Indonesia’s Financial Services Authority clarifies types of investments by Indonesian venture capital companies

VC companies in Indonesia are now required to operate as either:

• a venture capital corporation, focusing on capital participation activities, purchase of convertible debt instruments, and venture fund management; or 
• a venture debt corporation, focusing on financing activities. 

A VC company must choose to operate within only one of these two categories. 

VC companies may, however, also engage in (i) fee-based activities, with prior notification to OJK, and (ii) other activities, with prior approval from OJK.

• The term “Collective Investment Contract” (Kontrak Investasi Bersama) now has a clearer regulatory basis as a binding contract for (and therefore is enforceable by and against) a venture fund’s investors. “Venture Fund” (Dana Ventura) is defined as a fund involving the collection and management of funds invested by holders of participation units in the Collective Investment Contract. 
• Regulation 25 reaffirms that a venture fund is a distinct legal contract, rather than merely a source of funds for a venture company. A VC company’s role is to manage (as a general partner of) a venture fund, while the role of investors is to invest in units of the venture fund. In other words, a VC company is an entity that deploys investments made by specific investors as unit holders. This regulatory amendment therefore expressly recognises that a venture fund can exit from its investment (ie, divest). 

• Regulation 25 increases the permitted number of investors in a capital venture fund from 25 to 50, allowing more flexible fund formation and the structuring of a limited partnership agreement for the fund. Regulation 25 also extends the maximum term for a capital venture fund’s lifecycle to 10 years, which may be extended for a further five years. The new regulation effectively removes the previous understanding that a venture fund’s investments should be short-term and temporary. These changes should help venture funds improve the strategy for and management of their investments. 
• Regulation 25 requires a “venture capital corporation” to participate in investments through capital and/or convertible debt instruments representing at least 51% of total funds deployed by the “venture capital corporation”, at all times. Further, participation through capital and/or convertible debt instruments of a “related party” (as defined in Regulation 25) is capped at no more than 10% of the VC company’s equity, while participation in a non-related party is capped at 20 percent of the VC company’s equity. 
• Significantly, Regulation 25 clarifies that capital participation by a “venture capital corporation” can also be made into a non-Indonesian legal entity engaging in business activities in Indonesia. It is not clear what would satisfy the criterion of “engaging in business activities in Indonesia”. For example, it is unclear whether an investee with 10 Indonesian customers would satisfy this criterion. 
• Regulation 25 introduces four new divestment mechanisms for participations by venture capital corporations: (i) takeover by another investor, (ii) sale of shares to another VC company and/or new investor through a private placement, (iii) winding down or liquidation, and (iv) other corporate actions. Divestments through (iii) and (iv) must be conducted in accordance with the requirements of the Indonesian Company Law. Regulation 25 seems to appreciate market developments by recognising the winding down of an investee as an acceptable exit scenario for a VC company. Under the previous regulation, it was unclear how OJK would view a VC company’s decision to participate in the winding down of an investee in the context of its exit from that investee. 

• Regulation 25 introduces a new category of “venture debt corporation” as a type of business activity for VC companies. A debt venture will primarily buy debts issued by start-ups or micro, small and medium enterprises (MSMEs). Regulation 25 sets out the criteria (from the perspectives of capital and annual sales) of the types of start-ups or MSME in which a VC company can participate. A debt venture must maintain equity of at least 25 billion rupiah (~US$1.57 million) at all times. 
• A VC company can partner with a debt venture corporation for channelling or joint financing investments. In relation to channelling, no new key concepts are introduced by the amendment. The construct remains the same, whereby the risks relating to a channelling-based investment remain with investors, while the VC company acts as an investment manager receiving fees from its investors for its management services. 

An Indonesian VC company can raise funds in various ways, including by issuing debt or equity. Regulation 25 requires a VC company to undertake full hedging for all funding elements, including the investment returns it plans to distribute to investors, where these funds are denominated in a foreign currency (eg, a US dollar fund).