Repatriation of sale proceeds

The decision of the Bangladesh Bank (BB) regarding repatriation of sale proceeds of non-resident owned equity in unlisted companies deserves appreciation. By adopting globally-recognised price determination methods, it will end the long-standing debate of imposing undue ceiling of repatriating sale proceeds. We think, it will encourage the non-residents to invest in our unlisted companies.
Globally, this kind of venture through foreign direct investment (FDI) has maintained a positive relationship with the economy consistently more than that of portfolio investment. If we can encourage the potential non-residents to invest in our country without jeopardising our interest, it will be great boon for the economy.
Countries, where free movement of capital is allowed, do not suffer volatile inflows or outflows of capital just because repatriation is permitted using recognised pricing methods. We presume, until now that was one of our many fears which led to imposition of restriction on sales proceeds using NAV-based method. It is very likely that some investors may take the advantage of these pricing methods by tweaking assumption in their favour but we strongly support the idea of correcting these by the market itself. It will help the market to grow strongly and will expedite transaction among educated buyers and sellers irrespective of their residential status.
Earlier, it was really a discouraging feature for the non-residents to repatriate their investment only based on the last audited Net Asset Value (NAV) of the company. The foremost drawback of NAV-based pricing is that it does not have the ability to get the full value of a company with future growth potential.
However, the Bangladesh Bank may consider the following few points:
0 As the direction of the circular will reasonably ensure the fair pricing policy, we think the purchase option should be opened to both residents and non-residents.
0 It also misses some important considerations in arriving at per share value of the sample company under the income approach. The Weighted Average Cost of Capital (WACC) for discounting Free Cash Flow (FCF) is attributable to both debt and equity holder. For example, we see that for deriving the value of the unlisted equity, we simply divide the value of the firm deriving from perpetual FCF method by the number of shares. As it is a free cash flow to the firm by definition, we have to deduct only the fair value of liabilities that are interest bearing (e.g. short-term and long-term bank loan, bond) and mezzanine securities (e.g. preferred security) to get the value of free cash flow to the equity holder. It should be noted that we must not deduct non-interest bearing liabilities for assessing the value to the equity holder from value of the firm. And it is very much logical to add non-operating asset (e.g. cash and cash equivalent) for summing up the total value of equity.
0 When calculating the value of a firm, the circular guides us to use only perpetual free cash flow method and the growth rate will be determined by the average of annual cash flow growth over the past 3-5 years according to the audited financial statements. Usually, perpetual FCF method is suitable for matured stage company where growth is hovering near the long-term GDP growth rate. For a hyper growth company, this method may give these companies some unjustified favour. For example, a company having five years' average growth rate of 20 per cent will assume that the growth will last perpetually. Because of the size and dynamics of our economy, it is not unusual to find these companies providing that kind of growth over few years. But it is fairly impossible to maintain this high growth perpetually where our country's GDP (Gross Domestic Product) is growing on an average of 6.0 per cent over the past few years.
Some may argue that we may adjust the discount rate upward or downward for adjusting the growth problem mentioned above but this is not the recommended or right procedure. The growth rate and the discount rate each have a very distinct definition. We believe it will make more sense if we can also permit two-stage FCF method.
However, the central bank needs  to review its circular further so that ambiguity can be eliminated.
The writer is the Chief Investment Officer of Impress Capital Limited and was a fund manager of Alliance Capital Asset Management Limited. He has completed all three level exams of Chartered Financial Analyst Programme, the USA. [email protected]