Financing Liabilities in Mining Company Compliance in Indonesia

In international business transaction, it is very common for entrepreneur to conduct the financing or loan transaction. This transaction generally is to support the entrepreneur business activity for certain sector such the construction development, company capital injection, contractor settlement payment, to secure the process of the facilities and infrastructure construction and etc.

Accordingly, before the Bank may proceed with its approval for the entrepreneur financing or loan transaction, the Bank commonly proceed with its full compliance investigation covering Legal Due Diligence and Financial Due Diligence, where each of the corporate sector, license, government approval, capital current condition, debt and other loan, third party agreement, financial recapitulation, financial report and other elements shall be check very thoroughly.

Specifically for the mining company, there is one specific factor that currently becomes a high level of concern or threat for the Bank related with its approval for the financing or loan transaction, respectively for the government approval to the mining company to proceed with its activity for the financing or loan transaction with the Bank.

As you may aware, every entrepreneur who wishes to conduct its business in the mining sector shall require complying with the Law No 4 of 2009 concerning mineral and coal mining (“Mining Law”). At the beginning, the holder of IUP (Mining License) and IUPK (Special Mining License) shall have the obligation to conduct a report for its mining activity which regulated under Article 111 of the Mining Law, as follow “Mining Permit holders and Special Mining Permit holders must submit reports in writing periodically on activity plans and implementation of mineral and coal mining business activities to the Minister, governors, or regents/mayors within their authority”. The detail of this written report shall be governed under Government Regulation.

One of the detail reference that being use for mining activity report is regulated under the Article of 101 to 105 of the Government Regulation No 23 of 2010 concerning the Implementation of the Mineral and Coal Mining Activity (“PP No 23/2010”) covering the written report for the Work and Budget Plan (Rencana Kerja dan Anggaran Biaya/”RKAB”) where Work and Budget plan shall include change of capital activity for the financing or loan transaction governed under the Ministry Regulation of Energy and Mineral Resources of Republic of Indonesia No 27 of 2013 concerning the Procedure and Determination of the Stock Divestment Price, and the Change of Capital Investment in the Mineral and Mining Coal Sector (“Permen No 27/2013”)

Under Article 15 Permen No 27/2013 stipulated that “the Change of Capital Investment only can be conducted after obtained the approval from the Ministry, Governor or Head of Region/Mayor as in accordance with its authority” and the Change of the Capital Investment shall include the following:
- the change of investment and financing resources;
- the change of the company status from Foreign Direct Investment Company (FDI) to the National Investment Company (PMDN) and vice versa;
- the amendment of Article of Associations;
- the change of the Director and Board of Commissioner; and
- the change of Shareholders ownership.

For more detail, the regulation provided in the Article 16 of the Permen No 27/2013 stipulated that the request for the change of investment financial resources as provided before shall be conducted with the following required documents, as follow:

a. Ground / reason for the change of investment and financial resources;
b. Evidence of settlement for the Dead-rent for the IUP Exploration Holder, IUPK Exploration Holder, IUP Operation Production Holder, IUPK Operation Production Holder;
c. Evidence of settlement for production dues consecutively for the period of the last 2 (two) years for the IUP Operation Production Holder and IUPK Operation Production Holder;
d. Evidence of settlement for production dues for the IUP Exploration Holder and IUPK Exploration Holder that owned the temporary license to conducted the transporting and selling activity. And IUP Operation Production Holder specifically for processing and or refinement that harness the connatural mineral;
e. Audited financial report for the last 2 (two) years by the Public Accountant;
f. The Facility or Loan Agreement or Financing and credit Agreement;
g. The Copy of IUP Exploration Certificate or IUPK Exploration Certificate or IUP Operation Production Certificate or IUPK Operation Production Certificate owned by the mining company registered at the General Directorate of Mining and Mineral Resources and has been declared clean and clear.

Furthermore the issue is, that the legal infringement of this provision is not regulated under the Article 30 of Permen No 27/2013 concerning administration sanction. Although such sanction does not stipulated under the Permen No 27/2013, the obligation to obtain the approval from the Ministry, Governor or Head of Region/Mayor as in accordance with its authority for the change of the capital investment and financial resources shall keep binding the mining company.

In practice, this issue has become a very imperative concern from the Bank, considering that to conduct the financing or loan transaction, every mining company must in the full compliance position (comply to all obligation under the prevailing law and regulation) except for other obligation that has yet to arise based on the prevailing law and regulation. Further in practice, the Bank shall request to the mining company to provide a security or guarantee in order for the Bank to have the legal immunity to proceed with its approval for the financing or loan transaction as regulated under the prevailing Indonesian Law.

To understand its broader context, the mining company generally shall provide the following documents of security in the form of:
- Corporate guarantee and certificate;
- Director guarantee and certificate;
- Commissioner guarantee and certificate;
- Comfort Letter;

The following security documents as abovementioned shall become the basis or ground of legal immunity for the Bank to provide the financing or loan transaction to the mining company as regulated under the prevailing law and regulation in Indonesia. Therefore, the security for such compliance can be conducted by the mining company and shall not be waived without exception as agreed in accordance with its due date by both party. As a reminder, the limitation and obligation under the Permen No 27/2013 does not limit the mining company ability to obtain the financing or loan transaction, however in practice the Bank shall be more comfortable if the said financing or loan transaction can firstly be approved or has been agreed under the mining company RKAB.

ABOUT THE AUTHOR: Noverizky Tri Putra Pasaribu S.H LL.M (Adv)
Noverizky Tri Putra Pasaribu holds his bachelor degree from University of Parahyangan and continued his education under the Gulf International Institute at Houston Texas, USA. He earned the privilege to become the Legal Associates at Calehr & Associates, and finished his Master Degree from Leiden University for the Advance Program. He also received Exceptional Scholarship from European Law Student Association (ELSA) for the International Economy Law and Policy Program in the University of Barcelona. His strength is in financial law, banking, mining, oil and gas law, plantation, capital market, commercial dispute, etc.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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