Overseas equity investment – automatic route needed

The taka became partially convertible on transactions out of the capital account. A new window has been opened with the publication of the Capital Account Transactions (Overseas Equity Investment) Rules, 2022 by the government. The rule defines overseas equity investment as the establishment of a foreign subsidiary or the purchase of controlling shares of an existing foreign company.

The rule defines the eligible criteria for investment destinations. Destinations should have flexible support policies. They will allow Bangladeshi nationals to work and repatriate their earnings to Bangladesh; Bangladeshi investment and capital repatriation, including capital gains, dividends and other qualifying income such as technical know-how fees, royalties, advisory fees, commissions or other fees. In addition, the investment destinations will have a double taxation avoidance agreement and an investment promotion and reciprocal protection agreement with Bangladesh.

The new rule restricts investments in countries where sanctions have been imposed by the United Nations, European Union, Office of Foreign Assets Control. It also includes countermeasures required by countries, as identified in the Financial Action Task Force (FTAF). Investments will not be permitted in countries with which Bangladesh has no diplomatic relations.

Eligible investors are exporters with sufficient balances in their retention quota accounts called Exporter Retention Quota Accounts (ERQ) in foreign currency. The applicant entity must be financially sound, as evidenced by its audited accounts within the immediate past five years, with a credit rating of at least 2 in accordance with the capital adequacy guidelines mapping based on risks. The investment proposal for overseas business activity should generally be of a similar or complementary or additional nature to the activities that the applying entity is carrying out in Bangladesh. The investment proposal must be economically viable, as evidenced by a reliable feasibility report. It must have potential for future foreign exchange earnings coupled with the prospect of advancing other benefits to the country, such as improved Bangladeshi exports, job opportunities for Bangladeshi nationals. The applicant entity must have human resources with expertise in global trade operations, finance and investment.

The investment proposal outside Bangladesh should not exceed 20% of the applicant’s average annual export earnings over the previous five years or 25% of net worth as per their latest audited balance sheet, whichever is lower, subject to fund availability. in the applicant’s retention ERQ accounts.

There will be a review committee consisting of 15 members. The committee will be chaired by the Governor of the Bangladesh Bank. The investment limit can be increased or reduced by the committee, if necessary. The commission’s decision will be notified to the designated bank concerned with a copy to the applicant company.

The rule also contains detailed information on the incorporation of companies abroad. According to the rule, claims on companies incorporated abroad must be repatriated within 30 days of the due date. Receivables include income such as dividends, profits, interest, proceeds from stock sales, divestment proceeds, royalties, advisory fees, commissions, etc. Misuse of investments will be treated as money laundering under the Prevention of Money Laundering Act. The central bank disseminated the rule in a circular issued on January 27, 2022 in this regard for necessary measures by banks.

The rule is essentially a policy framework that allows exporters to invest in strategic overseas locations within the limits of the cap. The current regulatory framework allows exporters to retain a portion of export earnings in QRE accounts for the use of bona fide external payments. Exporters may, in accordance with the export policy, appoint overseas agents for whom they may use funds from the QRE accounts. According to the current exchange regulations, exporters can open offices abroad without the authorization of the central bank. They can send annual remittances from Bangladesh to these offices up to US$30,000. To maintain the current expenses of these offices, the funds held in the ERQ accounts can be used without any ceiling.

Under the new rule, overseas investments will not exceed 20% of the applicant’s average annual export earnings over the previous five years or 25% of net worth according to the last audited balance sheet, whichever is greater. low. Net worth is, essentially, the owner’s funds. Hypothetically, if an exporter’s average export is US$20 million while the net worth is around US$11.50 million (around Tk 100 crore), they will be eligible for investments at abroad up to 2.87 million US dollars. On the other hand, the retention of foreign currencies in the QRE accounts depends on the local value added of the exports concerned. The high added value merits that 60% of export earnings be kept in the QRE accounts. The same rate applies to service exports, but the IT sector is eligible for 70% to be retained in QRE accounts. The low added value merits a retention facility of 15 percent of repatriated export earnings. The percentage does not indicate that exporters are able to maintain qualifying funds in ERQ accounts. Retention essentially depends on the profitability of the export operations concerned. If an exporting company makes a profit of 5 percent on the value of exports, it is rarely possible to maintain authorized funds in QRE accounts.

Investments by exporters can be made in two ways, either for the promotion of exports of Bangladeshi products or for the relocation of the production process. Promotional activities do not require huge investments in infrastructure. Thus, the funds necessary for day-to-day operations are sufficient, in accordance with the ceiling of the rule, to meet the needs of subsidiaries abroad. It is an alternative to opening branches abroad. Considering business profitability, establishing overseas manufacturing facilities from funds held in ERQ accounts appears to be insignificant unless resident capital is injected. As such, the rule will not support investment in overseas manufacturing industries.

As stated earlier, the opening of overseas offices with remittance facilities is eligible. Offices established abroad facilitate the promotion of exports and the supply of raw materials. But the legal status of offices is not so strong; they encounter difficulties in obtaining political support, including the financial support in which they operate. Therefore, transactions for their own account are not easy. But subsidiaries can have overseas fulfillment capabilities like import from Bangladesh, export to Bangladesh and other permitted transactions.

The rule issued for overseas equity investments outlines the approval process. Applications submitted by banks on behalf of their customers must be submitted to the committee through the Bangladesh Bank. The committee’s decision appears to be final. But it’s a system that’s as good as case-by-case approval. No automatic route signifying general authorization to banks is given. Therefore, investment requests of an insignificant amount must also be submitted to the committee.

Taka is convertible on current account transactions. But there are lists of allowed transactions with a cap limit. Above the limit, requests are reviewed by the central bank. In the same way, a limit can be set for investments in shares abroad automatically for which no authorization will be required. This authorization may be granted once for each eligible company subject to regular reporting to the central bank. If additional capital is subsequently required, the requirement to submit applications to the committee should be made mandatory, regardless of the amount. This automatic route can facilitate the establishment of a subsidiary abroad without authorisation; this will certainly further support export promotion.

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