Franchising rules and regulations

We would expect this situation to continue through the end of the year, despite Indonesia having elected a new President, Joko Widodo, on July 9. Investors are expected to wait and see the direction of the new government and the economic policies of President Widodo, but there is optimism. With his call “to work, work, work” in his inaugural address, President Widodo has engendered hope for a better business environment in Indonesia.

Investors in the franchise sector though must first be aware of the latest changes to franchising regulations issued by the Ministry of Trade just prior to President Widodo’s inauguration on October 20.

Before the latest changes, franchising regulations were covered under the following:
1. Law Number 7 of 2014 on Trade, dated March 11, 2014;
2. Government Regulation Number 42 of 2007 regarding Franchises, dated July 23, 2007;
3. Minister of Trade Regulation Number 53/M-DAG/PER/9/2012 regarding Franchises, dated August 24, 2012 (MOT Regulation No. 53/M-DAG/PER/8/2012);
4. Minister of Trade Regulation Number 68/M-DAG/PER/10/2012 regarding Franchises for Modern Store Business, dated October 29, 2012; and
5. Minister of Trade Regulation Number 07/M-DAG/PER/2/2013 regarding Partnership Development in Franchises for the Food and Drink Service Business, dated February 14, 2013 (MOT Regulation No. 07/M-DAG/PER/2/2013).

On September 17, 2014, the Ministry of Trade issued two amendments to the above regulations, as follows:
1. Minister of Trade Regulation Number 57/M-DAG/PER/9/2014 regarding Amendment of MOT Regulation No. 53/M-DAG/PER/8/2012 (MOT Reg No. 57); and
2. Minister of Trade Regulation Number 58/M-DAG/PER/9/2014 regarding Amendment of MOT Regulation No. 07/M-DAG/PER/2/2013 (MOT Reg No. 58).

MOT Reg No. 57 changes the requirements and procedures for a franchisor to obtain a Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba or STPW). Before entering an agreement with a franchisee, a franchisor in Indonesia must register a franchise prospectus with the Ministry of Trade to obtain the STPW. Under MOT Reg No. 57, instead of directly registering the franchise prospectus, a franchisor must first submit a copy of the draft master franchise agreement of the franchisor. Previously, a franchisor would submit a draft of the franchise agreement together with the franchise prospectus. The Ministry of Trade would then have two working days to review the documents and issue the STPW.

With the new requirement, the Ministry of Trade is strengthening its review process. The ministry now has 20 days to review the draft master franchise agreement of a franchisor to ensure it does not violate Indonesian laws and regulations. If it is found to be in violation, the franchisor cannot register its franchise prospectus.

In the food and drink franchise business, one of the most attractive areas of the franchise sector in Indonesia, MOT Reg No. 58 now provides administrative sanctions for failure to comply with the requirement for franchisors and franchisees in the restaurant, diner, bar/tavern or cafe business to report to the Ministry of Trade any change in the number of outlets that are self-owned and self-managed, franchised or opened through a capital participation system. Administrative sanctions include warning letters up to the revocation of the STPW. We view these new sanctions as the Ministry of Trade pressuring franchisors and franchisees to comply with reporting rules to help the ministry exercise greater supervisory power over one of the most attractive franchising sectors in Indonesia.

There is some good news for existing franchisors and franchisees. MOT Reg No. 58 now allows franchisors and franchisees in Indonesia that owned more than 250 food and beverage outlets as of September 17, 2014, to continue to operate and own their outlets. Under the previous regulation, they had five years as of February 11, 2013, to comply with the requirement that they own and operate a maximum of 250 outlets.