LEGAL MEMORANDUM

Date : Monday, 11st March 2019

To : RBL

From : MPI

Subject : Establishment of Foreign Investment Company for Pipeline

Coating Business

I. REGULATIONS

For the purpose of providing this Legal Memorandum, we have reviewed and
considered relevant provisions in the following key Indonesian legislations:
1. Law No. 40 year 2007 concerning Limited Liabilities Companies ( “Company
Law”);
2. Law No. 5 year 1960 concerning Basic Regulations on Agrarian Principles
(“Agrarian Law”);
3. Law No. 28 year 2002 concerning Building ( “Building Law”);
4. Minister of Energy and Mineral Resources Regulation No. 14 year 2018 on Oil
and Gas Supporting Business Activities ( “MoEMR Reg 14/2018”);
5. Government Regulation No. 24 year 2018 concerning Online Single Submission (
“GR 24/2018”);
6. Head of BKPM Regulation No. 6 year 2018 concerning Guidelines and Procedures
for the Implementation of Capital Investment Licensing and Facilities ( “BKPM
Reg 6/2018”);
7. Presidential Decree No. 44 year 2016 concerning List of Closed Business Fields
and Open Business Fields with Investment Sector Requirements (hereinafter will
be mentioned by, “Negative List”);
8. Presidential Decree No. 36 year 2010 concerning List of Closed Business Fields
and Open Business Fields with Investment Sector Requirements (hereinafter will
be mentioned by, “Negative List of 2010”);
9. The Head of Central Statistics Agency regulation No. 19 year 2017 on Standard
Indonesian Business Field (hereinafter will be mentioned by, “KBLI 2017”);

II. BACKGROUND AND FACTS

1. PT A is a foreign investment company having the line of business of manufacture

of the steel pipe for offshore oil and gas transportation. PT Bis foreign investment
company having the line of business of oil and gas offshore construction.
2. PT A and PT B intend to set up a newly established joint venture company in
Indonesia having the line of business of pipe coating (“JV Company”) with the
shareholders composition of 60% of PT A and 40% of PT B.

3.In injecting the paid-up capital, PT A will inject with the machinery while PT B will
inject with the building for the operational of JV Company. The plan to inject the
building shall take into account that the party will only lease the land to the
proposed PMA Company where the building is constructed.

III. ASSESMENT/LEGAL ADVICE/ANALYSIS

1. General Requirement on Setting Up a JV Company in Indonesia

a. Procedure on Establishing Foreign Investment Company in Indonesia
The government of Indonesia has issued GR 24/2018 which delegates most
licensing processing and issuance of permits activities to the OSS system. The
OSS system is an online platform which integrates all business licensing activities
and allows simultaneous issuance of permits for both central and regional
government levels. Under the new OSS system, the procedures for
establishment of a JV Company are as follows:

1) Process the establishment of company to a notary

Newly established JV Company needs to secure its status as a statutory body
from the Ministry of Law and Human Right (“MOLHR”). PT A and PT B should
draft the Deed of the Establishment which contains the proposed company’s
Article of Association before the civil notary in Indonesia. The Deed of
Establishment should be drafted to be consistent with the Joint Venture
Agreement (if any), the Company Law, and the Chairman of Capital
Investment Coordinating Board Regulations. Certain commercial matters in
the Joint Venture Agreement are not normally stated in the Deed of
Establishment.

2) Submit the deed of establishment to the MOLHR

The civil notary responsible for drawing up the Deed of Establishment will
submit it to the Department of Law and Human Rights for approval within 60
days as of the execution of the Deed of the Establishment. After the Deed of
Establishment is approved by the MOLHR, the approved foreign investment
company’s Deed of Establishment will be registered in the Registry of MOHLR
and published in the State Gazette.

3) Apply for Business Identification Number under the OSS system

Upon the approval, the foreign investment company officially exists as a
limited liability company. Now the business actor will be required to register
their business through the OSS system by filling in the required data to
obtain a Business Identification Number (Nomor Induk Berusaha, “NIB”).
 Any newly established companies must obtain an NIB by registering to the
OSS system to be able to apply for necessary license for their business
activities. NIB is also a requirement for a newly established company to get
other licenses, such as:

a) Taxpayer registration number (NPWP);

b) Business license;
c) Employment BPJS and health BPJS membership certificates;
d) Approval letter of foreign employee utilization plan (RPTKA); and/or
e) Operation/commercial license.

4) Apply for Business License

Under the OSS System, business actors are not required to obtain any prior
approval from the OSS agency thereby creating a post-audit nature of the
system. GR 24/2018 introduces the concept of a Commitment, a statement in
form of a checklist, made by a business actor to fulfill certain requirements
for a business license and/or commercial license which the business actor
applied (“Commitment”). Once the issuance of NIB is done, the
Commitment and inactive Business License will follow.

5) Fulfillment of Commitment and Activation of Business License

The Commitments that is required to be fulfilled by the business actor
consists of:
1) Location Permit;
2) Environmental Permit;
3) BPJS?
4) Building Permit; and/or
5) Payment of? (if any).

For example, upon the application of a business license, the OSS system will
be able to issue such license automatically based on the Commitment that
the business actor made. Every Commitment has its own deadline, so
business actor must ensure that it is able to meet such Commitment on time
and shall not apply just any license impulsively without considering its
capability and readiness to complete such Commitment.

After all the Commitments are fulfilled by the business actor, the inactive
Business License will be activated within one calendar day.

6) Apply for Operational/Commercial License

After the business license is activated, the OSS will issue the Commitment
and the Inactive Operational or Commercial License. The Inactive Operational
or Commercial License is a license issued by the OSS on behalf of the related
Minister, Head of Agency, Governor, or Regent/Mayor. The Operational or
 Commercial License will be activated upon the fulfillment of Commitment
such as:
a) Standard, certification, license and/or registration from? (e.g. the
relevant Ministry depends on the business license that is being
applied);
b) Import License;
c) Registration of goods or services (NPB); and/or
d) Payment (if any).

All licenses that have been issued by the OSS will only be activated and become
effective after all the Commitments have been fulfilled and payment of the
licensing fees (if any).

b. Investment Value and Capitals

Based on the BKPM Reg 6/20181, PMA Company is obliged to fulfill the
requirement for the minimum investment value as following:
1) The total of the investment value has to be bigger than
Rp10.000.000.000,00 (ten billion rupiah) not including land and building;
2) The amount of issued capital equals the paid-up capital, in minimum of
Rp2.500.000.000,00 (two billion five hundred million rupiah);
3) The percentage of shares is counted based the shares nominal; and
4) The minimum amount of shares as mentioned above, for each
shareholders is in minimum of Rp10.000.000,00 (ten million rupiah).

The investment value as stipulated above should be fulfilled by PMA Company in

no later than one year since the issuance date of Business License.

The Company Law stipulates that the issued capital must be paid up at least
25% of the authorized capital. Since Reg 6/2018 does not set the minimum
amount of authorized capital for a PMA Company, means the minimum amount
of authorized capital should equals in amount of Rp2.500.000.000,00 (two billion
five hundred million rupiah) as the requirement for the minimum issued capital.

c. Post-Audit Model of OSS

Following the post-audit model as adopted by the OSS, business actors are
expected to self-assess their compliance to the extent required by law and
regulations to avoid any challenge that the relevant Ministries or Capital
Investment Coordinating Board (“BKPM”). Evaluation by BKPM or the relevant
ministries for compliance with regards to fulfillment of Commitment will be
conducted after such application is conducted by the company.

1The GR 24/2018 stipulates that BKPM is the government agency in-charge for the OSS system; it
means that BKPM Regulation applies to the establishment of PMA Company as long as GR 24/2018
does not regulate it.
 By virtue of Article 81 GR 24/2018, even though most licensing has been
delegated to the OSS system, the monitoring/supervision are still conducted by
the relevant ministries, agencies and/or regional government in accordance with
the applicable relevant laws and regulation, with respect to:
a) Completion of the Commitment;
b) Completion of standard, certification, license and/or registration; and/or
c) Business and/or activities.

In case of non-compliance, the relevant authorities will take actions, which may
be in the form of:
a) Written warning;
b) Suspension of business activity;
c) Administrative sanctions; and/or
d) Revocation of business licenses.

Such action will be notified through the OSS system by the relevant ministry,
agency and/or regional government based on the applicable laws and regulation.

2. Business Classification, Foreign Shares Limitation, and the Necessary Licenses to

Conduct Pipe Coating Business in Indonesia
a. Business Classification of Pipeline Coating
The KBLI 2017 does not explicitly classify pipe coating business as a business
field in Indonesia. Even MoEMR Reg 14/2018 stipulates that the oil and gas
supporting business activities are comprised of:

No Categories
1 Oil-and-Gas Construction
Service Business
2 Oil-and-Gas Non-
Construction Service
Business
3 Oil-and-Gas Supporting
Industrial Business
Sub-Categories
Construction Consulting Service
Business
Construction Work Business
Integrated Construction Work Business
Geological and Geophysical Services
Drilling Services
Technical Inspection and Technical
Testing Services
Post Operation Work Services
Research and Development Services
Waste Management Services
Transportation Rental Services
Operating and Maintenance Services
Material Industries
Devices Industries

The pipe coating business is still not explicitly mentioned in the oil and gas
supporting business activities on the table above but we have conducted a
desk research which results that in 2015, PT Bakrie Pipe Industries
established a coating pipe plant (the same business activities proposed in this
 matter).2 Based on the Certificate of Registration (Surat Keterangan
Terdaftar) of PT Bakrie Pipe Industries written that the business activity
conducted by the company is “Operating and Maintenance Services” of Oil-
and-Gas Non-Construction Service Business.3

We have also checked the official site of Ministry of Energy and Mineral
Resources which results that the issuance of Certificate of Registration for
“operating and maintenance services: rust prevention (coating/jacketing)” of
oil-and-gas non-construction service business especially is 27 times during
2015, 32 times during 2016, 27 times during 2017, and 3 times during
January – February 2018.

However the operating and maintenance services of oil-and-gas non-

construction service business is coded 09100 based on the KBLI which
contains:
“This category includes related to oil and gas mining services which are
carried out on a fee or contract basis, such as exploration for carrying
oil or gas using traditional methods, that is creating geological
observations, installing drilling tools, repairs and demolition of
cementing oil wells and gas wells, making wells, pumping wells
production, blockages and closures production wells, production
testing, dismantling, liquefaction and regasification natural gas for
transportation needs at mining sites, drilling experiments in the
framework of refining petroleum and natural gas and firefighting
services for oil and natural gas”

Thus, based on the explanation above, the pipeline coating business is

classified as Operating and Maintenance Services of Oil-and-Gas Non-
Construction Service Business which is coded 09100 based on the KBLI 2017
even though the term of pipe coating is not mentioned explicitly in MoEMR
Reg 14/2018 and/or KBLI 2017.

b. Foreign Shares Limitation of Pipeline Coating Business

To determine the foreign capital limitation for certain business activities in
Indonesia, firstly we have to check the list of business sectors are closed or
open based on the Negative List. In accordance with the previous sub-header,
we have explained that pipeline coating business is included in the operating
and maintenance services of oil-and-gas business which is coded 09100
under KBLI 2017.

2 The statement were based on the information from this link: https://finance.detik.com/industri/d-
2920822/bakrie-punya-pabrik-baru-pipa-baja-rp-15-triliun-di-bekasi
3 SKUP of PT Bakrie Pipe Industries is attached within this Legal Memo.
 According to the previous Negative List of 2010 that had been revoked, the
operating and maintenance services of oil-and-gas business was formerly
limited for 95% of foreign capitals.

Currently the latest Negative List has no longer stipulated the operating and
maintenance services of oil-and-gas business, even though several business
activities which are coded 09100 of KBLI 2017 are stipulated and limited to
foreign ownership.

The Negative List also stipulates that business fields that are not included in
the lists of business fields that are closed to investment and business fields
that are open with condition to investment shall be business fields that are
open to investment which is not limited to the foreign investment. Besides
the Negative List, the MoEMR Reg 14/2018 also stipulates that oil-and-gas
supporting business can be carried out by the foreign direct investment
companies. Thus, the pipeline coating business is open and not limited to
foreign ownership based on the Negative List and the related regulation.

c. Necessary Licenses to Conduct Pipeline Coating Business

Beside the Business License and Operational/Commercial License issued
through the OSS System as already explained before, the MoEMR Reg
14/2018 requires that oil and gas supporting business company to obtain the
Oil-and-Gas Supporting Business Competency Certificate (Surat Kemampuan
Usaha Penunjang Minyak dan Gas Bumi, “Oil-and-Gas SKUP”) for the
development and improvement of the competency of oil-and-gas supporting
business.

To secure the Oil-and-Gas SKUP, the company must register themselves via
online system by uploading the company’s documents by following:
No. General Requirements for Oil-and-Gas Supporting Services
1 Application letter
2 Power of attorney
3 Form on supporting business competency data
4 Company deed
5 Trade business license
6 Oil-and-Gas SKUP (the previous one, if any)
7 List of experts and supporters
8 List of devices and software
9 Work experience
10 Certificate for quality, environmental and K3 (healthy and work safety)
management
11 Organizational structure of companies
12 Approval of environmental impact analysis (Amdal) or Environmental
Management Efforts and Environmental Monitoring Efforts (UKL-UPL)
13 Proof of ownership of work facilities
 14 Proof of ownership of devices
15 Flow of service activity process
16 Company profile
17 Company TKDN roadmap
18 Certificate of expert and skilled employees
19 Proof of capital at state-owned enterprise banks
20 Corporate social responsibility program
21 Cooperation contract with domestic manufacturers
22 Proof of annual financial audit and the latest tax returns
23 Proof of transfer of technology (employee training program and its
proof of implementation)
24 Corporate taxpayer identification number
25 Form of domestic partially
No. Specific Requirements for Oil-and-Gas Non-Construction Services
1 Inspection institution management certificate
2 Ownership of standards in accordance with the field of inspection

In the event of the results of evaluation of documents as mentioned above has

been deemed complete and valid, the Director General of Oil and Gas of Ministry
of Energy and Mineral Resource issues Oil-and-Gas SKUP by assigning the Oil-
and-Gas Supporting Business competency ranking based on the MoEMR Reg
14/2018.

Prior to the MoEMR Reg 14/2018, any Oil-and-Gas Supporting Business shall
obtain the Certificate of Registration prior to obtain the Oil-and-Gas SKUP.
However since the issuance of this regulation, the Certificate of Registration is
declared invalid and any applications to obtain the license will not be processed.

3. The Possibility and Procedures for Injecting the Machineries and Building as an
Initial Paid Up Capital
a. Possibility of Injecting Machineries and Building as an Initial Paid Up Capital
The Company Law allows the payment for share capital may be made in other
than money form such as tangible goods form and/or intangible goods form
that are valuable in money terms and have been actually received by the
company.4 For avoidance of any doubt, such payments shall be accompanied
by itemized descriptions that elaborate the value or price, type or kind,
status, domicile, and other matters deemed required.

Thus for an establishment of a PMA Company, injecting machineries and

building as the paid up capital is allowed as long as the total value for such
goods equal the minimum amount of issued capital that is
Rp2.500.000.000,00 (two billion five hundred million rupiah) based on the
valuation for such items.

4
Article 34 (1) the Company Law
 b. Procedures of Injecting Machineries and Building as an Initial Paid Up Capital
1) Capital Valuation for Machineries and Building
The Company Law stipulates that the payment for share capital in other
form than money, the value of such items shall be determined on the
basis of quoted market prices.5 If quoted market prices are not available,
the fair value shall be determined on the basis of quoted market prices or
by an expert unaffiliated with the company.6

To determine the valuation for items as a payment for share capital, the
JV Company should hire a Public Appraisal7 based on The Ministry of
Finance Regulation No. 101/PMK.01/2014 year 2014 on Public Appraisal
(“MoF Reg 101/2014”) as amended by the Ministry of Finance
Regulation No. 56/PMK.01/2017(“MoF Reg 56/2017”).

The MoF Reg 56/2017 stipulates that the valuation of:

a) Factory including the installation as a unit; and
b) Machineries and tools including the installation strung together as a
unit and/or stand-alone which is used for the production process.
Is within the scope work of a public appraisal for a classification of a
personal property valuation.

Upon the valuation of machineries and building, the public appraisal will
issue the valuation report that must be signed by the appraisal. Such
valuation report will be the reference to determine the capital value of the
assets that will be injected as the paid up capital.

2) Public Announcement
The Company Law stipulates that a payment for share in immovable
property form must be announced in one national newspaper or more
within 14 days of the signing of the deed of establishment or upon the
general meeting of shareholders resolving the payment for a share.8 In
respect to the Company Law, the business actors who conduct a payment

5
Article 34 (2) the Company Law
6 The Company Law stipulates that Expert Unaffiliated means an expert who has no:
1) Relationship by marriage or blood within the second degree, both in horizontal and vertical
line, to the employees, members of board of commissioners, member of board of directors, or
the shareholders of the company;
2) Relationship to the company because one or more of the members of the board of directors or
the board of commissioners of both companies is/are the same person;
3) A control relationship to the company either directly or indirectly; and/or
4) 20% of company’s shares or more.

7MoF Reg 101/2014 stipulates that Public Appraisal is a person who has the competency to conduct
valuation activity and has obtained the license from Ministry of Finance to give the valuation service.
8
Article 34 (3) the Company Law
 for issued share in goods form shall determine whether such goods are
movable or immovable property.

The Indonesian Civil Code has determined anything constructed on a land

such as factory as an immovable property, and any objects at the factory
even though such objects are not attached or permanently fixed to the
ground such as machineries as an immovable property by its purpose.9

Thus the injection of machineries and building for a payment of share will
demand a public announcement in the purpose of the benefit of public
knowledge and to allow an opportunity to the interested parties to file an
objection to the transfer of the property as payment for share capital, for
example, in a case the property proves not belonging to the business
actor who conduct such payment. Unfortunately, the Company Law does
not stipulate the output of this public announcement provision whether to
attach the proof of the announcement on the deed of establishment or
not.

c. Possible Risks for Injecting the Machineries and Building

1) Ownership of the Building
Basically there is no restriction for the business actors to conduct such
payment for share in the form of machineries and building as long as the
ownership for such items are validly belong to the business actors. In our
case, we should reckon the ownership of the building considering the Joint
Venture partner will only lease the land for the construction of the
building.

The Agrarian Law of Indonesia is subject to the customary law which

recognizes the Horizontal Separation Principle of the land. The Horizontal
Separation Principle means that any buildings and/or plants attached is
not part of the land, as the Building Law stipulates that the construction of
building can be conducted whether in the owned land as well as other
party’s land. To conduct the construction of building in other party’s land,
the construction can be executed based on the lease agreement between
the land owner and the building owner and have obtained the building
construction permit from the OSS System. The building owner shall obtain
building ownership title from regional government to prove the ownership
of the building.

Take into account that the utilization of the land where the building
attached is based on the lease agreement which means the ownership of
the land belongs tp the other party. This situation will possibly become a

9 Article 507 the Indonesian Civil Code.

 risk if the land owner put the Hak Tanggungan security rights to the land.
To avoid such risks, the lease agreement shall contain the provision
regarding to security rights entitlement to the land.

Besides, we also note that PT B as the owner of the land is a legal entity
which means that the rights to the land can only be in limited forms and
terms, by following:10
Rights to Land Terms Extended Terms
Right to Cultivate (Hak Guna Usaha) 35 years 25 years
Right to Build (Hak Guna Bangunan) 30 years 20 years
Right to Use (Hak Pakai) 25 years 20 years
If the terms and the extension of the terms are expired, the rights owner
is allowed to earn the renewal of the rights to land.

Based on the explanation above, the lease agreement shall also notice the
remaining term of the land owned by PT B to ensure the ownership of the land for
pipeline coating business is safe from any interruption regarding to the ownership
risks.

2) Fulfillment of Investment Value

BKPM Reg 6/2018 stipulates that the total of the investment value has to
be bigger than Rp10.000.000.000,00 (ten billion rupiah) not including land
and building which should be fulfilled by JV Company in no later than one
year since the issuance date of Business License.

Considering our plan to inject the building and machineries as the paid up
capital, we should reckon this provision in mind. Thus, in a year within the
issuance of business license, the JV Company shall prepare the total
investment value of minimum Rp10.000.000.000,00 (ten billion rupiah)
not including land and building of the JV Company.

CONCLUSION

The establishment of a PMA Company shall be conducted through the OSS System
with the proposed issued and paid up capital must be paid equals in amount of
Rp2.500.000.000,00 (two billion five hundred million rupiah). However for the line
of business of pipeline coating is included to the oil-and-gas supporting business
and coded 09100 based on the KBLI 2017 without limitation to the capital owned by
PMA Company.

10
The following table based on Article 8, 25, and 45 Government Regulation No. 40 year 1996 concerning Right to
Cultivate, Right to Build, and Right to Use.
The necessary license to establish the pipeline coating company is Oil-and-Gas
SKUP issued by the Directorate General of Oil and Gas of Ministry of Energy and
Mineral Resources beside the business license issued by the OSS System.

In respect with the fulfillment of the issued and paid up capital, the injection of
machineries and building are allowed as long as the capital valuation for such items
comply the minimum of Rp2.500.000.000,00 (two billion five hundred million
rupiah) based on the valuation report of public appraisal.