* Law would require farms to be majority owned by Congolese
* Business association calls it "catastrophe"
* Firms say rethinking investment plans
By Jonny Hogg
KINSHASA, March 5 (Reuters) - A law meant to breathe new life into agriculture in Democratic Republic of Congo risks scaring off needed foreign investment due to a clause calling for farms to be majority-owned by Congolese, according to investors and other sector players.
The Congolese Federation of Enterprises has written a letter to the government calling the law, which is set to go into effect in June, "discriminatory" and a "catastrophe" and appealing for it to be amended.
"Everyone says to themselves, today they start with semi-nationalisation, and then one day we'll move to total nationalisation," said Paulin Mbandala, a Congolese lawyer specialising in agriculture.
"Look at Zimbabwe, that's the problem," he said, referring to Zimbabwe President Robert Mugabe's seizure of white-owned farms in the 1990s.
The Congo law, passed in December shortly after a chaotic presidential poll, aims to use tax breaks and other incentives to boost agricultural output in a country with enough cultivable land to cover Germany twice.
Only 10 percent of the land is in use and the country has been a net food importer since the 1960s due to decades of neglect, conflict and corruption.
Farmers and activists alike had been pushing for years for the government to pass the first ever agricultural law to revive the sector.
Since the law's passage, however, agribusiness companies have expressed concern over an article that says farms must be owned by "a person of Congolese nationality or a Congolese legal entity whose shares, if applicable, are majority-owned by the Congolese state or by nationals".
The risk is that the law could deepen Congo's investment woes, already suffering a setback from a drawn-out mining contract review that ended in 2010.
Several of Congo's existing agricultural investors, including a unit of Canada's Feronia <FRN.V>, said the law has created uncertainty over their projects and would likely stifle new investment.
New investments are unlikely if the law is not amended, said Agnes Kasongo, managing director of PHC, an oil palm operation majority-owned by Feronia.
The company produced more than 6,500 metric tonnes of palm oil last year and had plans to double the amount of land it cultivates.
"I don't think that Feronia will invest further if the law is not amended," Kasongo told Reuters from her office in Kinshasa's dilapidated port area, where farmed produce used to arrive by river from the interior of the country before war during the 1990s and corruption saw the sector collapse.
"I don't understand the law (article 16), the Congolese do not have money to acquire the land," she said.
Officials from several other companies told Reuters they would reconsider investment, but asked not to be identified for fear of running into problems with the government.
A Western diplomat, who also asked not to be named, said three potential investors have abandoned investment plans since the law was passed.
Congo's government has defended the law - which offers tax breaks and preferential rates on water and electricity for agricultural enterprises - as broadly positive for the sector, but admits the Article 16 clause on ownership could pose problems for foreign investors.
"The Congo could feed the whole of Africa, that's certain, but we must have investment", said Marcel Kapambwe Nyombo, an agriculture ministry adviser. "(Article 16) poses a problem. Among new investors there is a certain reticence."
Around a third of the country's food was imported in 2010 from as far away as Brazil, and more than two thirds of the country's 70 million inhabitants are living in poverty, the World Bank says.
A letter written by President Joseph Kabila last August and seen by Reuters shows that the president himself backs the rules limiting foreign ownership, arguing it is necessary to protect the sovereignty of Congolese land.
"I ask that the imperative is made clear that nationals control the shareholdings of Congolese-registered businesses eligible to be attributed land in Democratic Republic of Congo," it read.
In one of the biggest deals in Congo's agriculture sector, China's ZTE <000063.SZ> won rights in 2008 to farm 100,000 hectares of land in Equateur province.
But the three-year deal was not renewed in 2011 as nothing had been done to launch the project, agriculture adviser Kapambwe told Reuters. He said ZTE now holds just 600 hectares of land. The firm did not respond to requests for comment.
Singapore commodities giant Olam is also negotiating with the government over possible farming ventures. The company declined comment on the law.
(Writing and additional reporting by Richard Valdmanis; editing by Jason Neely)