Transparency of the Regulatory System
The Board of Investment strives to inform potential investors about laws and regulations affecting operations in Sri Lanka. However, existing laws remain hard to find and proposed laws and regulations, while generally made available for public comment, are occasionally published without public discussion. U.S. stakeholders have raised concerns that the government does not adequately consult with the private sector prior to implementing new taxes or regulations. Similarly, stakeholders have raised concerns that the government does not allow adequate time to implement new regulations or requirements. New regulations and policies will frequently be crafted to protect certain sectors or stakeholders.
Many foreign and domestic investors view the regulatory system as unpredictable due to outdated regulations, rigid administrative procedures and excessive leeway for bureaucratic discretion. Effective enforcement mechanisms are sometimes lacking and investors cite coordination problems between the Board of Investment and relevant line agencies. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during tendering.
Corporate financial reporting requirements in Sri Lanka are outlined in several laws, which include the Companies Act No. 7 of 2007, Securities and Exchange Commission Act No. 36 of 1987, Banking Act No. 30 of 1988, Finance Business Act of 2012, Regulation of Insurance Industry Act No. 27 of 2011, Inland Revenue Act 24 of 2017, Microfinance Act No. 6 of 2016, Finance Act No. 38 of 1971, and Accounting and Auditing Standards Act No. 15 of 1995.
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) respectively. 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 of such enterprises are required to be audited by professionally qualified auditors holding ICASL membership. ICASL has published accounting standards for small companies as well. The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards. British professional accounting bodies are active in Sri Lanka. The Chartered Institute of Management Accountants (CIMA), a leading professional accounting body based in the United Kingdom covering the Commonwealth of Nations member countries, has its largest overseas presence in Sri Lanka.
Rule-making authority lies with Parliament. Line ministries or specific regulatory authorities are responsible for crafting draft regulations, which may require approval from the National Economic Council, the Cabinet, and/or Parliament. Laws are published in Acts of Parliament.
At the pre-enactment stage, bills are drafted by respective ministries. Public consultation at this stage is limited in many instances. Every bill must be published in the government gazette http://documents.gov.lk/en/home.php at least seven days before it is placed on the Order Paper of the Parliament. This is the first occasion the public is officially informed of proposed laws. Until this time, the draft is treated as a confidential document. Any member of the public can challenge the 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 the bill, these have to be incorporated before the bill can be debated and passed. Regulations are made by administrative agencies and are published in the government gazette which is similar to a U.S. Federal Notice. In addition to regulations, some rules are made through internal circulars, which are hard to find. All public comments received by regulators are not made public, online or otherwise.
Widespread corruption has made 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.
International Regulatory Considerations
Sri Lanka is a member of the World Trade Organization (WTO) and has made many WTO notifications that pertained to 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. A National Trade Facilitation Committee is tasked with undertaking reforms needed to operationalize the TFA.
Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).
Legal System and Judicial Independence
Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British. Basic civil law is Roman-Dutch. Laws pertaining to marriage, divorce, and inheritance can vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory. The law reflects colonial British law but amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial matters: the Board of Investment 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). The provincial high courts have original, appellate and reversionary criminal jurisdiction. The Court of Appeal is the 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.
During the October 2018 constitutional crisis, the Supreme Court and Court of Appeals of Sri Lanka demonstrated their judicial independence by adhering to fundamental constitutional principles in the face of extralegal measure to remove the Prime Minister.
All commercial matters including intellectual property claims exceeding the value of LKR 20 million (approximately USD 111,000) fall within the jurisdiction of the Commercial High Court of Colombo. A number of tribunals also exercise judicial functions such as the Labor Tribunals that hear cases brought by workers against their employers. Litigation can be slow. Monetary judgments are usually made in local currency but procedures exist for enforcing foreign judgments.
Laws and Regulations on Foreign Direct Investment
The principal law governing foreign investment is Law No. 4, created in 1978 (known as the BOI Act), as amended in 1980, 1983, 1992, 2002, 2009 and 2012 along with implementing regulations established under the Act. The BOI Act provides for two types of investment approvals, one allowing concessions and the other without concessions. Under Section 17 of the Act, the BOI is empowered to approve companies satisfying certain eligibility criteria on minimum investment. Such companies are eligible for concessions such as duty free imports. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws of the country and applies to investments that do not satisfy eligibility criteria for BOI incentives. From April 1, 2017, Inland Revenue Act No. 24 of 2017 provides an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments made by investors. Commercial Hub Regulation No 1, of 2013 applies to transshipment trade, off-shore businesses and logistic services. Strategic Development Project Act of 2008 (SDPA) provides generous tax incentives for large projects that the Cabinet identifies as Strategic Development Projects. Other laws affecting foreign investment are the Securities and Exchange Commission Act of 1987 as amended in 1991, 2003 and 2009, the Takeovers and Mergers Code of 1995 (revised in 2003), Companies Act of 2007 (revised in 2014), and the Foreign Exchange Act of 2017. Various labor laws and regulations also affect investors. For more details, please visit: http://www.lawnet.lk/ .
Competition and Anti-Trust Laws
Sri Lanka does not have a specific competition law. Instead, the Board of Investment or the respective regulatory authority may review transactions for competition-related concerns.
In March 2017, the Sri Lankan Parliament approved an Anti-Dumping & Countervailing Act and a Safeguard Measures Act. These laws will provide a framework to guard against unfair trade practices and unforeseen surges of imports. The new laws will allow government trade agencies to initiate investigations relating to unfair business practices and impose additional duties and countervailing duties.
State Owned Enterprises (SOEs) are active in transport (bus 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.
Expropriation and Compensation
Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment. The last expropriation dispute was resolved in 1998. However, in 2011, the previous government approved the Revival of Underperforming Enterprises and Underutilized Assets Act allowing for the expropriation of assets belonging to 37 companies the government considered as underperforming. These companies had leased land from the government but the government claimed the companies were not meeting the conditions of the agreement. Although many of the companies were defunct, several others were viable businesses. The law increased investor uncertainty regarding property rights in Sri Lanka and is often cited as having a chilling effect on foreign direct investment. The Central Bank stated the Act was to be considered a one-off measure and the 2018 government budget proposed to repeal it, but it has not been done to date.
Apart from the Underutilized Assets Act, the land acquisition law empowers the government to take over private land for public purposes. Compensation is paid based on government valuation which some local investors consider relatively fair. There are cases, however, of the military taking over businesses in the North and East – on claims they are on government land – with little or no compensation. Many land records were lost or destroyed during the war which complicates land tenure issues and delays resolution. Under the previous regime, there were reports of government taking over private lands throughout the country purportedly for public purposes. The current government has pledged to refrain from the takeover of private assets.
ICSID Convention and New York Convention
Sri Lanka is a member state to the International Centre for the Settlement of Investment Disputes (ICSID convention). It is also a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.
Sri Lanka’s Arbitration Act of 1995 recognizes within its legal framework the terms of the New York Convention.
Investor-State Dispute Settlement
Sri Lanka has signed a Bilateral Investment Treaty (BIT) with the United States. Over the past ten years, according to the United Nations, two investment disputes have involved foreign investors: 1) a dispute between Deutsche Bank and Ceylon Petroleum Corporation regarding an oil hedging agreement concluded with the proceeding being decided in favor of Deutsche bank; and 2) an ongoing arbitration involving British and local investors with the Attorney General as respondent with regard to a tourism development project.
International Commercial Arbitration and Foreign Courts
Sri Lanka ranks very poorly on contract enforcement (165 out of 190) on the World Bank’s Doing Business Indicators. As a result, many investors tend to prefer arbitration over litigation. Sri Lanka currently has a community mediation system, which handles primarily non-commercial mediations and commercial disputes where the amount in controversy is less than USD 3,333.00. Therefore, there is no system of mediation for commercial disputes over that threshold amount. The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com ) and Sri Lanka National Arbitration Centre (www.slnarbcentre.com ) engage in private settlement of commercial disputes through arbitration. However, neither is functioning properly and efficiently. Both centers handle only a handful of cases a year.
Arbitral awards made abroad are now enforceable in Sri Lanka. Similarly, awards made in Sri Lanka are enforceable abroad. There is a considerable delay in enforcing arbitral awards and the respondents are often seen making objections based on technicalities or on public policy considerations.
The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com ) and Sri Lanka National Arbitration Centre (www.slnarbcentre.com ) engage in private settlement of 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 unless the employee agrees to such termination.
In the absence of proper 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 it cannot meet a creditor’s demands for payment of money in excess of LKR 50,000 (USD 320.00). Lenders are also empowered to foreclose on loan collateral without court intervention. However, loans below LKR 5 million (USD 32,000) are exempt and lenders cannot foreclose on collateral provided by guarantors to a loan. Financial institutions also face other legal challenges as defaulters obtain restraining orders on frivolous grounds due to technical defects in the recovery laws.
The Companies Act of 2007 provides a solvency test to determine the financial stability of a company. The solvency test is intended to prevent companies without sufficient assets from obtaining loans and to protect rights of creditors. The law sets forth the responsibilities of a company’s directors in cases of serious loss of capital. While the Companies Act does not provide for the revival of struggling companies, the courts generally take a liberal attitude towards any restructuring plans that would benefit a company.
Sri Lanka ranked 92 out of 190 countries in resolving insolvency index in the World Bank’s Doing Business Report 2019. Resolving insolvency takes 1.7 years at a cost equivalent to 10 percent of the value of the estate.