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Approvals for Changes in Shareholding and Boards in Oil & Gas, Mining, Power and Geothermal Sectors - Regulatory Update

Approvals for Changes in Shareholding and Boards in Oil & Gas, Mining, Power and Geothermal Sectors - Regulatory Update

03 August 2017

Ministry of Energy and Mineral Resources ("MEMR") Regulation Number 42 of 2017 on Supervision of Operations of Business Activities in the Energy and Mineral Resources Sector ("Reg 42/2017") came into effect on 17 July 2017. The regulation applies to licensed entities operating in the upstream and downstream oil and gas, mining, power, and geothermal sectors and has aims of improving MEMR oversight over the sector. In respect of the mining sector, Reg 42/2017 replaces and partially revokes MEMR Regulation Number 34 of 2017 in respect of provisions relating to the transfer of shares and the changes to the Board of Directors and Board of Commissioners.

Key Points:

 1. Oil & Gas

 Upstream:

  • prior approval from MEMR is required to assign a participating interest or transfer shares resulting in a direct change of control;
  • mandatory reporting to MEMR is required for transfer of shares causing an indirect change of control;
  • assignment of majority participating interest to non-affiliated parties in the first 3 years of the exploration period is prohibited; and
  • prior approval from MEMR is required for changes to members of the Board of Directors and Board of Commissioners.

 Downstream:

  • prior approval from MEMR is required for transfer of a majority of shares of the project company; and
  • prior approval from MEMR is required for changes to members of the Board of Directors and Board of Commissioners.

 2. Mining

  • prior approval from MEMR required for transfer of shares in entities holding a Mining Business Permit ("IUP"), Special Production Operation IUP for Processing and/or Smelting ("Smelting IUP"), Special Mining Business Permit ("IUPK"), Contract of Work ("CoW"), or Coal Contracts of Work ("CCoW"); and
  • prior approval from MEMR is required for changes to members of the Board of Directors and Board of Commissioners.

 3. Power

  • transfer of shares prior to Commercial Operation Date ("COD") only allowed to an affiliate in which the sponsor holds at least 90% of the shares;
  • transfer of shares prior to and after COD requires prior approval from (i) buyers of electricity under the PPA and (ii) MEMR;
  • prior approval from MEMR is required for changes to members of the Board of Directors and Board of Commissioners, with a recommendation of the buyers of electricity under the PPA.

 4. Geothermal

  • prior approval from MEMR is required for share transfer in entities holding Geothermal license ("IPB"); and
  • prior approval from MEMR is required for changes to members of the Board of Directors and Board of Commissioners.

The restrictions on transfer of shares will add further complexity to secured financing arrangements. There is no carve out to the MEMR approval requirement for transfers of shares pursuant to security enforcement so this will call into question the practical utility of share pledges. In addition, in the power sector, it appears that prior to COD transfers can only be made to a 90% affiliate of the Sponsor – again severely limiting the utility of share security during this period. 

Reg 42/2017 requires new shareholders and potential board members to submit at least 2 years of audited financial statements/Indonesian tax returns and the respective Taxpayer Registration Number ("NPWP"). If strictly upheld, this would preclude foreign companies and newly established Indonesian companies from direct investment. The requirement that potential board members would have to reside in Indonesia for at least 2 years will limit the pool of available foreign expertise. The impact of Reg 42/2017 in this respect will depend on MEMR policy in the implementation thereof. Discussions with MEMR at this stage indicate a practical approach of implementation, including the possibility of waiving the submission of audited statements for newly established companies and the requirement for foreign companies to provide an NPWP.

Energy businesses have voiced disappointment at Reg 42/2017 citing micromanagement and inconsistency with President Joko Widodo's deregulation and bureaucracy simplification efforts. It is understood that MEMR is in the process of evaluating certain recent regulations, including Reg 42/2017, and revisions to them may be issued in the near future. We are continuing to monitor these developments for our clients.

For questions or comments, please contact:

Noor Meurling (noor.meurling@dnfp.com)
Randy Rifdaan (randy.rifdaan@dnfp.cpm)
Aston Goad (aston.goad@dnfp.com)

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