Key Concepts of Company Capital under Indonesian Company Law

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Capital constitutes a fundamental element of a company's legal and financial framework. This ARMA Update provides an overview of the definitions and distinctions among the various types of capital as recognized under the Law No. 40 of 2007 on Limited Liability Companies, and its amendments (the “Company Law”), and takes a closer look on the legal procedures and requirements governing capital increases and reductions in Indonesia.

1. Types of Capital

   1. Authorized Capital – In principle, a company’s authorized capital (modal dasar) represents the total number of shares that a limited liability company is permitted to issue. The amount of authorized capital is determined by the articles of association, which specify the total number and nominal value of shares comprising the authorized capital.
   2. Issued Capital and Paid-up Capital – Issued capital (modal ditempatkan) refers to the portion of authorized capital that shareholders have agreed to take up (subscribe). On the other hand, paid-up capital (modal disetor), refers specifically to the portion that has actually been paid by the shareholders.

   In essence, issued capital represents the shareholders’ commitment to invest, while paid-up capital reflects the portion of that commitment which has been realized through payment. Under the Company Law, at least 25% (twenty-five percent) of the authorized capital must be both issued and fully paid at the time of incorporation, and this payment must be supported by valid proof. ¹

2. Payment of Share Capital

   The payment of share capital in a limited liability company may be made in the form of: (i) cash; and/or (ii) other non-cash assets (inbreng). ²

   In the event that the capital payment is made in a form other than cash, such non-cash contribution must be valued at fair market value, determined either in accordance with prevailing market prices or by an independent expert who is not affiliated with the company. Furthermore, if the capital contribution consists of immovable assets, such as land or buildings, the company is obligated to publish an announcement in at least one newspaper within 14 (fourteen) days following the execution of the deed of establishment or the resolution of the General Meeting of Shareholders (“GMS”) approving the said capital contribution. ³

3. Increase of Capital

   Under the Company Law, any increase in authorized, issued, or paid-up capital must be approved by the GMS. The GMS may delegate this authority to the Board of Commissioners for up to one year, though such delegation can be revoked at any time. ⁴

   Increasing authorized capital requires compliance with quorum and voting requirements for amending the company’s AOA, typically 2/3. ⁵ Meanwhile, increasing issued and paid-up capital within the authorized limit must be approved by more than half of the voting shareholders present, unless a stricter threshold is set in the company’s AOA. ⁶

   New shares must first be offered to existing shareholders in proportion to their ownership (pre-emptive rights), unless the shares are issued to employees, convertible bondholders, or in connection with a GMS-approved restructuring. If shareholders do not exercise their rights within 14 (fourteen) days, the company may offer the remaining shares to third parties. ⁷

4. Reduction of Capital

   A company’s capital may be reduced through a resolution of the GMS, provided it meets the quorum and voting requirements for amending the articles of association. ⁸ Capital reduction may be carried out by either withdrawing (buying back and cancelling) previously issued shares or by reducing the nominal value of shares. ⁹ If a capital reduction is carried out through a share buyback, the following requirements must be observed: ¹⁰

   1. The share buyback must not result in the company’s net assets becoming less than the total issued capital plus the statutory reserves that have been set aside; and
   2. The total nominal value of all shares bought back by the company, together with any pledge of shares or fiduciary security over shares held by the company itself and/or by another company whose shares are directly or indirectly owned by the company, must not exceed 10% (ten percent) of the company’s issued capital.

   Following the GMS resolution in regard to reduction of capital, the company must announce the decision in a newspaper within 7 (seven) days and notify its creditors. ¹¹ Creditors then have 60 (sixty) days to submit written objections, which the company must respond to within 30 (thirty) days. ¹² The capital reduction must be registered with the Minister of Law, who will approve the amendment if there are no objections, if objections are resolved, or if creditor claims are legally rejected by final court decision. ¹³

1. Article 33 of Company Law ↩
2. Article 34 (1) of Company Law ↩
3. Article 34 (2) of Company Law ↩
4. Article 41 of Company Law ↩
5. Article 88 of Company Law ↩
6. Article 42 of Company Law ↩
7. Article 43 of Company Law ↩
8. Article 44 (1) of Company Law ↩
9. Elucidation of Article 44 (1) of Company Law ↩
10. Article 37 of Company Law ↩
11. Article 44 (2) of Company Law ↩
12. Article 45 of Company Law ↩
13. Article 46 of Company Law ↩

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Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.

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1. Types of Capital
2. Payment of Share Capital
3. Increase of Capital
4. Reduction of Capital

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