Tag: Companies Act No.07 of 2007

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 1st 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 1st 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.