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Company Gets a Capital Injection from Foreign Investors

5 Things You Need to Know Before Your Company Gets a Capital Injection from Foreign Investors

5 Things You Need to Know Before Your Company Gets a Capital Injection from Foreign Investors

From the arrangement deciding the agreement forms to company status.

At the end of February 2020, Tech in Asia reported that, a subsidiary of a company based in the People’s Republic of China JD.Com which conducts e-commerce activities in Indonesia has reached a valuation of over US$ 1 billion. Therefore, becomes the 6th Startup company with Unicorn status in Indonesia, besides Gojek, Tokopedia, Traveloka, Bukalapak, and Ovo.

Not only Startup that holds Unicorn status that constantly looks for funding to run and expand its operational activities in Indonesia, but also other startups and not to mention micro, small, and medium enterprises (MSMEs) which means to continuously develop commercially.

Capital injections for business activities in Indonesia, especially if your business takes the form of a Company (Limited Liability Company or Perseroan Terbatas/PT), can come from local investors from Indonesia itself or foreign investors. Although in 2019 the investment capital injections into startups in Indonesia fell by 40% from US$ 4 billion to US$ 2.4 billion, Indonesia remained the Southeast Asian country that received the most investor’s capital injections, with a share of 59% compared to other ASEAN countries.

Surely, it is very tempting for Companies in Indonesia to find and get a large number of capital injections from foreign investors. However, it is surely important to know and understand about the consequences that will be on the Company and those in the Company such as shareholders, a board of directors, or employees, when the funds from foreign investors enter the Company.

Therefore, before signing and approving the capital injections from foreign investors into your Company, there are 5 important things for you to know:

    It is strongly recommended for the Company to ensure that before the funds are injected by foreign investors, terms and conditions should be stipulated first in a written agreement and signed by both the investors and the Company, as well as other related parties if necessary, in an Agreement. In practice, it is commonly found in Indonesia that a Company receives capital injections from foreign investors into the Company’s bank account beforehand without being preceded by an Agreement. This can be caused by many reasons, from not wanting to bother and expensive to make an Agreement, funds are needed in a short time to carry out operational activities, or there is already mutual trust between foreign investors and Companies which is considered enough to be the basis for injecting funds without making a written agreement.

    Indeed, at the time of a capital injection comes, the absence of an Agreement can be felt more effective and efficient, especially for Companies that intend to use the funds directly to run or expand their operational activities. However, this can lead to problems or requirements that have to be resolved by the Company or other parties in it in the future. Therefore, we strongly recommend making a written agreement, especially in the form of an agreement in advance, to be the basis for foreign investors’ funds being injected into the Company.

    The Agreement made determines the rights and obligations of the Company and parties in the Company to investors, as well as the rights and obligations of investors to the Company. Moreover, the Agreement can also become the basis for fund recording into the Company’s bookkeeping.

    Rights and obligations of the Company on funds in general according to the Agreement scheme are 2, as follows:

    1. Loans or Debts, i.e. investors’ funds enter the Company as debt that must be paid back with interest within a certain period. In this case, the investors do not become a shareholder who owns shares in the company but becomes creditors who have the right to receive repayment of principal debt and interest at the time of maturity. In practice, funds that enter as loans or debts can enter the Company based on a Loan Agreement.
    2. Capitals, i.e. investors’ funds enter the Company as paid-up capital and investors receive shares and rights attached to the shares, such as the right to distribute dividends if the Company records profits in a financial year, the right to vote in general meetings of shareholders, and other shareholder rights. In practice, funds that enter as paid-up capital can be entered into based on a Shares Sale and Purchase Agreement if an investor buys shares from Shareholders, or Shareholders’ Agreement, in terms of investors take part in new shares issued by the Company.

    If funds of a foreign investor enter as paid-up capital of the Company, the foreign investor is legally a shareholder of the Company, and for the person and the Company shall be applied laws and regulations concerning foreign capital.

    In addition to the Agreement form above, another important thing to consider in making the Agreement as the basis for investors’ funds’ entry is to ensure that both the investors and the Company have obtained all the required approvals based on the articles of association and the applicable laws of each party.

    These approvals may take the form of, but not limited to:

    1. Approvals by Board of Commissioners and/or General Meeting of Shareholders, as stipulated in the articles of association and company laws governing each party, such as Act No. 40 of 2007 for the Company;
    2. Approvals required from certain business sector agencies that have the authority to give approvals, such as the Financial Services Authority (Otoritas Jasa Keuangan/OJK) for companies engaged in the financial services sector and registered or have licenses issued by the OJK.

    For Companies that previously had 100% shareholders from Indonesia, either Indonesian citizens and legal entities comprising 100% Indonesian shareholders, the inclusion of foreign capital injections as capital means the inclusion of foreign investors as shareholders of the Company, and changes in the Company’s capital status became a Foreign Capital Investment (Penanaman Modal Masing/PMA) Company.

    This status change is not determined by the amount of capital given by foreign investors or the ownership of shares they owned. Even though foreign investors only have 1% or less of shares in the Company, the Company continues to change its status to PMA.

    The result of this status change is the Company becomes subject to the regulations governing PMA Companies, including the Investment Negative List (Daftar Negatif Investasi), which at the time of this article was written is regulated in Presidential Regulation No. 44 of 2016, which limits certain business sectors of PMA companies. It is very important to ensure whether the Company’s business sector can be run by the PMA Companies before a foreign capital injection enters because if any restrictions are required, it is necessary to do shares transaction again to ensure the share ownership proportion by foreign and local investors comply with applicable laws.

    Based on Regulation of the Head of BKPM No. 6 of 2018, PMA companies must become companies with large-scale businesses. This is indeed different from micro, small and medium-sized Companies as regulated in Act No. 20 of 2008. Companies with large-scale businesses:

    1. has a net of more than Rp10,000,000,000.00 (ten billion rupiahs) excluding land and buildings of business premises based on the latest financial statements, or
    2. has annual sales results of more than Rp50,000,000,000.00 (fifty billion rupiahs) based on the latest financial statements.

    Of course, after becoming a PMA Company, the Company can no longer participate in tenders specifically for micro, small and medium-sized enterprises Companies. Therefore, it is important to ensure that the Company will no longer intend to do business on a micro, small and medium-sized enterprises before foreign investors’ funds enter as paid-up capital in the Company.


    If a foreign investor fund injection makes a foreign investor the majority shareholder in the Company, so-called Acquisition happens.

    Acquisition of a Company must be preceded by steps such as notification in the newspaper 30 days before the Acquisition can be performed, the general meeting of shareholders and other approvals as required by each of the Company’s business sector. Therefore, it is important to ensure the percentage of shares of foreign investors and the steps that must be implemented based on the Limited Liability Company Act before foreign investors’ funds enter as paid-up capital in the Company.

    In addition to announcing in the newspapers 30 days before an Acquisition can be performed, the Company is also required to announce internally to the Employees about the Acquisition plan or Company control changes.

    Changes in the Company’s control also leads to implications and a potential for some employees who do not continue to work at the Company, either by the request of the Company’s new controllers or the employees’ decision after learning the changes in Company control. If such an event occurs, the Employees have the right to severance pay following Act No. 13 of 2003.

Author: Sekar Ayu/Frederik Yu

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