Wednesday, 3 September 2014 00:33
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Proposed new legislation on restrictions on land alienation causes widespread concerns over future of 100% FDIs projects and Joint Venture investments
Experts warn serious implications if Bill is passed
Officials say national interest is key, but insist exemptions and relief provided for select important FDIs and JV projects
Billion rupees worth of purely foreign and joint venture investments already made or firmed up are under threat thanks to a contentious Bill promoted by the Government, the private sector warned yesterday.
The contentious piece of upcoming legislation is the Land (Restrictions on Alienation) Bill, which makes provisions to stipulate restrictions on the alienation of lands in Sri Lanka to foreigners, foreign companies and certain institutions with foreign shareholding of 50% or above.
It also specifies the circumstances where the exemptions are granted apart from imposing a 15% Land Lease Tax for leasing of lands to foreigners, foreign companies and certain institutions with foreign shareholding for the granting of concessions to certain development projects.
Sources said that the new Bill effectively puts a large number of already commenced and upcoming multi billion rupee projects all at sea.
The Bill is the implementation of a 2013 Budget proposal. However, sources said that in March last year the Government issued an administrative circular giving clarity and exempting companies with 50% or more foreign ownership but having been in existence for over 10 years.
Since then a large number of companies listed on the Colombo Stock Exchange and unlisted have acquired land or have begun various projects including hotels.
“If passed in Parliament, the Bill will effectively make all such purchases null and void putting major investments in grave danger,” analysts warned.
Going by the provisions of the new Bill, even some of the large-scale projects by global brands will be at risk, they added.
The draft Bill also states that the law, once passed, will be effective from 1 January 2013. Legal experts have warned that this could also have ramifications for transactions that took place in the interim between 1 January 2013 and when the law is eventually passed.
Economic think tank Pathfinder Foundation has warned that failure to address some of the concerns over the Bill will create uncertainty that deters both domestic and foreign investment.
It said the last provision (and companies incorporated in Sri Lanka where foreign shareholders account for more of the capital, unless they have been operating in Sri Lanka for 10 consecutive years) creates uncertainty regarding its practical implications, as a Sri Lankan company floated on the stock exchange can become a majority foreign-owned company at any given time.
The uncertainty is created when this is taken together with the proposal that the legal validity of a transfer of land to a locally incorporated company with less than 50% foreign shareholding will only be maintained if the foreign shareholding remains below 50% for a minimum of 20 consecutive years. Hence, if the ownership structure changes through legitimate share market operations whereby foreign ownership exceeds the 50% threshold, a previously legal land deal is invalidated.
It said the proposed legislation on foreign ownership of land imposes restrictions which are likely to deter foreign investment. The proposed Land Lease Tax has to be seen as a tax on all Foreign Direct Investment as it will inflate land/property prices which are an important determinant of the destination of a large proportion of FDI.
Pathfinder Foundation also warned that domestic businesses will also be adversely affected by the increase in the price of land. Large and small businesses will be discouraged by this trend with particularly negative consequences for start-up and expansion plans.
“Measures which discourage or deter foreign investment in a country with twin savings and foreign exchange gaps (and concerning debt dynamics) can well be seen as a case of ‘throwing the baby out with the bathwater’,” opined Pathfinder Foundation.
Official sources however said the Bill was in the national interest and provides exemptions including for select foreign investments, hence fears were unwarranted.
