The Financial Express
Swasti Lankabangla Swasti Lankabangla

Flexible FDI rules, what next?  

| Updated: August 28, 2020 20:43:15

Flexible FDI rules, what next?   

East Asian factories owned by foreigners are expected to be relocated to other locations due to trade war. Bangladesh is a potential destination, it is found  in recent news items. To be competitive in attracting foreign direct investment (FDI), different initiatives in the form of ease of doing business have been taken. One of the reform programmes adopted by central bank is simplification of operational formalities in foreign exchange transactions.

Recently the central bank has brought a paradigm shift in repatriation of sales proceeds of investment by foreign investors. The circular issued by central bank in this regard has allowed authorised dealer (AD) banks to repatriate sales proceeds of shares regardless of amount, fair value of which is determined by the management of the target companies through net asset value (NAV) approach based on latest audited financial statements submitted together with tax returns. Most of the FDIs in Bangladesh are involved in manufacturing activities. Remittance on the basis of NAV without approval from the central bank is really a great deregulatory measure on capital account.  The central bank deserves  thanks for this policy support. The circular has also given general permission to repatriate sales proceeds of shares up to Tk 10.00 million equivalent of foreign currency without valuation reports from independent valuers. In addition, remittances of above Tk 10.00 million upto Tk 100.0 million equivalent of foreign currency on account of sales proceeds, fair value of which is determined in terms of prescribed valuation methods, have been allowed through the circular. The amount up to Tk 100.0 million will help medium ranged investment companies in service sectors for repatriation of disinvestment proceeds. Central bank's permission will now be required for transactions beyond Tk 100.0 million for which valuation other than NAV is applied. In these cases, the assets will mainly be valued on the basis of discounted cash flow approach. The company having assets of intellectual nature may be required such type of valuation. Practical cases in these types are expected to be very insignificant since service sectors of Bangladesh with high intellectual properties are in initial stage.

Investment is a capital-type account. It brings profits which are current-type accounts. The central bank has,  vide a circular, allowed the dividend income to be deposited in foreign currency accounts of foreign investors maintained in Bangladesh. They will use the funds held in foreign currency accounts for reinvestment in Bangladesh. Alternatively, they will take the fund out of Bangladesh at their convenience. The fund can be repatriated to their desired locations besides home countries. The circular has also permitted investment by foreign investors through their existing dividend income, with treatment as foreign investment.

Repatriation of dividend has been made more simplified in operational formalities.  The central bank has stopped post facto checking based on documents submitted by AD banks. This has been brought in regulatory framework through a circular issued recently.

These are all FDI friendly ecosystem created by the central bank. Few issues still remain unaddressed. Foreign exchange regulations require submission of report to the central bank within 14 days from the date of issuance of shares to foreign investors. Based on the report, central bank would open a file for concerned companies. This is like a tax type file. Post facto checking documents are preserved in the files. Permission for repatriation of disinvestment proceeds would be done through these files. But since no post facto documents for dividend are now required to be sent to the central bank, permission for repatriation of disinvestment proceeds will rarely be needed. So, this reporting formalities should be stopped. Instead, central bank may compile FDI information based on daily reporting by AD banks.

Waiver of post facto checking will help companies send dividend in compliance with regulatory instructions. Earlier it was a practice that AD banks did not remit if earlier post facto checking remained pending at the end of central bank. Now foreign owned and controlled companies will not face such hassles. In addition to dividend, profits of branch offices of foreign companies are allowed without permission from central bank. Still different types of regulatory bottlenecks are faced by such offices including different project offices. Another regular payment abroad is required in the name of surplus earnings by transport operators like airlines/shipping lines. Regulatory instructions of central bank require post facto checking after remittances. The documents for post facto checking are  unmanageable in numbers. It is unknown what value is added by so called post facto checking at the end of central bank. No news is found regarding their identification of excess remittances and bringing back the same. Instances may be, if any, very insignificant. If found, what regulatory actions central bank has adopted is a question of doubt. In line with dividend, post facto checking on account of profit and surplus earnings deserve attention for waiver. Otherwise, section 4(5) of Foreign Exchange Regulation Act stands exercised by central bank since banks need to comply with section 3(4) of the said Act.

There are duel regulatory framework with regard to foreign exchange transactions. Taka is freely convertible on current account transactions. It has set indicative limits for AD banks to execute transactions.  Beyond the limit, central bank's authorisation is required. The practice is contradictory to currency-convertibility regime. Again, there prevails another regime under BIDA Act. Some remittances like  royalty, fees for technical knowledge or technical assistance and franchise fees are remittable with approval from BIDA. Term loans from external sources are drawable with recommendation from the foreign loan scrutiny committee of BIDA. It seems that two regulators for foreign exchange transactions are in operations.

Business operations at initial stage and different other stages require service related expenses payable to foreign vendors. Central bank permits only one per cent of previous year's sales on account of consultancy fees. But green field entities including project implementing concerns do not have such historical figures for which they require case to case permission from central bank. It makes delay in executing the specified work. In case of new entities, the percentage should be linked with capital or project cost or imported machinery. The central bank should think whether the practice is contradictory to their declaration of taka convertibility on current account transactions or they are exercising powers under section 5(1) of Foreign Exchange Regulation Act, without considering section 4(5) of the said Act.

Recent policy supports by the central bank for ongoing situation due to covid-19 pandemic are well applauded. Same can be said with regards to repatriation of disinvestment proceeds, parking of dividend in foreign currency accounts and reinvestment therefrom, recognition of dividend as FDI in reinvestment in Bangladesh and waiver of bureaucratic bottlenecks in post facto checking against dividend remittances. Immediate attention is also required on regulatory reporting within 14 days of issuance of shares. Further simplification is required with regard to waiver of post facto checking against payments of profits and surplus earnings abroad, implementation of taka convertibility regime by bringing outward remittances for new and existing project entities within permissible framework. In addition to foreign currency and capital machinery, technological know how should be recognised as a medium of FDI with proper valuation and compliance of tax deduction formalities. Moreover, competent authorities should think regarding cross border transactions regulated by dual authorities. Implementation of all these as noted may bring policies on external transactions at par or better  compared to peer countries to attract the expected forthcoming factories relocation opportunities.


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