This country-specific Q&A provides an overview of Lending & Secured Finance laws and regulations applicable in Indonesia.
Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
In Indonesia, foreign lenders do not have to be licensed or obtain regulatory approval in order to lend money to Indonesian borrowers, or take benefit of security over assets in Indonesia. However, Indonesian borrowers of offshore loans must submit certain offshore loan reports to Bank Indonesia and the Ministry of Finance. Indonesian borrowers are also required to obtain a minimum credit rating equal to BB- from a rating agency acknowledged by Bank Indonesia, unless they are eligible for an exemption under the regulations.
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
According to the freedom of contract principle under the Indonesian Civil Code (“ICC”), the parties to an agreement may agree on the interest rate to be charged on payments. Therefore, the lender can charge interest on a loan as long as the rate has been agreed to by the parties to the loan agreement. However, an extortionate or outrageously high interest rate will most likely not be enforceable.
Under the Indonesian Civil Code in conjunction with Staatsblad No. 22 of 1848 (a Dutch regulation issued before Indonesian independence), the interest rate was set at 6% per annum, and it only applies if no other rate has been agreed to by the parties to the loan agreement.
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
Yes. Under the prevailing Bank Indonesia regulations, foreign currency offshore loans received by Indonesian borrowers, in cash generated from loan agreements, must be received through banks in Indonesia (including foreign bank branch offices) that are licensed to engage in banking activities in foreign currencies by Bank Indonesia (“FX Banks”). Indonesian borrowers must report the drawing down of any offshore loan must to Bank Indonesia by the 15th day of the following month along with supporting documents proving that it has been drawn down through an FX Bank.
On the conversion of Rupiah to a foreign currency, if the total amount of the foreign currency that the Indonesian borrower plans to purchase from local banks will exceed USD25,000 (or its equivalent in other currencies) per month per customer, it may only do so for one of the underlying transactions specified in the prevailing Bank Indonesia regulations which include, among others, the repayment of foreign loans.
The Indonesian borrower must also submit a copy of the underlying transaction document (such as the loan agreement) to the relevant local bank for any outgoing transfer in foreign currency of more than US$100,000 (one hundred thousand United States Dollars) or its equivalent in another currency.
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction.
Real property (land), plant and machinery
Real property (land) and immovable assets attached to the land such as plant can be secured by a land mortgage.
Meanwhile, machinery and other movable assets can be secured under a pledge or fiduciary security. A pledge is a possessory security so the machinery secured must come into the physical possession of the pledgee or no longer be in the physical possession or control of the pledgor. A pledge over machinery need not be registered. A fiduciary security is a non-possessory security right. Since it is a non-possessory security right, the machinery may remain in the physical possession of the fiduciary grantor. Any fiduciary security over machinery must be registered with the fiduciary registration office as evidenced by the issuance of a fiduciary security certificate. Therefore, machinery is usually secured under a fiduciary security instead of a pledge.
Equipment is secured under a pledge or fiduciary security. Our explanation above on the machinery and other movable assets also apply to equipment.
Receivables are secured under a fiduciary security.
For security over receivables, the debtor must be notified of and acknowledge the assignment of receivables before the assignment becomes effective (and therefore enforceable) against the debtor. In practice, it is common for this notice and acknowledgement to be provided in advance upon the signing of the security over receivables.
Shares in companies incorporated in Indonesia.
Shares in Indonesian companies can be encumbered under a pledge or fiduciary security. For foreign security grantors, they can only secure the shares by pledge.
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
Land mortgage security and fiduciary security can be granted over the future assets of a company, but a pledge cannot automatically cover future assets. A new pledge agreement or an amendment to a pledge agreement is required to cover future assets, and they must be delivered to the pledgee to be kept in its possession.
Under Indonesian law, a security interest is of an accessory nature, which means that a security interest is conditional upon the existence and validity of the underlying secured obligation(s) (such as, a facility agreement). Given the accessory nature of security in Indonesia, it cannot cover future (payment) obligations. The obligations secured must exist before the security is provided.
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
No. Separate agreements are required depending on the type of security or assets as explained in 4. above.
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
Yes. A fiduciary security agreement must be drawn up in notarial deed. Meanwhile, a land mortgage security must be drawn up in a land mortgage deed. The relevant parties need to appear before the notary to execute a deed of fiduciary security agreement and the land deed official to execute a land mortgage deed.
A pledge agreement is not legally required to be drawn up in notarial deed. Therefore, the parties can sign it privately or in notarial deed.
Are there any security registration requirements in your jurisdiction?
Yes. Land mortgage security must be registered with the relevant Land Office through electronic mortgage security, and an electronic Mortgage Security Certificate (Sertifikat Hak Tanggungan elektronik) will be issued as evidence of the registration. Meanwhile, a fiduciary security must be registered with the Fiduciary Registration Office, and a fiduciary security certificate will be issued as evidence of the registration.
The ICC does not require a pledge to be filed or registered with any authority in Indonesia. However, specifically for a pledge or fiduciary security of shares, under Law No. 40 of 2007 on Limited Liability Companies (as amended) (“Company Law”), a pledge or fiduciary security of shares must be recorded in the company’s shareholders register and the special register (if relevant).
For a pledge of shares in a listed company, the shareholder must submit a registration of pledge the shares in writing to the Indonesian Central Securities Depository (PT Kustodian Sentral Efek Indonesia – “KSEI”).
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement?
Under Indonesian law, a Rp10,000 (around US$0.70) duty stamp must be affixed to documents used as evidence of a civil case. Therefore, IDR10,000 must be paid and affixed to all security documents.
The amount of fees payable for the registration of fiduciary or land mortgage depend on the secured value of the fiduciary security or the land mortgage. Registration fee may be payable for the registration of a pledge of shares in a listed company to the KSEI. No fee is payable to register a pledge of shares in the shareholders register of a non-listed company.
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?
In the absence of a binding precedent or specific legal provisions, an Indonesian court may require a certain commercial interest to exist or a corporate benefit to be derived before a company can issue a guarantee of a debt or provide a security interest over its assets to a third party or before it undertakes to indemnify a party against losses, costs, expenses and the like caused by a third party (or another company). Under Article 35 (2) of the Company Law, a claim related to the principal amount of a debt against a company can be converted into equity if it is the result of, among other things, the enforcement of a guarantee provided by the company for a third party’s loan and the company has actually received a monetary benefit or goods with a monetary value. Although this provision only seems to apply to debt to equity swap transactions, it implies that a company can only provide a corporate guarantee if it provides the company a corporate benefit.
Are there any restrictions against providing security to support borrowings incurred for the purposes of acquiring shares: (i) of the company; (ii) of any company which directly/indirectly owns shares in the company; or (iii) in a related company?
No restrictions apply to privately-owned companies. However, if the guarantee or security is provided by a listed company or to secure the debts of a listed company for the above purposes, it may be deemed an affiliated or conflict of interest transaction and subject to certain requirements.
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
Yes, they can.
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?
A withholding tax applies to interest and fee payments made by borrowers to domestic or foreign lenders.
If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?
In general, a withholding tax of 20% applies to interest and fee payments made by borrowers to non-resident lenders, subject to any tax treaty. Tax treaty rates range from 0/5 – 0/15, depending on the country.
Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction?
As a general rule, any interest or fee paid by the borrower to the lender is deemed taxable income.
Are there any tax incentives available for foreign lenders lending into your jurisdiction?
Foreign lenders from countries that have a double tax treaty with Indonesia may enjoy certain income tax incentives for providing loans in Indonesia.
Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.
We are not aware of a financing structure ever being challenged by the Indonesian tax authorities. However, in the PT Indah Kiat Pulp & Paper Tbk (“PT Indah Kiat”) against foreign creditors case, as the borrower and security provider PT Indah Kiat challenged the validity of the financing structure because of tax issues and the courts declared the financing transactions null and void. However, in its Judicial Review the Supreme Court ruled in favour of the lenders.
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
There is no legal prohibition against entering into a loan agreement governed by a foreign law. It is common for foreign banks to choose a foreign law (such as English law) as the governing law of their agreements. However, in the past, Indonesian judges have issued conflicting rulings on the recognition of foreign choice of law clauses. In several precedents the Indonesian court disregarded a foreign choice of law clause and applied Indonesian law. Even if foreign law applies, the court will still consider Indonesian law to make sure that no infringement of Indonesian law has occurred. However, the Indonesian legal system does not rely on precedent.
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
The judgment of a foreign court (including an English or USA court) is not directly enforceable in Indonesia. To enforce a foreign court judgment in Indonesia, a party is required to file a suit in the relevant district court and the foreign judgment will be given such evidentiary weight as the Indonesian court deems appropriate. The Indonesian court is not bound by the findings of the foreign court.
Indonesia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
What (briefly) is the insolvency process in your jurisdiction?
Under Law No. 37 of 2004 on Bankruptcy and Delay of Payment (“Bankruptcy Law”), 2 types of proceedings may be initiated against distressed debtors: (i) Bankruptcy; and (ii) Delay of Payment.
In both, creditors must submit their claims to the receiver or administrator. The claims will then be verified and if acknowledged, the creditors will be entitled to repayment and will have voting rights during the Bankruptcy/Delay of Payment proceedings. In both proceedings, the debtor must submit a composition plan for the creditors’ approval (and if approved, it will be reviewed by the court). If the bankruptcy estate has been declared insolvent, the supervisory judge will hold a creditors’ meeting on the liquidation of the bankruptcy estate and, if necessary, verify the claims.
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
Under the Bankruptcy Law, creditors holding certain security rights over the bankrupt asset may enforce their rights as if the bankruptcy had never occurred. However, the Bankruptcy Law waives the rights of secured creditors (and any party whose assets are under the control of the bankrupt) to foreclose their security for 90 days from the date of the bankruptcy declaration. The 90 day stay period (which does not apply to security in the form of cash or the right to set-off) is intended to give the receiver time to decide how to administer the bankruptcy and to ensure the orderly handling of the bankruptcy.
Please comment on transactions voidable upon insolvency.
Any transaction entered into by the bankrupt party before its bankruptcy may be cancelled if it harms the interest of the creditors. The court may only cancel the transaction if it is proved that at the time the transaction was entered into, both the bankrupt party and its counter party knew or should have known that the transaction would harm the interests of the creditors.
If the transaction was entered into less than a year before the bankruptcy declaration and the bankrupt party was not required to enter into the transaction, both the bankrupt party and the counter party are deemed to have known or should have known that the transaction would harm the interests of the creditors if certain circumstances existed according to the Bankruptcy Law.
Is set off recognised on insolvency?
Yes, under the Bankruptcy Law, parties with debts to a bankrupt party may ask to set-off their debts if they were incurred before the bankruptcy ruling. However, a party that takes over the debt of a third party before the bankruptcy ruling may not ask for it to be set-off if it was not acting in good faith when it took over the debt. No debt taken over after the bankruptcy ruling may be set-off.
Are there any statutory or third party interests (such as retention of title) that may take priority over a secured lender’s security in the event of an insolvency
Priority may be given to a “privileged” creditor (the government for taxes, a state auction house for auction fees, employees for wages) or a “secured” creditor (holding security rights). A privilege is a right granted by law to one creditor over another, arising as a result of the nature of the debt. Unless the law states otherwise, secured creditors take precedence over privileged creditors, whilst among privileged creditors, ranking depends on the nature of the privilege.
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
We do not see any foreseeable reforms that may have material impacts on offshore lending in Indonesia.
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
According to the data provided by Bank Indonesia, offshore loans have increased for the last 10 years. However, we do not have data on the proportions of the types of offshore loans. Nevertheless, in our view, loans from traditional banks are still dominant in Indonesia.
Please comment on external factors causing changes to the drafting of secured lending documentation and the structuring of such deals such as (i) Brexit (ii) LIBOR transition and/or (iii) COVID 19
We do not believe that Brexit has caused certain changes to or affected the drafting of lending documentation with Indonesia companies.
For the LIBOR transition, a loan agreement should include at least a screen rate replacement event clause in the APLMA standard form that will generally govern the LIBOR transition.
Regarding the covid-19 pandemic, Bank Indonesia issued Bank Indonesia Regulation No. 22/7/PBI/2020 on Adjustments to the Implementation of Certain Provisions of Bank Indonesia Affected by Corona Virus Disease 2019 (COVID-19) Pandemic (“PBI 22/7/PBI/2020”). Under PBI 22/7/PBI/2020, certain adjustments (relaxation) have been made to various requirements to report to Bank Indonesia. They may impact an Indonesian borrower’s obligation to report to Bank Indonesia which is usually included as an undertaking of the borrower in a loan agreement. However, since the implementation of PBI 22/7/2020 is situational (because of covid-19 pandemic), this should be checked on when the transaction is to be executed.
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