World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Indonesia. View the full guide.
Makarim & Taira S.
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
For a venture capital company established in Indonesia, under Financial Services Authority (“OJK”) Regulation No. 35/POJK.05/2015 on Business Implementation by Venture Capital Companies (“OJK Regulation 35/2015”), the purpose of venture capital activities is to fund investees which have a productive business or ideas to develop a productive business.
In Indonesia, currently venture capital (either foreign or local) is mostly invested in technology start-ups (such as those engaged in e-commerce; financial technology; payment systems; and mobile applications, e.g., transportation, educational, travel, business applications, etc.) but there is also some investment in the offline consumer/retail sector such as food and beverage businesses, sports businesses, etc.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
No, offshore venture capital funds do not require any approvals before investing in Indonesia. However, if the investment is made by an Indonesian venture capital company, the company must have the required license issued by the OJK and comply with the OJK regulations.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
In Indonesia, the most common way for a venture capital fund to invest in an investee entity is either through providing a (convertible) loan or capital participation.
For investment through capital participation by an offshore venture capital fund, in general there is a legal limitation on foreign share ownership in certain lines of business. In Indonesia, foreign share ownership restrictions are imposed under the Negative List of Investment most recently updated in 2016. However, once the relevant offshore venture capital fund becomes a shareholder of an Indonesian company, it will be entitled to all rights as a shareholder of the company.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
The investor will be required to undertake antitrust analysis if it acquires control of a company by way of a merger, acquisition, or consolidation. Law No. 5 of 1999 on Anti-Monopoly Practices and Unfair Business Competition prohibits business actors from conducting mergers, consolidations or acquisitions which might lead to monopolistic practices or unfair business competition. In which case, a post-merger, share acquisition or consolidation notification must be submitted to the Indonesian Competition Commission (Komisi Pengawas Persaingan Usaha) within 30 working days of the date of the transaction if the transaction meets the threshold for notification. The threshold is triggered when the transaction results in (i) the value of the assets of a business entity resulting from the merger, consolidation, or acquisition exceeding IDR 2.5 trillion; or (ii) the value of sales of a business entity resulting from the merger, consolidation, or acquisition exceeding IDR 5 trillion. A different threshold is applicable in the banking sector.
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Under OJK Regulation 35/2015, an Indonesian venture capital company may engage in the following business activities:
a. equity participation;
b. quasi equity participation by purchasing convertible bonds;
c. financing through the purchase of bonds issued by the investee at the start-up stage or business development stage; and
d. financing productive businesses.
In addition to the above business activities, an Indonesian venture capital company can also provide business assistance to the investees. It can also provide services in return for fees, and engage in other activities, with the OJK’s approval.
OJK Regulation 35/2015 requires equity participation by an Indonesian venture capital company to be in the form of direct capital participation in an investee company which is a limited liability company. The maximum term of the investment is ten years, extendable twice for additional five years each to up to an aggregate additional ten years. At the end of the term of the investment, the shares must be divested through:
a. an initial public offering (IPO) in the capital market;
b. a private placement with new investors; or
c. being sold back to the investee (buyback),
so that the venture capital investor does not remain the controlling shareholder of the investee.
Participation through convertible bonds by an Indonesian venture capital company must be via the purchase of convertible bonds or sharia convertible bonds issued by an investee company which is a limited liability company, the purchase of which must be made in notarial deed form. On maturity, the convertible bonds or sharia convertible bonds can be converted into equity participation for a certain term. The conversion must be conducted under a joint agreement between the venture capital investor and the investee.
The above requirements for equity participation and participation through convertible bonds do not apply to foreign venture capital companies.
Participation by providing convertible loans and equity participation is the preferred structure of venture capital deals in Indonesia. The primary driver for selecting one of these structures is the goal of the venture capital investor’s investment in the investee company. Usually, if the venture capital investor wants to invest on a short-term basis, or if it does not want to be too involved in the development of the business or its management, or its business line is not open to foreign investment (if the venture capital investor is a foreign entity), the preferred structure is providing convertible loans. However, if the venture capital investor wants to invest on a long-term basis, or it wants to develop or be actively involved in the company, or if the business line is open to foreign investment (if the venture capital investor is a foreign entity), the preferred structure is equity participation. Note that for offshore venture capital funds providing loans to an Indonesian company, the Indonesian company must file certain reports to Bank Indonesia and the Ministry of Finance.
6) Is there any restriction on rights available to venture capital investors in public companies?
There is no restriction on rights available to venture capital investors in public companies. However, it is still not common for venture capital investors to invest in public companies in Indonesia as public companies can raise funds by issuing bonds or rights or any other capital market instrument.
As mentioned earlier in question 1, under OJK Regulation 35/2015, Indonesian venture capital fund investees which have a productive business or ideas to develop a productive business for the purpose of:
a. Developing a new invention;
b. Developing a company or individual business whose early stage has financial difficulties;
c. Developing micro, small, and medium business and cooperatives;
d. Assisting companies or individual businesses in the development stage or business decline stage;
e. Taking over companies or individual businesses in the development stage or business decline stage;
f. Developing research and engineering;
g. Developing various new technologies and the transfer of technology from domestic and/or overseas; and/or
h. Assisting with the transfer of ownership of a company.
7) What protections are generally available to venture capital investors in your jurisdiction?
Generally, if a venture capital company invests in equity, it is deemed a shareholder of the investee company and accordingly, the protections available to shareholders apply. The liability of a shareholder is limited to the capital that it invests in the company. Usually, preferred shares are issued to venture capital companies, which can be in the form shares with voting rights, shares with a right to appoint directors and/or commissioners, shares with a preferred right to receive dividend, etc. Please note that a foreign venture capital company as a foreign shareholder will also be protected by the laws and regulations on investment.
On the other hand, if a venture capital company invests in convertible loans, it will be deemed a lender to the investee company. A loan is usually secured by certain securities provided by the company or the shareholders, usually share pledges provided by the shareholders.
Under OJK Regulation 35/2015, investors in an Indonesian venture capital fund can be individual persons or entities, either domestic or foreign. The fund is created under an investment contract between the venture capital company and a custodian bank. The investment contract, which is drawn up in notarial deed form, sets out the rights and obligations of the venture capital investors and therefore these investors are protected by the contractual relationship under the investment contract.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
No, warranty and indemnity insurance is not common in Indonesia.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
Typically, the common exit mechanisms adopted in venture capital transactions in the event of equity investment include a private sale to other parties, a buyback by the investee, or an initial public offering (IPO). If the investment is through convertible loans, the common exits are the repayment of the loan or executing the security (which is commonly in the form of a pledge of shares).
An IPO exit has the following challenges:
a. It could be time consuming and have extra costs as it involves many supporting parties, such as underwriters, appraisers, financial and legal consultants, etc.;
b. the venture capital investor must focus on and be committed to developing the investee to prepare it for the IPO, including to develop a profitable company with good corporate governance and a good portfolio; and
c. there were just over 3 million capital market investors in Indonesia at the end of July 2020 compared to more than 250 million Indonesian citizens.
Meanwhile, the challenge of selling to other parties is usually the failure to attract buyers. In many cases, the investee company is sold at a low or discounted price and the venture capital investor suffers a loss of some of the funds invested in the investee.
If the investment is made by way of a convertible loan, the challenge in obtaining repayment of the loan or executing the security is that sometimes the company does not have sufficient assets to repay the debt.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
For investment by way of equity, in practice, venture capital investors usually prefer to exit through a private sale of the business to third parties rather than an IPO for the reasons explained in question 9 above.
Makarim & Taira S.
Want to Learn More?
The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.