Reporting for Foreign Investment, How Many Times?

 

Very recently, central bank has given directions to banks regarding the reporting of foreign direct investments. As per the directive, banks will scrutinize the relevant documents for issuance of shares amounting up to 1.00 million Taka against cash consideration in a resident company. After scrutinizing they will submit a declaration letter as per a given format within 14 days of such issuance to central bank. The directive has asked banks to observe all regulatory instructions. They need to be satisfied themselves to the effect that foreign exchange shall be brought in from abroad before issuance of shares. Shares can be issued against foreign exchange brought in from abroad only through the banking channel. The directive has asked banks to ensure from relevant documents that purpose of the remittance is equity investment.Banks and clients shall preserve encashment certificates in the prescribed format. Banks need to be ensured of resident status of the shareholders and source country of funds from relevant documents.

The directive requires issuance of shares to be reported to central bank if the cumulative issue value exceeds 1.00 million Taka in the name of a non-resident shareholder and/or all non-resident shareholders.

The circular is annexed with declaration format which needs to be preserved with endorsement by central bank. The format looks simple. But the necessity of the direction is not clear. It is a question why central bank needs separate documents. Transactions with external world are guided by foreign exchange regulations. The authority to regulate under the regulations is bestowed to central bank.

The central bank regulations allow foreign direct investment and portfolio investment. In respect of foreign direct investment, there are three levels At entry level, investment is allowed through inward remittances or import of capital machinery as equity. The investee company issues shares in favor of foreign investors based on the consideration - inward remittances or capital machinery. As per regulations, information regarding issuance of shares needs to be intimated to central bank within 14 days of the said issue. On the other hand, portfolio investment is securities trading in secondary market. Foreign investors are to send money in bank accounts in Bangladesh. The proceeds are used for buying securites from secondary market. Sales proceeds including capital gains and dividends can be credited in the accounts. The balances held in the accounts are said to be remittable abroad. Investors and investee companies do not need reporting procedures against portfolio investment. Banks facilitating transactions are to report the transactions in accordance with regulatory requirements.

Shares issued against foreign direct investment are required to undergo official formalities with authorities concerned in which the shares are registered as issues. The process is stamped as official record. Is there any other need as record? This is a question. The recent directive from central bank indicates that they keep records on account of foreign direct investment. It is said that records from central bank are single source regarding investment from external sector in the form of equity and loans, among others. Central bank's semi annual publication contains detailed information in this regard. How they process the information is a question. Definitely they have a template to collect information, and procedures to validate the information they collect. If so happens, why is further information required by central bank? Central bank's regulations should not require submission of information repeatedly.

As said earlier, investment has three levels - entry, operations, and exit. In the operation process, investee companies earn profit. It becomes dividend payable to foreign investors. As per foreign exchange regulations, dividend is remittable to foreign shareholders. Permission from central bank is not required. Banks can execute transactions, as per business insiders. At this stage, banks need to be ensured to the effect that the company has intimated central bank regarding the issuance of shares. In case of its failure, banks are reluctant to execute remittance for dividend payments. It is rarely possible to declare dividend just after establishment of companies. It takes time comprising of several years. What is to happen if a company declares dividend after a decade, having no information regarding share-issuance reporting? If such would happen, problems would know no bounds. Simply dividend will not be repatriable without the positive node from central bank. Not so easy it is to resolve the problem, stated by problem facers. Why such problems to be faced is a question. Semi annual reports of direct investment are well captured through information received in the prescribed format. Despite, investors face the music. Information within 14 days is a negative issue which is going on since long. 14-day becomes a 14-patches!

Exit stage is not so easy for foreign investment in unlisted companies. Bilateral deals to sell shares are not so easy. They set price bilaterally. But share value can be repatriated provided that valuation is based on net asset value method. In case of other methods, remittance is allowed up to certain limit. Transfer of shares between foreign shareholders is subject to valuation reports, even shares are valued at net asset value method. Valuation reports are exempted for upto an insignificant laughing amount. In the process of valuation, exit becomes a cost! How cost bearing policy becomes effective is a question. The exit policy is prescribed in the framework under foreign exchange regulations. Is it an investor-friendly? It is an issue deserving appropriate attention. But such attention is not found active, rather avoided in the name of capital siphoning in disguise of share transfer from foreign investors to resident ones.

The recent directive from central bank regarding reporting formalities imposes burden to banks. The direction articulates that banks need to scrutinize the relevant documents for issuance of shares amounting up to 1.00 million Taka against cash consideration in a resident company. It indicates that banks are considered as investment specialists. Is it possible at the end of banks? If it is not possible, banks will be reluctant to accommodate transactions relating to investment. Banks work as transactions facilitators, they buy foreign currency for inward remittances to sell the same with margin to outward remitters. Imposition of compliance to banks is a cost factor for engagement as investment professionals. The ultimate efficacy will go to increase the cost of investment.

Regulatory simplification is necessary when an economy encourages the particular sector. Foreign direct investment is said to be a priority. As such, it deserves encouragement for which problem free transactions are necessary. Considering this view in mind, reporting routine should be made one time at the time of monetary transaction. Banks report the transactions as soon as they receive payments on account of investment. This report needs to be stored in central bank database which can be tied up with share issuing authorities. Based on the information of share issuance, central bank database can easily be updated. Directive to banks for the reports within 14 days of share issuance seems to be an extra load to banks and investee companies. This can easily be avoided provided that inter-authorities are integrated. As such, authorities need to work together to make business free from problems.

Central bank is a banking regulator. In respect of foreign investment, its role should be a facilitator.   Being a facilitator, reporting routine needs to be made simplified without imposition of burden to parties concerned. In the same line, cost and time effective tools need to be devised for exit policy of foreign investment. These issues should be addressed to promote foreign investment in the country.

 
Mehdi Rahman works in the
development sector. He also
writes on business phenomena
and monetary issues.