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Taka has partially become convertible on outward capital account transactions. A new window has been opened with the issuance of 'Capital Account Transaction (Overseas Equity Investment) Rules, 2022 by the government. The rule defines overseas equity investment as formation of subsidiary company abroad or purchase of controlling shares from existing foreign company.
The rule sets eligible criteria for investment destinations. The destinations need to have flexible policy supports. They will allow Bangladeshi nationals to work and repatriate their earnings to Bangladesh; investment from Bangladesh and repatriation of capital including capital gain, dividend and other admissible earnings such as technical know-how fees, royalty, consultancy fees, commission or other entitlements. In addition, investment destinations will have double taxation avoidance agreement and an agreement on promotion and reciprocal protection of investment with Bangladesh.
The new rule restricts investment in countries where sanctions have been imposed by the United Nations, European Union, Office of Foreign Assets Control. It also includes countries required counter measure as identified in Financial Action Task Force (FTAF). Investment will not be allowed to countries with which Bangladesh has no diplomatic relationship.
The eligible investors are exporters having sufficient balances in their retention quota accounts known as exporter's retention quota (ERQ) accounts in foreign currency. The applicant entity needs to be financially sound as supported by its audited accounts during the immediate past five years, with credit rating at least 2 as per mapping of risk-based capital adequacy guidelines. The investment proposal for business activity abroad shall generally be of similar nature or complementary or supplementary to the activities that the applicant entity is engaged in Bangladesh. The investment proposal shall be economically viable as evidenced by a trustworthy feasibility report. It shall have potential for future earnings of foreign exchange coupled with the prospect of advancing other advantages for the country, such as enhancement of export from Bangladesh, employment opportunity for Bangladeshi nationals. The applicant entity shall have human resources having expertise in global trade operations, finance and investment.
Proposal of investment outside Bangladesh shall not exceed 20 per cent of average annual export earnings of the applicant during the previous five years or 25 per cent of the net worth as per its last audited balance sheet, whichever is lower, subject to availability of the fund in the applicant's retention ERQ accounts.
There will be a scrutiny committee comprising 15 members. The committee will be chaired by the Governor of Bangladesh Bank. The investment ceiling can be enhanced or reduced by the committee, if necessary. The decision of the committee will be intimated to designated concerned bank with a copy to the applicant company.
The rule also contains detailed information regarding formation of companies abroad. According to the rule, receivables from the companies formed abroad need to be repatriated within 30 days of the amount on being due. Receivables include income like dividend, profit, interest, sales proceeds of share, disinvestment proceeds, royalty, consultancy fee, commission etc. Misuse of investment will be treated as money laundering under Money Laundering Prevention Act. Central bank disseminated the rule vide a circular issued on January 27, 2022 in this regard for necessary action by banks.
The rule is basically a policy framework facilitating exporters to make investment at strategic locations abroad within the ceiling. The present regulatory framework permits exporters to maintain a portion of export proceeds in ERQ accounts for use of bonafide external payments. Exporters can, as per Export Policy, appoint agents abroad for which they can use fund from ERQ accounts. In accordance with prevailing foreign exchange regulations, exporters can open offices abroad without permission from central bank. They can send yearly remittance from Bangladesh to these offices up to 30,000 US dollar. To maintain current expenses of these offices, fund held in ERQ accounts can be used without any ceiling.
As per the newly framed rule, investment abroad will not exceed 20 per cent of average annual export earnings of the applicant during the previous five years or 25 per cent of the net worth as per last audited balance sheet, whichever is lower. Net worth is, basically, owner's funds. As a hypothetical case, if an exporter's average export is 20 million US dollar while net worth is around 11.50 million US dollar (around Tk 100 crore), he will be eligible for investment abroad up to 2.87 million US dollar. On the other hand, retention of foreign currency in ERQ accounts depends on local value addition of concerned exports. High value addition deserves 60 per cent of export proceeds to be retained in ERQ accounts. Same rate is applicable for service exports but IT sector is eligible for 70 per cent to be retained in ERQ accounts. Low value addition deserves retention facility at 15 per cent of repatriated export proceeds. The percentage does not indicate that exporters are able to maintain admissible fund in ERQ accounts. Retention depends basically on profitability of concerned export transactions. If an export firm earns 5 per cent profit on export value, it is rarely possible to maintain permissible fund in ERQ accounts.
Investment by exporters may be in two ways either for export promotion of Bangladeshi products or off-shoring production process. Promotional activities do not need huge investment for infrastructural facilities. As such, fund requiring for day to day operations is enough as per the ceiling of the Rule to meet the need of subsidiaries abroad. This is an alternative to the opening of branch offices abroad. Considering the profitability of business, establishment of manufacturing facilities abroad out of fund held in ERQ accounts seems to be insignificant, unless resident equity is injected. As such, the Rule will not be supportive for investment in manufacturing industries abroad.
As stated earlier, opening of offices abroad with remittance facilities is admissible. The offices established abroad facilitate export promotion and sourcing of raw materials. But legal status of offices is not so strong; they face difficulties to have policy supports including finance in which they operate. As a result, transactions on their own accounts are not easy. But subsidiary companies can have capacities to execute abroad like import from Bangladesh, export to Bangladesh and other permissible transactions.
The rule issued for equity investment abroad outlines approval process. Applications submitted by banks on behalf of their customers need to be placed to the committee through Bangladesh Bank. The decision of the committee appears to be final. But this is a system which is as good as case to case basis approval. No automatic route meaning general authorisation to banks is given. Hence, applications for investment of insignificant amount is also required to be placed before the committee.
Taka is convertible on current account transactions. But there are lists of authorised transactions with ceiling limit. Beyond the limit, applications are considered by central bank. In the same way a limit may be set for equity investment abroad at automatic route for which no permission will be required. This authorisation may be allowed one time for each eligible company subject to regular reporting routine to central bank. In case of additional equity required afterwards, requirement to submit applications to the committee needs to be made mandatory, irrespective of amount. This automatic route can facilitate establishment of subsidiary abroad without approval; this will definitely support promotion of exports to a greater extent.