Need to review FDI policy






The success stories of startups in Bangladesh are remarkable. Successful startups are attractive to foreign venture capital investing for capital gain, not a regular dividend. This is the true currency of venture capital.

The capital account is not convertible in Bangladesh. However, foreign investment in the form of equity as foreign direct investment (FDI) or portfolio investment is allowed. Investment in the form of a foreign loan is admissible with the approval of the competent authorities.

Investments abroad are limited under the current framework of exchange regulations. Very recently, a rule was issued by the government for overseas investment by exporters from their foreign exchange funds with the permission of a high-level committee.

As Bangladesh is said to enjoy a demographic dividend, the country also experiences huge economic activities due to the density dividend. The economy with a huge population is itself a bigger market. To make economic activities work, investments are necessary. FDI is one of the major sources, for which different promotion agencies such as Bangladesh Investment Development Authority, Bangladesh Export Processing Zones Authority, Bangladesh Economic Zones Authority, Bangladesh Hi-Tech Park Authority are trying to attract foreign investors.

Bangladesh is said to be open to FDI in all sectors except four reserved sectors. There are certain controlled sectors such as banks, financial companies, insurance, telecommunications, etc. Except for these sectors, foreign investors are allowed to invest in any sector of their choice. Sales of shares of local companies to foreign parties give rise to foreign companies, which can be described as FDI companies. The exact opposite situation — the sale of foreign shares to resident parties — may also occur. The main features of investment regulations, especially in the field of foreign exchange, are that 100% FDI investment is allowed, no restrictions are imposed on the use of imported inputs, the lending working capital is permitted from domestic sources, after-tax profit in the form of a dividend is freely transferable. and much more.

There are three stages in business processes: the establishment stage, the operational stage, and the exit stage. At the creation stage, equity capital is injected into the companies to be created. Banks support term loans to local businesses, FDIs can benefit from support from external sources for term loans with the approval of the competent authorities.

At the operational stage, there is the requirement for working capital loans which are available for FDI companies. They can access short-term loans from their parent companies and shareholders abroad. They need to import goods and services for which foreign exchange regulations facilitate hassle-free transactions. At the end of the financial year, the profit after tax declared as a dividend is freely repayable to shareholders abroad.

Partnerships limited by shares sell shares to investors. But the shares sold are not bought back by the companies concerned. Shareholders can sell their holdings to other parties. Shares of unlisted IFD companies have no market value. Sales of shares are executed through bilateral sale-purchase agreements between the parties. A valuation is required to determine fair value. The regulations allow for three methods of valuing stocks: the net asset value method, the market value method and the income method. The valuation is carried out by certified public accountants or investment bankers. Based on the valuation, foreign shareholders can sell their holdings to other parties. In the event of the sale of shares to other foreign parties, the transactions are executed abroad for which the reporting requirement must be complied with in accordance with the foreign exchange regulations. This declaration is required in case of transfer of shares against remittances from residents to foreign parties, including valuation formalities. No other authorization is required from the point of view of exchange regulations.

At the exit stage, sales of foreign equities to residents require outward remittances. Central bank permission is required for the repatriation of shares worth more than 100 million taka valued by the market value method or the income method. No authorization is required for the repatriation of proceeds from the sale of shares below the net asset value, whatever the amount.

As noted above, regulatory clearance is required in a few cases. Despite this, negative messages in the FDI sectors are prevalent, for which appropriate awareness programs should be launched.

The financial products market of Bangladesh is not so wide and deep. Only loan products are available on the market, foreign exchange derivatives depending on the needs are found over the counter. The same framework also applies to FDI cases. There are many terminologies available in the financial literature, which are practiced in different global financial centers. These centers can be qualified as ‘Heaven Cities’. The FDI products practiced there are “stock exchanges”, venture capital, alternative investment funds, among others.

Certainly, it is true that Bangladesh is an emerging economy. But investors’ investment decision needs confidence. They feel comfortable investing in Heaven Cities. It is observed that home companies set up companies in host countries like Heaven Cities in an exchange of shares without financial consideration. The shares of the original companies are exchanged for those of the host companies. The host companies become shareholders of the original companies and vice versa. Different venture capitalists purchase shares of host companies, the proceeds of which are used to invest in home companies, either as equity or as term loans. The income of the originating companies is transferred to the host companies in the form of dividends or interest charges, or both. This is a well-framed procedure for bringing investment into the original companies. But there are regulatory bottlenecks, the process must be approved by the relevant authorities. The proposal can easily be canceled under the pretext of a closed capital account.

There is a development of startups in the IT sector with good potential. Inside information indicates that entrepreneurs are selling shares to foreign capital at higher prices. But the mode of trades executed seems to be driven. Startup entrepreneurs have been known to open a business, say StartUp (Haven City) LLC, in Heaven City for a trivial amount of money. Venture capital is investing in this business. StartUp (Haven City) LLC buys shares of a Bangladeshi startup. As a result, the original company becomes an FDI company owned by StartUp (Haven City) LLC. Why doesn’t venture capital invest or buy shares of entrepreneurs directly from Bangladesh? It’s a question. This may be, as noted earlier, due to negative messaging regarding Bangladesh’s investment exit framework. On the other hand, the proceeds of equity sales by startup entrepreneurs at higher prices cannot be used for purchases of physical or financial assets abroad under the pretext of non-convertibility of the capital account. If so, not all of the proceeds from the sale of the shares flow back to Bangladesh for the purchase of shares by StartUp (Haven City) LLC. All the possibilities behind this are due to a closed regulatory framework within the framework of capital account transactions.

Many regulatory reforms are needed. Within the existing framework, a simple derogation is needed regarding the valuation requirements in case of transfer of shares between a foreign shareholder to another foreign shareholder. Under the new adoption, their major challenge is to allow entrepreneurs in any sector to use capital gains abroad, excluding legitimate benefits, with simple reporting arrangements. Venture capitalists feel comfortable investing in paradise cities. In this case, resident companies may be allowed to set up companies in Heaven Cities through share exchange agreements without sending funds out. Sales of shares by Heaven Cities companies are to be used in parent companies in Bangladesh as equity or term loans with the permission of the relevant authorities. Overseas companies will receive dividends or interest income from Bangladesh for the subsequent distribution of dividends to venture capital shareholders.

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