November 8, 2011 / 1:41 PM / 8 years ago

UPDATE 1-Sri Lanka's asset acquisition act constitutional-court

* Sri Lankan government plans to acquire underperforming businesses

* New act may make post-war foreign direct investment difficult-officials

* Opposition: Government discourages investors with rival policies (Adds business chambers’ reaction, BOI inv protection assurance)

By Shihar Aneez and Ranga Sirilal

COLOMBO, Nov 8 (Reuters) - Sri Lanka’s Supreme Court has ruled that the government’s controversial legislation to acquire so-called underperforming enterprises and under-utilised assets is consistent with the country’s constitution, parliament was told on Tuesday, despite some opposition.

The government act, which was presented to parliament on Tuesday, will see the state acquiring 37 private businesses it has defined as underperforming.

The bill is expected to be passed on Wednesday in parliament, where the government has a two-thirds majority.

President Mahinda Rajapaksa referred the proposed law to the Supreme Court last week to see if it was consistent with the constitution, a procedure followed by the government before when introducing a new act in an urgent manner.

“The Supreme Court has informed its decision that, subject to the drafting of errors, the bill has not been found inconsistent with the constitution,” Deputy Speaker Chandima Weerakkody told parliament, relaying the court’s decision.

Weerakkody did not elaborate on what the court had referred to as ‘errors’, but the leader of the house Nimal Siripala de Silva said the bill will be presented to parliament on Wednesday with relevant corrections.

Since the end of its 25-year civil war in 2009 Sri Lanka has been working to improve the investment climate, including making fiscal and tax reforms under the guidance of the International Monetary Fund, and the government has said the new legislation would provide effective management for the businesses and assets to be acquired.

These include Hotel Developers Lanka Plc , which owns the five-star Hilton Colombo hotel, and 6,300 hectares of land owned by Pelwatte Sugar Industries Plc .

Shares in Pelwatte Sugar fell 11 percent to 24 rupees on Tuesday, while Hotel Developers Lanka fell 5.8 percent to 122.50 rupees.

Once the government takes over the properties the owners will be compensated, it has said, without saying how much will be paid.

Though Rajapaksa has said the bill will be a ‘one-off’ act to acquire the specified properties, economists, investors, state officials and opposition have raised concerns over it, saying it could damage business confidence.

ANTI-INVESTMENT POLICIES

“These kind of ad hoc and anti-investment policies are going to drive away potential investors coming to Sri Lanka,” a top state official who has been dealing with foreign investors told Reuters on condition of anonymity, citing the sensitivity of the topic.

The government’s acquisition effort comes after it cancelled a $500 million hotel deal with a Chinese firm over a land dispute and transferred a top Securities and Exchange Commission (SEC) official. ,

“All these (actions) give a negative perception on Sri Lanka’s investment climate and the government should realise that this is not the only country in Asia to invest. Investors have a lot of choices,” the official said.

Sirimal Abeyratne, a professor in economics at University of Colombo, said the move was similar to destroying a whole tree instead of getting rid of some rotten fruit.

Sri Lanka’s six leading business chambers which represent 80 percent of the country’s corporate sector, said the bill will be counter-productive in the island nation’s effort to attract $15 billion a year of investment from the private sector, both local and foreign.

“Further, the expeditious manner in which the legislation is being enacted is likely to heighten such negative sentiments,” the business chambers said in a joint statement.

Sri Lanka’s foreign direct investment doubled in the first half of 2011 to $413 million compared with a year ago, mainly from Honk Kong based Shangri-La Asia for a luxury hotel in Colombo.

The country’s Board of Investment (BOI) said on its website www.boi.lk investors are constitutionally protected against nationalisation.

“This government has a split personality. It is trying to sell the people one story and sell the investors another story,” Harsha de Silva, a main opposition UNP legislator and an economic expert said.

“They themselves are stopping the investors. When you do things like this who would be willing to invest ? Even Shangri-La could be nationalised if they don’t perform well.” (Editing by Greg Mahlich)

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