Newly implemented, less restrictive regulations in Indonesia means there’s never been a better time to expand your brand there. Here’s everything you need to know about the change in law
In a world in which markets and regions seem to be pulling up the drawbridge to international trade, the Minister of Trade of the Republic of Indonesia (MOT) recently issued a new pro-foreign investment regulation for franchising known as Regulation 71, which effectively revokes the previous restrictive regulations.
Top 10 changes
The previous regulations acted as a barrier to international franchisors looking to expand into the world’s fourth most populous country. The key changes introduced by Regulation 71 are as follows:
1. Franchise business licence validity period
It is an existing requirement that a franchisor and a franchisee must both have a franchise business certificate called a Surat Tanda Pendaftaran Waralaba (STPW), which is issued by MOT. Obtaining a STPW can be difficult and, under the previous regulations, was only valid for five years.
Under the new Regulation 71, there is no longer a limitation on the validity period of a STPW. Once a STPW is obtained, it will remain valid indefinitely, unless:
• the validity period of the underlying franchise agreement has expired (for franchisees); or
• either party ceases to carry out the business activities; and/or
• the registration of Intellectual Property Rights (IPR) by the franchisor is not approved by the Directorate General of IPR or the validity period of the IPR under the franchise has expired.
2. Franchise business licence application process
The method for applying for, or revoking, a STPW has changed. Regulation 71 now requires all applications and revocations to be carried out through a single online system.
3. Removal of “clean break” requirement
Previous regulations placed restrictions on early termination by the franchisor, in that a franchisor was not able to appoint a new franchisee within the same area without the prior approval of the franchisee (a “clean break”), or a final and binding court decision. Regulation 71 removes this restriction.
4. Local supply requirement
This is the big one, particularly for any product-driven franchise system, which relies on an international supply chain. Regulation 71 removes the requirements on the use of 80 per cent locally-sourced raw materials, equipment or products and instead, obliges the franchisor to prioritize the use of local goods and services so long as the goods and services meet the quality set by the franchisor.
5. Number of outlets
Under previous regulation, the maximum number of outlets was 150 for “modern shop businesses” and 250 for food and beverage businesses. Regulation 71 removes the restriction on the maximum number of outlets.
“The previous regulations acted as a barrier to international franchisors looking to expand into the world’s fourth most populous country”
Regulation 71 recognizes the importance of having valid IP protection when conducting a franchise business. The status of IP may affect the validity of the franchise business licence. The franchise business licence will be deemed invalid if the registration of IP by the franchisor is not approved by the relevant authority, or if the validity period of IP has expired.
7. Common control
Previous regulations meant that franchisors could not appoint a franchisee that was involved in a common control relationship with the franchisor (e.g. a subsidiary, or joint venture partner of the franchisor). Regulation 71 has revoked this restriction, which means that it is now possible for a franchisor to enter into a franchise agreement with a company that it controls.
8. Governing law
No change on this point, but important to note that Regulation 71 stresses that all franchise agreements must be governed by Indonesian law.
9. Obligatory clauses
Along with requiring that the governing law be Indonesian, Regulation 71 further states that the franchise agreement must be executed in the Indonesian language and must include provisions on change of ownership.
10. Franchise logo
Franchisors no longer need to display their franchise logos at the main office, stores or outlets. It is now illegal for a franchise operator without a valid franchise business licence to use a franchise logo.
The Indonesian government is making it easier to do franchise business in the country. As set out above, Regulation 71 significantly simplifies the requirements in comparison to previous regulations. This presents an opportunity for international franchisors.
Further, in light of the new Regulation 71, current franchisors and franchisees should adjust their business models and supply chain relationship in accordance with each party’s long-term commercial objectives. Any parties currently operating under alternative business alliances in Indonesia also may well choose to convert to a franchise relationship.
Gordon Drakes is a partner at European law firm, Fieldfisher LLP. He has over 15 years of experience in advising brands on their expansion through third-party models such as franchising, licensing and joint ventures