Private Equity And Venture Capital: Regulatory Overview On Fund Formation In Indonesia

Indonesia has seen remarkable growth in tech investments (see our editorial publications on Indonesian tech deals Vol. 1Vol. 2Vol. 3, and Vol. 4). Most of these investors are Private Equity ("PE") and Venture Capital ("VC") companies, with major interests in continuing their investments in Indonesia. Although many of these PEs and VCs are based overseas, with continuing interest of homegrown investors in Indonesia and creation of investment arms by Indonesia-based conglomerates, it would be worthwhile to explore the regulatory stand points of the formation of PE and VC companies in Indonesia.

In this article, we provide a brief overview on the establishment of PE and VC based on the Indonesian law perspective.

A. General Regulatory Framework of PE in Indonesia: The Indonesian law does not provide any particular framework on the establishment and operation of PE funds. PE activities are resolved through merger and acquisition ("M&A") of companies that have not been publicly listed, which generally comply with provisions under Law No. 40 of 2007 on Limited Liability Company ("Company Law"), or other transaction structures such as convertible notes and security-backed, or in some cases, unsecured loans.

For foreign PE funds directly invested in target companies through acquisitions of shares, it is important to observe the Positive Investment List under Presidential Regulation No. 10 of 2021 on Investment Business Fields ("PR 10/2021"), which stipulates provisions on:

  1. Priority business fields;
  2. Allocated business fields or partnership with cooperatives and SMEs (Small-andMedium Sized Enterprises); and
  3. Business fields with certain conditions.

The provisions are generally applicable to any foreign direct investment in Indonesia, and all investors must comply with PR 10/2021. Furthermore, foreign direct investments shall also comply with all applicable requirements under the Investment Coordinating Board (Badan Koordinator Penanaman Modal or "BKPM"), such as a minimum investment of IDR 10 billion.

B. General Regulatory Framework of VC in Indonesia: While there is no particular legal framework for establishment of a PE, the Financial Services Authority (Otoritas Jasa Keuangan or "OJK") has issued OJK Regulation No. 35/POJK.05/2015 on Implementation of Venture Capital Enterprises ("Venture Capital Enterprises Regulation") and OJK Regulation No. 34/POJK.05/2015 of 2015 on Licensing and Organization of Venture Capital Company ("OJK Regulation 34/2015"). These regulations require VCs operating under the framework of Venture Capital Enterprises Regulation to be licensed by OJK. In this regard, an OJK licensed VC in Indonesia can be a conventional or Sharia-based (i.e., the investment is conducted based on Sharia principles) VC.

According to the Venture Capital Enterprises Regulation, a VC is a financing business entity that conducts capital participation or finances its business partner for a certain period of time to improve the partner's operation (the partner is usually a start-up or an early-stage business) or debtor. Please also note that the regulation requires the capital participation by a licensed Indonesian VC in a form of equity participation for a maximum period of 10 years, extendable two times for a total extension period of 10 years.

Permitted Activities: A licensed VC company (Perusahaan Modal Ventura) is permitted to carries out the following activities:

  1. Managing venture funds of its investors;
  2. Conducting investment services for certain fees; and
  3. Other activities as approved by OJK.

In specific, the investment activities of a VC shall be for the development of, among others, new inventions, Small-to-Medium Sized Enterprises, or new technology

Please note that a licensed VC cannot carry out the following activities:

  1. collecting funds directly from the community (in the form of current accounts (giro) or savings);
  2. granting securities in any form to third parties;
  3. issuing promissory note, except as collateral to the banks;
  4. taking actions that make other financial bodies under OJK supervision incompliant with the prevailing laws and regulations;
  5. taking actions that make other financial bodies under OJK supervision avoid compliance with the prevailing laws and regulations.

C. Sources of Funds of PEs and VCs: Both PEs and VCs raise funds from their investors. PEs can raise the funds through equity or shares, as well as bond issuance, while VCs can raise funds from venture funds in accordance with the Venture Capital Enterprises Regulation. The Indonesian law is generally silent on the requirements and provisions regarding the sources of funding for PEs. The funds are mostly formed overseas through private placements in the PEs. If a PE fund is formed in Indonesia, it would be typically structured under a Limited Liability Company (Perseroan Terbatas or "PT"). In which case, the PT needs to comply with the provisions under the Company Law.

Based on the Venture Capital Enterprise Regulation, the maximum number of investors in a venture funding is 25. These investors should enter a fund formation agreement in the form of a notarial deed. A venture fund should be, at least, IDR 1 billion and it should be placed in an appointed custodian bank.

Furthermore, Article 36 (1) of Venture Capital Enterprise Regulation stipulates that the source of funds of a VC can be as follows:

  1. Venture fund
  2. Loan
  3. Asset securitisation
  4. Medium-term notes
  5. Issued bonds
  6. Subordinated loan
  7. Issued shares
  8. Waqf, referring to the Islamic law
  9. Grant

The parties that can participate in the venture funding include:

  1. The government
  2. State or region-owned enterprises
  3. Financing companies
  4. Indonesian export financing agencies
  5. Banks
  6. Other financing institutions
  7. Multilateral financing institutions
  8. Other business entities
  9. Individuals

D. Licensing Requirements and Forms of Business Entity for PEs and VCs in Indonesia

PE Licensing Requirements and Form of Entity: As mentioned, there are no specific licensing requirements for a PE, and it is typically structured as a PT.

VC Licensing Requirements and Form of Entity: In Indonesia, Article 2 of OJK Regulation 34/2015 stipulates that a VC company can be one of the following business entities:

  1. PT;
  2. Cooperative (koperasi); or
  3. Limited partnership company ("CV")

Although the establishment of a VC in the form of Cooperative or CV is permitted, it is very uncommon.

A VC established in the form of a PT must have a minimum paid-up capital of IDR 50 billion, and a Sharia-based VC in the form of a PT must have a minimum paid-up capital of IDR 20 billion. A VC established as a PT is also subject to a maximum foreign ownership of 85% of its paid-up capital.

With regard to the licensing, please refer to the points below, on the general requirements to obtain the VC Company License (Izin Usaha Perusahaan Modal Ventura) from OJK:

  1. The Board of Directors of the VC shall submit the application to OJK in the form as provided under OJK Regulation 34/2015;
  2. The application must have the supporting documents that include the Deed of Establishment, Shareholder Register, identities of members of the Board of Directors (BOD) and Board of Commissioners (BOC), statement letter of the company shareholders on the source of funding, underlying agreements with the participating investors, evidence of capital injection, proof of operational readiness, work plan, organizational structure, etc;
  3. Upon receiving the complete application, OJK will assess and analyse the application within 30 working days, then issue its approval or rejection on the relevant application in a form of an OJK Decree (Keputusan OJK);
  4. The relevant VC should commence its operation no later than six months after the issuance of the OJK Decree;
  5. The licensed VC must submit a report on the commencement of operation no later than 10 days after the commencement.

The article above was prepared by Marshall S. Situmorang (Partner) and Audria Putri (Senior Associate).

Disclaimer: The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their particular circumstances. For more information, please contact us at