Success stories of startups in Bangladesh are remarkable. Successful startups are attractive for foreign venture capitals which make investment for capital gain, not for regular dividend. This is the real motto of venture capitals.
Capital account is not convertible in Bangladesh. However, inward investment in the form of equity capital as foreign direct investment (FDI) or portfolio investment is permissible. Investment in the form of foreign loan is admissible with approval from competent authorities.
Outward investment is restricted under the present foreign exchange regulatory framework. Very recently, a Rule has been issued by the Government for investment abroad by exporters from their foreign currency fund with permission from a high-powered committee.
As it is said that Bangladesh is enjoying demographic dividend, the country is also in huge economic activities due to density dividend. The economy with huge population is itself a bigger market. To operate economic activities, investment is needed. FDI is one of the major sources, for which different promotional agencies like Bangladesh Investment Development Authority, Bangladesh Export Processing Zones Authority, Bangladesh Economic Zones Authority, Bangladesh Hi-Tech Park Authority are working to attract foreign investors.
It is said Bangladesh is open for FDI in all sectors except four reserved sectors. There are some controlled sectors like banks, finance companies, insurance, telecommunications etc. Excepting these sectors, foreign investors are allowed to invest in any sector they like. Sales of shares of locally owned companies to foreign parties result in foreign owned companies, whichch can be said FDI companies. Just opposite situation -- sales of foreign shareholding to resident parties -- can also happen. The key features of investment regulations particularly in foreign exchange are that investment by hundred per cent FDI is permissible, no restriction is imposed to use imported inputs, working capital loan is allowed from domestic sources, post tax profit in the form of dividend is freely remittable and many more.
There are three stages of business processes -- establishment stage, operational stage, and exit stage. In establishment stage, equity capital is injected in the companies to be established. Banks support term loans to locally owned companies, FDI can take support from external sources for term borrowing with approval from competent authorities.
In the operational stage, there is the requirement of working capital loans which are available to FDI companies. They can access short term loans from their parent companies and shareholders abroad. They need import of goods and services for which foreign exchange regulations facilitate transactions without hassle. At the end of financial year, profit after tax declared as dividend is freely remittable to shareholders abroad.
Companies limited by shares sell shares to investors. But sold shares are not bought back by companies concerned. Shareholders can sell their holdings to other parties. Shares of FDI companies not listed in stock exchanges do not have market value. Sales of shares are executed through bilateral sales-purchases agreements between parties. There is the need for valuation for determination of fair value. The regulations allow three methods to value shares -- net assets value method, market value method, and income method. The valuation is executed by chartered accountants or licensed merchant bankers. On the basis of valuation, foreign shareholders can sell their holdings to other parties. In case of sales of shares to other foreign parties, transactions are executed abroad for which reporting requirement needs to be followed as per foreign exchange regulations. Such reporting is required in case of transfer of shares against inward remittances from residents to foreign parties, including valuation formalities. No other permission is required under foreign exchange regulatory point of view.
At exit stage, sales of foreign shares to residents require outward remittances. Central bank permission is required for repatriation of shares value exceeding 100 million Taka valued under market value method or income method. No permission is needed for repatriation of sales proceeds of shares under net assets value regardless of amount.
As noted above, regulatory permission is required for few cases. Despite this, negative messages in FDI sectors are in prevalence, for which appropriate awareness programmes need to be initiated.
Financial products market of Bangladesh is not so wide and deep. Only loan products are available in the market, need-based foreign exchange derivatives are found over the counter. Same framework is also applicable for FDI cases. There are many terminologies available in financial literature, which are practised in different global financial centres. These centres may be termed as 'Heaven Cities'. The FDI products practised there are 'share swap', venture capitals, alternative investment funds, among others.
Definitely it is true that Bangladesh is an emerging economy. But investment decision by investors needs confidence. They feel comfort to invest in Heaven Cities. It is observed that home companies establish companies in host countries like Heaven Cities under share swap without financial consideration. Shares of home companies are swapped by those of host companies. Host companies become shareholders of home companies and vice versa. Different venture capitals 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 from home companies move to host companies as dividend or interest expenses or both. This is a well framed procedure to bring investment in home companies. But there are regulatory bottlenecks, the process needs to be approved from competent authorities. The proposition can easily be nullified on the excuse of closed capital account.
There is observed development of startup companies in IT sector with good potential. Insider information indicates that entrepreneurs sell out shares to foreign capitals at higher prices. But the mode of the transactions executed seems to be conduit. It is known that startups entrepreneurs open a company, say StartUp (Haven City) LLC, at Heaven City by an insignificant amount of money. Venture Capitals invest in this company. StartUp (Haven City) LLC purchases shares of Bangladeshi startup. As a result, the home company becomes FDI company owned by StartUp (Haven City) LLC. Why venture capitals do not invest in or purchase shares of entrepreneurs directly from Bangladesh is a question. This may be, as said earlier, due to negative messages regarding exit framework of investment from Bangladesh. On the other hand, sales proceeds of shares by startups entrepreneurs at higher prices cannot be used for purchases of physical or financial assets abroad on the excuse of non-convertibility of capital account. If it happens so, full sales proceeds of shares do not come to Bangladesh for purchase of shares by StartUp (Haven City) LLC. Every possibility behind this is due to closed regulatory framework under capital account transactions.
There is the need for many regulatory reforms. Within the existing framework, a simple waiver is needed regarding valuation requirements in case of transfer of shares between one foreign shareholder to another foreign shareholder. As part of new adoption, major issue of them is to allow entrepreneurs in any sector to use capital gain abroad, excluding legitimate benefits, with simple reporting modalities. Venture capitals feel comfortable to invest in heaven cities. In this case, resident companies can be allowed to form companies in Heaven Cities through share swap arrangements without outward remittances. Sales of shares by companies at Heaven Cities need to be used in parent companies in Bangladesh as equity, or term loans with permission from competent authorities. Companies abroad will receive dividend or interest income from Bangladesh for onward distribution of dividend to venture capital-shareholders.
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