Bona fide agroforestry investments face regulatory uncertainty - Association

Plantation and agroforestry linked investment schemes in Sri Lanka are operating under an increasingly stringent regulatory environment, with the Central Bank of Sri Lanka (CBSL) reinforcing that only regulated financial institutions benefit from deposit protection mechanisms and that it does not guarantee returns on investment schemes operating outside the formal financial sector.

The Ceylon Agro Forestry Association (CAFA), representing leading plantation companies including Power Hands Plantations, Agroventures Plantations (Pvt) Ltd, Asia Plantation & Export (Pvt) Ltd, and Pintanna Plantations, said many genuine plantation investment models are increasingly being treated as financial risk products rather than purely agricultural ventures, particularly where their return structures resemble financial instruments.

According to the Association, the regulatory environment has tightened under the Finance Business Act (FBA), No. 42 of 2011, as the CBSL steps up oversight of investment schemes that may fall within the scope of financial regulation.

The Association noted that plantation and agroforestry investment models, including tree crop investments, carbon farming projects and plantation lease back schemes, are often structured in ways that resemble deposit taking or pooled investment products, prompting greater regulatory scrutiny.

It pointed out that regulatory oversight of the sector remains fragmented, involving the Ministry of Finance, CBSL, the Ministry of Agriculture, the Ministry of Plantation Industries, and environmental agencies responsible for climate finance and carbon related initiatives.

"This fragmented oversight has created a policy tension," the Association said, noting that while sector ministries actively promote agroforestry and plantation investment as part of economic development and climate resilience strategies, the CBSL's mandate is centred on financial stability, investor protection and preventing unlicensed deposit taking.

The Association said the absence of a comprehensive legal and policy framework that clearly distinguishes agricultural investment contracts from financial instruments has contributed to regulatory uncertainty and enforcement challenges.

It also noted that negative publicity, fuelled by public statements, parliamentary debates and committee level oversight, has raised concerns over unregulated plantation investment schemes, investor protection gaps and the lack of clear legal definitions governing such investments.

According to the Association, lawmakers have called for stronger enforcement mechanisms and clearer regulatory boundaries to prevent the misuse of agroforestry and plantation investment labels for schemes that effectively operate as financial products.

It warned that the existing regulatory environment enables regulatory arbitrage, allowing certain investment structures to present themselves as agricultural ventures while avoiding financial regulation, despite functioning in a manner similar to investment or deposit based products.

The Association said recent CBSL driven amendments to financial legislation and enforcement frameworks indicate a clear regulatory direction that plantation linked investment structures involving financial intermediation, pooled returns or guaranteed yield mechanisms are increasingly being brought within the regulatory perimeter of the Finance Business Act.

While agricultural and environmental authorities continue to encourage expansion of plantation investment to support national development and climate objectives, the CBSL's regulatory approach has become increasingly focused on risk containment, depositor protection and enforcement against unauthorised financial activities.

The Association cautioned that unless Sri Lanka adopts a harmonised legal framework that clearly distinguishes agroforestry investment from financial intermediation, plantation investment schemes will continue to operate in a regulatory grey area, exposing both investors and the State to potential financial, systemic and reputational risks. (SS)