Debt-equity ratio for foreign firms may go

A capital-financing constraint like debt-equity ratio for foreign firms in Bangladesh in availing term loans in local currency may go now as the government plans to relax the rules to boost industrial growth, officials say.

Presently, the foreign owned/controlled companies engaged in manufacturing or services output activities for three years or longer in Bangladesh can obtain term loans in BDT from the domestic market for capacity expansion or BMRE regardless of local content in their equity.

However, their total debts are not allowed to exceed the 50:50 debt-equity ratios under the Guidelines for Foreign Exchange Transaction.

There is no such restriction on debt-equity ratio in the case of local companies for getting loans.

They say the existence of debt-equity-ratio bar in the case o foreign companies is contrary to section-4 of the Foreign Private Investment (Promotion and Protection) Act 1980.

This section of the law provides that the government shall accord "fair and equitable treatment" to foreign private investment.

Keeping it in mind, officials say, the scrutiny committee on foreign loan/supplier's credit, headed by central bank governor Dr Ahsan H Mansur, at a recent meeting opined that the restrictive debt-equity-ratio ceiling may be relaxed for foreign-owned/controlled companies for term loans in taka.

Sources have said the committee decided that the Bangladesh Investment Development Authority (BIDA) will request Foreign Exchange Policy Department of Bangladesh Bank to reassess the related policies for foreign-owned or-controlled companies so they can borrow in local currency sans any bar.

The committee thinks lifting the ratio bar for such companies in case of getting term loan will help boost industrial growth that is imperative to spur the country's economy.

Dr Zahid Hussain, a former lead economist at the World Bank Dhaka office, welcomes the initiative as he thinks it will remove a barrier in case of creating level playing field for local and foreign investors.

He says according to international accounting standards a company where it is located is considered as resident of that country. "Since foreign companies have come here for business, why should they face debt-equity limit which is not applicable to domestic companies?" He asks.

Dr Hussain opines that the matter of granting loans should be decided on bank-customer relations. "I think this will enhance opportunity for bankers to give loans to good companies."

They are given loans in local currency so no exchange-rate risk being added here, he told the FE Monday.

However, Mr Hussain thinks the government should also ensure level playing field for both local and domestic companies in case of providing other facilities. "If you provide any special facility to foreign investors but not ensure the same for local investors that will also create space for uneven competition."

The economist suggests the government should work to create investment-friendly environment for businesses regardless of their identity, no matter whether they are domestic or foreign in nature.

syful-islam@outlook.com