Indonesia is a conducive place for investment and establishing a company in terms of markets, resources and investment climate. Companies may find themselves fortunate enough to reap good profits and run their businesses smoothly in this country.

Business Law

Often regarded as the world’s biggest archipelago, Indonesia encompasses 17,500 islands and has become one of the world’s emerging markets. Being one of the largest economies in Southeast Asia, Indonesia is seen as a young democratic country owing to its political stability which was progressively maintained since emerging from decades of autocratic rule. This economic growth and urbanisation have fueled the demand for infrastructure with petroleum and minerals continue to make up majority of the exports. As a step to continue reforming its investment climate, the government has opened sectors for investment to cope with the status of newly industrialised economy.

In Indonesia, the legal system here is based on civil law and in civil law systems, codes and statutes are designed to cover all cases.

In modern countries, a company is commonly classified as either public or privately-held, which depends on whether securities are publicly traded on the open market, into a government owned company or private company depending on the government ownership, financial company or non-financial company depending on its main business.

It is no different in Indonesia, as these categories are practised here as well. One of the unique aspects here is that a well-established legal practice mainly uses a dichotomy of company types that is not popular in foreign countries, which are:

  • A company with foreign direct investment (Penanaman Modal Asing or PMA), OR
  • A company with 100% domestic direct investment (Penanaman Modal Dalam Negeri or PMDN).

The participation of small and large business enterprises has increased and has adversely contributed to the economic development-planning program. Not only there has been an increase in capital accumulation and assets, enlistment of human resources, but also in business resources which creates a business cycle from time to time. Among the business entities prevalent in the Indonesian business sector, the one that dominates is the Limited Liability Company.

A Limited Liability Company is known as Perseroan Terbatas or PT. Under a PT, the shareholder liability is limited to the extent of capital agreed to be contributed by the shareholders. The Indonesian Business Law divides the PT into 2 classes which are:

  1. Local Company and PMDN Company
  2. PT PMA

Government plans on how regulate these companies differently becomes a national issue, as this is one of the main standards to evaluate how effectively and willingly the Indonesian government develops its economic policies. The types of companies are handled differently in accordance to the laws, regulations, actual legal practice, and based on whether a company has a foreign shareholder.

PT PMA in Indonesia

The Indonesia’s Law No. 25/2007 states that a foreign investment in the country is defined as an activity carried out by a foreign investor for the purpose of running a business within the jurisdiction of Indonesia.

A foreign national, foreign company, or foreign government body can conduct a business and generate revenue through a legal entity which is the PT PMA. The establishment of PT PMA is regulated by Law No. 40/2007 on Limited Liability Companies under the Company Law. This type of company can either be partially or 100 percent foreign-owned. There are several industry sectors in Indonesia which are closed or partially closed to foreign investment hence ownership restriction may be in place depending on the industry.

The capital requirements for limited companies can be quite large. The minimum authorized capital required for establishing a 100 percent foreign-owned PT PMA is more than Rupiah 10 billion, which is determined by the government. Under the purview of Indonesian law, the PT PMA is categorized as a legal entity which is a capital alliance with a minimum of 2 shareholders. The shareholders can be either individuals or other companies that are legal entities.  

The regulations under Indonesian Law for Limited Liability Companies establish a ‘two-board’ system of governance for PT PMA companies which are:

  1. The Board of Commissioners – Supervises the performance of the Board of Directors and policies made by the board, provides advice to the board.
  2. The Board of Directors – Manages the company’s operations and serves as the authorised organ and representative of the company in all matters which is subject to compliance with law, as well as the company’s rules and resolutions of the general meeting of shareholders.

Corporate Structure in Indonesia

Shareholders are regarded as the owner of the company thus they hold the highest position in the hierarchy of decision-making through the General Meeting of Shareholders (GMS).

The Board of Commissioners (BOC) is responsible to supervise management policies and advise the Board of Directors (BOD). Following the Company Law in Indonesia, the Board of Directors are mostly responsible for the company’s management and fluent operations.