The central bank recently issued a notification which allowed investment proceeds to be retained in foreign currency accounts. Given that a regulatory framework of foreign exchange is a crucial part of facilitating foreign investment, it is said that Bangladesh is currently enjoying an investment-friendly regulatory environment on foreign exchange. Capital account is not convertible, despite foreign investment in the form of equity capital being open in the country except for a few reserved sectors.
The entry route for investment is sending foreign currency through a banking channel. Investment is also permissible through the capital machinery sent by investors. In case a company has to be established afresh, temporary Taka accounts can be opened to park inward remittance on account of equity. Of course, the funds held in the accounts need to be transferred to regular accounts on completion of company formation. On the other hand, no such accounts are needed for sales of shares by existing companies.
As said earlier, the repatriated fund is to be converted into Taka, which leads investee companies to face losses in case of imports. The recent notification will facilitate capital expenditure in foreign currency without any exchange loss, with a scope of exactly one year. Something is still better than nothing, of course since it will help to import capital machinery smoothly. It is known that amount on account of foreign investment in specialized zones like export processing zones (EPZs), economic zones (EZs) can be retained in foreign currency accounts. The new notification can level the playing fields to an extent. The central bank deserves thanks for the initiatives.
During the operations stages, banking support is absolutely mandatory. Until the establishment of credit lines with banks, foreign owned/controlled companies can bring short-term working capital loans from their parent companies or shareholders abroad. As per the regulations, this borrowing is available for six years from the date of operations of the relevant company. But working capital loan facilities in Taka are available without restrictions from the banking system under banker-customer relations. Term loan to foreign controlled/owned companies is accessible provided that debt-equity ratio does not exceed 50:50.
The conditions seem to be dissonant considering the loan facilities available for locally owned/controlled companies. It is true that a capital fund is not sufficient to meet the need of capital expenditure; a loan fund is required for that. There is a foreign loan committee under the umbrella of Bangladesh Investment Development Authority (BIDA) which approves proposals of external loans. Foreign loans can be an alternative to term loans from local sources. The fund can be used for import of capital goods. Approval is needed for specialized zone companies from the central bank as per the rule book of foreign exchange regulations.
Taka is said to be convertible on current account transactions. Accordingly, year-end profit on account of dividend is freely remittable abroad in terms of regulatory compliance. Recurring transactions with regards to imports are executed in accordance with import policy order in force for which no special permission is needed. In addition to import, services are part and parcel of present day's business operations. Payments on account of royalty, fees for technical know-how, etc are permissible within a threshold as per the guidelines of BIDA. Besides, the central bank allows 1% of the previous year's sales or $100,000, whichever is higher, as payments for bonafide service expenses. Specialized zone companies are reported to have permission for service payments from their foreign currency accounts.
An investment undergoes three stages: Entry, operation, and exit. The first two stages, except in a few cases, appear to be investment friendly. It is not expected that foreign investors will continue their business in perpetuity; rather investment can be exited with capital gain. This is natural. The regulatory framework stipulates that market value of shares is repatriable abroad if the shares are traded in the secondary market. But fair value is allowed for repatriation abroad in case of shares not listed in stock exchanges. There are two ways for execution of sales-buy of unlisted shares -- foreign investors to other foreign investors and foreign investors to resident investors. No financial transactions are required for the former case except for regulatory payments. In this case, transactions are smoothly executed without bottlenecks. But latter cases require valuation to determine fair value of shares.
There is a valuation framework which allows suitable approaches such as the net assets value (NAV) method, market value method, and income method. The valuation is conducted by professional valuers like chartered accounts and merchant banks. Regarding regulations formalities, the central bank notification states that remittances on account of sales proceeds of shares, regardless of amount provided, that fair value is determined by the management of relevant companies through the NAV method based on latest audited financial statements. In this case, financial statements need to be free from revalued assets, intangible assets, expenses/losses shown as asset, with conditions that there is no abnormal growth in total assets in any of last three years, particularly the prior year.
Share prices determined based on NAV can be remittable under automatic route without permission. General permission is also available to repatriate sales proceeds of shares up to Tk1 crore equivalent foreign currency without valuation reports from valuers concerned. Price amounting from Tk1cr to Tk10cr equivalent in foreign currency is repatriable on account of sales proceeds if fair value is determined in terms of prescribed valuation methods. It indicates that a valuation report is required, without permission, for any amount exceeding that range, the valuation of which is made under the market approach and the income approach, with no requirement of a valuation report up to Tk1cr. There is every scope to siphon off money through overvaluation. As such, regulations for exit of investment seem to be reasonable. However, limits under the automatic route without a valuation report by competent valuers should be enhanced so that foreign investors can exit without undergoing troublesome formalities.
The present framework for investment by foreigners allows two paths: Remittances and capital machinery. In addition to physical assets, intellectual assets such as software, patents, etc dominate the current landscape. These can be a path for investment by foreigners. It is said valuation of intellectual properties is not so easy. It is true but it is not impossible. As such, there should be a policy framework to consider investment through intellectual properties. Moreover, inputs for production, sent by foreign investors, in case of non-availability, should be treated as equity.
The present regulations allow foreign controlled/owned companies to raise funds by issuing bonds, but the bond market still has some ways to go. As such, banks work as facilitators of capital market products by granting term loans. But the cap of debt-equity ratio at 50:50 creates problems for foreign investee companies. The central bank should be cognizant of this. The ratio needs to be rationalized and set at a point under which domestic companies can borrow loans in the local currency from the banking system.
There are several challenges for foreign investment. The Bangladeshi market is a hub for import substitution industries. Investment in this sector needs external payments without limit to dividend. This may create an extra burden for foreign exchange market. Except for a few, opening up unexplored sectors may be a good policy framework. But considering capital account transactions, there should be some qualified criteria for foreign investment particularly in import substitution industries.
The recent policy supports the retention of equity funds in foreign currency accounts for settlement of capital expenditure. Other issues such as permission for investment through intellectual properties, relaxation in debt-equity ratio, exit framework for enhanced remittances under automatic route, etc need to be addressed as well. On the other hand, capital products like preferential shares, redeemable shares, etc should be reviewed to attract foreign investment. These may be considered a few facilitating tools to attract foreign direct investment.
Mehdi Rahman works in the development sector.