Counterfeit and piracy: Far-reaching consequences on our lives and the economy

The American Chamber of Commerce (AmCham) Sri Lanka recently hosted a panel discussion titled ‘Counterfeits and Piracy – the far reaching consequences on our lives and the economy!’ The objective of the program was to bring together key public sector officials and private sector representatives of industries affected by the rampant issue of Intellectual Property Rights (IPR) violations, in order to formulate a joint effort to address the challenges facing both sectors.

AmCham will be carrying out a series of similar programs over the coming months in order to create awareness regarding IPR and the need to fight counterfeit and piracy, since there is a strong correlation between IPR and Foreign Direct Investment and it has been further established that IPR protection is a strong determinant of inward investment.

The theft of Intellectual Property (IP) from industries is a serious matter, as it stifles innovation, slows economic growth and weakens the competitiveness of businesses. IP theft has an adverse impact on innovation, commercialisation of new products and overall economic success. However, it has been noted that Small Medium Enterprises are particularly vulnerable because they are at a distinct disadvantage in securing IPR in foreign markets and confronting its theft.

During the panel discussion, the public sector was represented by National Intellectual Property Office (NIPO) Director General Gitanjali Ranawake and Coordinating Secretariat for Science, Technology and Innovation (COSTI) Project Scientist Kumudini Gunasekera. Representation for the private sector was made by Glaxo Welcome Head of Sales for Sri Lanka and the Maldives Dr. Kusal Senanayake and Ceylon Tobacco Company Head of Legal Ranjan Seneviratne.
Sudath Perera being an Attorney-at-Law and the Managing Partner of Sudath Perera Associates, formed part of the panellists where Perera gave a valuable insight with regard to the enforcement of IP laws and legal reforms in relation to IPR, in Sri Lanka. The panel discussion was moderated by Amice van der Burg-Dissanayake, a Strategist and Commercial Lawyer, in the Netherlands and also at John Wilson Partners, Attorneys-at-Law and Notaries Public.

The private sector representatives brought to light the impact caused by IPR violations and Dr. Senanayake addressed the necessity of the public to understand the concept of counterfeit and the damage caused by such counterfeit products, for e.g. plenty of counterfeit pharmaceutical drugs are available in the market for a very cheap price but most often the main purpose of a pharmaceutical drug is lost and the desired treatment from such a drug is not achieved and such drugs can be harmful and as a result has caused many deaths.

It was also mentioned that most pharmaceutical drugs that are counterfeit are not properly stored and are channelled through illegal means for trading and therefore products such as vaccines lose its effectiveness and may even cause harmful side effects.
Seneviratne informed that tobacco products need to be properly manufactured subject to quality control. Most tobacco products that are smuggled are not up to standard and are mostly expired but such products are packed using packaging of branded tobacco products to mislead the consumer.
Monetary and non monetary impact
Counterfeit products being sold in the market has a monetary and non monetary impact since allowing counterfeiting to take place damages the goodwill of a brand; as a result most brand owners allocate a large amount from their budget to protect their IPR, which could have been used to invest in research to develop better products as done by most pharmaceutical companies. In terms of monetary losses, the Government is hit the hardest as the Government losses around Rs. 200 million every year as revenue.
In order to protect the IPR in Sri Lanka, Perera informed that the key legal regulatory procedures that IPR owners may rely on are the criminal or civil procedures, and also section 30 and 31 of the Consumer Affairs Authority (CAA) Act No.09 of 2003; where parties are prevented from misleading, deceiving and or falsely representing counterfeit products as originals to consumers and traders.
The criminal procedure is known to be the most cost effective and easiest method to rely on as the IPR owner to make a police complaint; however the IPR needs to be duly registered with NIPO in order to proceed. It was also mentioned that even though it will be time consuming most IPR owners rely on the jurisdiction of the Commercial High Court to prevent further damage being caused by counterfeit items through interim relief such as injunctions.
It was also mentioned that the Commercial Crimes Investigations Unit 2 is a special unit at the Criminal Investigation Department that handles matters concerning the breach of IPR and handles many IPR matters concerning internationally renowned brands.
Perera further added that with the assistance of AmCham, a customs recordation procedure is to be implemented shortly in Sri Lanka where once a trademark is registered at NIPO such also gets registered with the Customs, and the Customs can monitor any parallel imports taking place and take necessary action to prevent IPR violations due to such parallel imports.
The way forward for IPR in Sri Lanka
The question was raised as to what is the way forward for IPR in Sri Lanka and Ranawake explained that the necessary laws are in place but much more needs to be done and most important is to create awareness regarding the importance of protecting IPR and also the registering process of IPR to safeguard IP in Sri Lanka. It was also mentioned that government officials need to be more conversant with regard to IPR especially the government law enforcement agencies, the Customs and the CAA, and the NIPO is currently engaged in educating these officials around the country.
Gunasekera informed that amongst its many objectives, COSTI engages in linking private and public partnerships in order to commercialise and protect IPR in Sri Lanka, and create awareness regarding the importance of patenting inventions which most inventors are not aware of and Sri Lanka is quite behind in terms of innovation as Sri Lanka was ranked at 105th place in the Global Innovation Index for 2014. It was also mentioned by Gunasekera that COSTI along with NIPO and WIPO are in the process of preparing a National Innovation Policy in Sri Lanka to encourage more innovators.
Participants at the panel discussion addressed the importance of a strong IP system in a country and which will be one of the key pre-requisites to bring in FDI and therefore ensuring IPR is well protected is a vital component for a growing economy such as Sri Lanka.

 

Published in DailyFT, Sri Lanka on June 11, 2015 (http://www.ft.lk/article/428265/Demystifying-the-complexity-of-related-party-transactions). Image courtesy of The American Chamber of Commerce.

Words by Radhi de Silva

The Sri Lankan Law: Is it Yea or Nay for the Foreign Investor?

Laws prevail in a legal system for the betterment and in the best interest of those who are within the jurisdiction of such legal system, and it must be noted that certain laws prevail in order to provide the people of its country an undue advantage. Such undue advantages are visibly seen especially in relation to laws with regard to investment and such mostly exist based on the current investment policies of the country.

Sri Lanka is currently on the fast track to make the country a commercial hub in Asian and in order to do so the economic policies in Sri Lanka must be welcoming towards foreign investors, but must also be duly regulated and closely monitored.

This paper focuses mainly on the regulations that prevail and those that are currently being proposed, and further to understand the practicality of such regulations being enforced.

Who is a foreigner?

In order to understand the laws regulating foreign investment being made in Sri Lanka, it is important to clearly identify who is a foreigner. According to the prevailing legislature there is no clear definition to the word ‘foreigner’ but is impliedly referred to those defined as ‘a person resident outside Sri Lanka’ in section 2 of the Government Gazette No.15007 dated 1973.04.21.

However it must be noted that recently a bill was presented to Parliament titled ‘Land (Restrictions on Alienation)’ which is at the moment scheduled to be subject to parliamentary debate, and subject to the proposed law[1] a ‘foreigner’ has been clearly defined as a person who is not a citizen of Sri Lanka and a ‘foreign company’ is defined as a company or a body of persons incorporated under the laws of any country other than Sri Lanka.

Procedures for a foreign investor to invest in Sri Lanka

In principles of law, a legal entity is considered as either a person or a company[2], and in Sri Lanka the manner in which a person may invest in a business is either by registering a business name or a partnership[3], or by incorporating a company[4]. However subject to the enactment of the Companies Act No. 07 2007, a foreigner may only invest in Sri Lanka through the types of company set out in the Companies Act, but cannot register any business name or a partnership due to the repeal of Companies Act (Special Provision) No. 19 of 1974.

The manner in which the foreign investment can be brought into Sri Lanka, and the manner in which funds can be repatriated is regularized by the Department of Exchange Control of the Central Bank of Sri Lanka[5], which investors needs to be complied with prior to proceeding with the said investment.

Are the current legislative provisions welcoming towards the foreign investor?

With many legislative enactments prevailing at the moment to provide investment opportunities for the foreign investor, one of the main binding provisions are set out in the Sri Lankan Constitution itself. The Constitution encourages foreign investment[6] by passing a resolution with a two thirds majority vote of the members of Parliament to introduce bilateral investment agreements between the Sri Lankan Government and the government of any foreign state. This provision is significant as such bilateral investment agreements are provided with a constitutional guarantee that prevents legislative, executive, or administrative action being taken to contravene the provisions of such bilateral investment agreement except on grounds of national security.

The aforesaid constitutional guarantee however is only extended to treaties and agreements between the Sri Lankan Government and the government of a foreign state and does not provide any assistance to private, medium and small scale foreign investors.

However, there exist relevant laws in place to provide opportunity for such foreign investors to invest in companies that are registered in Sri Lanka[7] subject to the Exchange Control Act[8]. Thereby with such laws in place corporate bodies incorporated outside Sri Lanka and individuals resident outside Sri Lanka (inclusive of Sri Lankans resident outside Sri Lanka) are allowed to invest in a company registered in Sri Lanka up to 100% of the issued capital of such company, however subject to certain exclusions, restrictions and conditions.

Apart from the above the foreign investor can also reply on the Board of Investment of Sri Lanka (BOI), which is a semi governmental institution created[9] for the economic development of Sri Lanka through encouraging and promoting foreign investment (amongst other objectives).  If a private foreign investor wishes to set up a company in Sri Lanka it is ideal that such investor obtains a BOI approval to its project, provided the required investment is made to such project.  However a foreign investor may invest in a Sri Lankan company without a BOI approval if it is not violating the limitations set out under section 3 of the Extraordinary Gazette notification No. 1232/14.

Exclusions, limitations and conditions towards Foreign Investment

Exclusions[10]:

With many opportunities available to a foreign investor in Sri Lanka, yet there are exclusions that prevent foreign investors from investing. Foreign investors are prevented from purchasing shares in a company in Sri Lanka which is proposing to carry on or carrying on the business of either money lending, pawn brokering, retail trade with a capital of less than one million United States Dollars, and coastal fishing.
Limitations[11]:

Apart from the aforesaid exclusions there exists limitation in foreign share investments being made in a company i.e. a company may have only 40% of foreign shareholding in such particular company or if approval has been granted by the BOI for a higher percentage of foreign investment in any company, only up to such higher percentage, which is carrying on or proposing to carry on the business of: producing goods that fall into the category of goods which are Sri Lanka’s exports that are subject to internationally determined quota restrictions, growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices, mining and primary processing of non renewable national resources, timber based industries using local timber, fishing (deep sea fishing), mass communications, education, freight forwarding, travel agencies and shipping agencies.

Furthermore, based on either general or special approvals being granted by the Government of Sri Lanka or any legal or administrative authority set up for the approval of foreign investment in such businesses a foreign investor may invest a particular percentage in the issued capital of the company carrying on or proposing to carry on the business of air transportation, coastal shipping, industrial undertaking in the second schedule of the Industrial Promotion Act, No.46 of 1990, any industry manufacturing arms, ammunitions, explosives, military vehicles and equipment aircraft and other military hardware any industry manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials any industry producing currency, coins or security documents, large scale mechanised mining of gems and Lotteries[12].

Pending changes to the Law

Vast changes are taking place with regard to the economic policies of the country with the rush to gain international recognition as a commercial hub in Asia, and at the same time there are many seeking the opportunity to invest in Sri Lanka as well. However, the question remains how favourable such investment will be to the economic and social development of the country.

Amongst many economic policies being presented by government, one such policy is the alienation of land in Sri Lanka. With the implementation of the 2013 Budget Proposal in early 2013 there have been many questions raised regarding the validity of the instructions issued to the Registrar General’s Department and other government authorities through a letter by the Director General of the Department of Fiscal Policy of the Ministry of Finance and Planning.

However as mentioned earlier, a new bill has been presented to parliament titled Land (Restrictions on Alienation). The proposed legislation appears prohibit the transfer of title of any land situated in Sri Lanka to a foreigner, to a company incorporated in Sri Lanka under Companies Act where any foreign shareholding in such company is fifty per cent or above, or to a foreign company, unless exempted as provided in section 3 of the proposed bill[13].

The said bill further goes on to prevent the creation of any lacuna in the proposed law by stating that in order to maintain the legal validity of a transfer of land to a company incorporated in Sri Lanka under the Companies Act, with less than fifty per cent of foreign shareholding, the foreign shareholding of such company shall remain less than fifty per cent, for a minimum period of consecutive twenty years from the date of such transfer and in the event such company increases its foreign shareholding up to fifty per cent before the said minimum time period the transfer of land shall be null and void with effect from the date of increasing of the foreign shareholding[14].

Apart from land being alienated through the transfer of title the proposed bill also addresses alienation of land through leasing, where land is leased to a foreigner, to a company incorporated in Sri Lanka under Companies Act where any foreign shareholding in such company is fifty per cent or above; or to a foreign company, shall be effected subject to the payment of the Land Lease Tax imposed under section 6 set out in the said bill[15], provided however, the maximum tenure of any such lease shall not exceed ninety nine years.

Another problematic situation that is bound to arise due to this said bill is where certain foreign investors who have already purchased or leased out land after the 1^st of January 2013 and have not yet registered the title deed or lease agreement, since this proposed laws are to have retrospective effect to all transactions that took place after the 1^st of January 2013 and until the speaker gives assent to the proposed legislation.

It is evident that the proposed laws will have an impact on the investments that are taking place and that are to take place in Sri Lanka especially since most investors would consider real estate as stable security provided in order to establish their respective business other than establishing businesses on leasehold property. Sri Lanka being a tropical island most foreign investors have been keen to investment in real estate, but with these new laws coming into place a drastic change is sure to take place.

Conclusion

 It is quite evident that many restrictions prevail when it comes to foreign investment taking place in Sri Lanka but cannot be held that it is not favourable towards the foreign investor but neither is it extremely favourable, since most foreign investments will only take place with the approval of the relevant authorities of the government, which has the likelihood of creating a very stringent economic policy that does not really create a platform for a commercial hub.

One might state that the strict regulations would provide an undue advantage for certain industries to develop in Sri Lanka with the required foreign investment and expert know-how, whilst other industries that do not require much expertise is developed and engaged in the business by the locals without having competition from stronger foreign counterparts.

With the new legislation coming in to place the government authorities will have a stronger role to play in order to ensure that a balance is struck to promote foreign investment whilst also developing the local industries.

Footnotes:

[1] Land (Restrictions on Alienation) Bill, s 25

[2] Salomon v Salomon & Co. [1897] AC 22

[3] Business Names Ordinance No.06 of 1918

[4] Companies Act No.07 of 2007

[5] Extraordinary Gazette Notification No. 1232/14 dated 2002.04.19, s 4

[6] Sri Lankan Constitution, art 157

[7] Extraordinary Gazette Notification No. 1232/14 dated 2002.04.19, s 1

[8] Exchange Control Act No. 24 of 1953, s 10, 11, 15 and 30(5)

[9] Board of Investment of Sri Lanka (Greater Colombo Economic Commission) Act No.04 of 1978

[10] Extraordinary Gazette Notification No. 1232/14 dated 2002.04.19, s 2

[11] Extraordinary Gazette Notification No. 1232/14 dated 2002.04.19, s 3(a)

[12] Extraordinary Gazette Notification No. 1232/14 dated 2002.04.19, s 3(b)

[13] Land (Restrictions on Alienation) Bill, s 2(1)

[14] Land (Restrictions on Alienation) Bill, s 2(2)

[15] Land (Restrictions on Alienation) Bill, s 5

**This article was published in the Fifth Volume of the Junior Bar Law Journal in 2014. At the time of publication of this article the Land (Restrictions on Alienation) Act No. 38 of 2014 was not passed by the Parliament of Sri Lanka.

Venture Engine Competition 2014 – A Solution to the Budding Sri Lankan Entrepreneur

Many reveal at some point or another of becoming an entrepreneur, and having their own ideas made into profitable business ventures. But making such dream a reality is not as easy as it seems, since it requires knowledge, experience, investments, hard work, dedication and also that little bit of luck.

Having met with many budding entrepreneurs and assisted most of them to establish their own businesses in Sri Lanka and providing the legal advice necessary to get established, it is yet a daunting task to commence business operations and ensure sustainability of the company since it is an ongoing process with numerous ups and downs and some of the reasons for such instability is due to the lack of funding and the lack of know-how to operate one’s own business.

With such lacuna existing in most businesses, a unique concept has been introduced by Blue Ocean Ventures and the Indian Angel Network who has collaborated to host Venture Engine 2014, a project aimed at fostering entrepreneurship in Sri Lanka. This project having been initially launched in 2012, has served as a springboard for 12 businesses by providing Rs. 200 million in investment for these businesses.

In Sri Lanka, most entrepreneurs are held with a daunting task of attracting investors, where they have the option of entering into dubious financial arrangements to fund the business and as a result most of the time such businesses are closed down; or the other option of seeking financial assistance through banks, which is well monitored yet the borrower is required to provide collateral for the funding provided by the bank for the business. Thereby it is not always feasible to start up just any business in Sri Lanka. Therefore this project can be considered an answer to any budding entrepreneur with zero collateral but with a well researched business plan looking for that backing towards starting up the business.

The uniqueness of this project is that it involves high risk investments being made by 3^rd parties on the equity of the company and nothing else, which is something anyone could hardly find and can be considered the perfect solution for any budding entrepreneur, especially in Sri Lanka.

Another feature of this project is that the entrepreneur is granted the opportunity to convey their business proposal directly to the investors and the selected candidates are mentored by the Indian Angel Network and also the Lankan Angel Network. The selected top ten candidates have a good opportunity to gain the required investment and mentoring to set up and expand their company.

The project might seem not-so-practical from a capitalist’s point of view but proof of the project’s success actually exists in Sri Lanka in the form of thriving businesses such as takas.lk, Wild Trails, Nithya, Lanka BPO Academy, Saraii, House of Lonali, etc.

This initiative is sponsored by Expolanka Holdings PLC, Orion City and also Dialog Axiata PLC. The calling for business plans was officially launched on the 29^th of April 2014 and the last date for submissions is scheduled for the 26^th of May 2014, after which a selection process will proceed where a panel of local and overseas investors will review business plans of applicants and thereby select a minimum of 20 applicants who will be participating in the second round where the applicants will be provided with valuable critique and insight during the competition process and thereafter these entrepreneurs will be provided an opportunity to pitch to a panel of local and international investors with the most exceptional business plans which shall be announced at the finale.

It can be suggest that Venture Engine is any budding entrepreneur’s solution to starting up and most importantly it generates cultural entrepreneurship which is currently lacking in our society. With the end of a 30 year civil war, and many business potentials springing up, it can be recommended as the perfect opportunity for anyone with entrepreneurial interests to take part in which is definitely an opportunity not to be missed out on.

For more information on the project, the application process and resources visit the official Venture Engine website www.ventureengine.lk. Applicants can submit their applications via email to submissions@ventureengine.lk. For further assistance regarding the project and competition contact inquiries@ventureengine.lk

Your Thoughts on Investing

Wishing everyone a happy new year!

As my initial post for the year I have compiled a basic survey in relation to investment in Sri Lanka. The purpose of these questions are to determine the factors taken into consideration by the general public prior to investing in Sri Lanka and whether regulations issued by relevant authorities are taken into account prior to making such an investment.

Please note that the information provided by you in this Questionnaire is confidential and particular details will only be released on your consent. Also note that it is not mandatory to fill in your name and email address.

If interested please answer the questions set out in the questionnaire and submit.

Please click the following link to be directed to the questionnaire,
https://docs.google.com/spreadsheet/viewform?formkey=dGJ1ZjFYSlo3X2pocTVMT1lVbFcxU0E6MQ

Thank you!

Incorporating an Entity

Development taking place in Colombo

A company in law, is recognised as a separate legal entity having its own rights and obligations separate to that of those who own and/or run the Company.  Subsequent to passing the new Companies Act No. 7 of 2007, the laws governing the incorporation of companies (Public, Private and Guarantee ) have been reformed. Such reform was welcome by many since it introduced a new system that made the incorporation process less tedious and making the functioning of the Department of  Registrar of Companies (the government body that deals with the company incorporation) more efficient, allowing an incorporation to take place within a week or two.  However, there still exists certain draw backs that need to be addressed, such as establishing branch offices of the Registrar of Companies in other districts,  so that everyone who wants a company incorporated need not come to Colombo to do so, specially since the government is currently on the fast track to develop particular districts. But since the internet is easily accessible by many, why not allow the incorporation of a company to take place online like in many developed nations.

But according to a foreign investor, he was surprised about the manner in which a company in Sri Lanka was incorporated, since it was an uncomplicated process compared to other developing countries in Asia, in which he had invested in.  So clearly it was something to be proud of, but that does not mean we must ponder on such and not evolve with time, specially since the time has come to attract more investment for the development in this country.

For those who are interested in Incorporating a Company, the instructions are clearly given on the Registrar of Companies website.

I happen to meet some young entrepreneurs, wanting to start-up small scale businesses and was opting to incorporate a Private Limited company than to just register the Business name under the Provincial Laws, due to certain benefits that come along by creating a separate legal entity.  So quite evidently the new laws being simplified makes it easy for anyone to incorporate a Company in Sri Lanka.

For those wanting to know the process of incorporating a “Private Company” the procedure is as follows;

Step One: Obtaining Company Name Approval;

Time to complete – 3 days
Cost to complete – LKR 500 + 12% VAT (Cost is subject to change)
Comment – The reservation is valid for 3 months

Step Two:  Registration of the Company;

Time to complete – 3 days
Cost to complete – LKR 10,000 + 12% VAT for registration fee (form 1) + LKR 500 + 12% VAT for each of the forms: 18 & 19 + LKR 500 + 12% VAT for the Articles of Association (Cost is subject to change)
Comment –
A company may draft or adopt the standard set of articles of association in Table A of the Companies Act of Sri Lanka, No.7 of 2007. Professional charges are higher for drafting new articles of association than for adopting the standard articles.

Also, will be required to appoint a registered Company Secretary as per Form 19, who can attend to all Company incorporation matters and other matters pertaining to the Company.

According to the Companies Act No.7 of 2007 the articles of association must be submitted in duplicate printed on A4 paper to the Registrar of Companies with the balance of documents for incorporation. No prior approval from the Registrar General of Companies is required for the articles of association. According to the new Companies Act, a notary public is no longer required to witness the signing of the articles of association.

The certificate of incorporation can be obtained usually in about 3 days.