JAKARTA, June 29 (Reuters) - Indonesia plans to require foreign investors in mining firms to gradually divest shares starting from the fifth year of commercial production, but may relax this if no buyers are found, an official said on Monday 29 June.

Newmont Mining Corp (www.newmont.com)

A new mining law passed in December requires foreign investors to sell shares to either the government, state-owned enterprises, and/or a local private entity.

In a draft regulation to the law, the government has proposed that foreign investors would have to gradually sell 20 percent after the fifth year of commercial production, Bambang Gatot Ariyono, director of coal and mining at the energy ministry, said.

"Each year, foreign shareholders will sell 5 percent and if they fail to do so, it will be accumulated in the following year," Ariyono told reporters at a seminar on the new law.

"We proposed the (20 percent) figure since it balances the interests of investors and the government," he said, adding the regulation would not apply to mining projects where the life span was less than five years.

The previous mining law, which dates from 1967, did not require foreign firms to divest although in some cases foreign mining firms were required under their contract to sell shares.

The issue has led to several disputes involving global firms.

PT Newmont Nusa Tenggara (NNT), a unit of Newmont Mining Corp (NEM.N), which operates the Batu Hijau copper and gold mine in Sumbawa, was ordered in April to sell part of its stake to the government after an arbitration ruling following a prolonged dispute. [ID:nJAK503192]

In 2003, Rio Tinto (RIO.AX) and BP (BP.L) were also embroiled in a long legal battle over the sale of a stake in PT Kaltim Prima Coal (KPC).

Priyo Pribadi Soemarno, executive director of the Indonesian Mining Association, which represents foreign and local mining interests, said the 20 percent figure was acceptable.

"But it needs to clearly set out how to determine share prices, the source of funds and the local investors that are eligible to buy the shares," he added.

Analysts have warned that the new divestment rule may stifle foreign investment if it did not address key issues such as finding local buyers, which is an obstacle for foreign shareholders when trying to meet divestment regulations.

Ariyono said the new rule would not apply a penalty to miners who were unable to find buyers, although the foreign firm would still be obliged to carry out a sale when a buyer was found.

"Investors must carry out divestment until it finds a buyer but there won't be any risk of default," he said, adding that the rule would be applied flexibly to remain attractive to investors.

Foreign investors, who have a local partner owning more than 20 percent, would be exempted from the obligation, Ariyono added.

Aviliani, an economist a local thinktank INDEF, said allowing foreign investors to list shares in their mining project on the stock exchange was a possible option to avoid such conflict.

"The government does not have to buy the shares, they can go public. It will attract people to invest because the process is more transparent," said Aviliani, who uses one name like many Indonesians.

This strategy was used by PT International Nickel Indonesia Tbk (INCO.JK) -- in which Brazil's Vale Inco Ltd (VALE5.SA) has a 60.8 percent stake -- when it sold a 20 percent stake in an initial public offering in 1990.

(By Fitri Wulandari. Editing by Ed Davies)