India businesses to benefit from Indonesia reforms

By Ahmad Fikri Assegaf and Eko Ahmad Ismail Basyuni, Assegaf Hamzah & Partners
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As year-end approaches, the government of Indonesia continues to implement the sweeping reforms brought about by the Omnibus Law (Law No. 11 of 2020) (law). The law, which has been the most comprehensive and aggressive regulatory reform in Indonesia by far, was introduced almost a year ago. Over 900 pages long, it covers many areas including employment, investment, licensing and land procurement. Since its introduction, various government-level regulations have been introduced, containing the technical details necessary to the law’s implementation.

Ahmad Fikri Assegaf Partner Rajah & Tann
Ahmad Fikri Assegaf
Partner
Rajah & Tann

As to the licensing of business, the law implemented at least three key initiatives. First, it introduced a new way of regulating business through a risk-based approach. Second, it further relaxed foreign investment limitations and restrictions. Third, there was deeper integration between business registration and licensing at both central and local levels through the online single submission (OSS) system.

Using the new risk-based approach, all business activities will be reviewed with reference to their impact on society, health, safety, security and the environment. Following this review, specific risk levels will be assigned to the business activities of each entity. If risks are low, only registration is required and no permit is needed. For medium risk, a business must comply with registration requirements and certain business standards prescribed by the government. If the risks are high, then a permit is required.

Eko Ahmad Ismail Basyuri Partner Rajah & Tann
Eko Ahmad Ismail Basyuni
Partner
Rajah & Tann

This changes everything. Before the law, permits had to be obtained for all types of business activities, which over time diluted the effectiveness of those permits. The government ended up focussing too much on the permit application process even before the business started operating. There were also insufficient resources to monitor compliance. The old regime created a massive risk of corruption as businesses that dealt directly with various central and local government offices at times resorted to illegal means to get the relevant permits.

As well as adopting a risk-based approach, the government has refined online processing through the OSS, allowing all business-related registrations and permits applications to be submitted and obtained online. This has proved to be very effective by significantly reducing the time to process permits and registration. A PMA (foreign limited liability) company now only takes one week to set up, and a local company can be established in two business days.

Together with the simplified business licensing regime, the government has introduced a new investment list called the priority investment list. This list is a crucial piece of the law puzzle. It simplifies the approach to classifying the permitted and restricted sectors for foreign investment. Almost all business sectors are open for foreign investment except those that are expressly declared closed to foreign investment or can only be carried out by the central government. Instead of navigating a long list of restricted sectors, investors simply have to ensure that they comply with any necessary conditions applicable to the business sectors in which they intend to invest.

Despite the pandemic, the implementation of the law continues, and there have been substantial results. For example, the lifting of restrictions on foreigners investing in telecommunication towers and allowing up to 100% of foreign investment, has led to increasing interest from foreign investors in this space. Another notable example is the health sector, where foreign investors can now invest up to 100%. Significantly increased foreign investment may well follow in hospitals, healthcare equipment, wholesale pharmaceuticals, and power plants above 1MW, all of which were previously closed. These reforms clearly offer opportunities for Indian investors safely to expand their portfolios within South East Asia.

Indonesia is now more open to foreign investment, and has made significant headway in more efficiently administering business-related registration and issuing permits. Under the law, 49 government and presidential-level regulations have been issued with more implementing regulations expected in the near future.

Ahmad Fikri Assegaf and Eko Ahmad Ismail Basyuni are partners with Assegaf Hamzah & Partners, a member firm of the Rajah & Tann Asia network. In case of queries, the authors can be contacted at ahmad.assegaf@ahp.id or eko.basyuni@ahp.id.

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