Foreign investments in Sri Lanka are regulated by the Foreign Exchange Act No.12 of 2017 (“Foreign Exchange Act”) and the regulations issued thereunder.

Foreign Exchange (Classes of Capital Transactions undertaken in Sri Lanka by a Person Resident Outside Sri Lanka) Regulations No. 2 of 2021 published in the Gazette Extraordinary No.2213/35 dated 03.02.2021 as amended by the Gazette Extraordinary No.2235/22 dated 06.07.2021 (“FX Regulations”) permit non-residents to:

1. acquire, hold or divest all classes of shares issued by a company incorporated under the Companies Act No.07 of 2007 (“Companies Act”);
2. invest in debt securities with a tenure of 3 or more years issued by a company incorporated under the Companies Act;
3. invest in debt securities issued by licensed commercial banks, licensed specialized banks, licensed finance companies or specialized finance companies subject to the approval of the relevant regulatory authority;
4. grant loans with a tenure of 3 or more years to companies incorporated under the Companies Act;
5. grant loans with a tenure of less than 3 years to companies incorporated under the Companies Act which hold Business Foreign Currency Accounts, for the purpose of utilizing such proceeds of the loan to meet the working capital requirement of the borrower provided that all repayments of such loans are made out of the foreign exchange earnings of the borrower;
6. grant loans to the Government of Sri Lanka (“GoSL”) or state-owned enterprises subject to the approval of the relevant line Ministry or any other relevant authority;
7. grant loans in foreign currency to licensed commercial banks, licensed specialized banks, licensed finance companies or specialized finance companies;
8. invest in:
   1. units in Unit Trusts or Mutual Funds;
   2. Government Securities (treasury bills, treasury bonds and any other securities issued by the Government of Sri Lanka);
   3. securities issued by the Central Bank of Sri Lanka (“CBSL”) or any state-owned enterprise (“SOE”) or any other statutory body;
   4. Sri Lanka Development Bonds;
   5. term deposits in Sri Lanka Rupee or any designated foreign currency in licensed financial institutions,
   6. immovable properties; or
   7.  debt securities in Sri Lanka Rupees listed in the Colombo Stock Exchange;
   8. debt securities in any designated foreign currency listed in the Colombo Stock Exchange.
9. subject to certain limitations specified under Fx Regulations, to acquire, hold or divest all classes of shares in any designated foreign currency (including the shares under an entitlement to shares or conversion to shares) listed in the Colombo Stock Exchange and issued by companies incorporated under the Companies Act No.7 of 2007.

Under no circumstances the aforementioned listed shares or listed debt securities issued in any designated foreign currency by companies in Sri Lanka are permitted to be sold to any person resident in Sri Lanka excluding non-nationals who are residing in Sri Lanka and making such investments through an Inward Investment Account.

FX Regulations further impose the following industry-specific exclusions, limitations and restrictions:

1. Exclusions: Foreign investment in voting shares is excluded in:
   1. Pawnbroking
   2. Coastal fishing
   3. Retail Trade [defined as “resale (sale without transformation) of new and used goods to the general public for personal or household consumptions or utilization”] where capital contributed by non-residents is less than USD 5 Million.
2. Limitations: Foreign investment in voting shares in the following industries is restricted to 40% unless the prior written approval of the Board of Investment of Sri Lanka (“BOI”) is obtained for the acquisition of a higher percentage of voting shares:
   1. Production of goods where Sri Lanka’s exports are subject to internationally determined quota restrictions
   2. Growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices
   3. Mining and primary processing of non-renewable national resources
   4. Timber-based industries using local timber
   5. Deep-sea fishing
   6. Mass communication
   7. Education
   8. Freight forwarding
   9. Travel agencies
   10. Shipping agencies
3. Restrictions: Prior approval of the relevant authorities is required for any non-resident to acquire or hold fully paid-up voting shares in a company that carries on the following activities:
   1. Air transportation
   2. Coastal shipping
   3. Industrial undertakings specified in the Industrial Promotion Act No.46 of 1990 include:
      • Any industry manufacturing arms, ammunition, explosives, military vehicles and equipment, aircraft and other military hardware
      • Any industry manufacturing arms, ammunition, explosives, military vehicles and equipment, aircraft and other military hardware
      • Any industry producing currency, coins or security documents
   4. Large-scale mechanized mining of gems
   5. Lotteries

Permitted investments in shares, unlisted debt securities and debt securities issued by banks, finance companies and specialized leasing companies must be remitted via an Inward Investment Account (“IIA”) established by the non-resident with a licensed commercial bank in Sri Lanka. Proceeds on such investments (such as dividends and sale proceeds) can be repatriated through the same IIA, without restriction.

Non-residents may remit loans either via its IIA or directly from offshore accounts in the following manner:

1. A loan of tenure of 3 or more years to a resident (other than banks, GoSL or SOEs) must be remitted to an External Commercial Borrowing Account (“ECBA”) established by the borrower with a licensed bank in Sri Lanka and will be serviced via the same ECBA. Such loans must be repaid in full at the end of the tenure or be amortized over the tenure in accordance with the terms of the loan agreement;
2. A loan of a tenure of less than 3 years to a local company having a Business Foreign Currency Account with a licensed bank in Sri Lanka to meet its working capital requirements must be credited to a Business Foreign Currency Loan Account (“BFCLA”) opened and maintained by the local company with a licensed bank in Sri Lanka and all repayments must be made via such BFCLA.

Foreign investments in real estate

In terms of the Land (Restrictions on Alienation) Act No. 38 of 2014 (as amended), the following are not permitted to acquire real estate in Sri Lanka:

1. Foreigners;
2. Local companies with direct/indirect foreign shareholding of 50% or more (save and except a listed company with a foreign shareholding of 50% or more with effect from 1st April 2018);
3. Foreign companies.

Foreign investment laws and regulations are based on a combination of economic protectionism and national security. Please refer to our responses to Q1 above, where foreign investments are subject to industry-specific exclusions, limitations and restrictions.

Any person who is not a resident of Sri Lanka in terms of the Order made under Section 31 of the Foreign Exchange Act will be considered a ‘foreign investor’. Foreign exchange laws and regulations extend to all countries.

Please refer to the summary of Foreign Investment Restrictions set out above on industry-specific exclusions, limitations and restrictions.

Please refer to our responses to Q1 above. Foreign investment in voting shares of companies engaged in retail trade will be subject to a minimum capital of USD 5 Million.

Further investment thresholds will be applicable if the local company is established with the approval of BOI based on the type of approval i.e., companies established with the approval of BOI under Section 16 of the Board of Investment Law No. 4 of 1978 as amended (“BOI Law”) will be subject to a minimum foreign investment of USD 250,000/- whereas companies approved under Section 17 of BOI Law will be subject to sector-specific minimum investment thresholds.

Companies approved under Section 16 of BOI Law will not be eligible for investment incentives, whereas Companies approved under Section 17 of BOI Law will be eligible for limited investment incentives and concessions.

There is no notification requirement under the FX Regulations.

Permitted investments set out under the FX Regulations do not require the prior approval of the relevant authority (i.e., the Department of Foreign Exchange ("DFE")). Investments that are not permitted under the FX Regulations and any deviations from the mandated remittance procedures will require DFE’s approval prior to closing.

Foreign investments and repatriations of returns on investments have not been restricted due to the pandemic.

In our experience, foreign investments are actively monitored by the relevant regulatory authorities in accordance with the FX Regulations. However, information on enforcement actions taken by the relevant regulatory authorities is not publicly available.

Authorized Dealers (i.e., licensed banks) and Restricted Dealers (i.e., any person or entity authorized by CBSL to deal in foreign exchange in terms of the Foreign Exchange Act) are required to ascertain (a) the bona fides of the person who carries out the transaction; (b) that such transaction is in compliance with the FX Regulations; by obtaining documentary evidence and is further required to exercise all due diligence in executing such transactions.  

Foreign investments are actively monitored as set out in our response to "How active has your agency been in reviewing, delaying, modifying or blocking foreign investments?" above. Investments that are not permitted under the FX Regulations will be prohibited unless the prior approval of the DFE is obtained.

We do not anticipate any regulatory developments relating to the FX Regulations over the next 6 months.