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15 August, 2017
A new regulation effective August 2017 moderates the Government of Indonesia’s supervision of the energy and mining industries. This regulation revises procedures relevant to operators and investors in oil and gas, electricity, mineral and coal, geothermal, and/or biodiesel businesses. It introduces new requirements for changes to the Board of Directors and Board of Commissioners, and for the transfer of shares.
On 3 August 2017, the Minister of Energy and Mineral Resources (the “Minister”) enacted Regulation No. 48 of 2017 on the Supervision of Business Activities in Energy and Mineral Resources Sector (“Regulation 48”), which revokes the short-lived Minister of Energy and Mineral Resources Regulation No. 42 of 2017 on the same subject (“Regulation 42”). Regulation 48 took immediate effect, and partially revokes the following regulations:
- Minister of Energy and Mining Regulation No. 10/P/M/PERTAMBEN/1981 on the Guidelines and Requirements for Cooperation under Joint Operation Contracts between Pertamina and Contractors in the Implementation of Operation of Geothermal Resources – to the extent that it regulates the transfer of rights and obligations of Contractors to third parties that are conducted outside of the stock exchange in Indonesia; and
- Minister of Energy and Mineral Resources Regulation No. 10 of 2017 on the Power Sale and Purchase Agreements – to the extent that it regulates the transfer of rights over shares (“Regulation 10”).
Regulation 48 also revokes:
- Minister of Energy and Mineral Resources Regulation No. 26 of 2016 on the Procurement and Utilization of Biofuel in the Form of Biodiesel for the Purposes of Financing by the Palm-Oil Plantation Fund Management Agency; and
- Minister of Energy and Mineral Resources Regulation No. 34 of 2017 on Licensing in Mineral and Coal Mining.
Like its predecessor, Regulation 42, Regulation 48 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 explains that the intention of Regulation 48 is to accommodate the interests of investors, and to prevent any hindrance to investment. While the previous Regulation 42 imposed obligations on companies in the oil and gas sectors to obtain prior approval over changes to the BOD and/or BOC, and restricted share transfers in the downstream oil and gas industry, Regulation 48 replaces these requirements with an obligation only to report these changes to the Minister. We note that Regulation 48 makes no change to the requirements that Regulation 42 introduced for companies in the mining sector to obtain approval for changes to the BOD and/or BOC, and for share transfers.
Regulation 48 redefines some controversial requirements in the electricity industry under Regulation 42 with respect to:
(i) changes in composition of the Board of Directors (“BOD”) and/or Board of Commissioners (“BOC”) – Regulation 42 previously imposed the obligation to seek approval from the Minister for such changes;
(ii) transfer of shares of Geothermal Independent Power Producers (“IPP”) and/or Non- Geothermal Independent Power Producers (“Non Geothermal IPP“) – Regulation 42 previously imposed the obligation to seek approval for such changes, where Regulation 10 provided an earlier iteration of this obligation to notify the Minister in the event of transfer of shares.
This update continues in four parts, focusing on the implications of points (i) and (ii) above.
Section I flags key issues under Regulation 48; Section II defines the new requirements for changes to the BOD/BOC, and for the transfer of shares of Non-Geothermal IPPs; Section III defines these new requirements as they apply to Geothermal IPPs; Section IV concludes.
I. KEY ISSUES
1. Regulation 48 requires Non Geothermal IPPs to:
(i) obtain a written approval from the purchaser (which will be the state-owned electricity company, Perusahaan Listrik Negara,“PLN”) for the transfer of shares prior to Commercial Operation Date (“COD”); and
(ii) notify the Minister in the event of the transfer of shares prior to COD, and of changes to the BOD and BOC.
Lenders should be aware of the effects of Regulation 48 with respect to security over shares in IPPs. In the event an IPP goes into default prior to COD, any transfer of shares will require approval from PLN. If this transfer goes ahead it must be reported to the Minister. We believe that this would 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.
2. Non-Geothermal IPPs which: (i) hold an Electricity Supply License, (ii) sell to PLN and (iii) use geothermal electricity power supply; will be exempted from the requirements in (1) above.
II. NON-GEOTHERMAL IPP
General Requirements for the Transfer of Shares
The following provisions appear to be material to the transfer of shares of Non-Geothermal IPPs:
1.1 Non-Geothermal IPPs must obtain approval from PLN to transfer shares prior to COD and subsequently notify the Minister no later than 5 (five) business days from the date the Ministry of Law and Human Rights (“MOLHR”) provides approval of the articles of association.
1.2 Prior to COD, Non-Geothermal IPPs may only transfer shares to affiliated parties whose shares are more than 90% owned by an equity financier or sponsor (see discussion below concerning ‘sponsor’). Further, the affiliate must be a party one level below the sponsor (a direct subsidiary of the sponsor).
Regulation 48 does not define the term ‘sponsor.’ However, in our discussions with officials from the Directorate General of Electricity under the MEMR (“DGE”) with respect to Regulation 42 (which also does not provide a definition), officials explained that a ‘sponsor’ is a direct shareholder of the IPP. We believe that interpretation applies equally to Regulation 48. As such, the restrictions set out at point 1.1 do not seem to apply to transfers made to parties who are at a level above the IPP’s direct shareholders. By implication, if Regulation 48 intends to restrict changes of control in the IPP prior to COD, this 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 whether the requirements to notify the MEMR of the transfer of shares also apply in context of enforcing a pledge of shares prior to COD. Nevertheless, as there is no explicit exemption, it seems that such enforcements over a pledge of shares will require notification to the MEMR.
Regulation 48 does not seem to require notification to or approval from the Minister for the transfer of shares after COD, including in the context of enforcing a pledge of shares. As such it seems that the only approval required for share transfers under Regulation 48 will be that of PLN, a condition which already commonly exists under Sponsor Agreements.
Impacts of Restrictions on Transfer of Shares under Regulation 48 for existing and new Power Purchase Agreements and Sponsor Agreements Regulation 48 does not address the impact that the transfer of shares provisions will have with respect to IPPs that have already signed a Power Purchase Agreement (“PPA”) and Sponsor Agreement (in larger power projects) with PLN. However, DGE officials inform us of the following:
2.1 Regulation 48 will apply to all IPPs, including IPPs of existing power projects (at any capacity, including small to medium capacity power projects). That is, there is no provision for grandfathering of IPP projects under the new Regulation 48 regime.
2.2 The provisions under Regulation 48, including those relating to the transfer of shares, will prevail in the event there is any conflict with the Sponsor Agreement. However, this cannot be assumed to also apply to provisions under a Sponsor Agreement that are more strict than those under Regulation 48.
In larger power projects, most if not all Sponsor Agreements provide rather more stringent terms with respect to the transfer of shares after COD. These terms include requirements that transfers: (i) can only be conducted after specified periods following the COD; (ii) will require a public offering; and (iii) the sponsor(s) or existing shareholder(s) are obliged to maintain a certain level of ownership in the IPP until full repayment of the senior loan.
Regulation 48 is a little more lenient with respect to the transfer of shares after COD, in the sense that the regulation permits the sponsor(s) or direct shareholder(s) to transfer its/their shares to any third party after COD, without the need to obtain prior approval from the purchaser/PLN and from the MEMR.
The foregoing suggests:
2.3 New IPPs that have not yet signed a PPA or Sponsor Agreement may benefit from the more lenient requirements under Regulation 48 with respect to the transfer of shares. This is not certain, however, for PLN may require Sponsor Agreements for new IPPs to include the same terms as would have been required prior to the enactment of Regulation 48.
2.4 For existing IPPs which have signed a Sponsor Agreement, Regulation 48 imposes additional obligations to notify the MEMR. Existing IPPs must also comply with (likely stricter) requirements under their Sponsor Agreement.
3. Changes to the composition of the BOD and BOC
Under Regulation 48, Non-Geothermal IPPs must notify the MEMR of any changes to the membership of the BOD and/or BOC within (five) working days of providing notification of these changes to the MOLHR. These requirements are far less stringent and easier to implement than those that existed under Regulation 48, which imposed an additional obligation for an IPP to obtain a recommendation from PLN for all changes prior to notifying the relevant ministry.
III.GEOTHERMAL IPP
1. Transfer of Shares
The existing Geothermal Law, Law No. 21 of 2014 (“Geothermal Law”) 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 MEMR. However, this requirement is unclear, and the Geothermal Law appears to only allow a Geothermal IPP to transfer shares by way of public trading or transfer.
In contrast, the now revoked Regulation 42 required Geothermal IPPs to submit a broad range of documentation to the MEMR in order to obtain approval for the transfer of shares. The documentation required extended beyond matters that would be relevant to public trading, and included, for instance, a report on the Identity of the Transferee(s). Because such reports would only be relevant to a private sale, Regulation 42 indicated that it may permit Geothermal IPPs to transfer shares to private purchasers as well as through public trade.
Regulation 48 clarifies matters by expressly distinguishing the formal requirements for the transfer of shares by way of public trading from those relating to transfer through private sale. Please note that Regulation 48 also covers Geothermal Concession Holders, Joint Operation Contractors and Geothermal Resources Permit Holders.
The wording of the Geothermal Law and Regulation 48 suggest that Geothermal IPPs cannot transfer their shares prior to completion of the exploration phase.
Public Trading
Regulation 48 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 states that the Minister must approve such shares transfers prior to the initial public offering (“IPO”), or before the transfer of share ownership is recorded on the stock exchange. Our discussions with the Director General of New Renewable Energy and Energy Conservation (“EBTKE”) clarify that the Minister’s approval will be required both prior to a Geothermal IPP’s IPO, as well as before the transfer of ownership is recorded on the stock exchange for all secondary offerings and rights issuances.
Timing of obtaining the MEMR approval
The MEMR will issue its approval or rejection to a Geothermal IPP for the transfer of shares through public trade within 14 (fourteen) business days after receiving all required documentation.
Private Sale
For transfer of shares conducted privately once the exploration phase is complete, Geothermal IPPs do not need to obtain prior approval from the Minister. Geothermal IPPs must, however, notify the Minister of the transfer within 5 (five) business days from the date of providing notice to and/or obtaining approval from the MOLHR.
2. Change of members of the Board of Directors (BOD) and Board of Commissioners (BoC)
Geothermal IPPs must also notify the Minister of any changes to the membership of the BOD and/or BOC within 5 (five) business days from the date of providing notice of the change to the MOLHR.
IV.CONCLUSION
Regulation 48 is considerably more investor friendly compared to Regulation 42, which imposed stringent obligations with respect to transfer of shares and changes to BOD and BOC composition 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 (both prior and after COD), which would likely cause difficulty in practice, now only apply to Geothermal IPPs for share transfers after the exploration phase and only to transfers that are made through public trading. Regulation 48 drops the requirement for all IPPs to obtain Minister approval for change of the BOD and BOC, requiring IPPs only to report these changes to the Minister. Regulation 48 applies to a broad sweep of Indonesia’s energy and mineral resources industries, and as such reflects an important development of which both new and existing companies must be aware.
For further information, please contact:
Woody Pananto, Partner, Ali Budiardjo Nugroho Reksodiputro (ABNR)
wpananto@abnrlaw.com
