the online system of the national land office; and
• upon the submission of complete documentation and payment of the required registration fee, the online system of the national land office will register the land mortgage in the land registry and the land mortgage will be perfected on the date of such registration, with a land mortgage certificate issued as evidence of such registration and perfection.

Hypothec

The creation and perfection process of a hypothec is as follows:

• the grantor grants a power of attorney to install a hypothec over vessel to the grantee;
• the grantee and the grantor (represented by the grantee using the power of attorney to install a hypothec over vessel) enter into a hypothec deed before the ship registration and recording official at the port where the vessel is registered, which is recorded in the master list of registration; and
• following registration, the hypothec over vessel will be perfected on such date of registration, with a first authenticated deed of hypothec issued as evidence of such registration and perfection.

Conditional Assignment

The creation process of a conditional assignment is as follows:

• the assignor and the assignee enter into a conditional assignment over contracts, which can be in a notarial deed or privately executed; and
• the assignor is required to deliver the notice of conditional assignment to, and obtain an acknowledgment from, the relevant third party who is a party to the contract that is being made subject to the conditional assignment over contracts.

Indonesian law does not prohibit Indonesian companies from granting any cross-stream, upstream or downstream security or guarantee.

Indonesian law does not prohibit Indonesian companies from providing financial assistance in the purchase of their own shares and assets or the shares and assets of any of their affiliates.

Whilst Indonesian law does not prohibit Indonesian companies from granting any cross-stream, upstream or down-stream security or guarantee, the Indonesian Company Law requires the board of directors of any Indonesian company to manage the company in the best interest of the company, and this includes any plan by the company to grant security or guarantee to secure or guarantee the obligations of a third party.

Considering that whether there is any corporate benefit in granting of security or guarantee depends on the then facts and circumstances, typically this issue is dealt with by way of obtaining resolutions from all organs of the company (ie, shareholders, board of commissioners and board of directors) approving the granting of security or guarantee by the company.

Lenders would be entitled accelerate the loans and enforce the security upon the occurrence of an event of default or other triggering events as agreed in the underlying agreement. As a general rule, the lenders would be required to serve a letter of demand to the borrower requiring the borrower to repay the loan before enforcing the security. If the borrower fails to comply with the letter of demand, the lenders may then enforce the security.

Enforcement methods for each type of security are set out below.

Fiducia Security

Methods of enforcement in respect of a fiducia security comprise:

• executorial title in the fiducia security certificate;
• sale of the fiducia security objects through public auction; or
• sale of the fiducia security objects through private sale, provided that it would result in the highest price that would be beneficial to all parties and an announcement in two local newspapers has been made one month prior to the sale.

Readers should take note of a Constitutional Court judgment in respect of the Fiducia Security Law in relation to the executorial title in the fiducia security certificate that required an enforcement order to be obtained from the courts in the event the fiducia grantor does not voluntarily deliver possession over the fiducia security objects.

Pledge

Methods of enforcement in respect of a pledge comprise:

• sale of the pledge object through public auction; or
• sale of the pledge object through private sale, if agreed by the pledgor and the pledgee or the pledgor authorised the pledgee to do so.

There is a view that such sale of the pledge object does not apply to the enforcement of a pledge over rights to a bank account given that the sale is intended to achieve the highest price in order to protect the interest of the borrower/pledgor whilst, in the case of pledge over rights to a bank account, the value of the pledge object can already be determined from the face value of the pledge object – ie, the balance standing in the relevant bank account where the rights are being pledged.

Land Mortgage

Methods of enforcement in respect of a land mortgage comprise:

• executorial title in the land mortgage certificate;
• sale of the land mortgage objects through public auction, provided that the land mortgage deed contains an agreement that the mortgagee can sell the land mortgage object upon the occurrence of an event of default; or
• sale of the land mortgage objects through private sale, provided that doing so would result in the highest price that would be beneficial to all parties and an announcement in two local newspapers has been made one month prior to the sale.

Hypothec

Methods of enforcement in respect of a hypothec comprise:

• sale of the vessel through public auction; or
• sale of the vessel through private sale, provided that doing so would result in the highest price that would be beneficial to all parties,

and provided further that the hypothec deed contains an agreement that the grantee may sell the vessel upon the occurrence of an event of default.

Conditional Assignment

As discussed in 5.1 Types of Security Commonly Used, a conditional assignment only provides contractual rights and does not provide any security right. Therefore, enforcement of a conditional assignment requires the assignee to file a claim against the assignor in court.

Further Enforcement Particulars

In the event there is resistance in the enforcement process, the lenders would need to apply for an enforcement order from the relevant Indonesian court.

The auction regulations require the auction to be conducted via the Indonesian State Auction Office (Kantor Pelayanan Kekayaan Negara dan Lelang – KPKNL). For this purpose the lenders need to apply for auction, the proposed auction date and to provide a copy of the relevant security document and all other pertinent documents (including any ancillary documents and/or perfection documents attached to the relevant security documents). Further, the lenders are also required to announce the auction in newspapers six days before the auction date.

The floor price of the security object will be determined pursuant to an independent appraiser’s valuation in order to get the highest sale price and also to avoid any claim from the debtor or the security provider. Following the auction, the KPKNL will issue a deed of auction that will serve as an agreement for the transfer of the object being auctioned.

The enforcement proceeds will be applied towards the unpaid sum owed by the borrower to the lenders and any excess from the enforcement proceeds must be returned to the security provider.

A guarantee under the ICC is a contractual agreement where a third party binds itself in favour of the lender to satisfy the obligations of the borrower in the event the borrower is in default. Accordingly, a guarantee does not provide any priority right and it is only a contractual arrangement that ranks pari passu with all other unsecured and unsubordinated claims of the guarantor.

Guarantees are usually required from the holdco/parent company of the borrower or from material companies within the group that meet a certain financial threshold, which is usually a certain percentage of the group’s EBITDA. In certain transactions, personal guarantees from the ultimate beneficial owner are sometimes required to support the facility.

Please refer to 5.4 Restrictions on Upstream Security, 5.5 Financial Assistance and 5.6 Other Restrictions.

There are no specific requirements on guarantee fees under Indonesian law.

The are no equitable subordination rules under Indonesian law. A subordination is effected through a subordination agreement between the senior lenders, the subordinated lenders and the borrower.

Under the ICC, any action taken by a borrower might be cancelled on the basis of fraudulent conveyance if:

• such action (the “action”) was not required by law or pursuant to the terms of a bona fide agreement;
• the action detrimentally affected the interests of other creditors; and
• the debtor and the party which benefited from the action (the “counterparty”) knew or should have known that the action would prejudice the creditors.

Under the Indonesian Bankruptcy Law, there is a presumption that the debtor and the counterparty knew that the action would prejudice other creditors if the action was performed one year before the bankruptcy declaration and the action:

• constitutes an agreement where the debtor’s obligations were more onerous than that of the counterparty;
• constitutes the payment of, or the granting of security for, debts which were not due and payable; or
• was performed with an affiliated party (as further elaborated in the Indonesian Bankruptcy Law).

In addition, under Indonesian law, payment of a debt that is due and payable by the debtor can also be invalidated if it can be demonstrated that:

• the counterparty that received the payment knew that a petition for a bankruptcy declaration had been filed against the debtor; or
• the payment was made following discussions or collaboration between the debtor and the counterparty, with the intention to prioritise the counterparty over other creditors.

Stamp duty at a flat rate of IDR10,000 is payable:

• in relation to agreements, notarial deeds and deeds made by land deed officials, when they are executed;
• in relation to securities and their related transaction documents, when they are made;
• in relation to statement letters, auction documents or documents confirming receipt of money or acknowledgment of debt repayment, when they are handed over to the party for whom the document is made;
• in relation to documents to be presented before an Indonesian court, when they are presented before an Indonesian court; and
• in relation to documents executed overseas that will be used in Indonesia, when they are used in Indonesia.

Indonesian borrowers are required to withhold tax at the rate of up to 20% from any payment of interest or any other payment of similar nature to offshore lenders. However, this rate may be reduced if there is a double tax treaty agreement in place between Indonesia and the country where the relevant offshore lender is based, provided that the required documents are produced and that an anti-treaty abuse test and a beneficial ownership test are satisfied.

Under the relevant Ministry of Finance (MoF) regulation, the maximum debt-to-equity ratio (DER) for Indonesian corporate taxpayers in the form of limited liability companies is 4:1, with exemptions provided to certain corporate taxpayers. In the event the corporate taxpayers are not exempted and they do not meet the DER requirement, their deductible borrowing costs will be capped at an amount that is aligned with the 4:1 DER under the MoF regulation.

MoF regulations also require Indonesian corporate taxpayers that have offshore loans from private (non-government) parties to report the amount of these offshore loans to the Directorate General of Tax of Indonesia. If they fail to make such a report, the borrowing costs relating to their offshore loans cannot be deducted for income tax calculation purposes.

The MoF regulation provides exemptions to corporate taxpayers in the form of limited liability companies engaging in the banking sector, financing sector, insurance and reinsurance sector, oil and gas and general mining sectors (which are based on production sharing contracts, contracts of work or other types of mining co-operation agreements, provided that such contracts or agreements set out their own DER requirement and only insofar as those contracts or agreements remain valid), micro-companies and small enterprises with gross turnover of not more than IDR4.8 billion where all of their revenues are subject to final income tax, and the infrastructure sector.

Indonesian law is silent on the concept of certain funds; however, there are some regulatory requirements that are worth noting under Indonesian law.

Controlling Shareholder

With regard to the financial institutions generally supervised by the OJK (eg, banks, insurance companies, securities companies, financing companies), there is a concept of controlling shareholder.

A party would be deemed to be a controlling shareholder if:

• it has more than 25% shares with voting rights in a company; or
• it has less than 25% shares with voting rights, but it can be proven that it has the control, either directly or indirectly, over a company.

Upon acquisition of a company under these circumstances, it is mandatory for the new controlling shareholder, as well as its new directors and commissioners, to pass a fit and proper test in order to receive OJK approval before it/they can undertake their commercial day-to-day activities.

Single-Presence Policy

In connection with the concept of controlling shareholders discussed above, the OJK also prohibits a controlling shareholder from having more than two financial institutions that are in the same line of business. As such, upon the acquisition of, for example, an Indonesian bank by a controlling shareholder that already has a banking presence in Indonesia (eg, a foreign bank branch operating in the country), it is mandatory to consolidate the two entities.

Mandatory Divestment Requirements

Specifically for a mining company with a certain mining licence, the foreign shareholders of such mining companies are subject to up to 51% divestment requirements, which must be carried out in stages that begin from the 10th to the 20th year of production, depending on the type of mining licence in question.

Approval for Shares Acquisitions

Share transfers in certain sectors may require approval from the sectoral regulator. For example, the change of shareholders of mining companies requires approval from the relevant ministry and the acquisition of Indonesian banks must obtain prior written approval from the OJK.

Negative List

The most recent negative list in Indonesia is known as a “positive list” given that, generally, a line of business is 100% open to foreign investment unless it is one of a small number of sectors that are (i) reserved entirely for domestic investors, (ii) subject to foreign ownership limitations, (iii) subject to special licensing requirements, or (iv) closed entirely to foreign investment.

In the event of acquisition of public companies, the acquirer must extend an offer to purchase the remaining shares of the public company from its shareholders, known as the mandatory tender offer (MTO). The MTO ensures that public shareholders have an opportunity to exit their investment if they disagree with the takeover.

The shares subject to the MTO are all the remaining shares of the target company, except for:

• shares owned by the selling shareholder(s);
• shares owned by another party(ies) to whom the acquirer has made an offer to purchase the shares under the same terms and conditions;
• shares owned by other parties which are also undertaking a (different) MTO or voluntary tender offer for the shares of the target company;
• shares owned by a principal shareholder(s) (ie, the shareholder(s) that directly or indirectly hold(s) at least 20% of the voting rights of a company’s issued shares); and
• shares owned by other controlling shareholders of the target company.

Before commencing the MTO, the acquirer must apply for the OJK’s approval. At the latest, two business days after receiving such OJK approval, the acquirer (ie, the new controlling shareholder) should announce the disclosure of information of the MTO in a nationwide circulated newspaper or on the Indonesian Stock Exchange website.

Maximum Lending Limit

Indonesian banks are bound by a maximum lending limit (BMPK) when extending loans to :

• related parties of the banks, with the BMPK capped at 10% of the respective bank’s capital; and
• third parties, whether a single borrower or groups of third-party borrowers, with the BMPK capped at 25% of the relevant bank’s tier 1 core capital.

Affiliated Party Transactions

If the acquisition finance transactions relate to Indonesian public companies, it may be subject to the requirements relating to affiliated party transactions under the OJK’s regulation if they are considered as affiliated party transactions, with certain exemptions.

The requirements include the Indonesian public company (i) using an independent appraiser to determine the fair value of the object and the fairness of such an affiliated party transaction; and (ii) obtaining an approval from independent shareholders if, inter alia:

• such affiliated party transaction may affect the business continuation of the company where it may experience a decrease in revenue of 80% or more or suffer a net loss; or
• the value of such affiliated party transaction exceeds the material transaction threshold that requires approval from the shareholders as discussed in the Material Transactions section below.

Conflict of Interest Transactions

Similarly, if the acquisition finance transactions relate to Indonesian public companies, they may be subject to the requirements relating to conflict-of-interest transactions under the OJK’s regulation if they are considered as conflict-of-interest transactions, with certain exemptions provided.

The requirements for affiliated party transactions discussed above would apply in the same manner to conflict-of-interest transactions.

Material Transactions

Further, if the acquisition finance transactions relate to Indonesian public companies, if their value is equal to 20% or more of the public company’s equity, whether in one or a series of transactions, the transactions are considered as material transactions, with certain exemptions provided.

The requirements for affiliated party transactions and conflict-of-interest transactions discussed above would apply in this case. However, if the value of the transactions exceeds 50% of the public company’s equity, whether in one or a series of transactions, such transactions must be approved by the independent shareholders.

Offshore Loan Requirements

Mandatory use of rupiah

Under Indonesian law, rupiah must be used in any transaction that involves payment, settlement of other obligations that must be settled using money and other financial transactions, except for:

• certain transactions for the implementation of state revenue and budget;
• receiving or granting of offshore grants;
• international trade transactions;
• deposits in banks in a foreign currency;
• international financing transaction, where loans from offshore lenders fall into this category; or
• transactions in foreign currencies that are permitted under laws and regulations, such as banking activities in foreign currencies.

Prudential principles

Indonesian borrowers having or intending to have offshore loans in foreign currency are required to implement prudential principles comprising:

• the minimum hedging ratio as discussed in 4.3 Role of Hedge Counterparties;
• a minimum liquidity ratio of at least 70% from the foreign currency liabilities that will fall due up to three months from the end of the preceding quarter; and
• a minimum credit rating requirement of at least BB- or its equivalent from a rating agency acknowledged by the BI, with certain exemptions and dispensations provided to certain borrowers and transactions.

Offshore loans drawdown

BI regulations require drawdown of certain offshore loans by Indonesian borrowers to be disbursed to an Indonesian bank licensed to trade foreign currencies (a “bank devisa”) and to submit their compliance with such requirement to the BI. The requirement applies to both (i) offshore loans deriving from non-revolving loan agreements, and (ii) debt securities (including bonds, medium term notes, floating rate notes, promissory notes and commercial papers).

The requirement also applies to the positive difference between the new offshore loan and the existing offshore loan that will be refinanced, where the new offshore loan is greater than the existing offshore loan. The requirement does not apply to the refinancing amount and therefore the refinancing amount may be disbursed directly to offshore lenders or agent without the need to be disbursed through a bank devisa.

Offshore loans and guarantee reporting requirements

Indonesian regulations require Indonesian borrowers to report their offshore loans to the MoF and BI initially on the effective date of the loans and guarantee, and periodically thereafter. The report is comprised of (i) a foreign exchange transaction report relating to amongst other things the position and change of overseas financial assets and liabilities, and (ii) a prudential principles implementation report relating to the prudential principles discussed above.

Corporate guarantees guaranteeing offshore loans must be reported to the BI and MoF, whilst personal guarantees guaranteeing offshore loans only need to be reported to the BI and does not need to be reported to the MoF.