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Private Equity And Venture Capital: Regulatory Overview On Fund Formation In Indonesia – Corporate and Company Law


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Indonesia has seen remarkable growth in tech investments (see
our editorial publications on Indonesian tech deals Vol.
, Vol. 2, Vol.
, and Vol. 4). Most of these investors are Private
Equity (“PE“) and Venture Capital
(“VC“) companies, with major interests
in continuing their investments in Indonesia. Although many of
these PEs and VCs are based overseas, with continuing interest of
homegrown investors in Indonesia and creation of investment arms by
Indonesia-based conglomerates, it would be worthwhile to explore
the regulatory stand points of the formation of PE and VC companies
in Indonesia.

In this article, we provide a brief overview on the
establishment of PE and VC based on the Indonesian law

  1. General Regulatory Framework of PE in
    The Indonesian law does not provide any
    particular framework on the establishment and operation of PE
    funds. PE activities are resolved through merger and acquisition
    (“M&A”) of companies that have not
    been publicly listed, which generally comply with provisions under
    Law No. 40 of 2007 on Limited Liability Company
    (“Company Law“), or other transaction
    structures such as convertible notes and security-backed, or in
    some cases, unsecured loans.

    For foreign PE funds directly invested in target companies through
    acquisitions of shares, it is important to observe the Positive
    Investment List under Presidential Regulation No. 10 of 2021 on
    Investment Business Fields (“PR
    “), which stipulates provisions on:

    1. Priority business fields;

    2. Allocated business fields or partnership with cooperatives and
      SMEs (Small-andMedium Sized Enterprises); and

    3. Business fields with certain conditions.

    The provisions are generally applicable to any foreign direct
    investment in Indonesia, and all investors must comply with PR
    10/2021. Furthermore, foreign direct investments shall also comply
    with all applicable requirements under the Investment Coordinating
    Board (Badan Koordinator Penanaman Modal or
    BKPM“), such as a minimum investment of
    IDR 10 billion.

  2. General Regulatory Framework of VC in
    While there is no particular legal framework
    for establishment of a PE, the Financial Services Authority
    (Otoritas Jasa Keuangan or “OJK“) has
    issued OJK Regulation No. 35/POJK.05/2015 on Implementation of
    Venture Capital Enterprises (“Venture Capital
    Enterprises Regulation
    “) and OJK Regulation No.
    34/POJK.05/2015 of 2015 on Licensing and Organization of Venture
    Capital Company (“OJK Regulation
    “). These regulations require VCs operating
    under the framework of Venture Capital Enterprises Regulation to be
    licensed by OJK. In this regard, an OJK licensed VC in Indonesia
    can be a conventional or Sharia-based (i.e., the
    investment is conducted based on Sharia principles) VC.

    According to the Venture Capital Enterprises Regulation, a VC is a
    financing business entity that conducts capital participation or
    finances its business partner for a certain period of time to
    improve the partner’s operation (the partner is usually a
    start-up or an early-stage business) or debtor. Please also note
    that the regulation requires the capital participation by a
    licensed Indonesian VC in a form of equity participation for a
    maximum period of 10 years, extendable two times for a total
    extension period of 10 years.

    Permitted Activities: A licensed VC company
    (Perusahaan Modal Ventura) is permitted to carries out the
    following activities:

    1. Managing venture funds of its investors;

    2. Conducting investment services for certain fees; and

    3. Other activities as approved by OJK.

    In specific, the investment activities of a VC shall be for the
    development of, among others, new inventions, Small-to-Medium Sized
    Enterprises, or new technology

    Please note that a licensed VC cannot carry out the following

    1. collecting funds directly from the community (in the form of
      current accounts (giro) or savings);

    2. granting securities in any form to third parties;

    3. issuing promissory note, except as collateral to the

    4. taking actions that make other financial bodies under OJK
      supervision incompliant with the prevailing laws and

    5. taking actions that make other financial bodies under OJK
      supervision avoid compliance with the prevailing laws and

  3. Sources of Funds of PEs and VCs: Both PEs and
    VCs raise funds from their investors. PEs can raise the funds
    through equity or shares, as well as bond issuance, while VCs can
    raise funds from venture funds in accordance with the Venture
    Capital Enterprises Regulation. The Indonesian law is generally
    silent on the requirements and provisions regarding the sources of
    funding for PEs. The funds are mostly formed overseas through
    private placements in the PEs. If a PE fund is formed in Indonesia,
    it would be typically structured under a Limited Liability Company
    (Perseroan Terbatas or “PT“).
    In which case, the PT needs to comply with the provisions under the
    Company Law.

    Based on the Venture Capital Enterprise Regulation, the maximum
    number of investors in a venture funding is 25. These investors
    should enter a fund formation agreement in the form of a notarial
    deed. A venture fund should be, at least, IDR 1 billion and it
    should be placed in an appointed custodian bank.

    Furthermore, Article 36 (1) of Venture Capital Enterprise
    Regulation stipulates that the source of funds of a VC can be as

    1. Venture fund

    2. Loan

    3. Asset securitisation

    4. Medium-term notes

    5. Issued bonds

    6. Subordinated loan

    7. Issued shares

    8. Waqf, referring to the Islamic law

    9. Grant

    The parties that can participate in the venture funding

    1. The government

    2. State or region-owned enterprises

    3. Financing companies

    4. Indonesian export financing agencies

    5. Banks

    6. Other financing institutions

    7. Multilateral financing institutions

    8. Other business entities

    9. Individuals

  4. Licensing Requirements and Forms of Business Entity for
    PEs and VCs in Indones

    PE Licensing Requirements and Form of Entity: As
    mentioned, there are no specific licensing requirements for a PE,
    and it is typically structured as a PT.

    VC Licensing Requirements and Form of Entity: In
    Indonesia, Article 2 of OJK Regulation 34/2015 stipulates that a VC
    company can be one of the following business entities:

    1. PT;

    2. Cooperative (koperasi); or

    3. Limited partnership company

    Although the establishment of a VC in the form of Cooperative or CV
    is permitted, it is very uncommon.

    A VC established in the form of a PT must have a minimum paid-up
    capital of IDR 50 billion, and a Sharia-based VC in the form of a
    PT must have a minimum paid-up capital of IDR 20 billion. A VC
    established as a PT is also subject to a maximum foreign ownership
    of 85% of its paid-up capital.

    With regard to the licensing, please refer to the points below, on
    the general requirements to obtain the VC Company License (Izin
    Usaha Perusahaan Modal Ventura
    ) from OJK:

    1. The Board of Directors of the VC shall submit the application
      to OJK in the form as provided under OJK Regulation 34/2015;

    2. The application must have the supporting documents that include
      the Deed of Establishment, Shareholder Register, identities of
      members of the Board of Directors (BOD) and Board of Commissioners
      (BOC), statement letter of the company shareholders on the source
      of funding, underlying agreements with the
      participating investors, evidence of capital injection, proof
      of operational readiness, work plan, organizational structure,

    3. Upon receiving the complete application, OJK will assess and
      analyse the application within 30 working days, then issue its
      approval or rejection on the relevant application in a form of an
      OJK Decree (Keputusan OJK);

    4. The relevant VC should commence its operation no later than six
      months after the issuance of the OJK Decree;

    5. The licensed VC must submit a report on the commencement of
      operation no later than 10 days after the commencement.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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