Overseas Equity Investment Rules 2022: An analysis

Bangladesh Bank has finally published a gazette for Capital Account Transaction (Overseas Equity Investment) Rules 2022 on January 16 and circulated it among banks and all main branches of authorised dealers and branch offices on January 26. The circular has been issued by the Foreign Exchange Investment Department (FEID) of Bangladesh Bank referring that Financial Institution Division (FID) of Ministry of Finance has issued the rules on January 9, 2022 as per section 9 of the Foreign Exchange Regulation Act, 1947.

Through the Rules, Bangladeshi entrepreneurs are now allowed to invest abroad, which was one of the requests from businesspersons for a long time. As per the rules, a suitable applicant can apply for an equity investment proposal as per the directives mentioned in the section 5 of the rules. Under the rule, exporters will be able to invest equity abroad from their retention quota accounts.

The applicant will be able to invest from their reserved retention quota provided enough amount remains there. The applicant will be able to invest 20 per cent of their average annual export earnings for five years or less than 25 per cent of the net assets shown in the latest audited annual financial report as equity abroad. The exporter organization has to apply to the Bangladesh Bank(BB) through the authorized dealer bank and the required documents as per attached Form 1-5 mentioned under section 4.

Exporters presently can retain seven per cent of their export income for export promotion purposes such as; office set up, marketing, attending trade fairs, etc. The gazette is not clear about the 20 per cent of the retention income; does it mean 20 per cent of the retainable 7 per cent. If that is the case, the investable amount will be minimal. Offshore Banking Unit (OBU) approved by the Bangladesh Bank will need to approve opening a bank account abroad. As per the concerned chapter and section of foreign exchange guidelines, branch offices abroad may be managed. This reporting must be made regularly.

A 15-member selection committee has been set up to scrutinize the applications. The committee will be chaired by the governor of the Bangladesh Bank. The committee's decision will notify the approved dealer bank, and a copy of the letter will be given to the applicant organization. However, there is no mention of a time frame to inform the applicant if all the documents are all right.

All the debts of the company formed abroad, such as profit or dividend, interests, proceeds of the sale of shares, balance due to liquidation of investment, salary, royalty, technical knowledge fee, consultation fee, commission, etc. must be remitted to Bangladesh within 30 days of receipt. The rules stated that investment misuse will be treated as money laundering under the Prevention of Money Laundering Act. The time limit of remitting receipts seems to be short as the process will be accomplished as per the policies of the investing countries.

In 2014 a Bangladeshi company was given first permission to make such an investment. So far about seventeen companies have been allowed these opportunities on a case-to-case basis. There is no specific information on how these companies are performing. Probably Bangladesh Bank has done some surveys on these investments and how they are running and thus extended these opportunities for others.

Bangladesh Bank has gone for this policy, considering the comfortable foreign exchange reserve situation of the country. However, very recently the situation has been changing. Even though export growth led by RMG has been showing some steady improvement, remittance growth is showing a downward trend.

It is expected that export of Bangladesh will see further momentum; new job creation will be possible by utilizing the advantages of the policy.

From the media reports, it is seen that about $ 70 million investment has already been made by the established Bangladeshi companies abroad. In the future, it is expected to see further growth. Recently steel rerolling mills, pharmaceuticals, and garments have been allowed to invest about $13.5million in different countries such as Ireland, the UK, Kenya, and Hong Kong. Instead of a case-to-case basis, these have been allowed for all, especially for exporters.

There is no mention of countries where investment will be encouraged in the new policy. Still, countries with restrictions by the UN and EU and the Office of Foreign Asset Control (OFAC) will be out of the purview of investment. In addition, exporters will not be permitted to invest in those countries where there are directives of countermeasure by the Financial Action Taskforce (FATF). And for these reasons, countries with diplomatic relations will obviously be preferred for investment.

The applicant's credit rating grade as per the guideline on risk-based capital adequacy mapping should be at least 2. It is further mentioned that the applicant's investment would need to be supportive or complementary to the investment already made within the country. The investment would need to be economically sustainable. The proposals should have the specific potential for increasing export and employment creation. Bangladesh has a narrow export base. Thus investment diversification may be limited.

The investment has been meant for exporters only; large scale RMG exporters will be able to invest. Leather could be another sector, as a producer of semi-finished raw materials, e.g., raw hides of Bangladesh can be used in some shoe-making industries. In this way, export can be increased. Very recently, there was a discussion session organized by BUILD in collaboration with Chinese companies, they informed leather goods and products have huge demand in their country, but the design and fashion are not up to the mark; thus investment in other countries can provide opportunities to produce goods as per the choice of the country concerned. Chinese companies have shown interest in fruits from Bangladesh, processed food, jute, etc. Technology transfer can be encouraged if the investors utilize the policy benefits properly.

Bangladesh has double taxation avoidance agreement with a number of countries, now the time has come to go through these agreements regarding what has been agreed in these agreements. Most of the agreements are too old and has been prepared depending on the desire of the countries that want to invest and are willing to do business with Bangladesh. In order to get loans from foreign companies there is a need for collateral, there could be some directives.

It is true that monitoring of Bangladesh Bank has to be strengthened. There are fifteen members in the selection committee which includes members from BIDA, EPB, BSEC, MOI, MOC, NBR, etc. As the policy is specifically meant for exporting organization there could be a member from Exporters Association which could allow the committee to gather feedback about the impact of already approved investment.

Export goods of Bangladesh are heavily dependent on import of raw materials and accessories. Even about after five decades of RMG exports, the sector still depends about 65-70 per cent on imported raw materials. Similar is the case of pharmaceuticals, steel mills, etc. in that respect, value addition by engaging local manpower, how much would be possible is a question. At the domestic level exporters have to deploy foreign experts. In Form 3, there is a mention in a column (14) regarding the reason behind the investment abroad, and in another column (15), it is mentioned about the benefits of the country from the investment.

There are already seventeen companies investing abroad. The benefits Bangladesh is getting can be surveyed to contribute to further allowable investments. Robust monitoring is required regarding analyzing the cost and benefits of investment policies.

Investment at the local level is highly demanding, and employment generation is necessary. In this situation, how investment abroad could fulfill the desired investment targets of the country has to be assessed and elaborated.

The writer is CEO, BUILD-a Public Private Dialogue Platform works for private sector development. She can be contacted at ceo@buildbd.org