Investment in Bangladesh is open for foreign direct investment (FDI) through the equity corridor.
Portfolio investment is also open for foreign investors.
However, exception prevails there for FDI, no investment is allowed in reserved sectors - (i) arms and ammunition and other defense equipment and machinery, (ii) forest plantation and mechanized extraction within the bounds of reserved forests, (iii) production of nuclear energy, and (iv) security printing and mining.
There is another list known as regulated sector, investment therein is permitted but licenses or appropriate approvals from the authorities concerned are required.
Present regulatory framework permits FDI in the form of cash capital transacted from banks abroad, another form is by sending capital machinery.
Other considerations such as intellectual property, technical know-how are not permitted.
Inward investment is a cross border transaction which falls within the framework of foreign exchange regulations.
Foreign exchange regulations accord general permission for inward remittances on account of FDI, subject to reporting routines to central bank such as remittance information from investors abroad and intimation within 14 days from the date of issuance of shares to foreign investors.
Physical reporting in the digital age is basically ridiculous. Central bank’s regulatory formalities regarding FDI need to be complied with through the banking reporting system.
The system is still manual, as insider information indicates.
Shareholder databases on issuance of shares should be developed through the information from the registration office of joint stock companies and firms.
In this case, there should be an online data sharing arrangement between two organizations.
Alternatively, investment promotion agencies like Bangladesh Investment Development Authority (BIDA), Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh Economic Zone Authority (BEZA), Bangladesh Hi-tech Part Authority (BHTP) should have a central data warehouse linking with other relevant regulatory authorities.
This can ease the investment process to a great extent.
Where the profits go
Profit earned by the company is a current transaction, taka is convertible for this transaction.
As such, remittances on account of dividend are remittable to shareholders abroad.
Foreign shareholders can maintain foreign currency accounts with banks in Bangladesh. The accounts can be credited with a dividend amount.
The balances in the accounts can be used for making reinvestment in Bangladesh.
The fund held in the accounts is freely remittable abroad.
Remittance on account of dividend was subject to post facto checking by the central bank. But the formalities have been waived for smooth transactions.
Only routine reports are required regarding outflow of money.
Banks execute transactions in compliance with regulatory instructions which allow accepting documents in support of remittable dividends issued by practicing chartered accountants.
While executing outward remittance, banks need to conduct due diligence so as to be ensured of legitimate amounts to be remitted.
Remittances on account of dividend paid to foreign portfolio investors.
A company listed in stock exchanges can make dividends available to portfolio investors’ bank accounts in Bangladesh.
Regulatory framework does not require documentation formalities as needed for remittance of dividend to foreign shareholders by companies not listed with stock exchanges.
Two systems prevail for the same type of transactions.
Remittance on account of dividend against FDI needs to be made as simple as followed in case of dividend payment against portfolio investment.
In that case, there will be a uniform regulatory framework both for portfolio investment and FDI.
Uniformity will ensure equitable treatment.
Shares purchased by investors are not bought back by investee companies.
If the shareholders sell their holdings, they need to find buyers.
This is required for companies whose shares are not listed in stock exchanges.
Transactions between residents need usual formalities for shares held by residents.
But sales of shares by foreign shareholders need different formalities to receive money from Bangladesh.
Regulations require valuation of shares by a practicing chartered accountant or a merchant banker.
In this case, the central bank accepts fair value determined by a merchant banker or a chartered accountant on the basis appropriate method or combination of three valuation approaches such as net asset value approach, market value approach and discounted cash flow approach, depending on the nature of the company.
However, there is a general authorization beyond the limit approval from the central bank is required.
The regulations allow remittance of sales proceeds of shares regardless of amount provided that fair value is determined through net asset value approach on the basis of latest audited financial statements, and the financial statements contain no revalued assets.
Sales proceeds of shares up to Tk1 crore are remittable without valuation reports.
Those exceeding Tk1 crore, up to Tk10 crore are remittable abroad without approval from the central bank, based on the fair value determined on the basis of appropriate valuation methods.
However, approval from the central bank is required for a value exceeding Tk10 crore, with shares valued under market value approach and discounted cash flow approach.
The valuation is reviewed and recalculated by the central bank.
The remittance approval is given on completion of review by the central bank based on valuation reports prepared by professional valuers.
Crosscheck
Shares sold in stock exchanges do not require a cross review process.
The reassessment of the valuation by central banks is a matter of subjective concern.
Since central bank assessment is final, what is the necessity by professional valuation is a question.
However, it seems that a valuation report is a supportive tool for review to determine remittable value.
As we hear since long misinvoicing regarding trade transactions.
Trade transactions are touched at different regulatory points. Trade is blamed as a window for capital flight.
Transactions under investment may result in capital flight despite regulatory touch at different points.
Service sectors providing service do not need regulatory points since they are provided in non-physical form.
But they are rarely blamed or possible to be brought under a supervisory net.
Service trade transactions do not require permission, rather systematic procedures need to be followed.
No safeguard tool is available to check service outflows and repatriation.
A simple declaration is required when payment is received.
Equal treatment is needed in all respects for which service trade needs to be brought under check-points as required for physical goods and other items like repatriation of disinvestment proceeds and many more requiring approval formalities.
Alternatively, formalities for service trade should be applied for other cases.
Regulatory requirement for repatriation of disinvestment proceeds is subject to valuation using appropriate approaches like net assets value, market value, and discounted cash flows.
Revaluation of assets may bring overvalue of shares compared to face value.
Such value may also come in case of market approach for adoption of inappropriate P/E ratio.
Discounted cash flows may bring unacceptable results if projection is high. So there are problems in all cases.
But the valuation process is internationally practiced.
The valuation needs either to be accepted or the central bank should evaluate the shares, based on which price is to be repatriated.
This will help foreign direct investors to exit easily.
Whatever, the criteria to make valuation under market value approach and discounted cash flow approach seem to be very subjective, unless appropriate prudence is applied while on valuation process.
Appropriate prudence is also a matter of subjective concern. We need to make foreign investors comfortable at end-leg while on exit so as to make them encouraged to make direct investment in Bangladesh.
Hence, the current regulations for repatriation of disinvestment proceeds up to Tk10 crore need to be extended to a higher ceiling for keeping remittance facilities without approval process.
At the same time, specified criteria for valuation approaches other than net asset value approach needs to be fixed with flexibility as much as possible.
The author works in the development sector and can be reached at mehdirahman82@ gmail.com
