In terms of the Foreign Exchange (Short Term Foreign Currency Loans from a Company Incorporated Outside Sri Lanka) Regulations No. 2 of 2022 dated 02.12.2022 (“Regulations No. 2”), permission has been granted for companies incorporated in Sri Lanka under the Companies Act, No. 07 of 2007 (as amended) which import raw materials for manufacturing of their products which have a value addition of a minimum of 30% to obtain foreign currency loans from its parent company or a company within the same group of companies incorporated outside Sri Lanka to finance such imports. The tenure of such a loan must be less than 3 years with a grace period of at least 1 year. These short-term foreign currency loans are subject to the following terms and conditions:
- the borrower must obtain a recommendation from the Secretary to the Ministry of Industries stating that the final product manufactured by the borrower/company using such raw material to be imported a domestic value addition of at least 30%;
- the borrower is required to open and maintain a “Special Foreign Currency Account – Short Term Loans” (“SFCA – Short Term Loans”) with a licensed commercial bank in Sri Lanka to receive the proceeds of the loan and to service and repay the loan subject to directions issued by the Central Bank of Sri Lanka
- the interest on the loan must be a reasonably concessional rate comparative to the prevailing interest rates in Sri Lanka;
- repayments of the loan together with interest must be amortized over the tenure of the loan after the grace period;
- payments for the raw material must be in accordance with other applicable laws in Sri Lanka.
Regulations No. 2 of 2022 is valid for 1 year from 02.12.2022.
In terms of the Directions No. 12 of 2022 issued to Authorised Dealers on Special Foreign Currency Account – Short Term Foreign Currency Loans from Overseas (SFCA – Short Term Loans) dated 09.12.2022, to be eligible to open an SFCA – Short Term Loans, a letter of authorization from the Controller General of Imports and Exports may also be required where necessary. Such an account may be opened and maintained as a sole account as a current or savings account in any designated foreign currency. SFCA – Short Term Loans maintained as a currency account will not have an overdraft and cheque drawing facilities.
The said account must be maintained until completion of servicing/repayment of the relevant loan and shall be closed upon full settlement of the respective loan.
Permitted Credits to SFCA – Short-Term Loans
- remittances/transfers of proceeds of the loan from an account maintained outside Sri Lanka or an Inward Investment Account maintained in the Offshore Banking Unit (“OBU”) of the lender.
- remittances/transfers of proceeds of the loan from an account maintained outside Sri Lanka or an Inward Investment Account maintained in the Offshore Banking Unit (“OBU”) of the lender.
- transfers from SFCA- Short Term Loans of the same account holder to make payments for imports of raw materials required for manufacturing products.
- interest earned on the funds held in the account, if any.
Permitted Debits from SFCA – Short-Term Loans
- outward remittances regarding payments for imports of raw materials required for manufacturing products.
- transfers from a Sri Lankan Rupees account of the accountholder/borrower to service the loan;
- remittances/ transfers of funds to an account maintained outside Sri Lanka or an IIA or an account maintained in OBU of the lender for the purpose of servicing/repayment of the loan in accordance with the terms of the loan agreement.
- bank charges, fees, commissions, etc., payable concerning the short-term loan.
- Transfers to another SFCA – Short-Term Loans of the same account holder to make payments for imports of raw material required for manufacturing products.
Any transaction for a purpose that falls outside those set out above requires prior permission of the Department of Foreign Exchange (“DFE”) which the relevant Authorised Dealer shall obtain.
Authorized Dealers are permitted to enter into suitable derivative instruments in accordance with the Directions issued under the provisions of the Banking Act, No. 30 of 1988 (as amended) if so requested by the borrower to mitigate exchange risks. As a reporting requirement, Authorised Dealers are required to submit information of opening and maintaining SFCA – Short Term Loans to the DFE on or before the 15th day of the following month and implement a system within the bank to generate or extract all requisite information from the books of accounts for such reporting requirement.
In the event the borrower requires the closure of the SFCA – Short Term Loans before the full settlement of the relevant loan to open a new SFCA – Short Term Loans with another Authorised Dealer, the first account may be closed only after forwarding the information and documents including confirmation of receipt of the loan to the Authorised Dealer that wishes to open the new account to their satisfaction. All closures of SFCA – Short Term Loans must be notified to DFE via an email within 1 week of the closure.
