Investment Q & A

• What are the laws I should be aware of when investing in local business?
• What are my options to invest in Sri Lankan business?
• Why should I choose BizPAct as my facilitator?
• What are the best industries to invest in? Lowest risk? Highest return?
• Help! I have a little bit of money and I want to invest in Sri Lanka. What do I do, how do I get started?
• What are the investment success stories and advice to first-time investors?
• Why are so many reticent to invest in Sri Lanka?
• Where does the perception of the potential risks reflect or diverge from the reality?
• What are some examples of organization which offer grants and loans to small businesses in Sri Lanka?
• How stable is the economic landscape ? What will happen to my money if the business fails?

What are the laws I should be aware of when investing in local business?

The principal law governing foreign investment is Law No. 4, created in 1978 (known as the BOI Act), as amended in 1980, 1983 and 1992, along with implementation regulations established under the Act. The BOI Act provides for two types of investment approvals. Under section 17 of the Act, the BOI is empowered to grant concessions to companies satisfying certain eligibility criteria on minimum investment, exports and in some cases employment. Investment approval under Section 16 of the act permits entry for foreign investment to operate under the "normal" laws of the country and applies to investments that do not satisfy eligibility criteria for BOI incentives. Most of the BizPAct investments would fall into this category.

Other laws affecting foreign investment are the Securities and Exchange Commission Act of 1987 as amended in 1991 and 2003, and the Takeovers and Mergers Code of 1995 revised in 2003. A new Companies Act came into effect in 2007 replacing the Companies Act of 1982. The new law aims to improve trade and commerce as well as corporate governance in the business sector. It features simplified regulations concerning company formation; provisions specifying the duties of company directors; provisions to prevent the abuse of powers by directors; provisions to protect creditors; and a dispute board to settle disputes among directors. Various labour laws and regulations also affect investors.

More details van be obtained from the website of the Board of Investment of Sri Lanka ( http://www.boi.lk/BOI2008/business_information.asp )

Back to FAQs

Are there restrictions on the types of Sri Lankan business in which I can invest?

The government allows 100% foreign investment in the following services: banking, finance, insurance, stock-brokering, construction of residential buildings and roads, supply of water, mass transportation, telecommunications and information technology (software development and business process outsourcing), energy production and distribution, professional services, and the establishment of liaison offices or local branches of foreign companies. These services are regulated and subject to approval by various government agencies. The screening mechanism is non-discriminatory and, for the most part, routine.

Investment in other sectors is restricted and subject to screening and approval on a case-by-case basis when foreign equity exceeds 49%. The affected sectors are: shipping and travel agencies; freight forwarding; fishing; timber-based industries; growing and primary processing of tea, rubber, coconut, rice, cocoa, sugar and spices; and the production for export of goods subject to international quota. Foreign investment restrictions and government regulations also apply to international air transport; coastal shipping; lotteries; large-scale mechanized gem mining; and sensitive industries such as military hardware, dangerous drugs and currency.

Foreign investment is not permitted in the following businesses: non-bank money lending; pawn-brokering; retail trade with a capital investment of less than $1 million (with one notable exception: the BOI permits retail and wholesale trading by reputed international brand names and franchises with an initial investment of not less than $150,000); coastal fishing; and the awarding of local university degrees. Foreign degree courses can be offered in Sri Lanka by affiliating with foreign universities. However, there is no scheme to monitor the quality assurance or accreditation of the foreign courses offered in Sri Lanka.

Back to FAQs

Why should I choose BizPAct as my facilitator?

BizPAct is specifically aimed at brokering investment in regional Small and Medium enterprises. The organisation behind BizPAct is the Business for Peace Alliance. This organisation is owned by 26 regional Chambers of Commerce.

If your interest is the SME sector then BizPAct should be carefully considered because:-

• It provides proposals that have already been scrutinised by senior members of the Colombo business community
• As part of the BizPAct process, the entrepreneur and his company have already been verified by both the local bank and by the local Chamber of Commerce.
• You still have to do the Due Diligence that any investment opportunity requires, but you can be confident that you are dealing with a genuine Sri Lanka company with staff that are known in their local area.

Back to FAQs

What are the best industries to invest in? Lowest risk? Highest return?

Unsurprisingly, there are no easy answers to this question. The ‘best’ industries will depend on our own attitude to risk and how much you want to involve yourself directly in the management of the company in which you invest. In turn, this will depend on your own interests and expertise. One investor may regard a particular investment opportunity as very risky, whereas because you know about the industry concerned, and you know the right questions to ask, you may be able to decide after having discussions with the entrepreneur that the same investment opportunity is very low risk – and will give a very high return.

Back to FAQs

Help! I have a little bit of money and I want to invest in Sri Lanka. What do I do, how do I get started?

Investing in Sri Lankan enterprises is not different to other investment opportunities that you may consider.

The first thing you must do is to decide what level of risk you are prepared to accept.

If you are really concerned about the possibility of losing your money then perhaps you should not be looking at this type of investment at all – you may be happier investing your money in bonds and other financial products with a more guaranteed return.

Having decided that you are prepared to accept the risk associated with investing in a business then you need to work out how to choose between the different opportunities that are available. Perhaps you are interested in a particular region of the country or perhaps you are interested in a particular type of business. The BizPAct website contains a number of potential projects. Once you are registered, you can review the details of these opportunities. If you find any of them interesting then you can get in touch directly with the entrepreneurs and get more details from them.

Before making any investment you should do some ‘due diligence’. BizPAct helps with this process by providing bank verification and verification from the local Chamber of Commerce. So, you can be assured that these proposals come from genuine business people in the regions. However, you need to evaluate for yourself the investment opportunity. How realistic are the costs? How realistic are the timescales for getting your money back? How risky will this investment be?

Only once you are satisfied on all of these points should you get into more detailed negotiations with the proposal writer about the amounts of investment and how the investment will work at a practical level (will it be a loan to the company, will you take a direct stake in the company, will a new joint venture be formed etc).

Back to FAQs

Why are so many reticent to invest in Sri Lanka?

“Sri Lanka's intractable civil war, erratic policy environment, and cumbersome bureaucracy make it an unpredictable investment destination” , in the view of the US Department of State. However, they also agree that “compared to other South Asian countries, Sri Lanka is relatively open to foreign investment. It offers a relatively open financial system, moderately good infrastructure, and generally capable workers. Some U.S. and other foreign investors have realized worthwhile returns on investment in Sri Lanka; others have tried and gone away frustrated.”

2009 will be a challenging year for the Sri Lankan economy. The Central Bank expects the economy to grow by 5-6% in 2009, aided by growth in agriculture, manufacturing and services, and forecasts inflation to slow down to single digit levels. The successful halt to the civil conflict could also help growth. Nonetheless, the global economic downturn is likely to impact the economy in a number of ways. Exports, services and remittances will likely decline, exerting pressure on the currency and reserves. The government's budget forecasts, including a deficit of only 6.5% of GDP, are likely unrealistic in light of global recessionary conditions. Sri Lanka will also likely face extreme difficulty in obtaining commercial loans in 2009 to assist in the financing of its deficit and debt service.

Back to FAQs

Where does the perception of the potential risks reflect or diverge from the reality?

Sri Lanka is a lower-middle income developing nation with a gross domestic product of about $38 billion in 2008. This translates into a per capita income of over $1,800.

The Sri Lankan economy is remarkable for its resilience. Although suffering a civil war that began in 1983, GDP growth averaged around 5% in the last ten years. Even the December 2004 Indian Ocean tsunami failed to dent GDP growth, which was over 6% in 2005-2008, due in part to damage being offset by reconstruction. Unfortunately, inflation remained high during this period, as in 2008, when it averaged 14% year-on–year. 2009 looks better with inflation down to single figures.

Despite the civil war and global recession, Sri Lanka's gross domestic product (GDP) grew once again by an estimated 6% in 2008. Growth was led by telecommunications, ports, construction, government services, agriculture and manufacturing exports. Sri Lanka’s trade and current account deficits widened sharply, mainly due to higher oil prices. While Sri Lanka’s exposure to the global financial crisis is limited due to controls on its capital account, Sri Lanka experienced capital flight by foreign investors who had invested in government debt instruments. The Central Bank expects a balance of payments (BOP) deficit in 2008.

However, what the above does not tell you about are the differences experienced by different regions of Sri Lanka. Some have been more impacted by the security situation than others. So, in considering any potential investment it is important to satisfy yourself that, for instance, access to local transportation is suitable and that any contruction sites are not subject to any land disputes.

Now that the war with the Tamil Tigers has reached a conclusion, the security situation is likely to improve in many parts. This is something that any investor will need to review on a regular basis.

Sri Lanka is a land of many opportunities. However, as with any investment you must make your own careful assessment of the risks

Back to FAQs

What are some examples of organization which offer grants and loans to small businesses in Sri Lanka?

The main organisation that offers grants and loans is the Board of Investment (BOI). You can find a document listing the main benefits they offer in the information section of this website. Can we include here a link to the information part of the website??

Back to FAQs

How stable is the economic landscape ? What will happen to my money if the business fails?

Despite the current World Recession, the economy of Sri Lanka is expected to carry on growing during 2009. It is unclear what the impact of the end of the civil conflict will be -but it could provide a significant stimulus to investment.

If the business fails then the result for the investor depends on the nature of the investment mechanism that has been agreed with the entrepreneur. If the business fails and the investment is in the form of equity in the company then the investment will be lost. However, investors who are worried about failure may seek to come to other sorts of agreement – perhaps by providing loans to the company that are secured against suitable assets.