Penny wise, pound foolish – Bangladesh Bank and foreign investors’ repatriation of share sale proceeds – (June 2012, Issue 1)

June 19, 2012, by Junayed Chowdhury

Foreign investment in Bangladesh is slowly growing. Despite the destructive political scenario of the country, global credit rater Standard & Poor’s has reaffirmed its sovereign rating for Bangladesh with stable outlook in view of growth prospects and ongoing donor support.[i]

 

It is natural that the influx of foreign investment would bring along a host of interesting questions about the transnational monetary policy of Bangladesh. The most fundamental question for any foreign investor would be – “how do I take my profits out of Bangladesh?” Sadly, this simple question has no straight answer.

 

The Foreign Exchange Regulations Act 1947 puts express restriction on making payment outside Bangladesh without the permission of Bangladesh Bank. The Guidelines for Foreign Exchange Transactions (“the BB Guidelines”) issued by Bangladesh Bank further clarifies this position by stipulating various qualifications on this general embargo. Paragraph 3(B) of Chapter 9 of Volume 1 of the BB Guidelines is one such provision. It specifically deals with repatriation of investments by a foreign investor in unquoted Bangladeshi companies. It states, amongst others, that prior approval of Bangladesh Bank is required for repatriation of sales proceeds of non-residents equity investment in private limited companies. Paragraph 3(B) further goes on and says 3 specific things. Firstly, it says that as there is no established market price for such investment, Bangladesh Bank, while determining the remittable amount, works out the net asset value (NAV) of the shares on the basis of audited financial statements as on the date of sales and the NAV thus calculated is considered repatriable. Secondly, if the NAV so calculated exceeds the face value of the share of the company concerned, any capital gain derived therefrom may also be repatriated. Thirdly, it says that however, only the NAV shall be considered as repatriable even if the declared sale value exceeds the NAV.

 

From a foreign investor’s perspective, there is an alarming issue in Paragraph 3(B). It allows Bangladesh Bank to work out the NAV of the shares on the basis of audited financial statements. Now, what is meant by “work out”? There is no published guideline as to what factors Bangladesh Bank would consider when calculating the NAV of shares. More importantly, what would be the position if there is a dispute between the parties (i.e. the foreign investor and the buyer of the shares) and Bangladesh Bank regarding the basis of calculation of the NAV of the shares? For example, what if the sale transaction between the foreign investor and the buyer of the shares applies discounted cash flow (DCF) analysis which is based on projections about the future? Again, what if Bangladesh Bank disregards any control premium[ii] for the shares?

 

Paragraph 3(B) of Chapter 9 of Volume 1 of the BB Guidelines needs to be amended. Calculation based on NAV is not the only way to value shares of a private limited company. There are various ways to do this calculation. Firstly, there must be express statement in the BB Guidelines to the effect that Bangladesh Bank would calculate the price per share by looking at some key qualitative factors, which would naturally vary between companies. For example, factors such as customers, market share, industry growth and competitors of a company must be looked at before arriving at a valuation per share. Secondly, the valuation methodology must also consider any control premium issues involved in the sale transaction. Thirdly, there must be a valuation appraisal conducted by merchant banker or chartered accountant registered by regulator like Securities and Exchange Commission (SEC). Finally, the BB Guidelines must stipulate a dispute resolution mechanism whereunder any dispute regarding the valuation conducted by Bangladesh Bank could be resolved.

 

HSBC, in one of its print advertisement, described the current world economic situation when it said “In the future, there will be no markets left waiting to emerge”.[iii] Perhaps the regulators in Bangladesh should appreciate the current international investment climate and open up the market for allowing more foreign investments. Creating an artificial bottleneck in Paragraph 3(B) of Chapter 9 of Volume 1 of the BB Guidelines would not only encourage people to manipulate the system, but it would also deter foreign investors to come to Bangladesh.

                                                        

Written by Junayed Chowdhury, Managing Partner 

 

† Disclaimer: The opinions and comments expressed in this Blawg are not to be regarded or construed as legal advice by and from Vertex Chambers or any of its members. It is highly advisable that any person should seek independent legal advice before relying on any of the contents of this Blawg.