The Land Bill: It just needs tweaking

Tuesday, 7 October 2014 01:12 - - {{hitsCtrl.values.hits}}

By A Special Correspondent The recent Land Bill has evoked much debate and discussion among the business and regulatory circles in the past month. This article is an attempt to reach a common perspective on the subject through a focus on the key objectives of the Bill and an understanding of the concerns of the business community over certain clauses in the Bill in its currently drafted form.

Residential property Judging by the debate and discussions, there appears to be universal agreement on a need to restrict the purchase of Residential Property by foreigners. There is also wide support of the need to have mechanisms to monitor, and manage, long-term leases which are de-facto substitutes for the freehold purchase of land/property. Commercial and industrial property Research indicates that barring a few selected instances, there are no restrictions, internationally, on the purchase and/or the long lease of commercial and industrial land by foreigners or foreign companies, provided that such purchases/long leases are supported by a Development Plan which is approved by an appointed government authority (e.g.: BOI, Committee of Ministers). There are some instances, internationally, where more onerous conditions and limits are placed on foreigners, or foreign companies, for the purchase/lease of agricultural lands, mining lands and coastal property. It is apparent that such conditions are driven by the need to ensure that nationals and local companies are not crowded out. This is not an unreasonable objective for lands which are considered to be of national importance. However, in all such instances, the conditions and limits placed on foreigners or foreign companies wishing to purchase or lease agricultural lands, mining lands, and other commercial and industrial lands are aligned, where relevant, with other national objectives such as the pursuit of Foreign Direct Investment (FDI), transfer of technology, enhancing export competitiveness etcetera. It is widely-accepted that Sri Lanka needs FDI to meet its economic vision. A system of efficient land transactions and a functional land market are important facilitators of FDI as well as economic development and growth. FDI, in general, improves productivity, enhances access to capital, technology and knowledge, all of which are essential for economic development and export competitiveness. In the light of the above, it is important that the restrictions on the purchase and/or long lease, by foreign companies, of commercial and industrial property, other than lands which are not available to foreign companies because of national policies, be carefully crafted. In this context, it is pertinent to note that land, and developments thereon, cannot be carried away by an exiting foreign company. Fixed assets and improvements remain in the country and will work for the benefit of the country in the hands of new shareholders/owners. If it is mandatory that the right to the use of such land is governed by a time-bound Development Plan which has already been approved by a Government authority (e.g.: BOI, Committee of Ministers) and if it is pre-stated that the subsequent sale/transfer of such land requires new approval (this has to be made law), the only other way that a foreigner or foreign company can exit is by selling his shares in the company which owns and/or has leased the land. The repatriation of such proceeds are, even today, governed by the Exchange Control Act. The point to note is that there already exist controls to safeguard any flights of capital from a direct or indirect sale of land. Therefore, what is required are: 1. Controls at time of purchase, and 2. Controls at time of sale or transfer. Rules governing the interim period between a purchase and a sale/transfer are more often counterproductive and on reflection achieves no National purpose. Based on what is known publicly, the major concerns/issues on the current Land Bill are as follows.

Retrospective application

The definition of a foreign company

The nullity of a land transaction if a company exceeds a specified foreign shareholding threshold

The negative impact on the Ease of Doing Business in Sri Lanka

There are other obvious drafting anomalies which are expected to be corrected before enactment. 1. Retrospective Application This is probably the easiest to rectify by making the Bill prospective. The Bill must also provide for the ratification of transactions done between November 2012, this being the date of which the first Administrative Circular on Land Transactions was released by the Ministry of Finance, and the passing of the Bill and subsequent enactment. 2. Definition of a foreign company It will probably be less confusing, if the differentiation is between “Resident” and “Non Resident”, the definitions of both are in the Exchange Control Act. In summary, the restrictions of freehold purchase of land, and/or long-term lease of Commercial or Industrial Land must only apply to Non Resident Companies. If foreign investors are willing to add to the GDP of the country by establishing locally incorporated companies which are governed by the Exchange Control Act and the Companies Act, let us encourage them. As was stated earlier, an exiting foreign shareholder, and/or foreign company, cannot physically carry away the land and the developments thereon. They can only repatriate monies, in-keeping with the Exchange Control Act. 3. The nullity of a land transaction Since companies listed on a Stock Exchange have no control regarding its ownership, the nullifying/voiding of a previously concluded land transaction if its foreign shareholding exceeds a specified threshold subsequently creates unpredictability and other practical problems for the stock market, investors, and the Registrar of Companies. It also poses significant problems for banks lending to the subject company where land is the collateral and for financial accounting/reporting. Further, it is not practical to base legislation on a factor (for listed companies) which is constantly moving without the immediate control of the subject company and that too, in a manner which is natural with the workings of a regulated stock market. Again, if one was to adopt the Resident Company and Non-Resident Company definitions of the Exchange Control Act, this issue/anomaly arising out of a moving shareholder base will not arise. Additionally, the Exchange Control Act will provide the necessary safeguards on capital flight. Basically a Resident Company will have no restrictions and a Non Resident Company will have restrictions. However, in both instances, the purchase/long lease of permitted commercial and industrial land, particularly State land, by non resident companies must only be allowed on the strength of a Development Plan approved by the appointed Government Authority (e.g.: BOI or in the case of strategic development projects, a committee of ministers). Subsequent transfers of such approved purchases/long leases must also receive approval. 4. Ease of Doing Business in Sri Lanka Given the main intention of the bill, this being to control the freehold purchase of land, and the need to manage long leases which are de-facto substitutes for the free hold purchase of land, by foreigners, it is suggested that the Land Tax be only applied to leases of a capital nature. Since there may be difficulties in differentiating between capital leases (de-facto substitutes for free hold purchase) and operational leases (routine shop and house rentals), it is suggested that the land tax be only applied to a long term lease of 30 years and above. Conclusion An unemotional look at the drafted Bill appears to indicate that the Bill requires just a little, but still very important, tweaking to make it consistent with other national objectives. The tweaks suggested afore will make the Bill more practical without losing the thrust of its main intent. It is up to the architects of the Bill to take an objective re-look at the Bill and correct the anomalies. After all, it is in our national interest to have policies which dovetail with each other and it is even better if the definitions are consistent with those already established per other legislations such as the Companies Act, the Exchange Control Act and the SEC Act, just to name a few.