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Adequate policy supports needed to attract FDI

Published : Sunday, 3 November, 2024 at 12:00 AM  Count : 360
Ferdaus Ara Begum
Overall investment scenario in Bangladesh is not satisfactory while Foreign Direct Investment (FDI) is much depressing as per the requirement. Policies and incentives are announced, a number delegates are visiting the country they  expressed their  sincere willingness however eventually all   investmentsdo not  get matured.  Bangladesh has announced several incentives for  power and electricity, some FDI have been attracted creating a very few job opportunities, we need investment in the diversified sectors where new employment creation and technology transfer  will be  possible.

At one time, land related issues came up largely, Bangladesh has announced a number of  100 economic Zones,  of which some are privately owned and some are government owned. In practice at the moment some private Zones are somehow progressing,but government zones could not progress better. Investors are too some extent ready but the infrastructure within the Zones, utility supports such as; gas, water, electricity  are not fully ready.  Interestingly Export Processing Zones Authority (BEPZA) lands have been saturated, as there is no opportunity now to expand horizontally, some factories are being expanding vertically. Some of the factories in the Mirersorai SEZ  have been leased out to BEPZA,are in production and ready to export while the core large areas of the  Mirersorai SEZ   is still  hovering  for a positive take off. 

One of the primary requirements is efficient labour force for sustaining FDI. Along with this, several challenges have been identified by investors and one of the very  commonly  mentioned areas is repatriation of profits of the  foreign investors. It is seen that foreign investors are required to repatriate their money in four different ways, these are salaries, dividends, royalties, technical service fees, technical assistance fees, technical knowhow fees and equity. 

The salary of the foreign employees as per the agreement with the companies is being given by BIDA. Bangladesh Bank has allowed for repatriationof 80% of the salary of a foreign employee. However as per foreign investors, global salary has to be remitted to Bangladesh Bank account. They felt the need that the salary remittance should be flexible and as per double taxation avoidance treaty. The reason might be that foreign investment companies may like to conceal some portion of the salaries of the incumbent in the face tax related issues. In some cases, income tax policy and repatriation are not aligned with, foreign investors may not feel comfortable in that respect.

Repatriation of royalty, technical know-how services, fees and assistances are another important areas where foreign investors face constraints. As per Bangladesh Bank (BB) Guideline for Foreign Exchange Transaction (Volume 1, Chapter 10, Section 25), technology transfer cost repatriation limit without any approval is 6% of yearly sales, if it is above the limit it would require a prior approval from sponsoring authority and BB to send it overseas destination. 

Bangladesh Investment Development Authority Act 2016 (Clause 18, Page 13630) published on August 1, 2016 stated that if foreign company or foreign business entity is payable any amount to overseas business entity who supplied technical services, the foreign investors needs to get endorsement from concern authority under a prescribed manner.On the other hand, Handbook& Guidelines of Bangladesh Investment Development Authority (BIDA)-page 93:stated that an investor is allowed to remit up to 6% of its C&F value of imported machinery for new project for the purpose of royalty, technical know-how, technical assistance fee. Recurrent annual fees for royalties and other expenses such as fees for technical know-how, technical assistance, operational services, marketing of products etc. should not exceed an aggregate limit of 6% of the previous year's sales of the firms as declared in the tax return. The  act and guidelines should be aligned clearly to give the right signal to the investors. 

Equity transfer   fromreinvestment occurs mostly in FDI. FDI in Bangladesh is not diversified among the sectors. Reinvestment is a good sign as it retains the investors in the country. However, new investment in diversified sectors is also important and for this policies needs to be clear and consistent.There is no restriction for repatriation of dividends, but it should be smooth, as presently investors face difficulties because of shortage of foreign currencies.  Also there is a restriction   for foreign investors to raise funds from local banks within the three years of establishment, this can be  based on the decisions of the AD banks.

Documentation requirements for visa for BIDA recommendations and work permit are huge and there is duplication of requirements. For example, office permits, board resolution, passport, CV, photo  are all the same but needs to be submitted twice.  Simplification of policies might make investors happy. 

Similar is the case of banks, procedural issues are there which vary from bank to bank. There is a published list of required documents, however sometime banks may ask for additional documents. Opening bank accounts by the foreign companies is another requirement.  Banks are unable to transfer money without a bank account as there is a provision of NBR to disburse salaries over BDT 20,000 through banks as per section 30(I) Income Tax Ordinance 1984 and Income tax Act 2023 (Section 55-Ta). 

In the case of work permits there is no defined time for residency by BIDA. But there is a provision for staying more than 183 days a year in Bangladesh in Income tax Act 2023 (Section;2-45). The definition of "Resident" in BIDA Guideline and Income tax Act 2023 are not aligned. As per the Foreign Exchange Regulations Act repatriation can be done by direct transfer. In the case of multiple country transactions, Bangladesh Bank (BB) needs to clear the issues. 

Exit Issues are another most discussed area for the foreign investors. Most of the complaints come from exit issues. For a company listed in the stock market, they can leave the market on the existing price. It is the best fair value, and easy exit is possible by Non-Resident Investors Taka Account (NITA). However, valuation becomes an issue and audit report acceptance takes time.  Clear policy guideline can bring confidence among investors.

As per paragraph 3(B), chapter 9 of the guidelines for foreign exchange transactions-2018(GEET), there is a given directive for sale proceeds of non-resident equity investment in public limited companies not listed with the stock  exchanges and private limited companies can be repatriated with prior approval of BB as on the date of share sales, based on latest audited financial statements. BB would accept the fair value of the shares based on an appropriate three valuation approaches; these are net value approach, market value approach and discounted cash flow approach depending on the nature of the company. 

In order to transfer the shares from a non-resident to resident companies, the MOU for share sale purchase agreement between buyer and seller needs to be concluded on receipt of approval from BB regarding determination of the fair value of shares. The fair valuation approaches will be determined by the weighted average calculation of the three valuation approaches as mentioned above. Indicative guidelines are given by the BB. This valuation is done by reputable CA firms and banks. These are policies, however in practice there should be transparency, and decisions should be time-bound.

For getting overseas loans from the parent companies  for one year  investors need to  get approval from BIDA and Bangladesh Bank both, however time requirements for getting the approval is too long because of the board meeting which is scheduled to be held  monthly. Interest rates are fixed which can be market based, and the authority can be delegated to authorizeddealers (Ads). There should be a clear guideline which can be followed by the Ads so that investors do not have to wait for several months for an approval from the concerned authorities. 

The companies can choose two kinds of exit mechanisms - voluntary and legal. The BB is only aware of the due processes followed under the Company Act. The local consultants in this case misguide the companies for exit process. This misguide is more prevalent in the cases of taxation. Sometimes the third parties willingly misguide the companies for more profits. This type of unofficial treatment may be a discouraging factor for foreign investors.

In this case, the investors mainly come for projects and technical assistance. The branch office is profit oriented. For profit they do not  come  to the  BB. In the case of a branch, the terms and conditions are set by BIDA and for the company it is  BB  in which  registrar of joint stock companies is involved. Office expenses should be bought from a foreign country. For projects, the outflow is not reflected in the financial statements as it creates problems for taxation. Equity money should not be uncashed. So there are a number of small and big nitty gritties,  Bangladesh Bank, BIDA and other relevant concerned organization would need to work in a coordinated manner to resolve these issues. 

So far we understand announced policies are investors friendly but in practice it is not, mind-set of the investment promotion agencies and regulators would need to be positive to support investors considering the  differences of  their needs to bring sureness about public support services in a timely and transparent manner. 

The writer is Chief Executive Officer, Business Initiative Leading Development (BUILD)


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