The Ministry of Finance issued a series of regulations repealing the regulations issued under the Extraordinary Gazette Notification 2045/56 dated 17.11.2017 (“Repealed Regulations”). The new Foreign Exchange (Classes of Capital Transactions Undertaken in Sri Lanka by a Person Resident outside Sri Lanka) Regulation No. 02 of 2021 (vide Gazette Extraordinary No.2213/35 dated 03.02.2021) (“New Regulations”) has introduced significant amendments to the permitted capital transactions undertaken by non-residents in Sri Lanka.

1. Investing in companies incorporated in Sri Lanka

Non-residents are permitted to invest in shares in companies incorporated in Sri Lanka under the Companies Act, No. 07 of 2007 (as amended) (“Sri Lankan Companies”) including conversions which is defined to mean conversion of preference shares; loans or debt securities; and value of imported machinery into ordinary shares.

Industry specific limitations and restrictions on acquiring and holding shares Sri Lankan Companies is now limited to investing in voting shares under the New Regulations.

In relation to the total prohibition on investing in voting shares of a company carrying on the business of retail trade where capital contributed by non-residents is less than US$ 5mn, the New Regulations have defined Retail Trade to include is re-sale (sale without transformation) of new and used goods to the general public for personal or household consumptions or utilization.

Other than the investments discussed in item 3 below, consideration payable for permitted investments referred to above must be mandatorily routed via an Inward Investment Account opened and maintained with a Licensed Commercial Bank in Sri Lanka (“LCB”).

2. Investing in Companies not incorporated in Sri Lanka and listed in the Colombo Stock Exchange (“CSE”)

Other than the investments discussed in item 3 below, consideration payable for permitted investments referred to above must be mandatorily routed via an Inward Investment Account opened and maintained with a Licensed Commercial Bank in Sri Lanka (“LCB”).

3. Debt investment in Sri Lanka by non-residents

3.1 New categories

In addition to the permission granted under the Repealed Regulations to grant loans with a tenure of 3 or more years to Sri Lankan Companies (other than LCBs, Licensed Specialised Banks (“LSBs”), Licensed Finance Companies (“LFCs”), Specialized Leasing Companies (“SLCs”) and companies limited by guarantee and overseas companies), the New Regulations have introduced the following debt investments without a limitation of the tenure:

1. Parent companies incorporated outside Sri Lanka to grant loans to its branch or project offices registered in Sri Lanka as overseas companies;


2. Grant loans to the Government of Sri Lanka (“GoSL”) or State-Owned Enterprises (“SOEs”) subject to obtaining any approval required from the relevant line Ministry and other relevant authority;


3. Grant loans in foreign currency or Sri Lanka Rupees (“LKR”) to LCBs, LSBs, LFCs, SLCs, companies limited by guarantee and overseas companies.

3.2 IIA is no longer mandatory

Requirement of routing funds via an IIA of the non-resident investor is no longer mandatory in respect of:

1. the investment categories set out in 3.1 above;


2. investments in units of unit trusts or mutual funds;


3. if permitted by the Monetary Board:
   1. government securities;
   2. securities issued by the Central Bank of Sri Lanka or any SOE or any other statutory body;
   3. Sri Lanka Development Bonds;
   4. term deposits in LKR or any designated foreign currency in licensed financial institutions;
   5. immovable properties;
   6. listed debt securities.

3.3 Loans with a tenure of less than 3 years

Sri Lankan Companies which hold Business Foreign Currency Accounts (“BFCA”) are permitted to obtain loans with a tenure of less than 3 years from non-residents through a Business Foreign Currency Loan Account (“BLA”) in order to meet any working capital requirement. All repayments of such loans should be made out of the same BLA. Such loan will not be permitted to be settled by conversion of LKR.

3.4 External Commercial Borrowing Account (“ECBA”)

1. Residents other than LCBs, LSBs, GoSL, and SOEs must open and maintain an ECBA to receive proceeds of, service and repay any loans received from non-residents.


2. Regulations authorize Sri Lankan Companies to open and maintain an ECBA in the form of Savings or Term Deposit accounts in any designated foreign currency or LKR.


3. ECBAs will be held as sole accounts.


4. An authorized dealer/restricted dealer is only permitted to close an ECBA after the borrower has fully settled the respective loan which provides non-resident lenders security of repayment.


5. An ECBA may be closed if the holder requests for a closure of the account for the purpose of opening a new ECBA with another authorized dealer to continue the future repayments of the same.

3.5 Reporting Requirements

1. Details such as date, amount, currency tenure and profile of the lender (“Details”) of borrowings by LCBs, and LSBs must be reported to the Head of the Department of Foreign Exchange (“HODFE”) on or before the 15th day of the following month;


2. Details of borrowings by GoSL and SOEs must be reported by the Department of External Resources, Department of Public Enterprise, and Department National Budget (as the case may be) to the HODFE within 1 month from the receipt of the loan proceeds.

3.6 Conversion of debt securities or loans

1. LCBs, LSBs, LFCs, and SLCs are permitted to convert debt securities or loans obtained from a non-resident into ordinary shares subject to the approval from the relevant regulatory authority;


2. Non-listed debt securities or loans issued or obtained by Sri Lankan Companies are permitted to be converted in to ordinary shares after the expiry of 18 months from the date of issuance or borrowing;


3. Listed debt securities issued by Sri Lankan Companies are permitted to be converted into ordinary shares in compliance with the regulations of the Colombo Stock Exchange