Foreign Direct Investment in Indonesia and Thailand

Indonesia and Thailand have always been an attractive destination for foreign direct investment (“FDI”) for a number of reasons, including their geographical location in Southeast Asia, strong supply chain and skilled workforce. Consequently, FDI has played a crucial role in driving economic growth both in Indonesia and Thailand. This article provides the key differences of legal requirements for FDI in Indonesia and Thailand, as well as gives a brief overview of some merger control regulations in said countries.

Indonesia

The Indonesian Investment Law defines foreign investment as an activity performed by a foreigner (either an individual, entity, or government) by investing in a business within Indonesian territory, either by foreign capital participation or by establishing a joint venture company. The term “foreign capital” refers to the capital owned by a foreigner or an Indonesian legal entity (in which the capital is partially or wholly owned by a foreign party). Hence, any foreign capital participation, in any amount, in an Indonesian company will be deemed as a foreign investment. 

As a general rule, all business sectors are open for foreign investment activities. However, in an effort to create an acceptable balance among foreign investors, national interest, local investors and small/medium businesses, the Indonesian government created an investment list, Presidential Regulation No.10 of 2021, which was amended by Presidential Regulation No.49 of 2021. Said investment list comprises of business fields that are: 

1. Open for investment:
   a.    Priority sector, such as strategic national projects, high technology industries, export-oriented sectors and research and development-oriented sectors, which can enjoy certain fiscal/non-fiscal incentives;
   b.    Require a partnership with co-operatives or small and medium size businesses (SMEs);
   c.    Open with conditions, such as foreign ownership limitations and zoning/location; or
   d.    Fully open for all investors.
2. Declared closed for investment (including narcotics, gambling, alcoholic beverages and manufacturing); or
3. Reserved for the central government of Indonesia. 

Furthermore, a foreign investor may only carry out business activities: (i) with an investment value of more than IDR 10 billion (approx. USD 655,000) excluding land and buildings (per business field, per location – with certain exception); and (ii) in the form of a limited liability company established and domiciled in Indonesian territory (locally known as Perseroan Terbatas Penanaman Modal Asing – PT PMA) with at least IDR 10 billion (approx. USD 655,000) of issued and paid-up capital.

Should the foreign investment be made by acquiring an existing company, a post-merger filing requirement under the Indonesian Antitrust Act must be observed if the following criteria are met in cumulative basis (“Mandatory Notification”):

1. The investment transaction is between non-affiliated parties and results in a change of control of the acquired company;
2. The investment transaction meets either of the following thresholds: combined assets value in Indonesia to exceed IDR 2.5 trillion (approximately USD 164 million), or the combined Indonesian sales value to exceed IDR 5 trillion (approximately USD 327 million); and
3. All of the transacting parties in the transaction have assets and/or sales in Indonesia.

While the Mandatory Notification adopts a post-merger notification concept, the Indonesian Antitrust Act however allows a pre-merger consultation, but the opinion rendered by the competition commission (KPPU) in the framework of such a consultation procedure is not binding and does not exempt parties from filing a Mandatory Notification. 

If the KPPU views that a transaction results in a monopolistic or unfair competition practice, it has the broad authority to cancel the transaction in question, although in practice, thus far, there has been no precedent in which the KPPU cancels a completed merger resulting from the post-merger transaction notification (except for a decision by the KPPU in 2007, instructing Temasek group case to sell its entire stake in either Telkomsel or Indosat within 2 years as the result of KPPU’s investigation on the reason that the transfer of shares to Temasek gave Temasek a dominant position decreasing competition level in the cellular market in Indonesia). However, many speculations that this case entails significant political aspect and therefore not pure legal.

Thailand

In Thailand, FDI is mainly governed by the Foreign Business Act B.E. 2542 (1999) (the “FBA”). The FBA restricts a “foreigner” from conducting certain business operations, as provided in the Annexes of the FBA, in Thailand. In this regard, under the FBA, a foreigner refers to:

1. a natural person who is not Thai national;
2. a juristic person not registered in Thailand;
3. a juristic person registered in Thailand of which at least 50 percent of the share capital (i.e., paid-in capital) is held by the persons set out in (i) or (ii) above, and a limited partnership or a registered ordinary partnership whose managing partner or manager is not of Thai nationality; or
4. a juristic person registered in Thailand of which at least 50 percent of the share capital is held by any of the entities set out in (i), (ii) or (iii) above.

In this regard, in order to consider whether a particular company is a foreigner under the FBA, it must be identified whether a shareholder that holds at least 50 percent of the total shares of such particular company is: (1) a natural person who is not a Thai national; or (2) a juristic person registered under a foreign law. If yes, such company would be considered as a foreigner under the FBA.

The restricted businesses are divided into three Annexes as set out below: 

Annex One: Foreigners are strictly prohibited from conducting the businesses listed in Annex One (e.g., land trading and extraction of Thai medicinal herbs). 

Annex Two: Foreigners are prohibited from conducting the businesses listed in Annex Two (e.g., manufacture of sugar from sugar cane and salt farming), as they are businesses which affect national security, arts, culture, tradition, local handicrafts or natural resources and the environment, unless a licence is obtained from the Minister of Commerce (the “MOC”), with the approval from the Cabinet.

Annex Three: Foreigners are prohibited from conducting the businesses listed in Annex Three (e.g., wholesaling and retailing businesses, and service business), as they are businesses in which Thai people are not ready to compete with foreigners, unless a licence is granted from the Director-General of the Department of Business Development of the MOC, with the approval from the Foreign Business Committee (the “FBA Licence”). 

Furthermore, a successful applicant who has duly obtained the FBA Licence must have a minimum capital as required for such FBA Licence. If the applicant is a company registered under the laws of Thailand, the required minimum capital must be no less than 25 percent of the average of the estimated annual expenditures for three years, provided that it is at least Baht 3 million (approx. USD 84,000) for each applied business.

However, in the case where the operation of the FBA-restricted business is promoted by the Board of Investment or conducted in an industrial estate governed by the Industrial Estate Authority of Thailand, among others, a foreigner operating such business is eligible to obtain a foreign business certificate (the “FBA Certificate”) for such business operation instead of applying for the FBA Licence. In general, obtaining the FBA Certificate would be faster than applying for the FBA Licence because the issuance of the FBA Certificate is not subject to the discretion of the MOC officer.

In the case where FDI in Thailand is undertaken by means of a merger and acquisition, the Trade Competition Act B.E. 2560 (2017) (the “TCA”), as the main legislation prescribing merger control regulations, would come into play. The TCA adopts a dual-threshold merger control system, consisting of Pre-merger Approval and Post-merger Notification. Pre-merger Approval is required to be obtained from the Trade Competition Commission (the “Commission”) in the case where a merger may cause a monopoly or result in a dominant position in a market. On the other hand, a Post-merger Notification is required to be notified to the Commission within seven days from the date of the merger if: (i) the aggregate sales turnovers is at least Baht 1 billion (approx. USD 28 million); and (ii) the merger does not cause a monopoly or result in a dominant position in the market (i.e. the merger is not subject to the Pre-merger Approval).

In this regard, “monopoly” refers to being a single business operator in any market which has the power to independently determine price and quantity of its product or service and has a sales turnover in Thailand of at least Baht 1 billion (approx. USD 28 million). A business operator holding a dominant position in a market refers to:

• any business operator in a market of any product or service with a market share in Thailand in the previous year of at least 50 percent and sales turnover in Thailand in the previous year of at least Baht 1 billion (approx. USD 28 million); or 
• any of the top three business operators in a market of any product or service with the aggregate market share in Thailand in the previous year of at least 75 percent and: (i) with sales turnovers in Thailand in the previous year of at least Baht 1 billion (approx. USD 28 million); and (ii) market share in Thailand in the previous year of at least 10 percent.

In practice, it seems that the Commission tends to grant approval for a merger which may cause a monopoly or result in a dominant position in a market by specifying certain conditions instead of disapproving such merger in the first place. This issue is brought into a wide discussion in a renowned case in 2020 where the Commission granted an approval with some conditions for Charoen Pokphand Group (CP)-Tesco acquisition. In addition, a recent judgement of the Thai Administrative Court stated that there was no issue with the Commission’s decision, which has raised huge concerns regarding monopoly among academic scholars and other interested parties about its impact on economy, market competition and consumers.

Authors:
E-mail: Luky Walalangi
E-mail: Jirapong Sriwat
E-mail: Putri Bening Larasati
E-mail: Sukjai Panpasuk
E-mail: Setyaning Kartika Rini

Authors