Shawn Donnan and Taufan Hidayat – When Singapore's ST Telemedia paid $630m last November for a 42 per cent stake in Indosat, Indonesia's number two telecommunications carrier, it was widely seen as a major accomplishment for the government in Jakarta.

The price for the state-owned stake was better than expected by most. The buyer seemed committed to building a credible competitor to the country's dominant carrier, Telkom. It all seemed to reinvigorate Indonesia's privatisation agenda, a key element of its four-year International Monetary Fund reform programme, and bode well for future sales of state-owned banks and other assets down the line.

Five months on, the Indosat sale is emerging as yet another cautionary tale of the lingering complications of investing in Indonesia.

ST Telemedia has been forced to weather protests by unions angry about a sale to a company controlled by the Singapore government. It has also faced parliamentary probing into what some nationalists see as the sale of a vital state asset.

There have been allegations of corruption levelled at officials from the ruling Democratic Party of Struggle (PDIP), who deny reaping a valuable commission. And this week, a diverse group, including former president Abdurrahman Wahid, and the sister of the current president, Megawati Sukarnoputri, said it would file a class action lawsuit to try to reverse the sale.

"The divestment of Indosat is against Indonesian law," Remy Sjahdeini, a lawyer for the group, said. "People think there is a national interest being lost. A state company that has dominated most people's interest has to be controlled by the government. If there is a divestment, a majority of shares should not be taken over by a foreign company." Mr Sjahdeini expects to file the lawsuit before the end of the month.

Just the threat of a lawsuit represents a daunting prospect for a foreign investor such as ST Tele-media. Indonesia's courts are renowned for their corruption and often elastic interpretations of the law.

The government has insisted it remains committed to the sale and ST Telemedia has reiterated its interest in Indosat as well. "We continue to view Indosat as a company with strong growth potential," ST Telemedia said last week.

But the loud opposition to the Indosat sale is likely to reverberate far beyond the individual deal, in part because of its rather blunt anti-Singaporean tenor.

The Indonesian Bank Restructuring Agency (Ibra) is in the process of selling one of Indonesia's leading banks, Bank Danamon. The leading bidder is a consortium led by Temasek Holdings, the Singapore government's investment arm and also ST Telemedia's controlling owner.

Singapore's interest is driven in large part by its fears about the stability of Indonesia. Many see its buying up of stakes in Indonesian companies as an attempt to shore up the economy and avoid social strife in the sprawling archipelago to the south of the far smaller island state.

But the reaction in Indonesia, where people have long been suspicious of any Singaporean intervention, has become increasingly paranoid as the island state has flexed its more powerful economic muscle in recent months.

The fears are unjustified, says Anton Gunawan, a Citibank economist in Jakarta. He also downplays any potential fallout. "It's still attractive to invest in Indonesia, especially for Singapore which is a close neighbour and knows Indonesia better than other countries." There are also suspicions about how much is ideology and how much is self-interest in some of the nationalist opposition to issues such as the Indosat sale.

Mr Gunawan and other observers believe there are other interests at play, chiefly politics.

Any nationalistic argument against the sale of Indosat or other assets may be first of all intended to embarrass President Megawati's PDIP, which many see as vulnerable. But its other purpose may well be to stake out a claim for something to fill individual political parties' coffers ahead of elections a year from now.

[Additional reporting by Taufan Hidayat.]