“No foreign investor may carry out any tourism related activity in the Maldives except after signing a foreign investment agreement and registering that investment with the Ministry of Tourism”.

Sounds like a major policy shift?

It is neither a new policy initiative nor a recent change in law.

The Law

The policy statement is captured eloquently in section 39 of the Maldives Tourism Act. The section has been part of the Tourism Act since the law was first enacted some 21 years ago. Despite the fact that the Tourism Act has undergone amendments at least 9 times since its introduction on 16 May 1999, section 39 has survived unaltered, unchanged.

Section 39 of the Maldives Tourism Act says this:

No foreign investor may carry out any tourism related activity in the Maldives except after signing a foreign investment agreement as mentioned in the Foreign Investment Act  and registering that investment with the Ministry of Tourism as a foreign investment as provided in the Foreign Investment Act.

As is evident from the language of the section, the position crystallized in the form of section 39 of the Tourism Act is closely related to and deeply rooted in the Maldives Foreign Investment Act – a piece of law that has been in existence for some 41 years already, again unaltered, unaffected.

Section 1 (b) of the Foreign Investment Act that was introduced on 1 May 1979 says that no foreign investment can be carried out in the Maldives except after registering that investment and signing an agreement with the Ministry of Tourism (if the investment is in tourism) and with Ministry of Trade Industries and Labor (if the investment is in any other industry). Ministry of Trade is now succeeded by the Ministry of Economic Development.

Further, section 3 of the Foreign Investment Act reiterates that every investor in the tourism industry shall sign an agreement with the Ministry of Tourism if that activity relates to tourism, and with the Ministry of Trade Industries and Labor if the business relates to any other industry.

The Unpacking

Let’s unpack section 39 of the Tourism Act and understand its components.

Firstly, the section applies to all foreign investments in the Maldives tourism sector. This may mean that it goes beyond the acquisition or leasehold ownership of a resort property. It extends to all verticals of the industry which are open for foreign direct investment.

Secondly, permissibility is dependent on to two events: signing a foreign investment agreement; and registration of the investment as a foreign investment.

The execution of the foreign investment agreement and registration of the investment are both considered as “entry requirements” for a foreign investor. Once a foreign investor travels through these two processes and completes its entry in to the Maldives, it gets to operate at a level field with a local investor in the same space. All other regulatory requirements of the industry are applicable to local and foreign investors alike – for example – the signing of an Island Lease Agreement for lease of a resort property.

This striking legal requirement flows from the Foreign Investment Act which asks tourism sector foreign investors to register their investments with the Ministry of Tourism and investors in the non-tourism sectors to register their investments with Ministry of Economic Development; and irrespective of their chosen industry, to sign foreign investment agreements with the respective ministries.

The Breach

Section 39 embodies a classic case of a piece of law that is “more honored in breach than in the observance”.

While over time foreign investment approvals and signing foreign investment agreements have become synonymous with the Ministry of Economic Development, the requirement of law is in reality equally applicable to foreign investors in tourism and non-tourism sectors alike – as the legal requirement emanates from the same source – the country’s foreign investment law.

However, to our knowledge, there has never been an occasion where this legal requirement has ever been complied with so far as it relates to the tourism industry.

There is nothing in the body of legal rules, guidelines, or administrative bureaucracy of the Ministry of Tourism that dictates a foreign investor to complete a separate process of signing a foreign investment agreement or complete a registration process for its investment with reference to section 39 of the Tourism Act or section 3 of the Foreign Investment Act.

Whenever this legal requirement was flagged in legal due diligence investigations in the past, the prevailing view of responsible officials had consistently been that the requirements of section 39 are duly met with the signing of the Island Lease Agreement (in place of a separate foreign investment agreement) and grant of an operating license (in place of the registration of a resort investment). As much as they carve out these two requirements, the remaining regulatory requirements on registration and licensing are religiously followed – and applied to all investors alike – local or foreign – in all verticals of the industry.

The Shift

However, this position may shift soon.

Ministry of Economic Development (the body responsible among other things for the registration of entities investing or operating in tourism industry) has launched a new FDI Policy on 11 February 2020.

Since the inception of this FDI Policy, the Ministry of Economic Development is insisting on following the foreign investment law requirements even in case of tourism sector investments –  so long as they remain law.

The relief for existing investors is that the policy will be enforced only in respect of future requests – existing investments will not be disturbed.

The Conclusion

Since this legal requirement rooted in an archaic piece of law (which has only been followed in its breach) has now been revived with the introduction of the FDI Policy, there is bound to be discussion and disagreement. It is likely that the ensuing discussions may stimulate relevant policy makers or interested legislators to make a decision – either to keep the requirement as it is or expunge it from the statute books of the country.