Law No. 5 of 1999 on the Prohibition of Monopoly and Unfair Business Competition Practices (Indonesian Competition Law (ICL)) was introduced in March 1999 and entered into force one year later. The ICL has multiple objectives, which include securing public interest and national efficiency; providing equal business opportunity; preventing monopoly and unfair business competition practices; and creating effective and efficient business. In order to achieve these objectives, the ICL essentially prohibits all restrictive business practices, which are, under the current ICL, categorised into three sections comprising prohibited agreements, prohibited conducts and abuse of dominant position. Prohibited agreements cover agreements harming competition, such as those related to price fixing, market allocations, boycotts, tying-in and exclusive dealing. The ICL also prohibits business conducts hampering the competition, such as price and non-price discrimination, refusal to deal, bid rigging and misappropriation of business secrets. Finally, the ICL also stipulates the dominant position in the provisions relating to the prohibition of abuse of dominant position, interlocking directorates, cross-ownership and mergers and acquisitions.
The ICL mandates the establishment of a national competition institution – the Commission for the Supervision of Business Competition (KPPU) – for enforcing the ICL. The KPPU’s commissioners shall be elected by the parliament for a five-year term. In December 2012, the Indonesian parliament elected nine commissioners to the KPPU for a term running from 2012 to 2017. This is the third such term since the establishment of the KPPU in 2000. The nine individuals who were voted in comprise both new commissioners and those serving in the previous period; most are economists, while a few others are legal practitioners. From this strong professional and academic expertise in economics, the KPPU could be expected to apply more economic analysis and approaches over the next five years. Issues concerning the KPPU’s internal capacity to build and amend of the ICL may become the top priorities of the newly appointed commissioners. On the business side, the KPPU will put more focus on the national strategic sectors (such as oil and gas) and other business industries with high concentrations. With regard to regional issues, promoting competition policy within the framework of ASEAN and APEC may emerge as the goals of the newly elected commissioners.
Guidelines and relevant regulations
One of the KPPU’s mandated duties is to develop guidelines related to the ICL. The KPPU has issued about 34 implementing regulations, many of which – in an effort to clarify the provisions of the ICL – are guidelines on the application and interpretation of these provisions. The regulations provide further guidelines on, for example, intellectual property rights, relevant markets, franchising, interlocking directorates, collusive tendering, cartels, mergers and acquisitions, and abuse of dominant position. Besides this, the KPPU has issued regulations related to its case-handling procedure. The M&A articles in the ICL require government regulation in order to be enforceable thus, aside from the KPPU regulation on mergers and acquisitions, there is also government regulation on the issues.
Scope of the ICL
The ICL applies not only to individuals but also business entities engaging in economic or commercial activities. Referring to the ICL, the term ‘business participant’ includes ‘individuals or corporations, either incorporated or not incorporated as legal entities, established and domiciled or conducting activities within the jurisdiction of the Republic of Indonesia, either independently or jointly based on agreement, in various business activities in the economic field’. The ICL also introduces the term ‘group of business participants’, which is not clearly defined in the ICL but it may have a similar interpretation to a single business participant, and thus it can be seen as a single economic entity. The KPPU has attempted to interpret this term by referring to the single economic entity concept in the Temasek case (2007). The KPPU considers that there is a single economic entity between a parent company and its subsidiaries when subsidiaries are not independent in determining their company policy direction, which can be seen from various factors such as the control of the parent company towards the management of subsidiaries, the benefit of the subsidiaries taken by the parent company and the arrangement of the subsidiaries’ policies in line with the policies of its parent company on marketing and investment.
The ICL adopts exemptions for certain conducts or agreements that are intended to implement applicable laws, agreements related to intellectual property rights, technical standard agreements of a product that do not impede competition, agency agreements, cooperation agreements in the field of research and development, international agreements ratified by the government of Indonesia, and export-import agreements that do not disrupt domestic supply. In addition, the ICL also provides exemptions for small businesses and cooperatives aimed specifically to serving their own members. Moreover, the ICL also applies a specific approach to the industries related to the livelihood of people at large, which are monopolised by the state-owned enterprise.
Indonesian Competition Commission
Duties and powers
The ICL gives the KPPU duties, inter alia, to evaluate agreements and business conducts including misuse of dominant position. The KPPU shall also provide competition-related policy recommendations to the government. The ICL allows the KPPU to commence investigation based on the report, a complaint from a third party (such as businesses or consumers) or upon their own initiative. In performing its duty the KPPU is equipped with various powers, including the power to summon or subpoena individuals, businesses, witnesses and experts, and to request documents or information from relevant parties or government institutions. The KPPU may also issue decisions and impose administrative sanctions. Since the KPPU does not have the authority to perform dawn raids or investigatory search and seizure orders, the KPPU has initiated cooperation with the national police to ensure the effective investigation of the competition cases.
Strategy and policy of the KPPU
The policy of the KPPU is directed to achieve the target of the national policy, which is economic development. One of the main targets of the KPPU is to increase buying power through effective competition law enforcement. The strategies of the KPPU include increasing efficiency in goods or services distribution and improving trade supervision. Moreover, the KPPU will focus on the policy recommendation to the government related to specific regulation that may give rise to excessive price and market allocation, as well as dominant position of the state-owned company.
Rules on procedures or case handling
Rules on procedures for case handling are further regulated under the KPPU Regulation No. 1 of 2010 on Case Handling Procedure. This regulation separates the function of the Commissioners Council, which comprises commissioners of the KPPU and the investigators, comprising the KPPU Secretariat’s staffs. The Commissioners Council has the task of examining and making a decision on a case, while the investigators act as plaintiff or prosecutor during the adjudication process before the Commissioners Council, whose tasks are to present the case and evidence. Thus, the defendant has to face the investigators during the proceeding while the Commissioners Council will be the ‘judge’. Under KPPU Regulation No. 1 of 2010, an injured company or party may seek for compensatory damages as the plaintiff before the KPPU proceeding, and bearing the burden of proof, which is similar to the private litigation in a civil court.
Until now, most of the cases handled by the KPPU involving allegations of collusive tendering or bid rigging mostly dealt with vertical collusion in the state-owned enterprises. To date the KPPU has investigated 266 cases and issued 205 decisions. Of these, the KPPU has initiated more than 37 cases.
Types of evidence accepted as proof of the violation of the ICL include:
- witness testimonies, from those who are aware of the alleged infringement;
- expert testimony, ie, information or a statement provided by an expert on the certain aspect or issues that can be used as evidence before the KPPU;
- letters or documents that may include authentic documents, privately executed documents, government-issued or public documents, documents containing the business activities of relevant parties, and other letters or documents that may relate to the case under investigation;
- indications and leads, which can be the expertise of Commissioners Council where it is accepted as fact; and
- testimonies from the alleged responsible business. These are not defined in KPPU Regulation No. 1 of 2010. Under the Indonesian criminal procedural code, the defendant’s testimony – which is given during the hearing and comprises an act the defendant has carried out, has knowledge of or has personally experienced – can also be considered as evidence.
Application of circumstantial evidence
KPPU Regulation No. 4 of 2010 on cartels accommodates circumstantial evidence for proving the existence of a cartel. Circumstantial evidence includes any evidence of communications or economic evidence, such as price fluctuation. However, this requires additional analysis – for example, the cause or purpose of the pricing policy as well as market structure, product homogeneity, existence of close substitutes, price adjustments, standardised prices, excess capacity, number of sellers and barriers to entry. Analysis of the market performance may include indication of a high level of profit or unreasonable excessive pricing, and analysis of facilitating devices, such as resale price maintenance, most favoured country and meeting competition clauses. However, the application of circumstantial evidence in competition cases under the Indonesian legal system is still under debate and has even been rejected in some district courts.
Administrative sanctions as covered by the ICL include the termination of anti-competitive agreements, orders to end the anti-
competitive practices, compensatory damages, and fines in the amount of 1 billion rupiahs to a maximum of 25 billion rupiahs for each company (defendant).
Criminal sanctions and proceedings
Criminal sanctions provided by the ICL are criminal fines ranging from 1 billion rupiahs to 100 billion rupiahs, or imprisonment ranging from three to six months. Besides this there may be additional sanctions, including the revocation of business licences, an order prohibiting the individual responsible from serving as director or commissioner in a company for a minimum of two years and a maximum of five years, and an order to cease certain activities or conducts.
Besides the criminal sanctions, the criminal proceedings can also be initiated against those refusing either to present before the KPPU or to provide data and information requested by the KPPU, as well as those who do not comply with the KPPU’s decision.
The ICL contains the prohibition of horizontal restrictive agreements, which cover agreements related to price fixing, market allocation, group boycott, bid rigging and conspiracy or concerted practices that may restrict competition and harm consumers. The ICL also covers vertical agreements that are generally reviewed under abuse of dominant position analysis, such as vertical integration, exclusive dealing, resale price maintenance, refusal to deal, tying and discriminatory practices. The ICL applies a per se illegal approach to some provisions while others are enforced under a rule of reason approach. The per se illegality approach does not require in-depth analysis by the KPPU to determine a violation of the ICL. On the other hand, the rule of reason approach, which is reflected from the phrase ‘which may result in the occurrence of monopoly or unfair business competition’ requires the KPPU to assess the effect of the agreements or conducts in the market or to competition.
Precedent of administrative and criminal sanctions in cartel cases
The most recent of the cartel cases was the collusive tendering in the scheme to implement electronic national identity (e-ID) cards (Case No. 03/KPPU-L/2012). The KPPU found horizontal collusion (collusion between the tender participants) as well as vertical collusion (collusion between the tender committee and tender participants) in the e-ID card scheme. In this case, the KPPU believed that the tender committee had engaged in an illegal conspiracy with PNRI Consortium and PT Astragraphia by coordinating the volume of product to be supplied and facilitating PNRI Consortium’s bid victory. The total fines imposed by the KPPU against PNRI Consortium amounted to 20 billion rupiahs, while PT Astragraphia must pay fines totalling 4 billion rupiahs. So far, there is no precedent of the imposition of criminal sanctions in the cartel case.
Mergers and acquisitions
Mergers and acquisitions which may result in monopoly and/or unfair business competition practices are prohibited by the ICL. This provision is further explained in Government Regulation No. 57 of 2010 on Mergers, Consolidations and Acquisitions. For the implementation of this rule, the KPPU has issued KPPU Regulation No. 3 of 2012 on the Guidelines for Mergers, Consolidations and Acquisitions (New Guidelines) that replaces KPPU Regulation No. 10 of 2011 (Old Guidelines).
The KPPU has also issued a separate regulation that sets out the procedure for the imposition of fines for failure to notify a completed or executed merger (Commission Regulation No. 4 of 2012). These regulations will enable the KPPU to monitor all mergers and especially those that are anti-competitive.
Mergers with the following criteria must be notified to the KPPU:
- the value of total assets of the company resulting from the merger exceeds 2.5 trillion rupiahs; or
- the value of total sales (turnover) of the company resulting from merger exceeds 5 trillion rupiahs.
For a merger between two or more banks, the threshold for notification is 20 trillion rupiahs for combined assets. If one of the parties is a bank and the other is a non-bank, then the threshold for notification is 2.5 trillion rupiahs for combined assets. The scope of this threshold involves not only the assets and/or sales of the merging companies but also the assets and/or sales of companies directly or indirectly controlling, or directly or indirectly controlled by, the merging companies. According to the New Guidelines, the assets and/or sales of the ultimate parent company will include assets and/or sales of all of its subsidiaries. With regard to assets, only assets located in Indonesia will be accounted and, with regard to sales, products for export will not be included in the assessment.
Consultation (pre-merger notification)
The ICL adopts post-merger notification, but companies may voluntarily consult with the KPPU before the merger is concluded. This aims to avoid the risk that a merger will be dissolved by the KPPU if it finds that the merger has anti-competitive effects. There are three possible KPPU decisions following the consultation process:
- there is no anti-competitive effect;
- there is no anti-competitive effect if conditions set by the KPPU are implemented by the companies; and
- there is anti-competitive effect.
After the consultation, the merging companies still have an obligation to file a post-merger notification, but the KPPU will not reassess the transaction unless there is material change to either the information submitted when the consultation was made, or to market conditions when the post-merger notification is under review.
Once all required information and documents are submitted, the KPPU will conduct preliminary assessment within a maximum of 30 working days, followed if necessary by comprehensive assessment for the next 60 working days. Essential for the assessment of a horizontal merger is the post-merger market concentration, which is measured using the Herfindahl-Hirschman Index (HHI) or other concentration ratios. The KPPU will only identify horizontal competition concerns if the post-merger HHI falls within Spectrum II, which is high concentration, with post HHI above 1,800 and the delta is more than 150 points. For vertical mergers, the KPPU will evaluate whether the merging companies have a dominant position. The KPPU will not continue with a comprehensive assessment if this condition is not satisfied.
Post-merger notification should be made no later than 30 working days after the merger becomes legally effective. Under Law No. 40 of 2007 on Limited Liability Companies, for mergers involving Indonesian limited liability companies (PT), the term ‘legally effective’ refers to one of the following conditions:
- the issuance of approval by the competent minister upon the amendment of articles of association in the case of a merger;
- the issuance of a receipt by the competent minister on notification, with or without particular amendments in articles of association as laid down in Law No. 40 of 2007; or
- the legalisation by the competent minister upon the deed of establishment of the company in the case of consolidation.
For acquisition of an Indonesian public company, the post-merger notification shall be conducted no more than 30 working days after the letter of information disclosure on the listed company share acquisition.
For mergers between foreign companies or mergers involving an Indonesian company not governed by Law No. 40 of 2007, notification is mandatory within 30 working days after the closing or the approval from the competent authority, if such approval is required for the transaction to be legally effective.
The KPPU will commence the assessment and issue its opinion no more than 90 working days after the required documents and data completeness declaration by the KPPU. In the post-merger notification, the substantive test method will be the same as that of a consultation. The possible outcomes of the assessment are similiar to those following a consultation. Before issuing a final opinion, the KPPU has to give its preliminary opinion to the merged entity in case there is anti-competitive concern, so that the merger entity has a chance to resolve the concern by proposing remedies, either in the form of structural or non-structural remedies.
Structural remedies can be in form of asset divestiture, share divestiture or other structural remedies which can resolve the competition concerns. Non-structural or behavioural remedies can be the removal of artificial barriers such as exclusive contracts and consumer switching costs, proposal on pricing and output policy, and other behavioural remedies which can eliminate competition concerns. Remedies can be offered by the merging companies up to 14 working days after the KPPU notifies the merging companies that there has been concern of anti competitive effects. If the proposed remedies are rejected by the KPPU, it will issue a negative opinion and open a formal investigation to decide whether or not the merger should be dissolved. In addition to that, the KPPU may impose fines in the amount of 1 billion rupiahs to 25 billion rupiahs.
Monitoring and clarification
The KPPU carries out periodic monitoring to obtain information from public complaints, the mass media, an official letter from related institutions or other relevant sources on the merger transactions that meet the criteria but have not been notified to the KPPU.
Proceeding on imposing administrative sanctions for failure to notify
Guidelines on the proceeding for imposing sanctions for failure to notify are regulated under KPPU Regulation No. 4 of 2012. The KPPU identifies whether there is a failure to notify based on either notification it receives or the results of its monitoring activities. If the merged companies fail to notify a merger, the KPPU will open examination, which includes preliminary and further examination. Preliminary examination should be completed within seven working days, while further examination should be completed within 14 working days. The Commissioners Council shall decide whether there is any violation of the ICL within seven days of the completion of further examination.
Recent cases on the administrative sanction for failure to notify
On 11 December 2012, the KPPU announced that it had issued an infringement decision against PT Mitra Pinasthika Mustika (a local main dealer and retailer of Honda motorbikes) for failure to notify its acquisition of PT Austindo Nusantara Jaya Rental (a local leasing company) within the 30 working days of the acquisition becoming legally effective. The acquisition was completed on 31 January 2012, but only notified to the KPPU on 27 April 2012, meaning that the notification was made 32 days after the mandatory deadline had elapsed. This company said that the delay in notifying the acquisition was not because it specifically intended to do so but rather due to its failure to understand the thresholds. PT Mitra Pinasthika Mustika was fined 4.6 billion rupiahs. Sanction for failure to notify is 1 billion rupiahs per day, with a maximum of 25 billion rupiahs in total. However in this case, the KPPU imposed a lower total amount of fines that it should have, taking into account that PT Mitra Pinasthika Mustika was very cooperative during the proceeding and responsive to the KPPU’s instruction to notify the acquisition. This is the first decision on the failure to notify a merger since the adoption of the Merger Regulation in July 2010. This decision shows that the KPPU will take seriously any violation of the merger rules and will not accept any excuses for failure to notify.
Separately to this, the KPPU has cleared the acquisition and issued its opinion on 25 October 2012.
‘Foreign merger’ may be simply referred to as a merger concluded between foreign companies. The KPPU has emphasised that, essentially, it has the authority to control any merger that affects competition in the domestic market. The KPPU thus affirms that it has the authority to review or decide on a foreign merger, taking into account the effectiveness of such enforcement. The KPPU has exercised its jurisdiction over foreign mergers in seven cases, such as in the Thainox Stainless Public Company Limited and Cargill International Luxembourg 3 Sarl cases. The KPPU also performs monitoring and clarification over foreign mergers in which, for instance, it invited the relevant companies in the Microsoft–Skype merger to clarify the transaction before the commission. The recent cases related to post-foreign merger notification are Brightpoint Inc and Vale International Holdings GMBH, which at the time of writing are being reviewed by the KPPU.
Criteria for notifiable foreign mergers:
Notification for foreign mergers is required if both companies to the transaction have operations, directly or indirectly, in Indonesia, for example, through the establishment of a subsidiary company in Indonesia. A notification is also required if at least one of the merging companies has operations in Indonesia and another company has sales in Indonesia; or if one of the merging companies has operations in Indonesia and the other company has no activities in Indonesia but has a sister company that does.
Cooperation with other competition agencies
The KPPU has established cooperation with several foreign competition authorities, such as the Japan Fair Trade Commission, the Korea Fair Trade Commission and the US Federal Trade Commission, as well as the Australian Competition and Consumer Commission. This cooperation, however, is limited to the exchange of information on competition cases and is not specific to merger control enforcement.