Central bank to overhaul tax certificate rule for foreign investors

The central bank has assured the prime bourse that the requirement for foreign investors to obtain a tax certificate after each executed sale order will be withdrawn to help attract overseas investment to the equity market.

DSE officials and brokers said the existing policy hinders the reinvestment of foreign funds that become available after the execution of a sale order until the tax certificate is submitted.

Suppose a foreign portfolio investor has offloaded shares worth Tk 1 million or more. Their local custodian, such as HSBC, would not release the funds until it receives a tax certificate against the transaction. During that time, the funds remain stuck and the foreign portfolio investor receives no interest on them.

Experts and market operators say the provision requiring tax certificates does not exist in other frontier and emerging markets. In India and Pakistan, tax certificates are required only at the time of fund repatriation, said DSE Managing Director Nuzhat Anwar.

"We look forward to working with the central bank to simplify operations for foreign investors and attract more foreign funds to the country's market," she added.

The Dhaka Stock Exchange discussed the matter with the Bangladesh Bank governor at a meeting at the BB office last week.

"Bangladesh Bank officials said, 'No one from the stock exchange has come to us to discuss the problem discouraging foreign portfolio investment,'" said a meeting participant in a telephone conversation with The FE.

At the meeting, the BB governor sought a proposal from the DSE on addressing the issue.

The premier bourse will submit a proposal this week to change the provision so that tax certificates are required only when foreign investors repatriate their funds, according to sources at the DSE.

Foreign portfolio investors allocate funds once a year for different frontier, emerging, and developed markets.

DSE officials and brokers who handle foreign clients said the existing complications discourage foreign fund managers from allocating sufficient funds to Bangladesh's capital market.

Ahsanur Rahman, a former managing director of BRAC EPL Stock Brokerage, said the country's capital market attracts much lower levels of investment compared to peer markets.

For example, a foreign fund manager may allocate $1 billion for five frontier markets, including Bangladesh and Vietnam. In that case, Bangladesh might receive an investment of $1 million, whereas the Vietnamese market would get at least $2.5 million.

Mr Rahman also said foreign investors always preferred markets that provide easy investment and exit opportunities.

Foreign investment in the country's stock market plunged 70 per cent in the five years to December last year to $914.58 million, according to the Dhaka bourse. The decline occurred as the market remained stubbornly bearish.

Mr Rahman said that if the tax certificate requirement is changed to a one-time submission at the time of fund repatriation, it would reduce both the cost of funds and the time involved.

That would not deprive the government of tax revenue.

Instead, the flexibility would boost government revenue through frequent and easier reinvestment of foreign funds, the DSE chief said.

A greater portion of foreign portfolio investment comes from the UK, US, and Norway through offices located in Singapore, Hong Kong, and Dubai.

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