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11 September 2017
In August 2017 a new regulation came into effect which moderates the government's supervision of the energy and mining industries. The regulation revises procedures relevant to operators and investors in oil and gas, electricity, mineral and coal, geothermal and biodiesel businesses. It also introduces new requirements regarding changes to boards of directors and boards of commissioners and the transfer of shares.
On August 3 2017 the minister of energy and mineral resources enacted Regulation 48/2017 on the supervision of business activities in the energy and mineral resources sector, which revoked the short-lived Regulation 42/2017 on the same subject. Regulation 48/2017 took immediate effect and partially revokes the following regulations:
Regulation 48/2017 also revokes:
Like its predecessor Regulation 42/2017, Regulation 48/2017 applies to all industries in the energy and mineral resources sector, including upstream and downstream oil and gas, coal and mineral mining and production, geothermal, biodiesel and electricity production (including electricity from renewable sources). In a press release the minister explained that the aim of Regulation 48/2017 is to accommodate the interests of investors and prevent any hindrance to investment. While the previous Regulation 42/2017 imposed obligations on companies in the oil and gas sectors to obtain prior approval over changes to the board of directors and board of commissioners, and restricted share transfers in the downstream oil and gas industry, Regulation 48/2017 replaces these requirements with an obligation to report these changes only to the minister. Regulation 48/2017 makes no change to the requirements that Regulation 42/2017 introduced for companies in the mining sector to obtain approval for changes to the board of directors and board of commissioners, or for share transfers.
Regulation 48/2017 redefines some controversial requirements in the electricity industry under Regulation 42/2017 with respect to:
Regulation 48/2017 requires non-geothermal IPPs to:
Lenders should be aware of the effects of Regulation 48/2017 with respect to security over shares in IPPs. In the event an IPP goes into default before the commercial operation date, any transfer of shares will require approval from PLN. If the transfer goes ahead it must be reported to the minister. This should not hinder any enforcement of security by the lenders because, in a typical project finance structure, PLN will provide consent over the transfer of shares in advance.
Non-geothermal IPPs will be exempt from the above requirements if they:
General requirements for transfer of shares
The following provisions appear to be material to the transfer of shares of non-geothermal IPPs:
Regulation 48/2017 does not define the term 'sponsor'. However, during discussions with officials from the Directorate General of Electricity under the Ministry of Energy and Mineral Resources with respect to Regulation 42/2017, officials explained that a 'sponsor' is a direct shareholder of the IPP. This interpretation applies equally to Regulation 48/2017. As such, the first restriction above does not seem to apply to transfers made to parties above the IPP's direct shareholders. By implication, the restriction of the changes of control in the IPP before the commercial operation date may not be achieved in practice, considering that – in a typical IPP structure – the IPP is a special purpose vehicle in which the actual controlling shareholder will be one (or more) levels above the direct shareholders.
It is unclear under Regulation 48/2017 whether the requirements to notify the Ministry of Energy and Mineral Resources of the transfer of shares also apply to enforcing a pledge of shares before the commercial operation date. However, in the absence of an explicit exemption, it seems that such enforcements will require notification.
Regulation 48/2017 does not seem to require notification to or approval from the minister for the transfer of shares after the commercial operation date, including in the context of enforcing a pledge of shares. As such, it seems that share transfers under Regulation 48/2017 will require only PLN approval, which is already the case under sponsor agreements.
Effect of restrictions on transfer of shares
Regulation 48/2017 does not address the effect that the transfer of shares provisions will have with respect to IPPs which have already signed a power purchase agreement and sponsor 4 agreement (in larger power projects) with PLN. However, according to Directorate General of Electricity officials:
In larger power projects, most if not all sponsor agreements provide more stringent terms with respect to the transfer of shares after the commercial operation date, including that:
Regulation 48/2017 is more lenient with respect to the transfer of shares after the commercial operation date – the regulation permits the sponsor(s) or direct shareholder(s) to transfer shares to any third party after the commercial operation date, without the need to obtain prior approval from PLN or the Ministry of Energy and Mineral Resources. This suggests the following:
Changes to the composition of boards
Under Regulation 48/2017, non-geothermal IPPs must notify the Ministry of Energy and Mineral Resources of any changes to the membership of the board of directors and board of commissioners within five working days of providing notification of these changes to the Ministry of Law and Human Rights. These requirements are less stringent and easier to implement than those under Regulation 48/2017, which imposed an additional obligation for an IPP to obtain a recommendation from PLN for all changes before notifying the relevant ministry.
Transfer of shares
The existing Geothermal Law (21/2014) indicates that a geothermal IPP may conduct share transfers on the Indonesian Stock Exchange after it has completed its exploration phase, subject to receiving approval from the Ministry of Energy and Mineral Resources. However, this requirement is unclear, and the law appears to allow a geothermal IPP to transfer shares only by way of public trading or transfer.
In contrast, the now-revoked Regulation 42/2017 required geothermal IPPs to submit a broad range of documentation to the Ministry of Energy and Mineral Resources in order to obtain approval for the transfer of shares. The required documentation extended beyond matters that would be relevant to public trading and included a report on the identity of transferee(s). Because such reports would be relevant only to a private sale, Regulation 42/2017 indicated that it may permit geothermal IPPs to transfer shares to private purchasers, as well as through public trade.
Regulation 48/2017 clarifies matters by distinguishing the formal requirements for the transfer of shares by way of public trading from those relating to transfer through private sale. Regulation 48/2017 also covers geothermal concession holders, joint operation contractors and geothermal resources permit holders.
The wording of the Geothermal Law and Regulation 48/2017 suggests that geothermal IPPs cannot transfer their shares before completion of the exploration phase.
Regulation 48/2017 provides that geothermal IPPs may transfer shares on the stock exchange once the exploration phase is complete, subject to the minister's approval. Regulation 48/2017 states that the minister must approve such share transfers before the initial public offering or the transfer of share ownership is recorded on the stock exchange. The director general of new renewable energy and energy conservation has clarified that the minister's approval will be required before a geothermal IPP's initial public offering, as well as before the transfer of ownership is recorded on the stock exchange for all secondary offerings and rights issuances.
The Ministry of Energy and Mineral Resources will issue its approval or rejection to a geothermal IPP for the transfer of shares through public trade within 14 business days after receiving all required documentation.
For transfer of shares conducted privately once the exploration phase is complete, geothermal IPPs need not obtain prior approval from the minister. However, geothermal IPPs must notify the minister of the transfer within five business days from the date of providing notice to, or obtaining approval from, the Ministry of Law and Human Rights.
Change of board members
Geothermal IPPs must notify the minister of any changes to the membership of the board of directors and board of commissioners within five business days from the date of providing notice of the change to the Ministry of Law and Human Rights.
Regulation 48/2017 is considerably more investor friendly than Regulation 42/2017, which imposed stringent obligations with respect to the transfer of shares and changes to the board of directors and board of commissioners of non-geothermal and geothermal IPPs. The previous requirement for both non-geothermal and geothermal IPPs to obtain minister approval for any transfer of shares (before and after the commercial operation date), which would likely cause difficulty in practice, now applies only to geothermal IPPs for share transfers after the exploration phase and only to transfers made through public trading. Regulation 48/2017 drops the requirement for all IPPs to obtain minister approval for changes of the board of directors and board of commissioners, requiring IPPs to report these changes only to the minister. The regulation applies to a broad sweep of Indonesia's energy and mineral resources industries and is therefore an important development for new and existing companies.
For further information on this topic please contact Zefanya S Sahusilawane at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125) or email (firstname.lastname@example.org) The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.
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Zefanya S Sahusilawane