ties local footwear industry in knots

• Despite President Maithripala Sirisena’s repeated assurances, it’s debatable as to why the BoI gave approval to an Indian Company
• According to Nimalasiri once the Indian investor commences operations a large percentage of local companies will have to give up on their businesses. 
• The local footwear manufacturers produce over 55 million pairs annually and they import over 3.3 million pairs annually from various countries including India: BoI

The local footwear industry is now on the verge of collapse due to an arbitrary decision taken by the Board of Investment (BoI), it is learned.

Despite President Maithripala Sirisena’s repeated assurances that he wouldn’t allow local industries to suffer at the hands of foreign investors, it’s debatable as to why the BoI gave approval to an Indian Company to manufacture footwear for the local market, a decision which could have an adverse impact on local footwear manufacturers.

The BoI on September 25, 2017 had issued a letter of approval to M/s Veekesy Slippers Lanka Pvt Ltd for a project to manufacture footwear for the local market. This project is expected to operate under the normal laws of the country. The investor had been permitted to supply 2.145 million pairs of footwear annually to the local market which could lead to the closure of many footwear manufacturing companies in the island.
According to Sri Lanka Footwear and Leather Products Manufacturers Association (SLFLPMA) Chairman Dharmachandra Nimalasiri there are more than 300,000 employees directly and indirectly involved in the footwear manufacturing business in the country. According to Nimalasiri once the Indian investor commences operations a large percentage of local companies will have to give up on their businesses. This will raise the unemployment rate in the country.

Nimalasiri was critical of the Government regarding the decision which could negatively affect the local footwear manufacturers and give the Indians control over the country’s footwear market. “What is the reason for the BoI to act arbitrarily when President Maithripala Sirisena had stated on many occasions that he will never allow the implementation of any detrimental proposal which will impact local Industries? They will repatriate 100% profits to India while neglecting the local industrialists, who had saved foreign exchange in the country by manufacturing quality footwear for the local market over the years,” Nimalasiri said.

Meanwhile an official of the BoI said that the application was initially submitted to the BoI, requesting approval to manufacture footwear to the local market. “Such companies are approved under Section 16 of the BoI Act No: 4 of 1978. Letters of approval granted under Section 16 are authorized by a Director. The application by the Indian Investor V. Abdul Razak of Prabha, Kodinattumukku, Post Olavanna, Kozhikode, 673025, Kerala, India had been submitted on January 5, 2017 and the letter of approval had been issued on February 2, 2017 to manufacture footwear for the local market,” informed sources who spoke to this newspaper on terms of anonymity said.

The sources further stated as to how the local manufacturers made a representation to the then BoI Chairman Upul Jayasuriya and informed him of what the detrimental consequences would be if the investor is allowed to manufacture footwear for the local market.

“Once the impending impact that could be had on the local manufacturers was brought to the notice of then Chairman, the earlier letter of approval was cancelled, and Jayasuriya issued a letter dated July 7, 2017 to the investor that they have to export a minimum of 90% of the products manufactured by them and only a quantity not exceeding 10% of the manufactured goods could be sold in the local market. This gave some relief to the local industrialists until they were informed a few weeks ago that the present Board of Directors had reverted back to the letter of approval granted on February 2, 2017,” the sources alleged.

Clause 3 of Jayasuriya’s letter states, ‘You are required to export a minimum of 90% of the products manufactured by this company and the income will be taxable under the prevailing tax rate applicable for export income. Clause 4 states that the investor is also permitted to sell a maximum quantity of 10% of exports in the local market subject to payment of Customs Duty, PAL, VAT, NBT, any applicable CESS or any other taxes levies including corporate income tax’.

The letter further states,‘Please note that the letter of approval issued on February 2, 2017 is hereby withdrawn. Accordingly you are requested to amend the object 
clause of the Articles of Association of the project company which is already incorporated under the name of Veekesy Slippers Lanka (Pvt) Ltd or any other name with reference to  a previous letter of approval as manufacturer of footwear for export and local markets subject to a minimum of 90% export of manufactured footwear products.

‘You are hereby advised to forward your amended Articles of Association of Veekesy Slippers Lanka (Pvt) Ltd to the Legal Department of the BoI for approval and required to submit approved Articles to the Registrar of Companies to incorporate the amendments within a period of 14 days of the date of this letter failing which the BoI will be compelled to withdraw the all approval granted to your project please’.

Despite the above conditions laid out by the BoI to safeguard the local footwear manufacturers, the Footwear Manufacturers Association queries as to why the present Chairman Dumindra Ratnayake by letter dated September 25, 2017 addressed to M/s Veekesy Slippers Lanka (Pvt) Ltd, No: 41, Park Lane, Ethukala, Negombo had stated that having considered the various aspects and review the provisions applicable to the project and the discussion the BoI had with various stakeholders and authorities, it has been decided to amend the clause 3 and 4 of the letter of approval issued on July 7, 2017.

Clause 3 had been amended as thus, ‘ You are required to confine your working production capacity to 2.1 million pairs per annum for the local market and to submit the production and local sales details quarterly to the Monitoring and the Investment Departments of the BoI.

‘If you wish to expand your working production capacity you are required to submit your proposal along with the export plan highlighting your total proposed production capacity for the prior approval of the BoI, prior to taking any action to expand beyond the committed production capacity in your project application’.

Clause 4 has been amended as, ‘You are required to pay customs duty PAL, VAT, NBT any applicable CESS and any other applicable levies for all imports and the income generated from the local sales referred to in clause no: 3, is taxable under the prevailing Inland Revenue Law of the country. Please ignore the proposed action to make amendment to the Articles of Association referred in page no: 4 of the letter of approval dated July 7, 2017’.

Meanwhile, Nimalasiri further queried as to why the BoI failed to inform the Ministry of Industries and Commerce before presenting the approvals to the Indians on a platter. “When the Ministry of Industries and Commerce has the mandate to look after the local industries what caused the BoI to take arbitrary decisions without consulting the Ministry that overseas the local industries? BoI Chairman in his letter dated September 25 states that they (BoI) had several discussions with the stakeholders before the said settlements, which are inaccurate.We are clueless how the BoI has enforced a very high annual quota of 2.145 million production target which is much higher than the local existing market output. Did the BoI name the quota by considering the market potential and the current local production? If so we are keen on having the statistics which led to this arbitrary decision,” Nimalasiri claimed.

According to Nimalasiri, the Ministry of Industries and Commerce and the Export Development Board have considered the footwear industry as a thrust industry which is very much akin to the garment industry. BoI’s unwise decision will have an adverse impact on the Industrial Development Board’s plan to take this industry to villages,” Nimalasiri further added.

“There were many requests from Sri Lankans to export our brand of footwear to Sri Lanka”

Abdul Razak, Chairman/Managing Director M/s Veekesy Slippers Lanka (Pvt) Limited 

Meanwhile Chairman/Managing Director M/s Veekesy Slippers Lanka (Pvt) Limited Abdul Razak, speaking from India, told the Daily Mirror that they had decided to visit Sri Lanka because there were many requests from Sri Lankans to export ‘VKC’ brand footwear to Sri Lanka.

“We started exporting VKC footwear to Sri Lanka three years ago and the demand for our footwear is very healthy. We even received many calls from Sri Lankan dealers requesting our products. That was why we decided to have our manufacturing plant in Negombo and after we made the investment and received the necessary approvals we were surprised when our initial letter of approval was withdrawn and the authorities instructed us to export 90% of our products and that only 10% could be sold in the local market.

 We do not want to export our production which is costly and that was why we came to Sri Lanka to invest on the local market. As we were given approvals under Section 16 of the BoI Act and like other local industrialists we too are not given any tax concessions.
 Local industrialists assume that we are receiving tax concessions as we are a BoI company. We have brought foreign exchange to the country and will take only the profits to India. We will be generating more than 650 jobs for the locals and only few Indians will come to train the locals in how to operate the hi-tech machinery. 

We don’t have to have any dispute with the local manufacturers nor with the BoI. That was why we humbly requested the BoI to grant us the facility to supply the footwear to the local market when we were asked to export 90% of the goods we manufacture,” Razak said. 

Response from BoI

QWhy did Dumindra Ratnayake amend the clause No: 3 and 4 and give permission to the investor to manufacture the footwear for the local market?

The original letter of approval dated 02nd February 2017 was issued by the BoI to the investor to manufacture footwear for the local market in response to the application submitted on 05th January 2017. This letter of approval was issued under Section 16 of the BoI Law which doesn’t grant any concessions to the investor. Accordingly the Investor is liable to pay Customs duty, VAT, PAL, NBT, Corporate Income Tax and any other taxes under the normal laws of the country.

This approval was based on Gazette No.1232/14 of 2002 issued under the Exchange Control Act (Chapter 423). The above Gazette refers to prohibitions and limitations of equity participation of foreign shareholding of business entities to be established in Sri Lanka. However, the shoe industry isn’t subject to any restrictions or limitations under the above Gazette notification. Therefore, any foreign investor is free to set up a business entity to manufacture shoes for the domestic market with the approval of the Registrar of Companies. Obtaining approval from the BoI isn’t required but companies go through BoI in order to obtain the facilitation provided by BoI specifically to obtain visa facilitation for Section 16 companies. There are no additional benefits for the investors other than the BoI facilitation.

When the Footwear Manufactures Association raised the initial protest for the original approval, BoI issued a new letter of approval on 07th July 2017 withdrawing the original letter requiring the investor to export 90% of the production.

However, by this time the investor had already invested to set up the factory building, installed machinery and hired staff. The Investor then sent a Notice of Litigation, citing that the withdrawal of the initial approval was illegal. BoI referred the matter to the Attorney General (AG), who advised the BoI to settle the matter amicably for the benefit of the Investor as well as the Country.

This matter was further discussed at the meeting held on 11th September 2017 at the Presidential Secretariat chaired by His Excellency the President. The meeting was attended by the representatives of the Footwear Manufacturers Association and other relevant line agency officials. At this meeting, the BoI explained the situation to the President, the AG’s recommendation as well as the negative impact to the country’s image in case of litigation by the Investor. The President directed the BoI to settle this matter amicably with the investor without resorting to legal action. As a result, BoI amended the said letter dated 07th July 2017 and issued the letter dated 25th September 2017 by which the BoI limited the investor’s production to 175,000 pairs per month (2.1 million pairs per annum). Further the investor is required to obtain prior approval of BoI for any capacity expansions, which would be for export market.

QIsn’t this a step taken to wipe out the local industry and give the opportunity to an Indian to supply the footwear the country requires?

The local footwear manufacturers produce over 55 million pairs annually and they import over 3.3 million pairs annually (275,000 pairs per month) from various countries including India.

The amount of pairs approved for the manufacture by the investor is 2.1 million pairs annually (175,000 pairs per month).

Q Although the chairman’s letter to Veekesy Slippers Lanka (Pvt) Limited states that he had discussions with various stake holders prior to issuing this letter of approval, the Sri Lanka Footwear and Products Manufactures Association refutes the claim and alleged that the decision had been taken arbitrary. 

The minutes of the discussion at the meeting held at the Presidential Secretariat on 11th September 2017 chaired by His Excellency the President, written by Mr. Nalaka Kaluwewa, Actg. Additional Secretary to the President clearly confirms the BoI claim, that its letter of approval dated 25th September 2017 was issued based on the above discussion held at Presidential Secretariat for which all relevant line agencies and footwear and product manufacturers associations were present.

QWhat made the BoI issue such a detrimental letter which will no doubt adversely impact the local manufacturers?

The BoI hasn’t issued any letter that will adversely impact the local manufactures. The BoI has acted according to the prevailing laws and regulations of the country and has taken all precautionary measures to mitigate adverse impact if any.