Regulatory Update: Overview of Key Points in the Amendment to the Indonesian Mining Regulatory Framework

On May 30, 2024, the Government of Indonesia (the "GOI") enacted Government Regulation No. 25 of 2024 ("GR 25/2024"), amending Government Regulation No. 96 of 2021 on the Implementation of Mineral and Coal Mining Activities ("GR 96/2021"). This amendment to GR 96/2021 marked a considerable transformation in the regulatory landscape for mining in Indonesia, introducing changes that could have substantial commercial implications for businesses in the sector.

Overview of Key Amendments Under GR 25/2024

GOI enacted an amendment to GR 96/2021 through GR 25/2024 to, amongst others, (i) ensure good mining practices and advance the national downstream program, and (ii) offer legal and investment certainty to holders of mining business licenses issued prior to Law No. 3 of 2020¹. GR 25/2024 includes the following important changes that could significantly affect the mining industry:

• new requirements imposed when applying for an extension of validity of a Special Mining Business License Operation Production Stage (Izin Usaha Pertambangan Khusus Tahap Operasi Produksi, "IUPK-OP") as continuation of Contract of Work (Kontrak Karya, "CoW") granted before Law No. 3 of 2020 ("Legacy CoW Transition IUPK-OP"). These requirements include mandatory participation by Indonesian State-Owned Entity(ies) (Badan Usaha Milik Negara, "SOE") and local parties in the Legacy CoW Transition IUPK-OP holders;
• privilege granted to SOE's subsidiaries in mining sector; and
• ownership of downstream mining business entities.

New Requirements for the Extension of Validity of Legacy CoW Transition IUPK-OP

Before the amendment, there were no requirements to apply for the extension of validity of a Legacy CoW Transition IUPK-OP. Now, GOI has imposed specific requirements that must be fulfilled by Legacy CoW Transition IUPK-OP holders in order to be granted an extension of validity of their licenses. Some notable requirements are: 

• mandatory ownership of integrated domestic processing and/or refinery facilities. It is unclear whether the ownership of the domestic processing and/or refinery facilities must be directly held by the Legacy CoW Transition IUPK-OP holders, or if it can be indirectly held through the ownership of a minimum of 30% shares (directly or indirectly) in a subsidiary – see section further below on "Ownership of Downstream Mining Subsidiary in Integrated Mining Business";
• demonstrating the availability of reserves to support the processing and/or refinery facilities' operations; 
• fulfillment of mandatory SOE's and local investor(s)' shareholding (as elaborated in the next section);
• having considered efforts to increase state revenues²;  and 
• formal commitment to make a new investment, which should at least be in the form of advanced exploration activities and the increase of refinery facilities' capacity, as approved by the Minister of Energy and Mineral Resources (including the Ministry of Energy and Mineral Resources, "MEMR").

The application for extension must be submitted to the MEMR no later than one year prior to the expiry of the Legacy CoW Transition IUPK-OP. The MEMR will also evaluate the application by considering, amongst others, the applicant's performance during operation production. For clarity, these requirements only apply to the extension of Legacy CoW Transition IUPK-OP.

Mandatory SOE(s) and Local Shareholding

To apply for the extension, GOI requires the Legacy CoW Transition IUPK-OP holders to divest their shares such that: 

• the local Indonesian participant holds a minimum of 51% of the total share capital ("Local Shareholding Requirement"); and
• the SOE(s) holds new shares of at least 10% of the total share capital ("New Shares for SOE Requirement"), 

each such percentages shall be maintained on a non-dilutable basis. It may be problematic if not all shareholders will inject capital (prorated to their respective shareholding) into the company, and in such cases, alternative structuring of the capital may be required to achieve the non-dilution effect. 

GR 25/2024 provides limited guidance as to how the Local Shareholding Requirement and the New Shares for SOE Requirement will be implemented. It is expected that GOI will issue further implementing rules.

The Requirement for Issuance of New Shares for SOE shall apply irrespective of the Legacy CoW Transition IUPK-OP holder being a domestic or foreign investment company (penanaman modal asing). 

Furthermore, the Local Shareholding Requirement and the Requirement for Issuance of New Shares for SOE supersede the divestment obligation that had existed prior to GR 25/2024, e.g. even if the deadline for an existing divestment obligation (as may be applicable to the Legacy CoW Transition IUPK-OP holder) falls after the extension is granted, the license holder will need to fulfill these requirements beforehand in order to apply for an extension.

SOEs' Subsidiaries Privilege in the Mining Sector

GR 25/2024 marked a shift in GOI's approach to the mining sector by extending privileges, once exclusive to SOEs, to their subsidiaries as well. Presently, under the new regulation, both SOEs and their subsidiaries are granted the same benefit of an unlimited number of extensions, each with a cap of 10 years, for their mining business licenses during the operation production stage (both IUPK-OP and Mining Business License Operation Production Stage (Izin Usaha Pertambangan Tahap Operasi Produksi), collectively referred to as "IUP(K)-OP"), regardless of whether their mining business is integrated⁴ or non-integrated. Such privileges were only given to SOEs in GR 96/2021, while SOEs' subsidiaries had to follow the general extension terms applicable to non-SOE entities (e.g. a non-SOE entity's IUPK-OP may obtain five or 10 years extension, subject to the type of extraction, and up to a maximum of two extensions). 

While GR 25/2024 does not specify which entities qualify as SOEs' subsidiaries, the Regulation No. 2 of 2023 on Guidelines for Governance and Significant Corporate Activities of SOE issued by the Minister of SOEs, defines an 'SOE Subsidiary' as a limited liability company either (i) majority-owned (over 50% of shares) by an SOE or (ii) under direct control by an SOE.

Ownership of Downstream Mining Subsidiary in the Integrated Mining Business

Previously, IUP(K)-OP holders with integrated downstream activities (i.e. processing and/or refinery for metal mining or development and/or utilization for coal mining) were required to perform these activities exclusively by themselves to achieve and maintain their integrated operation status.⁵ GR 25/2024 amends this approach to include downstream activities conducted by a subsidiary of the IUP(K)-OP holder as part of the integrated mining business classification, which results in the recognition of 'vertical integration' as a form of integrated mining business in Indonesia. For a downstream mining business to be considered under this classification when performed by a subsidiary (i.e. vertical integration), the IUP(K)-OP holder must maintain a minimum of 30% ownership of non-dilutable shares in the subsidiary (direct or indirect ownership). In the case of indirect ownership, the subsidiary and the IUP(K)-OP holder must share the same Ultimate Beneficial Owner (Pemilik Manfaat Akhir).

Prior to the issuance of GR 25/2024, IUP(K)-OP holders with 'vertically integrated' mining businesses were not expressly recognized as achieving the 'integrated' status under GR 96/2021, which resulted in them being subject to stricter regulatory provisions including, amongst others, (i) a shorter timeline to comply with the Local Shareholding Requirement⁶ and (ii) limited extensions for their IUP(K)-OP.⁷  Presently, IUP(K)-OP holders with 'vertically integrated' mining businesses may achieve 'integrated' status under GR 25/2024, thereby benefiting from more lenient regulatory provisions compared to 'non-integrated' mining businesses.

_{1 On June 10, 2020, Law No. 3 of 2020 was promulgated as an amendment to Law No. 4 of 2009 on Mineral and Coal Mining.
2 GR 25/2024 does not further elaborate on the considerations that may be viewed as "efforts to increase state revenues". Further clarification from the relevant authorities would need to be sought on what specific criteria or actions qualify under this provision. 
3 MEMR Regulation No. 9 of 2017 on Procedures for Divestment and Mechanism for the Determination of Divested Shares for Minerals and Coal Mining Business Activities, as amended by MEMR Regulation No. 43 of 2018.
4 An integrated mining business is a mining business that carries out both (i) upstream mining activities and (ii) downstream mining activities (i.e. processing and/or refinery for metal mining or development and/or utilization for coal mining).
5 In addition to other regulatory requirements, such as availability of extractives reserves (and in case of coal mining, minimum production percentage).
6 For example, non-integrated open pit mining businesses must divest 51% of its shares to local Indonesian participants by the 15th year of production, while integrated open pit mining businesses must do so by the 20th year.
7 Non-integrated mining businesses are subject to a maximum of two extensions, while integrated mining businesses may obtain an unlimited number of extensions.}

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