Legal development

Cross-border financing to the Indonesian borrower

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    The Indonesian Company

    The most common entity used for commercial business is Limited Liability Company or Perseroan Terbatas ("PT").

    Based on Law 40/2007 on Limited Liability Company ("Company Law") as last amended by Law 11/2020 on Job Creation ("Omnibus Law"), a PT must be established by at least two shareholders. Its incorporation takes place after the execution of a deed of establishment by the shareholders, and upon approval of the Minister of Law and Human Rights; only then does a PT obtain status as a "legal entity".

    Capital structure of PT can be divided into three categories:

    1. Authorised capital, this capital is determined based upon mutual consent from the founders.
    2. Issued capital, the Company Law mandates that a minimum of 25% of the authorized capital must be paid by the shareholders to the Company;
    3. Paid-up capital, must be paid in an amount equal to 100% of the issued capital.

    It is also important to note that a specific business sector may require a higher amount of authorized capital and issued capital.

    Shares in an Indonesian company may be held by an Indonesian citizen/company and a foreign citizen/company. An Indonesian company whose shares are partly or entirely owned by a foreign citizen/company is known as a foreign investment company (a.k.a PT PMA). Based on Article 12(7) of the Investment Coordination Board Regulation 4/2021, there is a minimum issued capital requirement of 10 billion IDR (US$ 689,140) for PT PMA.

    Indonesian law also governs maximum foreign shareholding threshold as regulated under Presidential Regulation No. 10 of 2021 as last amended by President Regulation No. 49 of 2021 on the Investment Business Sectors ("Positive List"). Under the Positive List, foreign ownership in a PT is regulated and certain business sectors may be open for 100% foreign shareholding, partly owned by foreign shareholders or 100% closed to foreign shareholding.

    A Company has 3 organs:

    1. Board of Directors, who conduct the company's daily business. Generally a company can appoint a single director, but for a public company it must appoint at least two directors;
    2. Board of Commissioners, who supervises and advises the Board of Directors of the Company. Generally a company can appoint a single commissioner, but for a public company it must appoint at least two directors, one of whom must be an independent commissioner; and
    3. General Meeting of Shareholders, which decides on matters beyond the authorities of the Board of Directors or Board of Commissioners, based on the company's Articles of Association.

    Offshore Loan General Compliances

    1. Offshore Loan Reporting

    As a result of offshore loan transaction, a series of transfers of foreign exchange from Indonesia to abroad (and vice versa) take place. Such activity is subject to reporting obligations to Bank Indonesia pursuant to:

    • Bank Indonesia Regulation 16/22/PBI/2014 on the Reporting Flow of Foreign Exchange Activities (as partly revoked by Bank Indonesia Regulation No. 21/2/PBI/2019);  
    • Bank Indonesia Governor Regulation No. 21/7/PADG/2019 on the Reporting of the Flow of Foreign Exchange Activities other than Offshore Loan; and 
    • Bank Indonesia Governor Regulation No. 21/4/PADG/2019 on the Reporting of the Flow of the Foreign Exchange Activities in form of Foreign Loan and Risk Participation Transaction.

    In addition to the above, a private entity borrower is required to submit a report to the Ministry of Finance in accordance with Presidential Decree No. 59 of 1972 on Receipt of Offshore Loan.

    2. Mandatory Use of Rupiah

    On 28 June 2011, Republic of Indonesia enacted Law No. 7 of 2011 on Currency (the "Currency Law") which states in Article 21 that, among other things, payment transactions, settlement obligations which use money and other transactions that take place within Indonesia, are required to use Indonesian Rupiah subject to certain exemptions, which include, among others, "international commercial transactions" and "international financing transactions" (neither of which are defined).

    Following the enactment of the Currency Law, Bank Indonesia issued Bank Indonesia Regulation No. 17/3/PBI/2015 concerning Mandatory Use of Rupiah in the Territory of the Republic of Indonesia ("BI Reg 17/2015") as the implementing regulation of the Currency Law. Article 4 of the BI Reg 17/2015 governs that the followings are exemptions from the mandatory use of Indonesian Rupiah requirement:

    • certain transactions related to the implementation of State Budget;
    • receipt or grant of offshore loans;
    • international commercial transaction;
    • bank deposits in foreign currency;
    • international financing transaction (where one of the party is domiciled offshore); or
    • transaction in foreign currency conducted based on prevailing laws and regulations (e.g. business activity in foreign currency conducted by banks, securities transaction in foreign currency issued by the government in the primary and secondary market).

    3. Mandatory Use of Indonesian Language

    Pursuant to Law No. 24 of 2009 on Flag, Language, Coat of Arms and National Anthem enacted on July 9, 2009 ("Language Law"), agreements to which Indonesian parties are a party are required to be executed in Bahasa Indonesia, although, when a foreign entity is a party, dual language documents in English or the national language of the foreign party are permitted. Article 31 of Language Law provides that: (i) Bahasa Indonesia must be used in a memorandum of understanding or an agreement which involves the State, government agencies of the Republic of Indonesia, private entity or individuals having Indonesian nationality; and (ii) with regard to a memorandum of understanding or an agreement referred to in (i) which involves a foreign party, the memorandum of understanding or agreement may also be made in the national language of such foreign party and/or in English.

    On 30 September 2019, Presidential Regulation No. 63 of 2019 on the Use of Indonesian Language ("PR 63") was enacted. PR 63 is the implementing regulation of the language provisions of the Language Law and confirms the position already reflected in the Language Law that agreements or MOUs which involve an Indonesian party have to be drawn up in Bahasa Indonesia and that, if the agreement or MOU also involves a foreign party, it must also be drafted in the national language of such party and/or English. Further, PR 63 goes beyond the Language Law in providing that in such circumstances (i) the foreign language and/or English version are to be used as equivalent or translation of the Indonesian version and (ii) the parties may determine the governing language of the contract.

    4. Offshore Loan Prudential Principle

    Pursuant to Bank Indonesia ("BI") Regulation No 16/21/PBI/2014 as amended by BI Regulation No 18/4/PBI/2016 and supplemented by BI Circular Letter No. 16/24/DKEM of 2014 and its amendments, namely BI Circular Letter No. 17/18/DKEM of 2015 and BI Circular Letter No. 18/6/DKEM of 2016, non-bank Indonesian companies that have obtained offshore debt denominated in a foreign currency are required to comply with the following requirements in order to manage their risk exposure associated with such foreign currency funding:

    • hedging requirement: 
      • the non-bank Indonesian company must hedge at least 25% of its foreign currency shortfall (i.e. the shortfall between its "Foreign Currency Assets"1  and its "Foreign Currency Liabilities"2) for the following two quarters; and
      • the hedging must be undertaken with a bank located in Indonesia;
    • liquidity requirement:

      the non-bank Indonesian company must maintain Foreign Currency Assets equalling at least 70% of its Foreign Currency Liabilities for the following quarter; and
    • rating requirement3:
      • either the non-bank Indonesian company has a minimum credit rating of BB- or, if the non-bank Indonesian company has issued debt securities, those debt securities have a minimum credit rating of BB- (determined at the time of issue);
      • the credit rating must not be more than 2 years old; and
      • the rating must have been issued by an approved ratings agency, either of:

        (A) domestic rating agencies: PT Pemeringkat Efek Indonesia, Fitch Ratings Indonesia and PT ICRA Indonesia; and

        (B) international rating agencies: Standard & Poor’s, Fitch Ratings, Moody’s Investor Service, Japan Credit Rating Agency and Investment & Credit Rating Agency Indonesia.

    Certain exemptions from (some of) the above requirements may be applicable to non-bank Indonesian company borrowers fulfilling certain criteria set forth in the regulation.  For example, certain refinancing facilities, trade credits, loans for government infrastructure projects, and debts from insurance claim and (unpaid) declared dividends do not fall under categories of offshore loans requiring the borrower to have a credit rating.

    Another exemption applies to requirement to hedge, as long as the non-bank Indonesian company borrower records their financial statement in USD (and has obtained an approval to do so from the Minister of Finance ("MOF")) and their portion of revenue from exports is greater than 50% of their (overall) business revenue for the previous calendar year.

    5. Foreign Exchange Compliance

    Pursuant to BI Regulation No. 18/18/PBI/2016 on Foreign Exchange Transaction against Rupiah between Banks and Domestic Parties ("PBI 18/2016"), as implemented by BI Governor Regulation No. 20/16/PADG/2018, an Indonesian citizen or entity (excluding banks) may purchase foreign currencies against Rupiah without an underlying transaction up to a maximum amount of (a) USD 25,000 for on the spot transaction, (b) USD 100,000 for standard derivative transaction, (c) USD 5,000,000 for forward transaction, and (d) USD 1,000,000 for option transaction, or its equivalent per month/customer. Any purchase of foreign currencies against Rupiah of more than the relevant threshold must be supported by an underlying transaction and the maximum amount of the foreign exchange that can be purchased is equal to the value of the underlying transaction. The "underlying transaction" defined in PBI 18/2016 includes loan, direct investment or portfolio investments. BI may specify the forms of document evidencing the underlying transaction. In general, the party purchasing or selling (as relevant) the foreign currencies is required to submit the following documents to the bank making the conversion:

    • a copy of the underlying agreement;
    • tax registration number; and
    • a duly stamped and signed statement from the party purchasing or selling (as relevant) the foreign currencies: 
      • confirming that the underlying agreement is an authentic and valid document and the utilization of the underlying transaction for the purchase of foreign currencies against Rupiah shall not exceed the nominal value of the underlying transaction in the banking system in Indonesia and setting out the purpose of utilization and date of foreign currencies utilization, in case the underlying transaction is an estimation; and
      • (only if the underlying transaction is above USD25,000 (or its equivalent) for spot transaction and USD100,000 (or its equivalent) for (plain vanilla) derivative transaction as set out above, and conducting foreign currency structured product in the form of call spread option) setting out the total need, purpose of utilization and date of foreign currencies utilization, in case the underlying transaction is an estimation; or
      • (only if the underlying transaction is above USD5,000,000 (or its equivalent) for forward transactions and USD1,000,000 (or its equivalent) for option transactions, as set out above) setting out the source of funds, sales amount and time in obtaining the foreign currencies, in case the underlying transaction is an estimation.

    Recent Developments

    Bank Indonesia has recently issued the implementation regulation to the Bank Indonesia regulation No. 22/23/PBI/2020 on Payment System ("PBI 22/2020"), on 1 July 2021.

    PBI 22/2020 provides the umbrella regulation for the payment system industry, this regulation supports the digitalization of financial services to keep up with the rapid development of the Indonesian financial services industry. PBI 22/2020 classifies payment system operators into (i) Payment Services Operators ("PSO"), i.e. banks or non-bank entities that provide services to facilitate payment transactions to users and (ii) Payment System Infrastructure Operators ("PSIO"), i.e. parties that operate infrastructure as facilities that can be used to transfer funds for the interests of their members.

    In relation to that, the following new implementation regulations cover more detailed provisions governing the PSO and PSIO:

    • Bank Indonesia Regulation No. 23/6/PBI/2021 on Payment Service Operators ("PSO Regulation"); and
    • Bank Indonesia Regulation No. 23/7/PBI/2021 on Payment System Infrastructure Operators ("PSIO Regulation").

    The above new implementation regulations provides more detailed provisions on the capital structure of PSO/PSIO and also the fit and proper test obligation for certain parties of PSO/PSIO.

    Authors: Rizaldy Tauhid, Partner; Chandra Setyabrata, Associate; and Muhammad Irsan, Trainee Associate.


    1. 1. BI Circular Letter No. 16/24/DKEM of 2014 defines "Foreign Currency Assets" as: cash, current account, savings, deposit, receivables, inventory, marketable securities, receivables from forward, swap and/or option transactions.  Further criterion are given therein as to what types of receivables, inventory, marketable securities, and receivables from forward, swap and/or option transactions may qualify as an "asset" under this definition. 
    2. BI Circular Letter No. 16/24/DKEM of 2014 defines "Foreign Currency Liabilities" as all foreign currency obligations of the borrower to resident and non-residents, including (i) obligations from forward, swap, and/or option transactions falling due: (a) up to 3 months following the end of the quarter; and/or (b) 3 to 6 months following the end of the quarter, but (ii) not include foreign currency liability that is about to fall due but is undergoing a process to get a rollover, revolving, or refinancing, as to be evidenced by adequate supporting documents.
    3. For greenfield projects, the relevant entity can use the rating of one of its (direct or indirect) parents until up to 3 years post-COD.
    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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