Foreign investment in the local equity market is open to approved Country Funds and Regional Funds, (approval is given by the Ministry of Finance, which is a formality) and Citizens of Foreign States (whether resident in Sri Lanka or outside Sri Lanka) and Sri Lankans resident outside Sri Lanka. Foreign investors may invest in up to 100 per cent of the issued capital of a limited company [subject to certain exclusions, limitations and conditions which are referred to hereinafter]. The investment in an unlisted company requires prior approval from the relevant authorities. Foreign investment is permitted in all sectors of the economy except in the following activities which are reserved for citizens of Sri Lanka :-

(a) Money Lending;
(b) Pawn Broking;
(c) Retail Trade with a capital investment of less than US$ 1 Million;
(d) Personal Services other than for exports or for tourism;
(e) Coastal fishing;
(f) Education of students who are citizens of Sri Lanka and not over 14 years of age.
(g) Award of local educational degrees.

The BOI now permits 100% foreign ownership in a number of areas of investments. Foreigners are permitted to acquire shares up to 100% in public quoted companies subject to the limitations set out in the notification of the Controller of Exchange in the Government Gazette No.721/4 of the 29th June 1992, 1122/12 of March 07, 2000 and 1232/14 of 19th April 2002. The monies for such investment should be received through a SIERA. (Share Investment External Rupee Account). Prior to 1992 the Finance Act No.11 of 1963 imposed a transfer tax of 100% on the transfer of shares in Companies to non-citizens of Sri Lanka but that tax was abolished in 1992.

SIERA ACCOUNT

Foreign investors are permitted to invest in shares of (a) Companies listed at the Colombo Stock Exchange and (b) unlisted companies in which foreign investment has been approved by the Board of Investment of Sri Lanka or the Government of Sri Lanka or by any legal or administrative authority set up for approval of any such investment. To facilitate investment by foreign investors, authorized dealers are permitted to open and maintain Share Investment External Rupee Account (SIERA) for

(a) Country Funds and Regional Funds as may be approved from time to time by the Minister of Finance Corporate Bodies incorporated outside Sri Lanka
(b) Citizen of Foreign States, and Citizen of Sri Lanka Resident outside Sri Lanka.

SIERA shall only credited with inward remittances or transfer form a non-resident foreign currency account or from and off shore unit of a bank and converted into Sri Lanka Rupees at the prevailing rate of exchange, The credits to this account will comprise inward remittances, sale proceeds of shares, dividends and commissions to such transactions. Funds in this account may be utilized for all payments related to share transactions such as brokers fees, bank charges, etc., expenses in Sri Lanka of the Account holder subject to certain limits . For remittance of dividends abroad, tax clearance has to be obtained, confirming that withholding tax has been paid. Sale proceeds of shares of listed companies may be remitted without delay. Such remittances are made by banks without the need for prior exchange control approval. Although remittances are subject to the production of a tax clearances certificate, the procedure for the issuance of this Certificate has been streamlined. Please see also Chapter 6.

PROTECTION

Foreign investment is guaranteed protection by the Constitution of the Republic of Sri Lanka. Article 157 of Sri Lanka's Constitution provides for such protection. Any treaty or agreement between the Sri Lanka Government and a foreign government for the promotion and protection of foreign investments has the force of law and no executive or administrative action can be taken against such an agreement. The Article 157 reads - "157. 

Where Parliament by resolution passed by not less than two-thirds of the whole number of Members of Parliament (including those not present) voting in its favour, approves as being essential for the development of the national economy, any Treaty or Agreement between the Government of Sri Lanka and the Government of any foreign State for the promotion and protection of the investments in Sri Lanka of such foreign State, its nationals, or of corporations, companies and other associations incorporated or constituted under its laws, such Treaty or Agreement shall have the force of law in Sri Lanka and otherwise than in the interests of national security no written law shall be enacted or made, and no executive or administrative action shall be taken, in contravention of the provisions of such Treaty or Agreement."

Sri Lanka has entered into a number of Investment Protection Agreements with several countries including Belgium, China, Denmark, Egypt, France, Finland, Germany, Italy, Indonesia, India, Iran, Japan, Korea, Luxembourg, Malaysia, The Netherlands, Norway, Romania, Singapore, Sweden, Switzerland, Thailand, U.K. and U.S.A. Bi-Lateral agreements are valid for 10 years. They are extended automatically unless terminated by either party. If the agreements, are terminated, investments already made are protected for another 10 years. The said Article 157 of the Constitution ensures the sanctity of these agreements which generally provide for :-

(a) Protection against nationalisation;
(b) Prompt and adequate compensation if required;
(c) Free remittance of earnings, capital and business fees;
(d) Settlement of disputes under the ICSID

Sri Lanka is also a founder-member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank which provides guarantees against non-commercial risks, such as those arising out of political changes or political instability and insecurity. MIGA issues guarantees including co-insurance and re-insurance of investments, against non-commercial risks such as losses resulting from expropriation, breach of contract, war and civil disturbances.

BOARD OF INVESTMENT

The Board of Investment (BOI) has its origins in the Greater Colombo Economic Commission (GCEC) established in 1978. In 1992 the Commission was reconstituted as the Board of Investment of Sri Lanka.

The BOI is structured to function as a Central Facilitating point for investors. It operates as an autonomous statutory body that is directly responsible to the President of Sri Lanka. Board of Directors of BOI drawn from the Private Sectors, Public Sectors and several departments that are geared to facilitating the investment process. Salient features in the BOI Agreement are that the specific incentive granted to the eligible company as tax holidays or preferential tax rates, exemption from custom duty and foreign exchange controls remain valid for the life of the enterprise. The provisions and the spirit of the agreement which may include cannot be changed by successive government.

The GCEC was initially established with the objective of encouraging Foreign Direct Investment in export-oriented activities. In pursuance of this objective, the Export Processing Zones were developed as industrial estates with the necessary infrastructure and other needs of GCEC enterprises. These Export Processing Zones (EPZs) come under the sole authority of the GCEC. The first to be established in 1978 was the Katunayake EPZ. It is located in dose proximity to the International Airport. This was developed in three phases and covers an area of approximately 200 hectares. The second EPZ at Biyagama is situated between the Colombo Port and the Katunayake International Airport, 24 kilometers from Colombo, and covers an area of 180 hectares. A third zone, the Koggala EPZ, covering an area of 80 hectares, was opened in mid-1991, close to the southern seaport at Galle, which is 115 kilometers south of Colombo.

APPLICABLE LAW

The main Law governing foreign investment is found in the Law No.4 of 1978 as amended in 1980, 1983, 1992 and 2002 and regulations made under the Act. The Board of Investment Law was amended by :-

(a) Greater Colombo Economic Commission (Amendment) Act No. 43 of 1980;
(b) Greater Colombo Economic Commission (Amendment) Act No. 21 of 1983; and
(c) Greater Colombo Economic Commission (Amendment) Act No. 49 of 1992 whereby the title of the Law was also changed to the Board of Investment of Sri Lanka Law.
(d) Board of Investment of Sri Lanka (Amended) Act 10th of 2002.

The most relevant BOI Regulations are :- No. of Regulations Gazette Extra-Ordinary No. and Date

1 of 1978 8/2 of 31.10.1978
1 of 1978 (Amendment) 111/4 of 24.10.1980
1 of 1978 (Amendment) 127/9 of 11.02.1981
1 of 1978 (Amendment) 171/16 of 18.12.1981
1 of 1978 (Amendment) 329/7 of 27.12.1984
1 of 1978 (Amendment) 522/18 of 08.09.1998
1 of 1978 (Amendment) 685/14 of 25.10.1991
1 of 1991 690/9 of 28.11.1991
1 of 1978 (Amendment) 697/4 of 13.01.1992
1 of 1978 (Amendment) 780/12 of 16.08.1993
1 of 1994 813/21 of 08.04.1994
2 of 1994 813/21 of 08.04.1994
1 of 1978 (Amendment) 813/21 of 08.04.1994
1 of 1995 896/17 of 10.11.1995
1 of 1994 (Amendment) 941/13 of 19.09.1996
1 of 1995 (Amendment) 941/13 of 19.09.1996
1 of 1995 (Amendment) 969/10 of 01.04.1997,
1 of 2002 1242/29 of 28.06.2002
1 of 2006 1447/15 of 31.05.2006
1 of 2006 1469/35 of 02.11.2006

The Exchange Control and the Inland Revenue Act are the other two important Laws which affect foreign investors.

RESERVED AND REGULATED ACTIVITIES

As stated earlier the areas totally reserved for Sri Lankans are:
(a) Money Lending;
(b) Pawn Brokering;
(c) Retail Trade with a capital investment of less than US$ 1 Million;
(d) Personal Services other than for exports or for tourism;
(e) Coastal fishing.
(f) Education of students who are citizens of Sri Lanka and not over 14 years of age.
(g) Award of local educational degrees.

Foreign Investment in the regulated areas listed below will be allowed on a case by case basis by the relevant authorities. The BOI will direct potential foreign investors to the appropriate authorities who regulate these activities and evaluate foreign investment proposals

(a) Air Transportation;
(b) Coastal Shipping;
(c) Industrial undertaking in the second schedule of the Industrial Promotion Act No. 46 of 1990 namely – 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,
(d) Lotteries and
(e) Large scale mechanised mining of gems

APPROVAL FOR INVESTMENT

The approval of the BOI for foreign investment is automatic in most instances unless t he same is in respect of foreign investment of more than 40% in an activity in the non-automatic list or if that involves provision of fiscal and financial incentives. The non-automatic list given by the BOI is as follows :- 
(a) Export production of goods subject to international quotas;
(b) Growing and primary processing of tea rubber coconut rice cocoa sugar and spices;
(d) Timber-based industries using local timber;
(e) Fishing; (deep sea Fishing)
(f) Mass Communications;
(g) Education;
(h) Freight forwarding;
(i) Travel Agencies ;
(j) Shipping Agencies.

Foreign investment exceeding 40% will be subject to case by case evaluation and approval by the BOI in consultation with the relevant authorities. This non-automatic list is stated to be under review with the aim of further simplification.

INCENTIVE PACKAGES

As an impetus to the development effort, the BOI provides a wide range of incentives and concessions. These incentives and concessions depend on the type of project proposed. The incentives offered belong to two classes or "regimes", and the enterprise may become eligible for incentives offered by either of these two regimes. Reproduced below are the investment incentives as announced by the BOI.

The two regimes are :

BOI Incentives under Section 17 of the BOI Law

Special incentives, outside identified laws of the country, are available to enterprises approved by the BOI, under Section 17 of the BOI Law, if they meet certain criteria.

INCENTIVES UNDER SEC. 17

Section 17(l) of the Board of Investment of Sri Lanka Law ('BOI Law') reads as follows:

"The Board shall have the power to enter into agreements with any enterprise in or outside the Area of Authority and to grant exemptions from any law referred to in Schedule B hereto, or to modify or vary the application of any such laws, to such enterprises in accordance with such regulations as may be made by the Minister." (Emphasis is ours)

The laws referred to in the Schedule B of the BOI Law are the following -

* The Inland Revenue Act No.4 of 1963;
* The Inland Revenue Act (No. 28 of 1979).
* The Inland Revenue Act (No. 38 of 2000)
* The Customs Ordinance.
* The Exchange Control Act.
* The Companies Act.
* The Merchant Shipping Act.
* The Finance Act No.65 of 1961, Parts I, 11, V, VI, VIl & VIII.
* The Air Navigation Act.

"Enterprise" has been defined by section 35 of the BOI Law and it means and includes only the enterprise, which is established with BOI approval for the purpose of carrying on the envisaged business.

Section 17(2) reads as follows :- "Every such agreement shall be reduced to writing and shall upon registration with the Board, constitute a valid and, binding contract between the Board and the enterprise."

Enterprises which satisfy specific eligibility criteria qualify for incentives under Section 17 of the BOI Law. The incentives offered by the BOI were expanded in November 1995. The new incentives represent a two pronged strategy: diversification of exports towards advanced technology and value addition, and investments in large scale projects including infrastructure. (Please see the BOI incentives at a glance given in the Table reproduced at pages 7a and 12 from the latest Brochure of the BOI)

For the purpose of granting the new incentives, "advanced technology" has been defined as follows by the Ministry of Finance.
i. Technology which introduces a new design, formula or process for the manufacture of an article or in the provision of a service, resulting in one or more of the following :- a. Higher productivity resulting in lower cost of production

b. Quality improvement of product/ service
c. Better Utilization of raw materials
d. Upgrading of technical skills
e. Minimizing/ controlling environmental pollution and/or wastage

ii. Manufacture of products using a technology hitherto not applied in Sri Lanka (excluding technology involving only simple processing)
iii. Technology for the local processing of raw materials, which are currently imported in processed form, excluding simple types of processing.
iv. Technology hitherto unutilized in Sri Lanka that would make use of local resources to provide public utilities and infrastructure services.

Investments in Non-Traditional Export-Oriented Manufacturing, Advanced Technology Electronics Sector Information Technology, IT enable d and Services, Regional Operating Head quarters and Direct and Indirect Exporters are the main types of investment that qualify for incentives under Section 17 of the BOI Law, with applicable conditions.

General Incentives Under the Normal Laws of the Country - Permission under Sec. 16 of the BOI Law

The incentives offered under this regime are also available to both local and foreign investors. Firms that do not qualify for concessions under Section 17 of the BOI Law may seek incentives available under the normal laws of the country such as Inland Revenue Act, Turnover Tax Act, Excise (Special Provisions) Act and Customs Ordinance. Foreign investment entry to operate under the normal laws is conferred under section 16 of the BOI Law which entities the enterprise to repatriate profits and dividends attributable to foreign shareholders.

Resident Visas

The BOI is responsible for the approval of all foreign direct investment. Foreign investors need to invest at least US $ 50,000 in the equity of the enterprise in order to qualify for approval under sections 16 or 17 of the BOI Law and to be eligible for a Resident Visa.

BOO, BOT AND BOOT PROJECTS

The Government of Sri Lanka has sought the collaboration of the private sector, local and foreign, on mutually beneficial terms in the development of the infrastructure. These projects typically take the form of privately owned and managed ventures or public-private partnerships whereby the resources, risk and profits connected with the venture are shared. Projects are usually structured on the basis of Build-Own-Operate (BOO), Build-Own-Transfer (BOT) or Build-Own-Operate-Transfer (BOOT).

In determining the terms of the BOO/BOT/BOOT projects the Government will negotiate with the objective of providing satisfactory services to the public at reasonable costs, while providing the private sector owner/operator with a risk-adjusted return. In the case of projects initiated by the Government, a tendering process will be conducted to secure such services at reasonable cost to the consumer by encouraging competition among potential private sector participants, while ensuring that their return on investment is reasonable but not excessive.

The Sri Lankan government now encourages local and foreign private investment in the country's infrastructure. Private investors are already active in telecommunications services such as cellular services, wireless local loop systems and pay phone networks. Investments into the power sector, ranging from mini-hydro systems to large-scale generation plants, and the port sector are now being implemented. Other opportunities in infrastructure investments are wide ranging highways, public transport and environment are a few examples. Foreign ownership up to 100% is allowed in these ventures.

In 1996, the Government issued new guidelines on the Government Tender Procedure. Part 11 of these guidelines deals with private sector finance projects. These guidelines require a Government agency which decides that certain infrastructure projects are to be implemented by or with the participation of the private sector to follow the procedure laid down in those guidelines. According to those guidelines, the Bureau of Infrastructure Investment is the coordinating agency of all activities in relation to such projects.

The focal point of the BOO/BOT/BOOT program is the Bureau of Infrastructure Investment (Bll) established as a separate unit of the BOI. Bll is responsible for all aspects of project development in collaboration with key policy and implementing Ministries and is promoting coordinating and facilitating foreign investment into the Infrastructure sector.

In terms of the guidelines set down by the Government, the procurement process relating to Infrastructure projects commences with the issue of a request for proposals. The proposals will be evaluated by a Project Committee which functions under a Cabinet Appointed Negotiating Committee.

In the alternative, in terms of the guidelines it is also possible for an investor to submit an unsolicited proposal. Where such a proposal is submitted, the relevant Government Agency will examine the need for such an Infrastructure project and if the need for such a project is recognised, the Government Agency will thereafter submit the unsolicited proposal to a competitive process. By this method the Government expects to obtain the best terms even from such an unsolicited proposal.