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The government has framed draft rules to allow local firms to set up subsidiaries or buy shares in companies in other countries with a view to facilitating investment abroad.
As per the draft, exporters will be able to invest as much as 20 per cent of their five-year average annual export receipts as equity to establish subsidiaries on foreign soil.
In order to qualify, exporters will need to have an adequate balance in their Export Retention Quota (ERQ) accounts, where entrepreneurs keep a portion of their export proceeds in foreign currency.
Alternatively, an exporting firm can invest 25 per cent of its net asset based on its most recent financial statement, according to the draft rules on equity investment abroad framed by the Financial Institutions Division of the finance ministry.
The rules, drawn up under the Foreign Exchange Regulation Act 1947, come at a time when Bangladesh’s businesses are increasingly looking to invest abroad to expand their footprint. The Bangladesh Bank has far allowed 15 firms to set up subsidiaries or open offices in other countries.
Of them, the central bank gave the go-ahead to five firms to invest in countries such as India, Ireland, the US, Singapore, and Saudi Arabia to do business in food processing, pharmaceuticals, and dates.
Earlier, the central bank permitted 10 companies to open subsidiaries in countries such as Malaysia, Singapore, Ethiopia, and Kenya.
Central bankers say they framed the new rules in order to have a framework at hand so that local investors get a clear guideline on the issue. The rules will be finalised upon approval from the government.
As per the draft rules, exporters with an adequate balance in their ERQs can apply to make an investment in other countries. The applicant should be financially solvent or viable in the previous five years. In addition, interested firms must submit certificates of export proceeds realisation and import bill settlement.
Firms will need to furnish documents confirming that they do not have any default or rescheduled loans and any unpaid tax, value-added tax and duties. They will have to provide at least two of these supporting documents, according to the draft.
Conditions also apply regarding the selection of investment destinations. The draft rule says investments will be allowed in countries that have no restriction on profit repatriation.
Investment in the countries that have double taxation avoidance agreements with Bangladesh will be given priority. Priority will be given to the investment bids in the nations with which the country has bilateral treaties on investment and development.
Investment proposals aimed at the countries that have been slapped with sanctions or restrictions by the United Nations, the European Union and the Office of Foreign Assets Control of the US will not be entertained.
Investors seeking to do business in the countries identified as the destinations for illegal transactions by the Financial Action Task Force, a Paris-based intergovernmental body combating money laundering, will not get the permission to do as well.
Similarly, any investment proposal in the countries with which Bangladesh does not have any diplomatic relations will also not be entertained.
As per the draft, investors will have to transfer money directly to the associated enterprises. In the case of share purchases, investors must send money to the accounts of sellers. Money should be brought back if the investment does not take place.
Investors can’t invest income, dividends, profits, or proceeds from the sales of shares without prior approval of the Bangladesh Bank.
Investors will be asked to follow a zero-tolerance policy towards associated firms, their management team and employees on racism, derogatory remarks about religion, the local culture, money laundering, and terrorist financing.
They will have to have a full or majority stake in the firms abroad where they invest, and they must make efforts to hire as many Bangladeshis as possible in the entities to be established.
Interested investors will need to submit an investment climate report to the BB and the foreign ministry on the opportunities and threats in view of political, social, economic, and environmental events. They will require to apply through authorised dealer branches of banks.
Officials of the government, the BB and the National Board of Revenue can visit the entities abroad any time, and investors will have to bear the cost of the visits, the draft rule says.
Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue (CPD), said any inspections funded by investors might create a conflict of interest.
“Such an arrangement may have an impact on proper evaluation.”
He, however, says as travelling abroad is expensive, the regulatory authority can realise a service charge from the firms investing abroad and keep the money in an account to be used during evaluation.
Investors will have to submit audited financial statements of subsidiaries abroad, the summary of equity capital of the subsidiary, and a list of shareholders approved by the local authority of the host country.
A statement of directors of the subsidiaries, managers and management representatives approved by appropriate authorities will need to be submitted to the BB every year.
Investors must submit audited financial statements of the parent company alongside a consolidated financial statement to the central bank.
In addition, investors will need to provide statements of their business, citing information such as existing and new products, annual turnover, profit margin, production cost, and market share.
The draft bars Bangladeshi investors from selling shares to other Bangladeshi firms without the central bank’s approval.
The abuse of the scope for investment abroad and violation of related rules will be treated as an offence of money siphoning and money laundering. For this, owners, directors, chief executives, and concerned officials will be held responsible in line with the Money Laundering Prevention Act 2012 and the Foreign Exchange Regulation Act 1947.
(TDS)
