The Government of India continued to actively court foreign investment. In the wake of COVID-19, India enacted ambitious structural economic reforms, including new labor codes and landmark agricultural sector reforms, that should help attract private and foreign direct investment. In February 2021, the Finance Minister announced plans to raise $2.4 billion though an ambitious privatization program that would dramatically reduce the government’s role in the economy. In March 2021, parliament further liberalized India’s insurance sector, increasing the foreign direct investment (FDI) limits to 74 percent from 49 percent, though still requiring a majority of the Board of Directors and management personnel to be Indian nationals.
In response to the economic challenges created by COVID-19 and the resulting national lockdown, the Government of India enacted extensive social welfare and economic stimulus programs and increased spending on infrastructure and public health. The government also adopted production linked incentives to promote manufacturing in pharmaceuticals, automobiles, textiles, electronics, and other sectors. These measures helped India recover from an approximately eight percent fall in GDP between April 2020 and March 2021, with positive growth returning by January 2021.
India, however, remains a challenging place to do business. New protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade.
The U.S. government continued to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies toward Foreign Direct Investment
Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for most sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. FDI proposals in sensitive sectors, however, require the additional approval of the Home Ministry.
DPIIT, under the Ministry of Commerce and Industry, is India’s chief investment regulator and policy maker. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct–investment/foreign–direct–investment-policy. DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with lead ministries and stakeholders. There however have been multiple incidents where relevant stakeholders reported being left out of consultations.
Limits on Foreign Control and Right to Private Ownership and Establishment
In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” In the parliament’s 2021 budget session, the Indian government approved increasing the FDI caps in the insurance sector to 74 percent from 49 percent. However, the legislation retained the “Indian management and control” rider. In the August 2020 session of parliament, the government approved reforms that opened the agriculture sector to FDI, as well as allowed direct sales of products and contract farming, though implementation of these changes was temporarily suspended in the wake of widespread protests. In 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules that mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy.
Screening of FDI
All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment and applies in most sectors. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. The government route includes sectors deemed as strategic including defense, telecommunications, media, pharmaceuticals, and insurance. In August 2019, the government announced a new package of liberalization measures and brought a number of sectors including coal mining and contract manufacturing under the automatic route.
FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics are available at: http://dipp.nic.in/publications/fdi–statistics.
DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.
InvestIndia is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/. After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in the case of major projects, Prime Minister Modi started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As of January 2020, a total of 275 project proposals worth around $173 billion across ten states were cleared through PRAGATI. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. The government also launched an Inter-Ministerial Committee in late 2014, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports of stalled projects from business chambers and affected companies.
The Ministry of Commerce’s India Brand Equity Foundation (IBEF) claimed in March 2020 that outbound investment from India had undergone a considerable change in recent years in terms of magnitude, geographical spread, and sectorial composition. Indian firms invest in foreign markets primarily through mergers and acquisition (M&A). According to a Care Ratings study, corporate India invested around $12.25 billion in overseas markets between April and December 2020. The investment was mostly into wholly owned subsidiaries of companies. In terms of country distribution, the dominant destinations were the Unites States ($2.36 billion), Singapore ($2.07 billion), Netherlands ($1.50 billion), British Virgin Islands ($1.37 billion), and Mauritius ($1.30 million).
2. Bilateral Investment Agreements and Taxation Treaties
India adopted a new model Bilateral Investment Treaty (BIT) in December 2015, following several adverse rulings in international arbitration proceedings. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors first to exhaust all local judicial and administrative remedies before entering international arbitration. The Indian government also served termination notices for existing BITs with 73 countries.
In September 2018, Belarus became the first country to execute a new BIT with India, based on the new model BIT, followed by the Taipei Cultural & Economic Centre (TECC) in December 2019, and Brazil in January 2020. India has also entered into a BIT negotiation with the Philippines and joint interpretative statements are under discussion with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius, and Oman.
Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).
Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry. For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control.” On most occasions the rules are framed after thorough discussions by government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts. However, in some instances the rules have been framed without following any consultative process.
In 2017, India began assessing a six percent “equalization levy,” or withholding tax, on foreign online advertising platforms with the ostensible goal of “equalizing the playing field” between resident service suppliers and non-resident service suppliers. However, its provisions did not provide credit for taxes paid in other countries for services supplied in India. In February 2020, the FY 2020-21 budget included an expansion of the “equalization levy,” adding a two percent tax to the equalization levy on foreign e-commerce and digital services provider companies. Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms. In February 2021, the FY 2021-22 budget included three amendments “clarifying” the 2020 equalization levy expansion that will significantly extend the scope and potential liability for U.S. digital and e-commerce firms. The changes to the levy announced in 2021 will be implemented retroactively from April 2020. The 2020 and 2021 changes were enacted without prior notification or an opportunity for public comment.
The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html
International Regulatory Considerations
India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC’s economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1995, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.
Legal System and Judicial Independence
India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations for Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian judiciary provides for an integrated system of courts to administer both central and state laws. The judicial system includes the Supreme Court as the highest national court, as well as a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.
Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.
The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy (http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy). DPIIT makes policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are notified by the Ministry of Finance as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA). These notifications take effect from the date of issuance of the Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant Notification under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 will prevail. The payment of inward remittance and reporting requirements are stipulated under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 issued by the Reserve Bank of India (RBI). The regulatory framework, over a period, thus, consists of FEMA and Rules/Regulations thereunder, Consolidated FDI Policy Circulars, Press Notes, Press Releases, and Clarifications.
The government has introduced a “Make in India” program. “Self-Reliant India” program, as well as investment policies designed to promote domestic manufacturing and attract foreign investment. “Digital India” aimed to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to become commercially viable businesses and grow. The “Smart Cities” project was launched to open new avenues for industrial technological investment opportunities in select urban areas.
Competition and Anti-Trust Laws
The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, reviews cases against cartelization and abuse of dominance as well as conducts capacity-building programs for bureaucrats and business officials. Currently, the Commission’s investigations wing is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.
Expropriation and Compensation
Tax experts confirm that India does not have domestic expropriation laws in place. Legislative authority does exist in the form of the retroactive taxation, a measure introduced in 2012 and that has been defended despite government assurances of not introducing new retroactive taxes. The Indian government has been divesting from state owned enterprises (SOEs) since 1991. In February 2021, the Finance Minister detailed an ambitious program to privatize roughly $24 billion in SOEs and public sector assets to both help finance the FY 2021-22 budget without increasing taxes and reducing the role of the government in the economy.
India made resolving contract disputes and insolvency easier with the enactment and implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code put in place effective tools for creditors to successfully negotiate and increased their ability to receive payments. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also was reduced significantly from 4.3 years to 1.6 years. With these changes, India became the highest performer in South Asia in this category and exceeded the average for OECD high-income economies
India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with global standards. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.
Judgments of foreign courts have been enforced under multilateral conventions, including the Geneva Convention. India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying an arbitral award. Several cases are currently pending, the oldest of which dates to 1983, and the latest case is that of Amazon Vs. Future Retail, in which Amazon also received an interim award in its favour from the Singapore International Arbitration Centre. Future Retail refused to accept the findings and initiated litigation in Indian courts. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).
The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although it remains pending. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.
In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.
Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or via ad hoc proceedings.
International Commercial Arbitration and Foreign Courts
Alternate Dispute Resolution (ADR)
Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.
An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches, and judges; inordinate delays in filling judicial vacancies; and a very low rate of 14 judges per one million people.
The introduction and implementation of the IBC in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC created a uniform and comprehensive creditor-driven insolvency resolution process that encompasses all companies, partnerships, and individuals (other than financial firms). According to the World Bank Doing Business Report, after the implementation of the IBC, the time taken to for resolving insolvency was reduced significantly from 4.3 years to 1.6 years. The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions.
In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments targeted helping banks and financial institutions recover loans more effectively, encouraging the establishment of more asset reconstruction companies (ARCs), and revamping debt recovery tribunals. Union Finance Minister Nirmala Sitharaman, while presenting the FY 2021-22 budget, proposed setting up an ARC, or “bad bank”, to address perennial non-performing assets (NPAs) in the public banking sector.
4. Industrial Policies
The regulatory environment in terms of foreign investment has been eased to make it investor friendly. The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors, and simplifying other conditions of the FDI policy. The Indian government has issued guarantees to investments but only in cases of strategic industries.
Foreign Trade Zones/Free Ports/Trade Facilitation
The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. According to the Ministry of Commerce and Industry, as of October 2020, 426 SEZ’s have been approved and 262 SEZs were operational. SEZs are treated as foreign territory — businesses operating within SEZs are not subject to customs regulations nor have FDI equity caps. They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks. In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official. So far, three NIMZs have been accorded final approval and 13 have been accorded in-principal approval. In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been established as NIMZs. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in, https://www.stpi.in/ http://www.fisme.org.in/export_schemes/DOCS/B–
The GOI’s revised Foreign Trade Policy, which will be effective for five years starting April 1, 2021, is expected to include a new regionally focused District Export Hubs initiative in addition to existing SEZs and NIMZs
Performance and Data Localization Requirements
Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India. State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:
1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
a. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
b. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
c. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3,000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7,500), whichever is higher.
In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement. A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: http://meity.gov.in/esdm/pma.
Research and Development
The Government of India allows for 100 percent FDI in research and development through the automatic route.
Data Storage & Localization
In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. RBI policy overwhelmingly and disproportionately has affected U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and anti-money-laundering/combatting the financing of terrorism (AML/CFT) protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.
In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Personal Data Protection Bill (PDPB) in December 2019 which has remained pending in Parliament. The PDPB would require “explicit consent” as a condition for the cross-border transfer of sensitive personal data, requiring users to fill out separate forms for each company that held their data. Additionally, Section 33 of the bill would require a copy of all “sensitive personal data” and “critical personal data” to be stored in India, potentially creating redundant local data storage. The localization of all “sensitive personal data” being processed in India could directly impact IT exports. In the current draft no clear criteria for the classification of “critical personal data” has been included. The PDPB also would grant wide authority for a newly created Data Protection Authority to define terms, develop regulations, or otherwise provide specifics on key aspects of the bill after it becomes a law. Reports on Non-Personal Data and the implementation of a New Information Technology Rule 2021 with Intermediary Guidelines and Digital Media Ethics Code added further uncertainty to how existing rules will interact with the PDPB and how non-personal data will be handled. 5.Protection of Property Rights
In India, a registered sales deed does not confer title of land ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all the documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.
Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai, have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates — normally senior local government officials — notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.
In other urban areas, and in areas where illegal settlements have been established, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021.
Though land is a state government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list and so both the Indian Parliament and state legislatures can make laws on this subject. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, and continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70 percent approval from landowners. The displacement of poorer citizens is politically challenging for local governments.
Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.
Businesses that intend to build facilities on land they own are also required to take the following steps: register the land, seek land use permission if the industry is located outside an industrially zoned area, obtain environmental site approval, seek authorization for electricity and financing, and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.
In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php
The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx. Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.
Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.
Intellectual Property Rights
India remained on the Priority Watch List in the 2020 Special 301 Report due to concerns over weak intellectual property (IP) protection and enforcement. The 2020 Review of Notorious Markets for Counterfeiting and Piracy includes physical and online marketplaces located in or connected to India. The United States and India have continued to engage on a range of IP challenges facing U.S. companies in India with the intention of creating stronger IP protection and enforcement in India.
In the field of copyright, procedural hurdles, problematic policies, and effective enforcement remained concerns. In February 2019, the Cinematograph (Amendment) Bill, which would criminalize illicit camcording of films, was tabled in Parliament and remains pending. The expansive granting of licenses under Chapter VI of the Indian Copyright Act and overly broad exceptions for certain uses have raised concerns regarding the strength of copyright protection and complicated the market for music licensing. In June 2020, the Copyright Board was merged with the Intellectual Property Appellate Board. The lack of a functional copyright board had previously created uncertainty regarding how IP royalties were collected and distributed.
In 2019, the DPIIT proposed draft Copyright Amendment Rules that would broaden the scope of statutory licensing to encompass not only radio and television broadcasting but also online broadcasting, despite a high court ruling earlier in 2019 that held that statutory broadcast licensing does not include online broadcasts. If implemented, the Amendment Rules would have severe implications for Internet content-related right holders.
In the area of patents, a number of factors negatively affect stakeholders’ perception of India’s overall IP regime, investment climate, and innovation goals. The potential threat of compulsory licenses and patent revocations, and the narrow patentability criteria under the Indian Patent Act, burden companies across different sectors. Patent applications continue to face expensive and time consuming pre- and post-grant oppositions and excessive reporting requirements. In October 2020, India issued a revised “Statement of Working of Patents” (Form 27). The United States is monitoring whether the revision addresses concerns previously raised by innovators over Form 27’s burdensome nature and required disclosure of sensitive business information.
While certain administrative decisions in past years have upheld patent rights, and specific tools and remedies do exist in India to support the rights of a patent holder, concerns remain over revocations and other challenges to patents, especially patents for agriculture biotechnology and pharmaceutical products. In particular, the United States continues to monitor India’s application of its compulsory licensing law. Moreover, the Indian Supreme Court’s 2013 decision that India’s Patent Law created a second tier of requirements for patenting certain technologies, such as pharmaceuticals, continues to be of concern as it may limit the patentability in India for an array of potentially beneficial innovations.
India currently lacks an effective system for protecting against unfair commercial use, as well as unauthorized disclosure, of undisclosed tests or other data generated to obtain marketing approval for pharmaceutical and agricultural products. The U.S. government and stakeholders have also raised concerns with respect to allegedly infringing pharmaceuticals being marketed without advance notice or opportunity for parties to resolve their IP disputes.
U.S. and Indian companies have expressed interest in eliminating gaps in India’s trade secrets regime, such as through the adoption of standalone trade secrets legislation. In 2016, India’s National Intellectual Property Rights Policy called for trade secrets to serve as an “important area of study for future policy development,” but India has not yet prioritized this work.
Developments Strengthening the Rights of IP Holders
In terms of progress in patent examination, India issued a revised Manual of Patent Office Practice and Procedure in November 2019 that requires patent examiners to look to the World Intellectual Property Organization’s Centralized Access to Search and Examination (CASE) system and Digital Access Service (DAS) to find prior art and other information filed by patent applicants in other jurisdictions.
Other developments over the past year strengthening the rights of IP holders include India’s continued efforts to reduce delays and backlogs of patent and trademark applications, the Cell for IPR Promotion and Management’s (CIPAM) promotion of IP awareness and commercialization throughout India, and ongoing efforts to improve IP enforcement, particularly at the state level. However, state-level IP enforcement remains uneven in India, with some states conducting enforcement activities and others falling short in this regard.
Capital Markets and Portfolio Investment
According to media reports, India climbed two notches in 2020 to take the eighth spot among the world’s top stock markets as equities crossed the $2.5 trillion market capitalization mark on December 28, 2020 for the first time. The previous high was in January 2018 when market capitalization reached $2.47 trillion. 2020 saw 15 initial public offer (IPO) issues raising over $3.8 billion (INR 266.11 billion), a 115.3 percent rise over $1.77 billion (INR 123.61 billion) raised in 2019 through 16 IPO issues.
The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies. It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC). SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange. SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.
Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.
Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines. Standard Chartered Bank, a British bank which was the first and only foreign entity to list in India in June 2010, delisted from the domestic exchanges in June 2020. Experts attribute the lack of interest in IDR to initial entry barriers, lack of clarity on conversion of the IDR holding into overseas shares, lack of tax clarity, and the regulator’s failure to popularize the product.
External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity; permitted and non-permitted end-uses; maximum all-in-cost ceiling as prescribed by the RBI; funds are used for outward FDI or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities. The rules are published by the RBI: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.
According to RBI data, external commercial borrowings (ECBs) by corporations reached $36.35 billion in 2020. This was the second highest inflow of offshore loans in a calendar year, following $50.51 billion raised in 2019. The monthly borrowing dropped to a multi-year low of $0.9 billion in April when the lockdown brought both economic and lending activities to a standstill. It then improved to $5.22 billion in September, driven by funds-raising by Reliance Industries. Non-banking financial companies (NBFC) also increased borrowing and corporations raised $1.6 billion through the issuance of rupee-denominated bonds.
The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non-Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market. FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds.
The RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs). In June 2020, the RBI allowed foreign branches of Indian banks and branches located in the IFSC to participate in the NDF. With the rupee trading volume in the offshore market higher than the onshore market, RBI felt the need to limit the impact of the NDF market and curb volatility in the movement of the rupee.
The International Financial Services Centre at Gujarat International Financial Tech-City (GIFT City) in Gujarat is being developed to compete with global financial hubs. The BSE was the first to start operations there, in January 2016. NSE domestic banks and foreign banks have started IFSC banking units in GIFT city. As part of its Budget 2020 proposal, the government proposed establishing an international bullion exchange at IFSC, which would lead to better price discovery of gold, create more jobs, and enhance India’s position in such markets.
Money and Banking System
The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. However, the share of public banks has fallen sharply in the last five years (from 74.2 percent in 2015 to 59.8 percent in 2020), primarily driven by stressed balance sheets and non-performing loans. Also, several new licenses were granted to private financial entities (two new universal bank licenses and 10 small finance bank licenses) in the past few years. The government announced plans in 2021 to privatize two PSBs. This follows Indian authorities consolidating 10 public sector banks into four in 2019, which reduced the total number of public sector banks from 18 to 12. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18 percent of their net demand and time liabilities in government securities.
PSBs continue to face two significant hurdles: capital constraints and poor asset quality. As of September 2020, gross non-performing loans represented 7.5 percent of total loans in the banking system, with the public sector banks having a larger share at 9.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years has been driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. The COVID-19 crisis further exacerbated the stress, with NPAs likely to rise as the forbearance period ends. The government announced its intention to set up an asset reconstruction company to take over legacy stressed assets from bank balance sheets. With IBC in place, banks were making progress in non-performing asset recognition and resolution. However, the IBC Code was suspended following the onset of COVID-19 through March 2021 to help businesses cope with the economic disruptions caused by the pandemic.
To address asset quality challenges faced by public sector banks, the government injected $32 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CAR) improved to 13.5 percent in September 2020 from 12.9 in March 2020.
Women in the Financial Sector
Women’s lack of sufficient access to finance remained a major impediment to women’s entrepreneurship and participation in the workforce. According to experts, women are more likely than men to lack financial awareness, confidence to approach a financial institution, or possess adequate collateral, often leaving them vulnerable to poor terms of finance. Despite legal protections against discrimination, some banks reportedly remained unwelcoming towards women as customers. The International Finance Corporation (IFC) analysts described Indian women-led Micro, Small, and Medium Enterprises (MSME) as a large but untapped market that has a total finance requirement of $29 billion (72 percent for working capital). However, 70 percent of this demand remained unmet, creating a shortfall of $20 billion. The IFC argued that financial institutions should view this market as a compelling, profitable business segment, not corporate social responsibility or charitable activity.
The government-affiliated think tank NITI Aayog provides information on networking, mentorship, and financing to more than 18,000 members via its Women Entrepreneurship Platform (WEP). The WEP was launched in March 2018, following the 2017 Global Entrepreneurship Summit, that India hosted in partnership with the United States, focused on “Women First and Prosperity for All.” The GOI’s financial inclusion scheme Pradhan Mantri Jan Dhan Yojana (PMJDY) provides universal access to banking facilities with at least one basic banking account for every adult, financial literacy, access to credit, insurance, and pension. As of March 3, 2021, 233 million out of 420 million beneficiaries are women (55 percent.) In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000 — 70 percent of the beneficiaries are women.
Foreign Exchange and Remittances
The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The Indian Rupee or INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 (https://www.rbi.org.in/Scripts/Fema.aspx).
Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.
Capital account transactions are open to foreign investors, though subject to various clearances. Non-resident Indian investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.
FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.
The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification (https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.
Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.
Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.
Sovereign Wealth Funds
In 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. In December 2020, NIIF officially closed the Master Fund with $2.34 billion in commitments from other Sovereign Wealth Funds and global pension funds. The NIIF Master Fund is focused on investing in core infrastructure sectors including transportation, energy, and urban infrastructure.
The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises (http://dpe.gov.in) controls and formulates all the policies pertaining to SOEs and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken several steps to improve the performance of SOEs, also called Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. This was necessary as the government planned to disinvest its stake from these entities. All the CPSE’s are listed on stock exchanges as the government partially divested its equity from these entities.
According to the Public Enterprise Survey 2018-19, as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses.
Foreign investments are allowed in CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp. While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.
Despite the financial upside to disinvestment in loss-making SOEs, the government has not generally privatized its assets as they have led to job losses in the past, and therefore engendered political risks. Instead, the government adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.
In the FY 2021-22 budget, however, Finance Minister Nirmala Sitharaman unveiled a new Disinvestment/Strategic Disinvestment Policy detailing the government’s intent to privatize most state-owned companies in a phased manner. A few sectors were categorized as strategic sectors where the government plans to maintain a minimal presence. The budget established a disinvestment target of $24 billion for FY2021-22 after disinvestments planned for the prior fiscal year were not completed, many of which the government claimed were negatively impacted by the COVID-19 pandemic.
Foreign institutional investors can participate in the disinvestment programs. The earlier limits for foreign investors were 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. In the case of public sector banks, the limit is 20 percent of the paid-up capital. For many SOEs there is no bidding process as the shares of the entities being disinvested are sold in the open market. Certain SOEs, however, such as Air India are subject to a structure bidding process.
Among Indian companies there is a general awareness of standards for responsible business conduct. The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013 and is responsible for regulating the corporate sector in accordance with the law. The MCA is also responsible for protecting the interests of consumers by ensuring competitive markets.
The Companies Act of 2013 also established the framework for India’s corporate social responsibility (CSR) laws. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track CSR activities and provide recommendations in some cases for effective use of CSR funds. MCA released the National Guidelines on Responsible Business Conduct, 2018 (NGRBC) on March 13, 2019 to improve the 2011 National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The NGRBC aligned with the United Nations Guiding Principles on Business & Human Rights (UNGPs).
Per the Ministry of Corporate Affairs, corporations used all or most of their CSR money in 2020 to combat the COVID-19 pandemic, be it through contributions to the PM CARES Fund or other relief funds; distribution of food, masks, personal protective equipment (PPE) kits; or providing relief material to the needy. About $1 billion was spent during March-May 2020 that was classified as CSR. The tally of eligible companies that spent on CSR in FY 2019 and duly reported it rose to 1,276, compared with 1,246 the previous fiscal and their total CSR spend increased by around 14 percent year on year. Over two-thirds of these spent 2 percent or more of their net profits. (Note: The Companies Act, 2013 mandates that companies spend an average of 2 percent of their average net profit of the preceding three fiscal years. End Note).
India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.
India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.
India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India, with a score of 40, ranked 86 among 180 countries in Transparency International’s 2020 Corruption Perception Index.
Corruption is addressed by the following laws: The Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels and elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector based on allegations of revenue loss to the exchequer.
Other statutes approved by parliament to tackle corruption include:
The Benami Transactions (Prohibition) Amendment Act of 2016
The Real Estate (Regulation and Development) Act, 2016, enacted in 2017
The Whistleblower Protection Act, 2011 was passed in 2014 but has yet to be operationalized
The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. However, the government has not established any monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act of 2011 may afford some protection once implemented.
In 2013, Parliament enacted the Lokpal and Lokayuktas Act, which created a national anti- corruption ombudsman and required states to create state-level ombudsmen within one year of the law’s passage. A national ombudsman was finally appointed in March 2019.
UN Anticorruption Convention, OECDConvention on Combatting Bribery
India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
The Indian chapter of Transparency International was closed in 2019.
Resourcesto ReportCorruption at the Embassy
Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi +91 11 2419 8000 email@example.com
India is a multiparty, federal, parliamentary democracy with a bicameral legislature. The president, elected by an electoral college composed of the state assemblies and parliament, is the head of state, and the prime minister is the head of government. National parliamentary elections are held every five years. Under the constitution, the country’s 28 states and eight union territories have a high degree of autonomy and have primary responsibility for law and order. Electors chose President Ram Nath Kovind in 2017 to serve a five-year term. Following the May 2019 national elections, Prime Minister Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) received a larger majority in the lower house of Parliament, or Lok Sabha, than it had won in the 2014 elections and returning Modi for a second term as prime minister. Observers considered the parliamentary elections, which included more than 600 million voters, to be free and fair, although there were reports of isolated instances of violence.
The government’s first 100 days of its second term were marked by two controversial decisions. The removal of special constitutional status from the state of Jammu and Kashmir (J&K) and the passage of the Citizenship Amendment Act (CAA). Protests followed the enactment of the CAA but ended with the onset of COVID-19 in March 2020 and the imposition of a strict national lockdown. The management of COVID-19 became the dominant issue in 2020 including the drop in economic activity and by December 2020, economic activity started to show signs of positive growth. The BJP-led government has faced some criticism for its response to the recent surge in COVID-19 cases.
Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port and dock, banking, and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.
In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages in 2019. During 2020, the parliament passed the Industrial Relations Code; the Occupational Safety, Health and Working Conditions Code; and the Code on Social Security. Along with the 2019 Code on Wages, the four codes harmonize and simplify India’s 29 existing labor laws with the aim of improving the business environment for both industry and workers. The changes expanded the potential use of contract labor, raised the threshold for small and medium sized enterprise exemptions from 100 to 300 employees, and expanded minimum wage and social security coverage to informal sector workers in agriculture and the growing gig economy, and gave employers greater hiring and firing flexibility. Details of the laws approved by parliament can be accessed at https://labour.gov.in/labour-law-reforms.
In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks. The amendment also made it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.
In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.
There are no reliable unemployment statistics for India due to the informal nature of most employment. During the COVID-19 pandemic experts claimed the unemployment rate spiraled as people in the informal sector lost their jobs. The Centre for Monitoring Indian Economy (CMIE) reported that the average unemployment in the April-June period of 2020 was around 24 percent. during a stringent national lockdown imposed in response to COVID-19. As the lockdown was eased, CMIE estimated the unemployment rate during the August-October period improved to around 7.9 percent.
The government has acknowledged a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. In response, the government established a Ministry of Skill Development and embarked on a national program to increase skilled labor.
The United States and India signed an Investment Incentive Agreement in 1997. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). The DFC is the U.S. Government’s development finance institution, launched in December 2019, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974 the DFC (under its predecessor agency, OPIC) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance.
As of March 2021, DFC’s current outstanding portfolio in India comprised more than $2.5 billion across 50 projects. These commitments were concentrated in renewable energy, financial services (including microfinance), and impact investments that include agribusiness and healthcare.
Table2: KeyMacroeconomicData, U.S. FDI in HostCountry/Economy
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Cumulative FDI April 2000 to December 2020
(in USD million)
Total Inward 521,468
Source: Inward FDI DIPP, Ministry of Commerce and Industry
Outward investments from India (April – November 2020)
(in USD millions)
Total Outward 12,250
British Virgin Islands 1,370
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000 IngeneriPM@state. gov
Sri Lanka is a lower middle-income country with a Gross Domestic Product (GDP) per capita of about $ 3,682 (according to the Central Banka of Sri Lanka (CBSL) and a population of approximately 22 million in 2020. The island’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives Sri Lanka a regional logistical advantage.
After 30 years of civil war, Sri Lanka is transitioning from a predominantly rural-based economy to a more urbanized economy focused on manufacturing and services. Sri Lanka’s export economy is dominated by apparel and cash-crop exports, mainly tea, but technology service exports are a significant growth sector. Prior to the April 21, 2019, Easter Sunday attacks, the tourism industry was rapidly expanding, with Lonely Planet naming Sri Lanka its top travel destination in 2019. However, the attacks led to a significant decline in tourism that continued into 2020 due to COVID-19 and the government’s related decision to close its main international airport for commercial passenger arrivals in March 2020. The airport reopened for limited commercial passengers in January 2021, but newly reimposed travel restrictions are resulting in severe contractions for both the tourism and apparel export sectors with potential follow-on impacts in related sectors including services, construction, and agriculture. Tourism revenue dropped 73 percent year-over-year (YoY) in 2020 while apparel exports dropped 15.6 percent in the same period. However, official figures for migrant labor remittances, another significant source of foreign exchange, increased to $7.1 billion in 2020 due to the collapse of informal money transfer systems during the pandemic, despite the job losses to Sri Lankan migrant workers, especially in the Middle East.
The administration of President Gotabaya Rajapaksa, who was elected in November 2019, has largely promoted pro-business positions, including announcing tax benefits for new investments to attract foreign direct investment (FDI). As outlined in its election manifesto, the Rajapaksa government’s economic goals, include positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines), improving trade logistics, attracting export-oriented FDI, and boosting firms’ abilities to compete in global markets. However, COVID-19 and the subsequent lockdowns brought new economic challenges, forcing the government to adapt policies to the situation on the ground. In April 2020, the Ministry of Finance restricted imports of luxury and semi-luxury consumer products such as consumer durables, motor vehicles, and the import of certain agricultural products as a means of saving foreign reserves and creating employment in labor intensive agriculture. With a debt-to-GDP ratio now above 100 percent (of which 60 percent is foreign debt), Sri Lanka is facing a potential liquidity crisis, exacerbated by declining export receipts due to the pandemic. Exports of goods fell 15.6 percent to $10 billion in 2020, down from $12 billion in 2019. Exports of services fell roughly 60 percent to $3 billion in 2020 down from $7.5 billion in 2019.
FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. With a growing middle class, investors also see opportunities in franchising, information technology services, and light manufacturing for the domestic market. The Board of Investment (BOI) is the primary government authority responsible for investment, particularly foreign investment, aiming to provide “one-stop” services for foreign investors. The BOI is committed to facilitating FDI and can offer project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances. However, Sri Lanka’s import regime is one of the most complex and protectionist in the world. Sri Lanka ranks 99th out of 190 countries on the World Bank’s Doing Business Index and ranks very poorly in several areas, including contract enforcement (164 out of 190); paying taxes (142/190); registering property (138/190); and obtaining credit (132/190). Sri Lanka ranks well in protecting minority investors, coming in at 28/190 in 2020.
Sri Lanka’s GDP contracted 3.6 percent to approximately $81 billion in 2020 due to COVID-19, an improvement on the International Monetary Fund (IMF) projection for a 4.6 percent contraction. FDI fell to approximately $550 million in 2020, significantly less than the $1.2 billion in 2019 and $2.3 billion in 2018. The IMF projects a four percent growth in 2021.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Sri Lanka is a constitutional multiparty socialist republic. In 1978, Sri Lanka began moving away from socialist, protectionist policies and opening up to foreign investment, although changes in government are often accompanied by swings in economic policy. While the incumbent government largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI, the government also made interventionist policies to arrest the ongoing economic fallout from COVID-19. This in turn has altered the field of foreign direct investment towards manufacturing intended to the domestic market.
The BOI (www.investsrilanka.com), an autonomous statutory agency, is the primary government authority responsible for investment, particularly foreign investment, with BOI aiming to provide “one-stop” services for foreign investors. BOI’s Single Window Investment Facilitation Taskforce (SWIFT) helps facilitate the investment approvals process and works with other agencies in order to expedite the process. BOI can grant project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.
Importers to Sri Lanka face high barriers. According to a World Bank study, Sri Lanka’s import regime is one of the most complex and protectionist in the world. U.S. stakeholders have raised concerns the government does not adequately consult with the private sector prior to implementing new taxes or regulations – citing the severe import restrictions imposed as a reaction to COVID-19 as an example. These restrictions, quickly imposed without consulting the private sector, further complicated Sri Lanka’s import regime. Similarly, stakeholders have raised concerns that the government does not allow adequate time to implement new regulations. Additionally, the Sri Lankan government has banned the importation of several “non-essential” items since April 2020 in an attempt to curtail foreign exchange outflow as the Sri Lankan rupee (LKR) depreciated around five percent year-to-date in 2021 and is expected to come under further pressure.
Sri Lanka is a challenging place to do business, with high transaction costs aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices. Investors noted concerns over the potential for contract repudiation, cronyism, and de facto or de jure expropriation. Public sector corruption is a significant challenge for U.S. firms operating in Sri Lanka and a constraint on foreign investment. While the country generally has adequate laws and regulations to combat corruption, enforcement is weak, inconsistent, and selective. U.S. stakeholders and potential investors expressed particular concern about corruption in large infrastructure projects and in government procurement. The government pledged to address these issues, but the COVID-19 response remains its primary concern. Historically, the main political parties do not pursue corruption cases against each other after gaining or losing political positions.
While Sri Lanka is a challenging place for businesses to operate, investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other lower middle-income markets. However, scalability is a problem due to the lack of skilled labor, a relatively small talent pool and constraints on land ownership and use. Investors note that employee retention is generally good in Sri Lanka, but numerous public holidays, a reluctance of employees to work at night, a lack of labor mobility, and difficulty recruiting women decrease efficiency and increase start-up times. A leading international consulting firm claims the primary issue affecting investment is lack of policy consistency.
Limits on Foreign Control and Private Ownership
Foreign ownership is allowed in most sectors, although foreigners are prohibited from owning land with a few limited exceptions. Foreigners can invest in company shares, debt securities, government securities, and unit trusts. Many investors point to land acquisition as the biggest challenge for starting a new business. Generally, Sri Lanka prohibits the sale of public and private land to foreigners and to enterprises with foreign equity exceeding 50 percent. However, on July 30, 2018, Sri Lanka amended the Land (Restriction of Alienation) Act of 2014 to allow foreign companies listed on the Colombo Stock Exchange (CSE) to acquire land. Foreign companies not listed on the CSE—but engaged in banking, financial, insurance, maritime, aviation, advanced technology, or infrastructure development projects identified and approved as strategic development projects—may also be exempted from restrictions imposed by the Land Act of 2014 on a case-by-case basis.
The government owns approximately 80 percent of the land in Sri Lanka, including the land housing most tea, rubber, and coconut plantations, which are leased out, typically on 50-year terms. Private land ownership is limited to fifty acres per person. Although state land for industrial use is usually allotted on a 50-year lease, the government may approve 99-year leases on a case-by-case basis depending on the project. Many land title records were lost or destroyed during the civil war, and significant disputes remain over land ownership, particularly in the North and East. The government has started a program to return property taken by the government during the war to residents in the North and East.
The government allows up to 100 percent foreign investment in any commercial, trading, or industrial activity except for the following heavily regulated sectors: banking, air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. However, select strategic sectors, such as railway freight transportation and electricity transmission and distribution, are closed to any foreign capital participation. Foreign investment is also not permitted in the following businesses: pawn brokering; retail trade with a capital investment of less than $5 million; and coastal fishing.
Foreign investments in the following areas are restricted to 40 percent ownership: a) production for export of goods subject to international quotas; b) growing and primary processing of tea, rubber, and coconut, c) cocoa, rice, sugar, and spices; d) mining and primary processing of non-renewable national resources, e) timber based industries using local timber, f) deep-sea fishing, g) mass communications, h) education, i) freight forwarding, j) travel services, k) businesses providing shipping services.
In areas where foreign investments are permitted, Sri Lanka treats foreign investors the same as domestic investors. However, corruption reportedly may make it difficult for U.S. firms to compete against foreign bidders not subject to the U.S. Foreign Corrupt Practices Act when competing for public tenders.
The Department of Registrar of Companies (www.drc.gov.lk) is responsible for business registration. Online registration (http://eroc.drc.gov.lk/) was recently introduced and registration averages four to five days. In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number (TIN) for payment of taxes and with the Department of Labor for social security payments.
The government supports outward investment, and the Export Development Board offers subsidies for companies seeking to establish overseas operations, including branch offices related to exports. New outward investment regulations came into effect November 20, 2017. Sri Lankan companies, partnerships, and individuals are permitted to invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the new Foreign Exchange Regulations. Sri Lankan companies are also permitted to establish overseas companies. Investments over the specified limit require the Central Bank Monetary Board’s approval. All investments must be made through outward investment accounts (OIA). All income from investments overseas must be routed through the same OIA within three months of payment. (Note: In the wake of the COVID-19 pandemic, the Sri Lankan government introduced a series of measures attempting to ease pressure on the Sri Lankan rupee. These measures included a temporary suspension on OIA transactions and additional foreign exchange controls.)
2. Bilateral Investment Agreements and Taxation Treaties
Sri Lanka has signed investment protection agreements with 26 countries, including the United States (which came into force in May 1993). Pursuant to the Constitution, investment protection agreements enjoy the force of law and legislative, executive, or administrative actions cannot contravene them.
Sri Lanka has signed free trade agreements (FTAs) with India, Pakistan, and Singapore, and is negotiating an FTA with China.
The FTAs with India and Pakistan only cover trade in goods. They provide for duty-free entry and duty preferences for manufactured and agricultural goods. A domestic value addition of 35 percent is required to qualify for concessions granted pursuant to the FTAs.
The Singapore-Sri Lanka FTA came into force on May 1, 2018, and covers: investment, goods, services, trade facilitation, government procurement, telecommunications, e-commerce, and dispute settlement. Sri Lanka eliminated customs duties on 50 percent of tariff lines, which will progressively increase to 80 percent over 14 years. Sri Lanka will not reduce or eliminate duties on the remaining 20 percent of tariff lines.
Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).
The United States-Sri Lanka Trade and Investment Framework Agreement (TIFA) is the primary forum for bilateral trade and investment discussions, including the protection of worker rights.
Sri Lanka has signed bilateral agreements with an additional 43 countries.
Sri Lanka passed an Inland Revenue Act in 2017. The law, which came into force on April 1, 2018, provides a tax framework to provide increased certainty to investors and taxpayers; modernize rules related to cross-border transactions to address tax avoidance; broaden the tax base; and expand income tax sources. A three-tier corporate tax structure was also introduced with a 40 percent rate for businesses in the liquor, tobacco, and betting and gaming industries. The law also introduced capital gains tax and fines and/or imprisonment for tax evasion and personal liability for company directors.
3. Legal Regime
Transparency of the Regulatory System
Many foreign and domestic investors view the regulatory system as unpredictable with outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion. BOI is responsible for informing potential investors about laws and regulations affecting operations in Sri Lanka, including new regulations and policies that are frequently developed to protect specific sectors or stakeholders. Effective enforcement mechanisms are sometimes lacking, and investors cite coordination problems between BOI and relevant line agencies. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during the tender process.
Corporate financial reporting requirements in Sri Lanka are covered in a number of laws, and the Institute of Chartered Accountants of Sri Lanka (ICASL) is responsible for setting and updating accounting standards to comply with current accounting and audit standards adopted by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB). Sri Lanka follows International Financial Reporting Standards (IFRS) for financial reporting purposes set by the IASB. Sri Lankan accounting standards are applicable for all banks, companies listed on the stock exchange, and all other large and medium-sized companies in Sri Lanka. Accounts must be audited by professionally qualified auditors holding ICASL membership. ICASL also has published accounting standards for small companies. The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards.
Overall legislative authority lies with Parliament. Line ministries draft bills and, together with regulatory authorities, are responsible for crafting draft regulations, which may require approval from the National Economic Council, the Cabinet, and/or Parliament. Bills are published in the government gazette http://documents.gov.lk/en/home.php at least seven days before being placed on the Order Paper of the Parliament (the first occasion the public is officially informed of proposed laws) with drafts being treated as confidential prior to this. Any member of the public can challenge a bill in the Supreme Court if they do so within one week of its placement on the Order Paper of the Parliament. If the Supreme Court orders amendments to a bill, such amendments must be incorporated before the bill can be debated and passed. Regulations are made by administrative agencies and are published in a government gazette, similar to a U.S. Federal Notice. In addition to regulations, some rules are made through internal circulars, which may be difficult to locate.
The Central Bank and the Finance Ministry published information on Central Government debt including contingent liabilities and government finance. Central Bank publishes information on debt of major SOE’s. Debt obligations are available online in the Central Bank Annual Report; Fiscal Management Report of the Finance Ministry; Annual Report of the Ministry of Finance. Information on contingent liabilities is available in the Annual Report of the Ministry of Finance. Since 2018, the Central Bank published guaranteed debt and central government debt annually.
International Regulatory Considerations
Sri Lanka is a member of the World Trade Organization (WTO) and has made WTO notifications on customs valuation, agriculture, import licensing, sanitary and phytosanitary measures, the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Sri Lanka ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and a National Trade Facilitation Committee was tasked with undertaking reforms needed to operationalize the TFA. The WTO conducted a review of the TFA in June 2019 in which Sri Lankan officials noted challenges related to accessing technical assistance and capacity building support for implementation of TFA recommendations.
Legal System and Judicial Independence
Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British-based while civil law is Roman-Dutch. Laws on marriage, divorce, inheritance, and other issues can also vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory, reflecting British colonial law, although amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial issues: the BOI Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act.
Sri Lanka’s court system consists of the Supreme Court, the Court of Appeal, provincial High Courts, and the Courts of First Instance (district courts with general civil jurisdiction) and Magistrate Courts (with criminal jurisdiction). Provincial High Courts have original, appellate, and reversionary criminal jurisdiction. The Court of Appeal is an intermediate appellate court with a limited right of appeal to the Supreme Court. The Supreme Court exercises final appellate jurisdiction for all criminal and civil cases. Citizens may apply directly to the Supreme Court for protection if they believe any government or administrative action has violated their fundamental human rights.
Laws and Regulations on Foreign Direct Investment
The principal law governing foreign investment is Law No. 4 (known as the BOI Act), created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012. The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions. Under Section 17 of the Act, the BOI is empowered to approve companies satisfying minimum investment criteria with such companies eligible for duty-free import concessions. The BOI acts as the “one-stop-shop” to facilitate all the requirements of the foreign investors to Sri Lanka. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws and applies to investments that do not satisfy eligibility incentive criteria. From April 1, 2017, Inland Revenue Act No. 24 of 2017 created an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments. Commercial Hub Regulation No 1 of 2013 applies to transshipment trade, offshore businesses, and logistic services. The Strategic Development Project Act of 2008 (SDPA) provides tax incentives for large projects that the Cabinet identifies as “strategic development projects.”
Sri Lanka does not have a specific competition law. Instead, the BOI or respective regulatory authorities may review transactions for competition-related concerns. In March of 2017, Parliament approved the “Anti-Dumping and Countervailing” and “Safeguard Measures” Acts. These laws provide a framework against unfair trade practices and import surges and allow government trade agencies to initiate investigations relating to unfair business practices to impose additional and/or countervailing duties.
Expropriation and Compensation
Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment, with the last expropriation dispute resolved in 1998. The land acquisition law (Land Acquisition Act of 1950) empowers the government to take private land for public purposes with compensation based on a government valuation. Still, there have been reported cases of the military taking over businesses in the North and East part of the country, by claiming they were on government land, with little or no compensation.
ICSID Convention and New York Convention
Sri Lanka is a member state to the International Centre for the Settlement of Investment Disputes (ICSID convention) and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.
Investor-State Dispute Settlement
Sri Lanka signed a Bilateral Investment Treaty (BIT) with the United States in 1991. Over the past ten years, according to the United Nations, two investment disputes in Sri Lanka have involved foreign investors: 1) a dispute between a major European bank and the national Ceylon Petroleum Corporation regarding an oil hedging agreement, concluded with the proceeding being decided in favor of the foreign bank; and 2) an arbitration involving British and local investors (with the Attorney General as respondent) regarding a tourism development project that concluded in 2020 with the ICSID tribunal dismissing the $20 million claim for failure to prove the claim.
International Commercial Arbitration and Foreign Courts
Sri Lanka ranks very poorly on contract enforcement (164 out of 190) on the World Bank’s Doing Business Indicators. As a result, many investors prefer arbitration over litigation. Sri Lanka has a community mediation system, which primarily handles non-commercial mediations and commercial disputes where the amount in controversy is less than $3,333.00. There is no-mediation system for commercial disputes over that threshold amount. The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com) and the Sri Lanka National Arbitration Centre (www.slnarbcentre.com) also help settle private commercial disputes through arbitration.
The Companies Act and the Insolvency Ordinance provide for dissolution of insolvent companies, but there is no mechanism to facilitate the reorganization of financially troubled companies. Other laws make it difficult to keep a struggling company solvent. The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems. In the absence of comprehensive bankruptcy laws, extra-judicial powers granted by law to financial institutions protect the rights of creditors. A creditor may petition the court to dissolve the company if the company cannot make payments on debts in excess of LKR 50,000 ($320.00). Lenders are also empowered to foreclose on collateral without court intervention. However, loans below LKR 5 million ($32,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan.
Sri Lanka ranked 94 out of 190 countries in the resolving insolvency index in the World Bank’s Doing Business Report 2020. Resolving insolvency takes, on average, 1.7 years at a cost equivalent to 10 percent of the estate’s value.
4. Industrial Policies
The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in certain sectors and increased capital allowances (depreciation) on capital investments.
As per the 2021 budget revisions the standard rate of corporate tax is 14 percent for: a) small and medium companies (with an annual income of less than LKR 500 million or $3.2 million); b) companies exporting goods and services; and c) companies engaged in education services; promotion of tourism; d) companies engaged in construction and e) companies engaged in healthcare services. Companies engaged in information technology services and agricultural business are exempt from taxes. A 40 percent corporate tax rate applies to companies engaged in gaming, liquor, and tobacco related businesses. An 18 percent tax on manufacturing and 24 percent tax on Trading, banking, finance, insurance, and similar businesses.
Sri Lanka has 15 free trade zones, also called “export processing zones,” which are administered by the BOI. Foreign investors have the same investment opportunities as local entities in these zones. Export-oriented companies located within and outside the zones are eligible to import project-related material and inputs free of customs import duties although such imports may be subject to other taxes.
In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transportation time and cost. However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, environmental pollution, and a scarcity of labor. The BOI and the government now encourage export-oriented factories to locate in industrial zones farther from Colombo, although Sri Lanka’s limited road network create other challenges for outlying zones.
In 2019, the China Harbor Engineering Company (CHEC) completed the reclamation of 269 hectares of land adjacent to Colombo’s port and historic downtown to form the Colombo Port City Special Economic Zone (SEZ), which government officials describe as a future “international commercial and financial hub.” CHEC invested $1.4 billion in the land reclamation and basic infrastructure of the Port City, in return for which it will have control, via lease, of 116 of the 178 total hectares of marketable land on the site, the balance of which the government will control. Parliament approved on May 20, 2021 legislation to govern the SEZ and establish a commission to act as promoter, manager, regulator, and “single window investment facilitator” to attract foreign direct investment to the project. The legislation also includes tax exemptions and other incentives for potential investors. The legislation was amended prior to approval by a simple majority in Parliament following a Supreme Court ruling on multiple legal challenges to the bill’s constitutionality, though concerns remain about the potential risk of illicit financial flows.
Performance and Data Localization Requirements
Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor. Technical and managerial personnel are in short supply, and this shortage is likely to continue in the near future. Foreign laborers do not experience significant problems in obtaining work or residence permits. Sri Lanka has seen a rise in foreign laborers, mainly in construction sites, with some reportedly working without proper work visas. Foreign investors who remit at least $250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program: (http://www.immigration.gov.lk/web/index.php?option=com_content&view=article&id=154&Itemid=200&lang=en). Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries, including the United States. Tourist and business visas are granted for one month with possible extensions.
Sri Lanka has no specific requirements for foreign information technology providers to turn over source code or provide access to surveillance. Provisions relating to interception of communications for cybercrime issues are subject to court supervision under the Computer Crimes Act (CCA) of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015, and safeguards based on the convention are in force. Although there is no comprehensive legislative protection of electronic data, the CCA has a provision to protect data and information. The government is currently formulating data protection legislation. There is no ban on the sale of electronic data for marketing purposes.
5. Protection of Property Rights
Secured interests in real property in Sri Lanka are generally recognized and enforced, but many investors claim protection can be flimsy. A reliable registration system exists for recording private property including land, buildings, and mortgages, although problems reportedly exist due to fraud and forged documents. In the World Bank’s 2020 “Doing Business Index,” Sri Lanka ranked 138 out of 190 countries for registering a property. Property registration required, on average, completion of eight procedures lasting 39 days. Sri Lanka prohibits the sale of land to foreign nationals and to enterprises with foreign equity exceeding 50 percent.
Intellectual Property Rights
While IPR enforcement is improving, counterfeit goods, particularly imports, are still widely available, and music and software piracy are reportedly widespread. Foreign and U.S. companies in the recording, software, movie, clothing, and consumer product industries claim that inadequate IPR protection and enforcement weaken their businesses in Sri Lanka.
Sri Lanka has a comprehensive IPR law, and several offenders have been charged or convicted. The government points to the new information technology (IT) policy that requires government agencies to use licensed or open-source software as proof of IPR improvements (although the government has yet to put systems in place to monitor compliance with the policy) and some sectors – including apparel, software, tobacco, and electronics have reported success in combating trademark counterfeiting through the courts. Still, judicial redress remains time-consuming and challenging. Better coordination among enforcement authorities and government institutions – such as the National Intellectual Property Office (NIPO), Sri Lanka Customs, and Sri Lanka Police as well as more trained staff and resources – is needed to strengthen Sri Lanka’s IPR regime. Although infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties, Sri Lanka does not track and report on seizures of counterfeit goods.
Sri Lanka is a party to major intellectual property agreements. Sri Lanka adopted an intellectual property law in 2003 intended to meet U.S.-Sri Lanka bilateral IPR agreements and trade-related aspects of intellectual property rights (TRIPS) obligations. The law governs copyrights and related rights; industrial designs; patents, trademarks, and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets). All trademarks, designs, industrial designs, and patents must be registered with the Director General of Intellectual Property. No legal provisions exist for registration of copyrights and trade secrets.
The Securities and Exchange Commission (SEC) governs the CSE, unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories. Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors. Investors may open an Inward Investment Account (IIA) with any commercial bank in Sri Lanka to bring in investments. As of August 30, 2020, 289 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage exit strategies carefully.
In accordance with its IMF Article VIII obligations, the government and the Central Bank of Sri Lanka (CBSL) generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it tends to impose controls on foreign exchange transactions. Due to pressures on the balance of payments caused by the COVID-19 economic crisis, Sri Lanka took several measures to restrict imports and limit outward capital transactions.
The state consumes over 50 percent of the country’s domestic financial resources and has a virtual monopoly on the management and use of long-term savings. This inhibits the free flow of financial resources to product and factor markets. High budget deficits have caused interest rates to rise and resulted in higher inflation. On a year-to-year basis, inflation was approximately 5.1 percent in March of 2021, and the average prime lending rate was 9.91 percent. Retained profits finance a significant portion of private investment in Sri Lanka with commercial banks as the principal source of bank finance and bank loans as the most widely used credit instrument for the private sector. Large companies also raise funds through corporate debentures. Credit ratings are mandatory for all deposit-taking institutions and all varieties of debt instruments. Local companies can borrow from foreign sources. FDI finances about 6 percent of overall investment. Foreign investors can access credit on the local market and are free to raise foreign currency loans.
Money and Banking System
Sri Lanka has a diversified banking system. There are 25 commercial banks: 13 local and 12 foreign. In addition, there are seven specialized local banks. Citibank N.A. is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. Banking has expanded to rural areas, and by end of 2020 there were over 3,619 commercial bank branches and over 6,176 Automated Teller Machines throughout the country. Both resident and non-resident foreign nationals can open foreign currency banking accounts. However, non-resident foreign nationals are not eligible to open Sri Lankan Rupee accounts.
CBSL is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance. Credit ratings are mandatory for all banks. CBSL introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standards substantially increased impairment provisions on loans. The migration to the Basel III capital standards began in July of 2017 on a staggered basis, with full implementation was kicking in on January 1, 2019 and some banks having had to boost capital to meet full implementation of Basel III requirements. In addition, banks must increase capital to meet CBSL’s new minimum capital requirements deadline, which is set for December 31, 2022. A staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed.
Total assets of the banking industry stood at LKR 14,666 billion ($75.2 billion) as of December 31, 2020. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 33 percent of all banking assets. The Bank of Ceylon currently holds a non-performing loan (NPL) ratio of 4.98 percent (up from 4.79 percent in 2019). The People’s Bank currently holds a NPL ratio of 3.85 percent (up from 3.68 percent in 2019). Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state. The six-month debt moratorium issued by the CBSL for distressed borrowers will expired in March 2021, the impact of this is yet to be reflected on the banking sector NPL
In October 2019, Sri Lanka was removed from the Financial Action Task Force (FATF) gray list after making significant changes to its Anti-Money Laundering/Countering the Finance of Terrorism (AML/CFT) laws. CBSL is exploring the adoption of blockchain technologies in its financial transactions and appointed two committees to investigate the possible adoption of blockchain and cryptocurrencies.
Sri Lanka has a rapidly growing alternative financial services industry that includes finance companies, leasing companies, and microfinance institutes. In response, CBSL has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions. Credit ratings are mandatory for finance companies as of October 1, 2018. The government also directed banks to register with the U.S. Internal Revenue Service (IRS) to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA). Almost all commercial banks have registered with the IRS.
Foreign Exchange and Remittances
Sri Lanka generally has investor-friendly conversion and transfer policies. Companies say they can repatriate funds relatively easily. In accordance with its Article VIII obligations as a member of the IMF, Sri Lanka liberalized exchange controls on current account transactions in 1994 and, in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions. A new Foreign Exchange Act, No. 12 of 2017, came into operation on November 20, 2017 and further liberalized capital account transactions to simplify current account transactions. Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments but there are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by CBSL.
No barriers exist, legal or otherwise, to remittance of corporate profits and dividends for foreign enterprises since 2017 when Sri Lanka relaxed investment remittance policies with the new Foreign Exchange Act. Remittances are done through IIAs. There are no waiting periods for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties, and management fees provided there is sufficient evidence to prove the originally invested funds were remitted into the country through legal channels. Exporters must repatriate export proceeds within 120 days.
Sovereign Wealth Funds
Sri Lanka does not have a sovereign wealth fund. The government manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in government securities), stock market investments, and corporate debenture investments.
7. State-Owned Enterprises
SOEs are active in transport (buses and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. Following the end of the civil war in 2009, Sri Lankan armed forces began operating domestic air services, tourist resorts, and farms crowding out some private investment. In total, there are over 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important, and 345 have been identified as non-commercial.
The government currently have not adopted a strategy of privatizing SOEs. Several attempts to sell the government’s stake in the heavily indebted national carrier, Sri Lankan Airlines, were not successful. The government is also seeking to improve the efficiency of SOEs through private sector management practices. SOE labor unions and opposition political parties often oppose privatization and are particularly averse to foreign ownership. Privatization through the sale of shares in the stock market is likely to be less problematic.
8. Responsible Business Conduct
The concept of Corporate Social Responsibility (CSR) is more widely recognized among Sri Lankan companies than Responsible Business Conduct (RBC). Leading companies in Sri Lanka actively promote CSR, and some SMEs have also started to promote CSR. CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR. The Ceylon Chamber of Commerce actively promotes CSR among its membership. The SEC, together with the Institute of Chartered Accountants of Sri Lanka, published a Code of Best Practices on Corporate Governance in order to establish good corporate governance practices in Sri Lankan capital markets. Separate government agencies are tasked with protecting individuals from adverse business impacts in relation to labor rights, consumer protection, and environmental protections, although the effectiveness of these agencies is questioned by some. The government has not launched an initiative to promote RBC principles, such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. The government also does not participate in the Extractive Industries Transparency Initiative (EITI) although Sri Lanka has mineral resources including graphite, mineral sands, and gemstones.
While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is often weak and inconsistent. U.S. firms identify corruption as a major constraint on foreign investment, but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Projects geared toward exports face fewer problems. A Right to Information Act came into effect in February of 2017 which increased government transparency.
The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations, but it is widely considered ineffective and has reportedly made little progress pursuing cases of national significance. The law states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and fine. Bribery laws extend to family members of public officials, but political parties are not covered. A bribe by a local company to a foreign official is also not covered by the Bribery Act and the government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials. Thus far, the Bribery Commission has focused on minor cases such as bribes taken by traffic police, wildlife officers, and school principals. These cases reportedly follow a pattern of targeting low-level offenses with prosecutions years after the offense followed by the imposition of sentences not always proportionate to the conduct (i.e., sometimes overly strict, other times overly lenient).
Government procurement regulations contain provisions on conflicts-of-interest in awarding contracts or government procurement. While financial crime investigators have developed a number of cases involving the misappropriation of government funds, these cases have often not moved forward due to lack of political will, political interference, and lack of investigative capacity. Sri Lanka signed and ratified the UN Convention against Corruption in March of 2004 and the UN Convention against Transnational Organized Crime in 2006. Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.
Resources to Report Corruption
Contact at government agency responsible for combating corruption:
Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
T+94 112 596360 / 2595039 M+94 767011954
Email: firstname.lastname@example.org or email@example.com
The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE. During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were intentionally directed against U.S. citizens. On April 21, 2019, terrorist attacks targeted several churches and hotels throughout Colombo and in the eastern city of Batticaloa, killing more than 250 people, including over 40 foreigners including five Americans. In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets.
Demonstrations occasionally take place in response to world events or local developments and are not uncommon near Western embassies. However, they tend to be well-contained with support from the Sri Lankan police.
Business related violence is not common and has little impact on the investment environment.
11. Labor Policies and Practices
Both local and international businesses have cited labor shortages as a major problem in Sri Lanka.In 2019, 8.5 million Sri Lankans were employed: 47 percent in services, 27 percent in industry and 25 percent in agriculture. Approximately 60 percent of the employed are in the informal sector. The government sector also employs over 1.4 million people.
Sri Lanka’s labor laws afford many employee protections. Many investors consider this legal framework somewhat rigid, making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages averaged over 54 salary weeks, one of the highest in the world. There is no unemployment insurance or social safety net for laid off workers.
Labor is available at relatively low cost, though higher than in other South Asian countries. Sri Lanka’s labor force is largely literate (particularly in local languages), although weak in certain technical skills and English. The average worker has eight years of schooling, and two-thirds of the labor force is male. The government has initiated educational reforms to better prepare students for the labor market, including revamping technical and vocational education and training. While the number of students pursuing computer, accounting, business skills, and English language training programs is increasing, the demand for these skills still outpaces supply with many top graduates seeking employment outside of the country.
Youth are increasingly uninterested in labor-intensive manual jobs, and the construction, plantation, apparel, and other manufacturing industries report a severe shortage of workers. The garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere.
A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs. Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. Investors often struggle to find employees with the requisite skills, a situation particularly noticeable as the tourism industry opens new hotels.
Many service sector companies rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products and retention is reasonably good in the information technology sector. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.
Migrant Workers Abroad
There were an estimated 1.8 million Sri Lankan workers abroad in 2009/10, the last year the government published the figure. Remittances from migrant workers, averaged about $7.1 billion in 2020, making up Sri Lanka’s largest source of foreign exchange. Most of this labor force is unskilled (i.e., housemaids and factory laborers) and located primarily in the Middle East. Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad. Approximately 6,000 Sri Lankans work in Bangladeshi garment factories.
Foreign Workers in Sri Lanka
Sri Lanka has seen a gradual rise in foreign workers. Most foreign workers are from India, Bangladesh, and the PRC, many reportedly without proper work visas or other documentation.
Approximately 9.5 percent of the workforce is unionized, and union membership is declining. There are more than 2,000 registered trade unions (many of which have 50 or fewer members), and several federations. About 18 percent of labor in the industry and service sector is unionized. Most of the major trade unions are affiliated with political parties, creating a highly politicized labor environment. This is not the case for private companies, which typically only have one union or workers’ council to represent employees. There are also some independent unions. All workers, other than police, armed forces, prison service, and those in essential services, have the right to strike. The President can designate any industry an essential service. Workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court.
Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses typically do not belong to unions. The tea industry, however, is highly unionized, and public sector employees are unionized at high rates. Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist within the EPZs. The International Labor Organization’s (ILO) Freedom of Association Committee observed that Sri Lankan trade unions and worker councils can co-exist but advises that there should not be any discrimination against those employees choosing to join a union. The right of worker councils to engage in collective bargaining has been recognized by the ILO.
Collective bargaining exists but is not universal. The Employers’ Federation of Ceylon, the main employers’ association in Sri Lanka, assists member companies in negotiating with unions and signing collective bargaining agreements. While about a quarter of the 660 members of the Employers’ Federation of Ceylon are unionized, approximately 90 of these companies (including a number of foreign-owned firms) are bound by collective agreements. Several other companies have signed memorandums of understanding with trade unions. However, there are only a few collective bargaining agreements signed with companies located in EPZs.
All forms of forced and compulsory labor are prohibited. In March of 2016, the government introduced a national minimum wage set at LKR 10,000 ($54) per month or LKR 400 ($2.16) per day. Forty-four “wage boards” established by the Ministry of Labor set minimum wages and working conditions by sector and industry in consultation with unions and employers. The minimum wages established by these sector-specific wage boards tend to be higher than the minimum wage.
Sri Lankan law does not require equal pay for equal work for women. The law prohibits most full-time workers from regularly working more than 45 hours per week without receiving overtime (premium pay). In addition, the law stipulates a rest period of one hour per day. Regulations limit the maximum overtime hours to 15 per week. The law provides for paid annual holidays, sick leave, and maternity leave. Occupational health and safety regulations do not fully meet international standards.
Child labor is prohibited and virtually nonexistent in the organized sectors, although child labor occurs in informal sectors. The minimum legal age for employment is set at 16 years of age. The minimum age for employment in hazardous work is 18 years of age.
Sri Lanka is a member of the ILO and has ratified 31 international labor conventions, including all eight of the ILO’s core labor conventions. The ILO and the Employers’ Federation of Ceylon are working to improve awareness of core labor standards and the ILO also promotes its “Decent Work Agenda” program in Sri Lanka.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs
Sri Lanka and the Overseas Private Investment Corporation (OPIC) signed an agreement in 1966 and subsequently renewed in 1993. This agreement provides investment insurance guarantees for U.S. investors. The Development Finance Corporation (DFC) succeeded OPIC in 2019 and is now party to the agreement. Sri Lanka is a founding member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, which offers insurance against non-commercial risks.
Several countries provide bilateral project loans to the government, which assist firms from their countries to win projects. China has provided extensive loans, enabling Chinese companies to engage in numerous projects in Sri Lanka ranging from road and port construction to railway equipment supply.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Central Bank of Sri Lanka
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
People’s Republic of China:
“0” reflects amounts rounded to +/- $500,000.
According to CBSL, the United States is the 13th largest foreign investor in Sri Lanka in terms of stock of foreign direct investment (FDI). The United States stock of FDI in 2020 was $274 million. FDI inflows from the United States were $13 million in 2020. United States FDI in Sri Lanka has remained steady over the past five years.
Table 4: Sources of Portfolio Investment
Data not available.
Thailand is an upper middle-income country with a half-trillion-dollar economy, pro-investment policies, and well-developed infrastructure. General Prayut Chan-o-cha was elected by Parliament as Prime Minister on June 5, 2019. Thailand celebrated the coronation of King Maha Vajiralongkorn May 4-6, 2019, formally returning a King to the Head of State of Thailand’s constitutional monarchy. Despite some political uncertainty, Thailand continues to encourage foreign direct investment as a means of promoting economic development, employment, and technology transfer. In recent decades, Thailand has been a major destination for foreign direct investment, and hundreds of U.S. companies have invested in Thailand successfully. Thailand continues to encourage investment from all countries and seeks to avoid dependence on any one country as a source of investment.
The Foreign Business Act (FBA) of 1999 governs most investment activity by non-Thai nationals. Many U.S. businesses also enjoy investment benefits through the U.S.-Thai Treaty of Amity and Economic Relations, signed in 1833 and updated in 1966. The Treaty allows U.S. citizens and U.S. majority-owned businesses incorporated in the United States or Thailand to maintain a majority shareholding or to wholly own a company, branch office, or representative office located in Thailand, and engage in business on the same basis as Thai companies (national treatment). The Treaty exempts such U.S.-owned businesses from most FBA restrictions on foreign investment, although the Treaty excludes some types of businesses. Notwithstanding their Treaty rights, many U.S. investors choose to form joint ventures with Thai partners who hold a majority stake in the company, leveraging their partner’s knowledge of the Thai economy and local regulations.
The Thai government maintains a regulatory framework that broadly encourages investment. Some investors have nonetheless expressed views that the framework is overly restrictive, with a lack of consistency and transparency in rulemaking and interpretation of law and regulations.
The Board of Investment (BOI), Thailand’s principal investment promotion authority, acts as a primary conduit for investors. BOI offers businesses assistance in navigating Thai regulations and provides investment incentives to qualified domestic and foreign investors through straightforward application procedures. Investment incentives include both tax and non-tax privileges.
The government passed laws on cybersecurity and personal data protection in 2019; as of April 2021, they are still in the process of drafting implementing regulations. The government unveiled in January 2021 a Made In Thailand initiative that will set aside 60 percent of state projects for locally made products.
Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice, though some government agencies enforce strict “gift” bans. Firms that refuse to make such payments can be placed at a competitive disadvantage to other firms that do engage in such practices. The government launched its Eastern Economic Corridor (EEC) development plan in 2017. The EEC is a part of the “Thailand 4.0” economic development strategy introduced in 2016. Many planned infrastructure projects, including a high-speed train linking three airports, U-Tapao Airport commercialization, and Laem Chabang Port expansion, could provide opportunities for investments and sales of U.S. goods and services. In support of its “Thailand 4.0” strategy, the government offers incentives for investments in twelve targeted industries: next-generation automotive vehicles; intelligent electronics; advanced agriculture and biotechnology; food processing; tourism; advanced robotics and automation; digital technology; integrated aviation; medical hub and total healthcare services; biofuels/biochemical; defense manufacturing; and human resource development.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Americans planning to invest in Thailand are advised to obtain qualified legal advice. Thai business regulations are governed predominantly by criminal, not civil, law. Foreigners are rarely jailed for improper business activities, yet violations of business regulations can carry heavy criminal penalties. Thailand has an independent judiciary and government authorities are generally not permitted to interfere in the court system once a case is in process.
Thailand continues to generally welcome investment from all countries and seeks to avoid dependence on any one country as a source of investment. However, the FBA prescribes a wide range of business that may not be conducted by foreigners without additional licenses or exemptions. The term “foreigner” includes Thai-registered companies in which half or more of the capital is held by non-Thai individuals and foreign-registered companies. Although the FBA prohibits majority foreign ownership in many sectors, U.S. investors registered under the United States-Thailand Treaty of Amity and Economic Relations (AER) are exempt. Nevertheless, the AER’s privileges do not extend to U.S. investments in the following areas: communications; transportation; fiduciary functions; banking involving depository functions; the exploitation of land or other natural resources; domestic trade in indigenous agricultural products; and the practice of professions reserved for Thai nationals.
The Board of Investment (BOI) assists Thai and foreign investors to establish and conduct businesses in targeted economic sectors by offering both tax and non-tax incentives. In recent years Thailand has taken steps to reform its business regulations and has improved processes and reduced time required to start a business from 29 days to 6 days. Thailand has steadily improved its ranking in the World Bank’s Doing Business Report in the last several years and now occupies the 21st position out of 190 countries in the 2019 ranking, trailing only Singapore (2) and Malaysia (12) in the ASEAN bloc. Thai officials routinely make themselves available to investors through discussions with foreign chambers of commerce.
Limits on Foreign Control and Right to Private Ownership and Establishment
Various Thai laws set forth foreign-ownership restrictions in certain sectors. These restrictions primarily concern services such as banking, insurance, and telecommunications. The FBA details the types of business activities reserved for Thai nationals. Foreign investment in those businesses must comprise less than 50 percent of share capital, unless specially permitted or otherwise exempt.
The following three lists detail FBA-restricted businesses for foreigners.
List 1. This contains activities non-nationals are prohibited from engaging in, including: newspaper and radio broadcasting stations and businesses; agricultural businesses; forestry and timber processing from a natural forest; fishery in Thai territorial waters and specific economic zones; extraction of Thai medicinal herbs; trading and auctioning of antique objects or objects of historical value from Thailand; making or casting of Buddha images and monk alms bowls; and land trading.
List 2. This contains activities related to national safety or security, arts and culture, traditional industries, folk handicrafts, natural resources, and the environment. Restrictions apply to the production, distribution and maintenance of firearms and armaments; domestic transportation by land, water, and air; trading of Thai antiques or art objects; mining, including rock blasting and rock crushing; and timber processing for production of furniture and utensils. A foreign majority-owned company can engage in List 2 activities if Thai nationals or legal persons hold not less than 40 percent of the total shares and the number of Thai directors is not less than two-fifths of the total number of directors. Foreign companies also require prior approval and a license from the Council of Ministers (Cabinet).
List 3. Restricted businesses in this list include accounting, legal, architectural, and engineering services; retail and wholesale; advertising businesses; hotels; guided touring; selling food and beverages; and other service-sector businesses. A foreign company can engage in List 3 activities if a majority of the limited company’s shares are held by Thai nationals. Any company with a majority of foreign shareholders (more than 50 percent) cannot engage in List 3 activities unless it receives an exception from the Ministry of Commerce under its Foreign Business License (FBL) application.
Aside from these general categories, Thailand does not maintain a national security screening mechanism for investment, and investors can receive additional incentives/privileges if they invest in priority areas, such as high-technology industries. Investors should contact the Board of Investment [https://www.boi.go.th/index.php?page=index] for the latest information on specific investment incentives.
The U.S.-Thai Treaty of Amity and Economic Relations allows approved businesses to engage in FBA restricted businesses detailed above in Lists 1, 2, and 3. However, the Treaty does not exempt U.S. investments from restrictions applicable to: owning land; fiduciary functions; banking involving depository functions; inland communications & transportation; exploitation of land and other natural resources; and domestic trade in agricultural products.
To operate restricted businesses as defined by the FBA’s List 2 and 3, non-Thai entities must obtain a foreign business license. These licenses are approved by the Council of Ministers (Cabinet) and/or Director-General of the MOC’s Department of Business Development, depending on the business category.
Every year, the MOC reviews business categories on the three FBA lists. Businesses no longer subject to restrictions include regional office services and contractual services provided to government bodies and state-owned enterprises. In an effort to further reduce obstacles to foreign investment, four business types under List 3, otherwise supervised by specific acts, were removed from the restricted list in 2019 and 2020. Those businesses include telecommunication services for license type 1 (telecommunication business operator without its own network for services); financial centers; aviation/aircraft maintenance; and software development.
The U.S. Commercial Service, U.S. Embassy Bangkok is responsible for issuing a certification letter to confirm that a U.S. company is qualified to apply for benefits under the Treaty of Amity. The applicant must first obtain documents verifying that the company has been registered in compliance with Thai law. Upon receipt of the required documents, the U.S. Commercial Service office will then certify to the Foreign Administration Division, Department of Business Development, Ministry of Commerce (MOC) that the applicant is seeking to register an American-owned and managed company or that the applicant is an American citizen and is therefore entitled to national treatment under the provisions of the Treaty. For more information on how to apply for benefits under the Treaty of Amity, please e-mail firstname.lastname@example.org.
The MOC’s Department of Business Development (DBD) is generally responsible for business registration. Registration can be performed online or manually. Registration documentation must be submitted in the Thai language. Many foreign entities hire a local law firm or consulting firm to handle their applications. Firms engaging in production activities also must register with the Ministry of Industry and the Ministry of Labor and Social Development.
A company is required to have registered capital of two million Thai baht per foreign employee in order to obtain work permits. Additionally, foreign companies may have no more than 20% foreign employees on staff. Companies that have obtained special BOI investment incentives may be exempted from this requirement. Foreign employees must enter the country on a non-immigrant visa and then submit work permit applications directly to the Department of Labor. Application processing takes approximately one week. For more information on Thailand visas, please refer to http://www.mfa.go.th/main/en/services/4908/15388-Non-Immigrant-Visa- percent22B percent22-for-Business-and.html.
In February 2018, the Thai government launched a Smart Visa program for investors in targeted industries and foreigners with expertise in specialized technologies. Under this program, foreigners can be granted a maximum four-year visa to work in Thailand without having to obtain a work permit or re-entry permit. Other relaxed immigration rules include having visa holders report to the Bureau of Immigration just once per year (instead of every 90 days) and providing the visa holder’s spouse and children many of the same privileges as the primary visa holder. More information is available online at https://smart-visa.boi.go.th/home_detail/general_information.php and by telephone at +662-209-1100 ext. 1109-1110.
In 2020, Thai companies continued to expand and invest overseas despite the pandemic. These investments primarily target neighboring ASEAN countries, China, the United States, and Europe. A relatively strong domestic currency, rising cash holdings, and subdued domestic growth prospects are helping to drive outward investment. The baht depreciated over 4 percent against the dollar in Q1 2021. Faced with the effects of the pandemic, the government may prioritize domestic investment to stimulate the economy.
Previously, food, ago-industry, energy, and chemical sectors accounted for the main share of outward flows. Purchasing shares, developing partnerships, and making acquisitions help Thai investors acquire technologies for parent companies and expand supply chains in international markets. Thai corporate laws allow outbound investments to be made by an independent affiliate (foreign company), a branch of a Thai legal entity, or by any Thai company in the case of financial investments abroad. BOI and the MOC’s Department of International Trade Promotion (DITP) share responsibility for promoting outward investment. BOI focuses on outward investment in ASEAN (especially Cambodia, Laos, Myanmar, and Vietnam) and emerging economies. DITP covers smaller markets.
2. Bilateral Investment Agreements and Taxation Treaties
The 1966 U.S.-Thai Treaty of Amity and Economic Relations allows U.S. citizens and U.S. majority-owned businesses to engage in business on the same basis as Thai companies (national treatment). The Treaty exempts qualified companies from most of the foreign investment restrictions imposed by Thailand’s Foreign Business Act (FBA). As described above, the Treaty does not exempt U.S. investments from restrictions applicable to owning land; fiduciary functions; banking involving depository functions; inland communications & transportation; exploitation of land and other natural resources; and domestic trade in agricultural products.
In October 2002, the United States and Thailand signed a bilateral Trade and Investment Framework Agreement (TIFA). The TIFA established a regular government-to-government forum to discuss bilateral trade and investment issues. These have included intellectual property rights, customs, market-access barriers, and other areas of mutual concern.
Thailand has bilateral investment treaties with Argentina, Bahrain, Bangladesh, Belgium-Luxembourg Economic Union, Bulgaria, Cambodia, Canada, China, Croatia, Czech Republic, Egypt, Finland, Germany, Hong Kong, Hungary, Indonesia, Israel, Jordan, Democratic People’s Republic of Korea, Republic of Korea, Lao People’s Democratic Republic, Myanmar, Netherlands, Peru, Philippines, Poland, Romania, Russian Federation (signed, not in force), Slovenia, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan (signed, not in force), Turkey, United Arab Emirates, United Kingdom, Vietnam, and Zimbabwe (signed, not in force).
Thailand has free trade agreements (FTAs) with Australia, New Zealand, China, Japan, India, South Korea, Peru, Chili, and Hong Kong. As of 2020, Thailand is pursuing FTA discussions with the European Union, Turkey, Pakistan, and the United Kingdom. Thailand belongs to the 10-member Association of Southeast Asian Nations (ASEAN), a regional free-trade and economic bloc comprising a total population of 600 million. ASEAN has free trade agreements with Australia, New Zealand, China, India, Korea, and Hong Kong. ASEAN also has a comprehensive economic partnership with Japan and is pursuing FTA discussions with the EU, Pakistan, and Canada.
Thailand’s Parliament approved ratification of the Regional Comprehensive Economic Partnership (RCEP), a free-trade bloc of 15 Indo-Pacific nations expected to take effect in 2021. Thailand has expressed interest in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force on December 30, 2018. In April 2020, however, Thailand shelved plans to negotiate near-term accession in the wake of the coronavirus pandemic. In February 2021 Thailand’s International Economic Policy Committee announced it will review the findings of a nine-month internal study on the costs and benefits of CPTPP membership.
Thailand and the United States concluded a bilateral tax treaty in 1996. The United States and Thailand signed an Intergovernmental Agreement (IGA) on the Foreign Account Tax Compliance Act (FATCA) in 2016. The IGA will enter into force once all steps have been completed by both sides for ratification.
3. Legal Regime
Transparency of the Regulatory System
Generally, Thai regulations are readily available to the public. Foreign investors have, on occasion, expressed frustration that draft regulations are not made public until they are finalized. Comments that stakeholders submit on draft regulations are not always taken into consideration. Non-governmental organizations report; however, the Thai government actively consults them on policy, especially in the health sector and on intellectual property issues. In other areas, such as digital and cybersecurity laws, the Thai government has taken stakeholders’ comments into account and amended draft laws accordingly.
U.S. businesses have repeatedly expressed concerns about Thailand’s customs regime. Complaints center on lack of transparency, the significant discretionary authority exercised by Customs Department officials, and a system of giving rewards to officials and non-officials for seized goods based on a percentage of their sales price. Specifically, the U.S. government and private sector have expressed concern about inconsistent application of Thailand’s transaction valuation methodology and the Customs Department’s repeated use of arbitrary values. Thailand’s latest Customs Act, which entered into force on November 13, 2017, is a moderate step forward. The Act removed the Customs Department Director General’s discretion to increase the customs value of imports. I t also reduced the percentage of remuneration awarded to officials and non-officials from 55 percent to 40 percent of the sale price of seized goods (or of the fine amount) with an overall limit of five million baht (USD160,000). While a welcome development, reduction of this remuneration is insufficient to remove the personal incentives given Customs officials to seize goods nor to address the conflicts of interest the system entails. Thai Customs is expected to announce new revisions to the Customs Act in 2021.
Consistent and predictable enforcement of government regulations remains problematic. In 2017, the Thai government launched a “regulatory guillotine” initiative to cut down on red tape, licenses, and permits. The policy focused on reducing and amending outdated regulations in order to improve Thailand’s ranking on the World Bank “Ease of Doing Business” report. The regulatory guillotine project has helped improve Thailand’s ranking and, although making slow progress, is still underway.
Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice despite stringent gift bans at some government agencies. Firms that refuse to make such payments can be placed at a competitive disadvantage to other firms that do engage in such practices.
The Royal Thai Government Gazette (www.ratchakitcha.soc.go.th) is Thailand’s public journal of the country’s centralized online location of laws, as well as regulation notifications.
International Regulatory Considerations
Thailand is a member of the World Trade Organization (WTO) and notifies most draft technical regulations to the Technical Barriers to Trade (TBT) Committee and the Sanitary and Phytosanitary Measures Committee. However, Thailand does not always follow WTO and other international standard-setting norms or guidance but prefers to set its own standards in many cases. In October 2015, the country ratified the WTO Trade Facilitation Agreement, which came into effect in February 2017.
Legal System and Judicial Independence
Thailand’s legal system is primarily based on the civil law system with a strong common law influence. Thailand has an independent judiciary that is generally effective in enforcing property and contractual rights. Most commercial and contractual disputes are generally governed by the Civil and Commercial Codes. The legal process is slow in practice and monetary compensation is based on actual damage that resulted directly from the wrongful act. Decisions of foreign courts are not accepted or enforceable in Thai courts.
There are three levels to the judicial system in Thailand: The Court of First Instance, which handles most matters at inception; the Court of Appeals; and the Supreme Court. There are also specialized courts, such as the Labor Court, Family Court, Tax Court, the Central Intellectual Property and International Trade Court, and the Bankruptcy Court.
The Specialized Appeal Court handles appeals from specialized courts. The Supreme Court has discretion whether to take a case that has been decided by the Specialized Appeal Court. If the Supreme Court decides not to take up a case, the Specialized Appeal Court decision stands.
Laws and Regulations on Foreign Direct Investment
The Foreign Business Act or FBA (described in detail above) governs most investment activity by non-Thai nationals. Other key laws governing foreign investment are the Alien Employment Act (1978) and the Investment Promotion Act (1977). However, as explained above, many U.S. businesses enjoy investment benefits through the U.S.-Thailand Treaty of Amity and Economic Relations (often referred to as the ‘Treaty of Amity’), which was established to promote friendly relations between the two nations. Pursuant to the Treaty, American nationals are entitled to certain exceptions to the FBA restrictions.
Pertaining to the services sector, the 2008 Financial Institutions Business Act unified the legal framework and strengthened the Bank of Thailand’s (the country’s central bank) supervisory and enforcement powers. The Act allows the Bank of Thailand to raise foreign ownership limits for existing local banks from 25 percent to 49 percent on a case-by-case basis. The Minister of Finance can authorize foreign ownership exceeding 49 percent if recommended by the central bank. Details are available at https://www.bot.or.th/English/AboutBOT/LawsAndRegulations/SiteAssets/Law_E24_Institution_Sep2011.pdf.
Apart from acquiring shares of existing (traditional) local banks, foreign banks can enter the Thai banking system by obtaining new licenses. The Ministry of Finance issues such licenses, following a consultation process with the Bank of Thailand. The Thai central bank is currently studying new licenses for digital-only banks, a tool meant to enhance financial inclusion and keep pace with consumer needs in the digital age. Digital-only banks can operate at a lower cost and offer different services than traditional banks.
The 2008 Life Insurance Act and the 2008 Non-Life Insurance Act apply a 25 percent cap on foreign ownership of insurance companies. Foreign boards of directors’ membership is also limited to 25 percent. However, in January 2016 the Office of the Insurance Commission (OIC), the primary insurance industry regulator, notified that Thai life or non-life insurance companies wishing to exceed these limits may apply to the OIC for approval. Any foreign national wishing to hold more than 10 percent of the voting shares in an insurance company must seek OIC approval. With approval, a foreign national can acquire up to 49 percent of the voting shares. Finally, the Finance Minister, with OIC’s positive recommendation, has discretion to permit greater than 49 percent foreign ownership and/or a majority of foreign directors, when the operation of the insurance company may cause loss to insured parties or to the public. OIC launched an insurtech sandbox in 2017 to allow industry to test new products. While OIC has not issued a new insurance license in the past 20 years, OIC is now contemplating issuing new virtual licenses for entrants wishing to sell insurance digitally without an intermediary, and digital licenses for existing insurers wishing to switch to digital sales only. Full details have not yet been announced.
The Board of Investment offers qualified investors several benefits and provides information to facilitate a smoother investment process in Thailand. Information on the BOI’s “One Start One Stop” investment center can be found at http://osos.boi.go.th. A physical office is located on the 18th floor of Chamchuri Square on Rama 4/Phayathai Road in Bangkok.
Competition and Antitrust Laws
Thailand updated the Trade Competition Act on October 5, 2017. The updated Act covers all business activities, except state-owned enterprises exempted by law or cabinet resolution; specific activities related to national security, public benefit, common interest and public utility; cooperatives, agricultural and cooperative groups; government agencies; and other enterprises exempted by the law. The Act broadens the definition of a business operator to include affiliates and group companies, and broadens the liability of directors and management, subjecting them to criminal and administrative sanctions if their actions (or omissions) resulted in violations. The Act also provides details about penalties in cases involving administrative court or criminal court actions. The amended Act has been noted as an improvement over the prior legislation and a step towards Thailand’s adoption of international standards in this area.
The Office of Trade Competition Commission (OTCC) is an independent agency and the main enforcer of the Trade Competition Act B.E. 2560 (2018). The OTCC is comprised of seven members nominated by a selection committee and endorsed by the Cabinet. The Commission has the following responsibilities: advises the government on issuance of relevant regulations; ensures fair and free trade practices; investigates cases and complaints of unfair trade; and pursues criminal and disciplinary actions against those found guilty of unfair trade practices stipulated in the law. The law focuses on the following areas: unlawful exercise of market dominance; mergers or collusion that could lead to monopoly; unfair competition and restricting competition; and unfair trade practices. In November 2020, OTCC approved conglomerate Charoen Pokphand’s (CP Group) USD 10 billion acquisition of retail giant Tesco Lotus. Academics and consumer groups claim this merger would allow CP Group to hold more than 80 percent market share of Thailand’s wholesale and retail sector in some provinces, which would be non-compliant with the Trade Competition Act that aims to prevent any operator from holding more than 50 percent of the market share in any sector.
The Thai government, through the Central Commission on Price of Goods and Services, has the legal authority to control prices or set de facto price ceilings for selected goods and services, including staple agricultural products and feed ingredients (such as, pork, cooking oil, wheat flour, feed wheat, distiller’s dried grains with solubles (DDGs), and feed quality barley), liquefied petroleum gas, medicines, and sound recordings. In February 2020, the government added surgical masks, polypropylene (spunbond) for surgical mask production, alcohol for hand sanitizer, and wastepaper or recycled paper to the price-controlled products list. The controlled list is reviewed at least annually, but the price-control review mechanisms are non-transparent. In practice, Thailand’s government influences prices in the local market through its control of state monopoly suppliers of products and services, such as in the petroleum, oil, and gas industry sectors.
Expropriation and Compensation
Thai laws provide guarantees regarding protection from expropriation without compensation and non-discrimination for some, but not all, investors. Thailand’s Constitution provides protection from expropriation without fair compensation and requires the government to pass a specific, tailored expropriation law if the expropriation is required for the purpose of public utilities, national defense, acquisition of national resources, or for other public interests. The Investment Promotion Act also guarantees the government shall not nationalize the operations and assets of BOI-promoted investors.
The Expropriation of Immovable Property Act (EIP), most recently amended in 2019, applies to all property owners, whether foreign or domestic nationals. The Act provides a framework and clear procedures for expropriation; sets forth detailed provision and measures for compensation of landowners, lessees and other persons that may be affected by an expropriation; and recognizes the right to appeal decisions to Thai courts. The 2019 EIP requires the government to return land that was expropriated but has not been used back to the original property owners. However, the EIP and Investment Promotion Act do not protect against indirect expropriation and do not distinguish between compensable and non-compensable forms of indirect expropriation.
Thailand has a well-established system for land rights that is generally upheld in practice, but the legislation governing land tenure still significantly restricts foreigners’ rights to acquire land.
ICSID Convention and New York Convention
Thailand is a signatory to the New York Convention, which means that investors can enforce arbitral awards in any other signatory country. Thailand signed the Convention on the Settlement of Investment Disputes in 1985 but has not ratified it. Therefore, most foreign investors covered under Thailand’s treaties with investor-state dispute settlement (ISDS) provisions that are limited to ICSID arbitration have not been able to bring ISDS claims against Thailand under these treaties.
Investor-State Dispute Settlement
Thailand is party to bilateral investment treaties with 46 nations. Two treaties – with the Netherlands and United States (Treaty of Amity) – do not include binding dispute resolution provisions. This means that investors covered under these treaties are unable to pursue international arbitration proceedings against the Thai government without first obtaining the government’s consent. There have been two notable cases of investor-state disputes in the last fifteen years, neither of which involved U.S. companies. The first case involved a concession agreement for a construction project filed under the Germany-Thailand bilateral investment treaty. In the second case, Thailand is engaged in a dispute over the government’s invocation of special powers to shut down a gold mine in early 2017.
International Commercial Arbitration and Foreign Courts
Thailand’s Arbitration Act of 2002, modeled in part after the UNCITRAL Model Law, governs domestic and international arbitration proceedings. The Act states that “in cases where an arbitral award was made in a foreign country, the award shall be enforced by the competent court only if it is subject to an international convention, treaty, or agreement to which Thailand is a party.” Any arbitral award between parties subject to the New York Convention should thus be enforced. The following organizations provide arbitration services in Thailand: the Thai Arbitration Institute of the Alternative Dispute Resolution Office; Office of the Judiciary; and the Office of the Arbitration Tribunal of the Board of Trade of Thailand. In addition, the semi-public Thai Arbitration Center offers mediation and arbitration for civil and commercial disputes. An amendment to the Arbitration Act that allows foreign arbitrators to take part in cases involving foreign parties came into force on April 15, 2019. Under very limited circumstances, a court can set aside an arbitration award.
Thailand’s bankruptcy law is modeled after that of the United States. The law authorizes restructuring proceedings that require trained judges who specialize in bankruptcy matters to preside. According to the law, bankruptcy is defined as a state in which courts permit the distribution of assets belonging to a debtor among the creditors within the parameters of the law. Thailand’s bankruptcy law allows for corporate restructuring similar to U.S. Chapter 11 and does not criminalize bankruptcy. The law also distinguishes between secured and unsecured claims, with the former prioritized. While bankruptcy is under consideration, creditors can request the following ex parte applications from the Bankruptcy Court: an examination by the receiver of all the debtor’s assets and/or that the debtor attend questioning on the existence of assets; a requirement that the debtor provide satisfactory security to the court; and immediate seizure of the debtor’s assets and/or evidence in order to prevent the loss or destruction of such items.
The law stipulates that all applications for repayment must be made within one month after the Bankruptcy Court publishes the appointment of an official receiver. If a creditor eligible for repayment does not apply within this period, the creditor forfeits his/her right to receive payment or the court may cancel the order to reorganize the business. If any person opposes a filing, the receiver shall investigate the matter and approve, partially approve, or dismiss the application. Any objections to the orders issued by the receiver may be filed with the court within 14 days after learning of the issued order.
Within bankruptcy proceedings, it is also possible to undertake a “composition” in order to avoid a long and protracted process. A composition takes place when a debtor expresses in writing a desire to settle his/her debts, either partially or in any other manner, within seven days of submitting an explanation of matters related to the bankruptcy or during a time period prescribed by the receiver. After the proposal for a composition has been submitted, the receiver calls for a meeting among creditors to consider whether or not to accept the proposal. If the proposal is accepted, the court will approve the composition in order to legally execute the proposal; however, it will only do so if the proposal includes clear provisions for the repayment of debts. Despite these laws, some U.S. businesses complain that Thailand’s bankruptcy courts in practice can slow legislative processes to the detriment of outside firms seeking to acquire assets liquidated in bankruptcy processes.
The National Credit Bureau of Thailand (NCB) provides the financial services industry with information on consumers and businesses. The NCB is required to provide the financial services sector with payment history information from utility companies, retailers and merchants, and trade creditors.
4. Industrial Policies
The Board of Investment:
The Board of Investment offers investment incentives to qualified domestic and foreign investors. To upgrade the country’s technological capacity, the BOI presently gives more weight to applications in high-tech, innovative, and sustainable industries. These include digital technology, “smart agriculture” and biotechnology, aviation and logistics, automation and robotics, medical and wellness tourism, and other high-value services.
The most significant privileges offered by the BOI for promoted projects include: corporate income tax exemptions; tariff reductions or exemptions on imports of machinery used in the investment; tariff-free treatment on imported raw materials used in production for export.
corporate income tax exemptions; tariff reductions or exemptions on imports of machinery used in the investment; tariff-free treatment on imported raw materials used in production for export.
permission to own land; permission to bring foreign experts; and visa and work permit facilitation.
Investment projects with a significant R&D, innovation, or human resource development component may be eligible for additional grants and incentives. Moreover, grants are provided to support targeted technology development under the Competitive Enhancement Act. BOI offers a one-stop service to expedite multiple business processes for investors.
For additional information, contact the Office of Board of Investment on 555 Vibhavadi-Rangsit Road, Chatuchak, Bangkok 10900 and telephone at +662-553-8111 or website at www.boi.go.th.
Office of the Eastern Economic Corridor:
Thailand’s flagship investment zone, the “Eastern Economic Corridor (EEC),” spans the provinces of Chachoengsao, Chonburi, and Rayong (5,129 square miles). The EEC leverages the developed infrastructure networks of the adjacent Eastern Seaboard industrial area, Thailand’s primary investment destination for more than 30 years. The Thai government foresees the EEC as a primary investment and infrastructure hub in ASEAN and a gateway to east and south Asia. Among the EEC development projects are smart cities; an innovation district (EECi); a digital park (EECd); an aerotropolis (EEC-A); a medical hub (EECmd); and other state-of-the-art facilities. The EEC is targeting twelve key industries:
Advanced agriculture and biotechnology
Advance robotics and automation
Integrated aviation industry
Medical hub and total healthcare services
Biofuels and biochemicals
Human resource development
The EEC Act authorized investment incentives and privileges. Investors can obtain long-term land leases of 99 years (with an initial lease of up to 50 years and a renewal of up to 49 years). The EEC Act shortens the public-private partnership approval process to approximately nine months.
The BOI works in cooperation with the EEC Office. BOI offers corporate income tax exemptions of up to 13 years for strategic projects in the EEC area. Foreign executives and experts who work in targeted industries in the EEC are subject to a maximum personal income tax rate of 17 percent.
For additional information, contact the Eastern Economic Corridor Office at 25th floor, CAT Tower, 72 Soi Wat Maungkhae, Charoenkrung Road, Bangrak, Bangkok 10500, telephone at +662-033-8000 and website at: https://eng.eeco.or.th/en.
Foreign Trade Zones/Free Ports/Trade Facilitation
The Industrial Estate Authority of Thailand (IEAT), a state-enterprise under the Ministry of Industry, develops suitable locations to accommodate industrial properties. IEAT has an established network of industrial estates in Thailand, including Laem Chabang Industrial Estate in Chonburi Province and Map Ta Phut Industrial Estate in Rayong Province in Thailand’s eastern seaboard region, a common location for foreign-owned factories due to its proximity to seaport facilities and Bangkok. Foreign-owned firms generally have the same investment opportunities in the industrial zones as Thai entities. While the IEAT Act requires that in the case of foreign-owned firms, the IEAT Committee must consider and approve the amount of space/land bought or leased in industrial estates, in practice, there is no record of disapproval for requested land. Private developers are heavily involved in the development of these estates.
The IEAT currently operates 14 estates, plus 45 more in conjunction with the private sector, in 16 provinces nationwide. Private-sector developers independently operate over 50 industrial estates, most of which have received promotion privileges from the Board of Investment. Amata Industrial Estate and WHA Industrial Development are Thailand’s leading private industrial estate developers. Most major foreign manufacturing investors, including U.S. manufacturers, are located in these two companies’ industrial estates and in the eastern seaboard region.
The IEAT has established 12 special IEAT “free trade zones” reserved for industries manufacturing exclusively for export. Businesses may import raw materials into, and export finished products from, these zones free of duty (including value added tax). These zones are located within industrial estates and many have customs facilities to speed processing. The free trade zones are located in Chonburi, Lampun, Pichit, Songkhla, Samut Prakarn, Bangkok (at Lad Krabang), Ayuddhya, and Chachoengsao. In addition to these zones, factory owners may apply for permission to establish a bonded warehouse within their premises to which raw materials, used exclusively in the production of products for export, may be imported duty-free.
The Thai government also established Special Economic Zones (SEZs) in ten provinces bordering neighboring countries: Tak, Nong Khai, Mukdahan, Sa Kaeo, Trad, Narathiwat, Chiang Rai, Nakhon Phanom, Songkhla, and Kanchanaburi. Business sectors and industries that can benefit from tax and non-tax incentives offered in the SEZs include logistics; warehouses near border areas; distribution; services; labor-intensive factories; and manufacturers using raw materials from neighboring countries. These SEZs support Thai government goals for closer economic ties with neighboring countries and allow investors to tap into abundant migrant labor; however, these SEZs have proven less attractive to overseas investors due to their remote locations far from Bangkok and other major cities.
In 2019, Thai Customs implemented three measures to improve trade and customs processing efficiency: Pre-Arrival Processing (PAP); an “e-Bill Payment” electronic payment system; and an e-Customs system that waives the use of paper customs declaration copies. The measures comply with the World Trade Organizations (WTO) Trade Facilitation Agreement (TFA), adopted in February 2016, which requires WTO members to adopt procedures for pre-arrival processing for imports and to authorize electronic submission of customs documents, where appropriate. The measures have also improved Thailand’s ranking in the World Bank’s “Doing Business: Trading Across Borders 2020” index.
Performance and Data Localization Requirements
The Thai government does not have specific laws or policies regarding performance or data localization requirements. Foreign investors are not required to use domestic content in goods or technology, but the Thai government has encouraged such an approach through domestic preferences in government procurement proceedings. In March 2021, Thailand announced the “Made in Thailand” initiative, which will direct government agencies to procure at least 60 percent of their goods from local producers.
There are currently no requirements for foreign IT providers to localize their data, turn over source code, or provide access to surveillance. However, the Thai government in 2019 passed new laws and regulations on cybersecurity and personal data protection that have raised concerns about Thai authorities’ broad power to potentially demand confidential and sensitive information. IT operators and analysts have expressed concern with private companies’ legal protections, ability to appeal, or ability to limit such access. IT providers have expressed concern that the new laws might place unreasonable burdens on them and have introduced new uncertainties in the technology sector. As of April 2021, the government is still in the process of considering and implementing regulations to enforce laws on Cyber Security and Personal Data Protection. Thailand has implemented a requirement that all debit transactions processed by a domestic debit card network must use a proprietary chip.
5. Protection of Property Rights
Property rights are guaranteed by the Constitution. While the government provides fair compensation in instances of expropriation, Thai policy generally does not permit foreigners to own land. There have been instances, however, of granting such permission to foreigners under certain laws or ministerial regulations for residential, business, or religious purposes. Foreign ownership of condominiums and buildings is permitted under certain laws. Foreigners can freely lease land. Relevant articles of the Civil and Commercial Codes do not distinguish between foreign and Thai nationals in the exercise of lease rights. Secured interests in property, such as mortgage and pledge, are recognized and enforced. Unoccupied property legally owned by foreigners or Thais may be subject to adverse possession by squatters who stay on that property for at least 10 years.
Intellectual Property Rights
Thailand remained on the Special 301 Watch List in 2020 although its single physical market listed in the Notorious Markets Report dropped off in 2020. USTR highlights Thailand’s absence of accession to major international IP treaties, the unauthorized activities of collective management organizations, online piracy from streaming devices and applications, the use of unauthorized software in the public and private sectors, and a continued backlog in pharmaceutical patent applications as the main challenges confronting the country’s protection of intellectual property rights.
The National Committee on Intellectual Property Policy sets Thailand’s overall Intellectual Property (IP) policy. The National Committee is chaired by the Prime Minister with two Deputy Prime Ministers as vice chairs while 18 heads of government agencies serve as committee members. In 2017, this Committee approved a 20-year IP Roadmap to reform the country’s IP system. The Department of Intellectual Property (DIP) is responsible for IP-related administration, including registration and recording of IP rights and coordination of IP enforcement activities. DIP also acts as the secretary of the National Committee on Intellectual Property Policy.
Thailand has a robust legal and enforcement regime for IP rights. Thailand is a member of the Patent Cooperation Treaty (PCT). Thailand’s patent regime generally provides protection for most new inventions. The process of patent examination through issuance of patents is slow, taking on average six to eight years. The patenting process may take longer for certain technology sectors such as pharmaceuticals and biotechnology. Thailand protects trademarks, traditional marks, and sound marks. As a member of the “Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks” (Madrid Protocol), Thailand allows trademark owners to apply for trademark registrations in Thailand directly at DIP or through international applications under the Madrid Protocol. DIP historically takes 10 to 14 months to register a trademark. As Thailand is a member of the “Berne Convention,” copyright works are protected automatically. However, copyright owners may record their works with DIP to establish proof of ownership. Thailand joined the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired or Otherwise Print Disabled in January 2019. Thailand’s Geographical Indications (GI) Act has been in force since April 2004. Thailand protects GIs, which identify goods by their specific geographical origins. The geographical origins identified by a GI must be directly attributable to the reputation, qualities, or characteristics of the good. In Thailand, a registered trademark does not prevent a similar geographical name to be registered as a GI.
As of March 2021, Thailand remained in the process of amending its Patent Act to streamline the patent registration process, to reduce patent backlog and pendency, and to help prepare for accession to the Hague Agreement Concerning the International Registration of Industrial Designs. Furthermore, Thailand has increased the number of examiners to reduce the patent backlog. Thailand is also amending its Copyright Act to prepare for accession to the WIPO Internet Treaties. To address the use of unlicensed software in the public sector, Thailand adopted guidelines in November 2020 on the government acquisition of legitimate software. DIP recently adopted a new system of voluntary registration of copyright (collective management) agents to curb illegal activities of rogue agents. To register, an agent must meet certain qualifications and undergo prescribed training. The roster of registered agents along with associated licensed copyrights is available on the DIP website. Thailand also organized an MOU in January 2021 between internet platforms, DIP, and rightsholders, to streamline the process of removing IP-infringing and counterfeit goods from the country’s most popular online marketplaces.
Thailand maintains a database on seizures of counterfeit goods that is updated monthly (https://www.ipthailand.go.th/en/statistics). In 2020, the Royal Thai Police conducted 1,685 raids and seized 330,607 items, the Department of Special Investigation conducted four raids on trademark violations resulting in 512,621 items being seized, and the Customs Department had 1,541 seizures that stopped 52,517,596 IP-infringing items from entering Thailand.
Thailand’s Central Intellectual Property and International Trade Court (CIPIT) is the court of first instance that has the jurisdiction over both civil and criminal intellectual property cases and the appeals from DIP administrative decisions. The Court of Appeal for Specialized Cases hears appeals from the CIPIT.
The Thai government maintains a regulatory framework that broadly encourages and facilitates portfolio investment. The Stock Exchange of Thailand, the country’s national stock market, was established under the Securities Exchange of Thailand Act B.E. 2535 in 1992. There is sufficient liquidity in the markets to allow investors to enter and exit sizeable positions. Government policies generally do not restrict the free flow of financial resources to support product and factor markets. The Bank of Thailand, the country’s central bank, has respected IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.
Credit is generally allocated on market terms rather than by “direct lending.” Foreign investors are not restricted from borrowing on the local market. In theory, the private sector has access to a wide variety of credit instruments, ranging from fixed term lending to overdraft protection to bills of exchange and bonds. However, the private debt market is not well developed. Most corporate financing, whether for short-term working capital needs, trade financing, or project financing, requires borrowing from commercial banks or other financial institutions.
Money and Banking System
Thailand’s banking sector, with 15 domestic commercial banks, is sound and well-capitalized. As of December 2020, the non-performing loan rate was low (around 3.25 percent industry wide), and banks were well prepared to handle a forecast rise in the NPL rate in 2021 due to the pandemic. The ratio of capital funds/risk-weighted assets (capital adequacy) was high (20.1 percent). Thailand’s largest commercial bank is Bangkok Bank, with assets totaling USD 100 billion as of December 2020. The combined assets of the five largest commercial banks totaled USD 492.6 billion, or 70.82 percent of the total assets of the Thai banking system, at the end of 2020.
In general, Thai commercial banks provide the following services: accepting deposits from the public; granting credit; buying and selling foreign currencies; and buying and selling bills of exchange (including discounting or re-discounting, accepting, and guaranteeing bills of exchange). Commercial banks also provide credit guarantees, payment, remittance and financial instruments for risk management. Such instruments include interest-rate derivatives and foreign-exchange derivatives. Additional business to support capital market development, such as debt and equity instruments, is allowed. A commercial bank may also provide other services, such as bank assurance and e-banking.
Thailand’s central bank is the Bank of Thailand (BOT), which is headed by a Governor appointed for a five-year term. The BOT serves the following functions: prints and issues banknotes and other security documents; promotes monetary stability and formulates monetary policies; manages the BOT’s assets; provides banking facilities to the government; acts as the registrar of government bonds; provides banking facilities for financial institutions; establishes or supports the payment system; supervises financial institutions manages the country’s foreign exchange rate under the foreign exchange system; and determines the makeup of assets in the foreign exchange reserve.
Apart from the 15 domestic commercial banks, there are currently 11 registered foreign bank branches, including three American banks (Citibank, Bank of America, and JP Morgan Chase), and four foreign bank subsidiaries operating in Thailand. To set up a bank branch or a subsidiary in Thailand, a foreign commercial bank must obtain approval from the Ministry of Finance and the BOT. Foreign commercial bank branches are limited to three service points (branches/ATMs) and foreign commercial bank subsidiaries are limited to 40 service points (branches and off-premise ATMs) per subsidiary. Newly established foreign bank branches are required to have minimum capital funds of 125 million baht (USD 3.99 million at 2020 average exchange rates) invested in government or state enterprise securities, or directly deposited with the Bank of Thailand. The number of expatriate management personnel is limited to six people at full branches, although Thai authorities frequently grant exceptions on a case-by-case basis.
Non-residents can open and maintain foreign currency accounts without deposit and withdrawal ceilings. Non-residents can also open and maintain Thai baht accounts; however, in an effort to curb the strong baht, the Bank of Thailand capped non-resident Thai deposits to 200 million baht across all domestic bank accounts. However, in January 2021, the Bank of Thailand began allowing non-resident companies greater flexibility to conduct baht transactions with domestic financial institutions under the non-resident qualified company scheme. Participating non-financial firms which trade and invest directly in Thailand are allowed to manage currency risks related to the baht without having to provide proof of underlying baht holdings for each transaction. This will allow firms to manage baht liquidity more flexibly without being subject to the end-of-day outstanding limit of 200 million baht for non-resident accounts. Withdrawals are freely permitted. Since mid-2017, the BOT has allowed commercial banks and payment service providers to introduce new financial services technologies under its “Regulatory Sandbox” guidelines. Recently introduced technologies under this scheme include standardized QR codes for payments, blockchain funds transfers, electronic letters of guarantee, and biometrics.
Thailand’s alternative financial services include cooperatives, micro-saving groups, the state village funds, and informal money lenders. The latter provide basic but expensive financial services to households, mostly in rural areas. These alternative financial services, with the exception of informal money lenders, are regulated by the government.
Foreign Exchange and Remittances
There are no limitations placed on foreign investors for converting, transferring, or repatriating funds associated with an investment; however, supporting documentation is required. Any person who brings Thai baht currency or foreign currency in or out of Thailand in an aggregate amount exceeding USD 15,000 or the equivalent must declare the currency at a Customs checkpoint. Investment funds are allowed to be freely converted into any currency.
The exchange rate is generally determined by market fundamentals but is carefully scrutinized by the BOT under a managed float system. During periods of excessive capital inflows/outflows (i.e., exchange rate speculation), the central bank has stepped in to prevent extreme movements in the currency and to reduce the duration and extent of the exchange rate’s deviation from a targeted equilibrium.
Thailand imposes no limitations on the inflow or outflow of funds for remittances of profits or revenue for direct and portfolio investments. There are no time limitations on remittances.
Sovereign Wealth Funds
Thailand does not have a sovereign wealth fund and the Bank of Thailand is not pursuing the creation of such a fund. However, the International Monetary Fund has urged Thailand to create a sovereign wealth fund due to its large accumulated foreign exchange reserves. As of December 2020, Thailand had the world’s 13th largest foreign exchange reserves at USD 258.1 billion.
7. State-Owned Enterprises
Thailand’s 52 state-owned enterprises (SOEs) have total assets of USD 523.5 billion and a combined gross income of USD 159.3 billion (end of 2019 figures, latest available). In 2020, they employed 249,400 people, or 0.65 percent of the Thai labor force. Thailand’s SOEs operate primarily in-service delivery, in particular in the energy, telecommunications, transportation, and financial sectors. More information about SOEs is available at the website of the State Enterprise Policy Office (SEPO) under the Ministry of Finance at www.sepo.go.th .
A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 52 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions. The Thai government generally defines SOEs as special agencies established by law for a particular purpose that are 100 percent owned by the government (through the Ministry of Finance as a primary shareholder). The government recognizes a second category of “limited liability companies/public companies” in which the government owns 50 percent or more of the shares. Of the 52 total SOEs, 42 are wholly owned and 10 are majority-owned. Three are publicly listed on the Stock Exchange of Thailand: Airports of Thailand Public Company Limited, PTT Public Company Limited, and MCOT Public Company Limited. By regulation, at least one-third of SOE boards must be comprised of independent directors.
Private enterprises can compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives in most sectors, but there are some exceptions, such as fixed-line operations in the telecommunications sector.
While SEPO officials aspire to adhere to the OECD Guidelines on Corporate Governance for SOEs no level playing field exists between SOEs and private sector enterprises, which are often disadvantaged in competing with Thai SOEs for contracts.
Generally, SOE senior management reports directly to a line minister and to SEPO. Corporate board seats are typically allocated to senior government officials or politically affiliated individuals.
The 1999 State Enterprise Corporatization Act provides a framework for conversion of SOEs into stock companies. Corporatization is viewed as an intermediate step toward eventual privatization. (Note: “corporatization” describes the process by which an SOE adjusts its internal structure to resemble a publicly traded enterprise; “privatization” denotes that a majority of the SOE’s shares is sold to the public; and “partial privatization” refers to a situation in which less than half of a company’s shares are sold to the public.) Foreign investors are allowed to participate in privatizations, but restrictions are applied in certain sectors, as regulated by the FBA and the Act on Standards Qualifications for Directors and Employees of State Enterprises of 1975, as amended. However, privatizations have been on hold since 2006 largely due to strong opposition from labor unions.
A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 56 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions; however, privatization is not part of this process.
8. Responsible Business Conduct
The Thai government has committed to implement the UN Guiding Principles on Business and Human Rights (UNGP). Thailand has two national plans for responsible business conduct. The 4th National Human Rights Plan (2019-2022) sets a framework on human rights for government agencies, the private sector, and civil society to reduce the incidence of human rights violations.
In October 2019 Thailand’s Cabinet adopted the country’s first National Action Plan on Business and Human Rights (NAP on BHR), based on UNGP. The NAP aims to prevent adverse effects of business operations on human rights. The plan identifies four priority areas: 1) labor; 2) community, land, natural resources, and environment; 3) human rights defenders; and 4) cross border investment and multinational enterprises. The Department of Rights and Liberties Protection at the Ministry of Justice is the lead agency. The Global Compact Network of Thailand opened a Business and Human Right Academy in 2020 to raise awareness in the private sector.
There are several local NGOs that promote and monitor responsible business conduct. Most such NGOs operate without hindrance, though a few have experienced intimidation as a result of their work. International NGOs continue to call on the Thai government and Thai companies to act more responsibly with respect to human and labor rights.
Thailand has not ratified the Montreux Document on Private Military and Service Companies.
In March 2020 the Thai Labor Minister signed an MOU with 13 private industry associations for prevention and elimination of child labor and forced labor in sectors including shrimp-farming, sugarcane, fisheries, and garments – all sectors identified as high risk in the U.S. Department of Labor’s TDA report.
Transparency International’s Corruption Perceptions Index ranked Thailand 104th out of 180 countries with a score of 36 out of 100 in 2020 (zero is highly corrupt). According to some studies, bribery and corruption are still problematic. Despite increased usage of electronic systems, government officers still wield discretion in the granting of licenses and other government approvals, which creates opportunities for corruption. U.S. executives with experience in Thailand often advise new-to-market companies that it is far easier to avoid corrupt transactions from the beginning than to stop such practices once a company has been identified as willing to operate in this fashion. American firms that comply with the strict guidelines of the Foreign Corrupt Practices Act (FCPA) are able to compete successfully in Thailand. U.S. businesses say that publicly affirming the need to comply with the FCPA helps to shield their companies from pressure to pay bribes.
Thailand has a legal framework and a range of institutions to counter corruption. The Organic Law to Counter Corruption criminalizes corrupt practices of public officials and corporations, including active and passive bribery of public officials. The anti-corruption laws extend to family members of officials and to political parties.
Thai procurement regulations prohibit collusion amongst bidders. If an examination confirms allegations or suspicions of collusion among bidders, the names of those applicants must be removed from the list of competitors.
Thailand adopted its first national government procurement law in December 2016. Based on UNCITRAL model laws and the WTO Agreement on Government Procurement, the law applies to all government agencies, local authorities, and state-owned enterprises, and aims to improve transparency. Officials who violate the law are subject to 1-10 years imprisonment and/or a fine from Thai baht 20,000 (approximately USD 615) to Thai baht 200,000 (approximately USD 6,150).
Since 2010, the Thai Institute of Directors has built an anti-corruption coalition of Thailand’s largest businesses. Coalition members sign a Collective Action Against Corruption Declaration and pledge to take tangible, measurable steps to reduce corruption-related risks identified by third party certification. The Center for International Private Enterprise equipped the Thai Institute of Directors and its coalition partners with an array of tools for training and collective action.
Established in 2011, the Anti-Corruption Organization of Thailand (ACT) aims to encourage the government to create laws to combat corruption. ACT has 54 member organizations drawn from the private, public, and academic sectors. Their signature program is the “Integrity Pact,” run in cooperation with the Comptroller General Department of the Ministry of Finance, and based on a tool promoted by Transparency International. The program forbids bribes from signatory members in bidding for government contacts and assigns independent ACT observers to monitor public infrastructure projects for signs of collusion. Member agencies and companies must adhere to strict transparency rules by disclosing and making easily available to the public all relevant bidding information, such as the terms of reference and the cost of the project.
Thailand is a party to the UN Anti-Corruption Convention, but not the OECD Anti-Bribery Convention. Thailand’s Witness Protection Act offers protection (to include police protection) to witnesses, including NGO employees, who are eligible for special protection measures in anti-corruption cases.
Resources to Report Corruption
International Affairs Strategy Specialist
Office of the National Anti-Corruption Commission
361 Nonthaburi Road, Thasaai District, Amphur Muang Nonthaburi 11000, Thailand
Tel: +662-528-4800 Email: TACC@nacc.go.th
Dr. Mana Nimitmongkol
Anti-Corruption Organization of Thailand (ACT)
44 Srijulsup Tower, 16th floor, Phatumwan, Bangkok 10330
10. Political and Security Environment
Periodic street protests against the government occurred throughout 2020, though they were generally peaceful and did not result in property damage.
Violence related to an ongoing ethno-nationalist insurgency in Thailand’s southernmost provinces has claimed more than 7,000 lives since 2004. Although the number of deaths and violent incidents has decreased year-over-year, efforts to end the insurgency have so far been unsuccessful. The government is currently engaged in preliminary talks with the leading insurgent group. Almost all attacks have occurred in the three southernmost provinces of the country.
11. Labor Policies and Practices
In 2020, 39.45 million people were in Thailand’s formal labor pool, comprising 59.6 percent of the total population. Thailand’s official unemployment rates stood at 1.5 percent at the end of 2020, significantly more than 1.0 percent the previous year. Unemployment among youth (15-24 years old) is around 5.4 percent, while the rate is only 1.1 percent for adults over 25 years old. Well over half the labor force (53.7 percent) earns income in the informal sector, including through self-employment and family labor, which limits their access to social welfare programs. The National Statistical Office show COVID-19 negatively affected the labor force’s working hours; many people although still employed, work less hours and receive less pay.
The Thai government is actively seeking to address shortages of both skilled and unskilled workers through education reform and various worker-training incentive programs. Low birth rates, an aging population, and a skills mismatch, are exacerbating labor shortages in many sectors. Despite provision of 15 years of free universal education, Thailand continues to suffer from a skills mismatch that impedes innovation and economic growth. Thailand has a shortage of high-skill workers such as researchers, engineers, and managers, as well as technicians and vocational workers.
Regional income inequality and labor shortages, particularly in labor-intensive manufacturing, construction, hospitality, and service sectors, have attracted millions of migrant workers, mostly from neighboring Burma, Cambodia, and Laos. In 2019, the International Organization for Migration estimated Thailand hosted 4.9 million migrant workers, or 10 percent of country’s labor force. Nearly 200,000 workers returned to their home countries due to the COVID-19 pandemic. Although an increasing number of migrant laborers are documented, many continue to work illegally. At the end of 2020, approximately 2.5 million migrant workers had registered with the Ministry of Labor.
Employers may dismiss workers provided the employer pays severance. Where an employer temporarily suspends business, in part or in whole, the employer must pay the employee at least 75 percent of his or her daily wages throughout the suspension period.
Among wage and salary workers, 3.4 percent are unionized and only 34 out of 77 provinces have labor unions. Thai law allows private-sector workers to form and join trade unions of their choosing without prior authorization, to bargain collectively, and to conduct legal strikes, although these rights come with some restrictions. Noncitizen migrant workers, whether registered or undocumented, do not have the right to form unions or serve as union officials. Migrants can join unions organized and led by Thai citizens.
In 2020, the Department of Labor Protection and Welfare issued a ministerial regulation on occupational safety, health and working environment for diving work; the regulation sets a minimum age of 18. The Department is in the process of drafting a regulation on fishery worker protection. Additional information on migrant workers issues and rights can be found in the U.S. Trafficking in Persons Report, as well as the Labor Rights chapter of the U.S. Human Rights report.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International
Source of Data: BEA; IMF;
Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)