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Easing repatriation of proceeds from share sale

Anita Ghazi Rahman and Nauriin Ahmed | July 16, 2020 00:00:00

The ability to repatriate sale proceeds from investments with ease is an important factor when deciding where and how to invest in any jurisdiction. Equity investment being a major component of foreign direct investment (FDI) inflow in Bangladesh, the Foreign Exchange Investment Department (FEID) of the Bangladesh Bank has been progressively working to simplify the procedure for foreign investors to repatriate the proceeds from the sale of their shares in Bangladesh.

The FEID Circular No.1 issued by Bangladesh Bank on the 18th of June 2020 (hereinafter referred to as the "New Circular"), is another step in the direction of easing the process to repatriate sale proceeds for sale of shares for foreign investors in favour of non-residents, in (i) non-listed public limited companies, and (ii) private limited companies. The New Circular is to be read along with the FEID Circular No.1 dated June 6, 2018 (hereinafter referred to as the "2018 Circular"), which is the previous Bangladesh Bank circular on the procedure for repatriation of share sale proceeds by non-residents.

According to the 2018 Circular, a share sale could be effected only after the fair value for the shares was approved by Bangladesh Bank, based on the valuation report issued by a merchant banker or a chartered accountant listed/licensed by Bangladesh Bank and/or BSEC. The fair value was to be determined using the "appropriate combination of three valuation approaches (viz., Net asset value approach, market value approach and discounted cash flow approach) depending on the nature of the company". This prior approval of Bangladesh Bank was required irrespective of the amount of the share sale proceeds. However, if the value of proceeds to be repatriated was lower than Taka 1 crore or the net asset value (NAV) of the shares was higher than the sale price of the shares, independent valuation report was not required, and Bangladesh Bank would work out the fair value of the shares based on the audited financial statements of the company submitted to it for approval of the repatriation.

The New Circular has now brought the following welcome changes to the process, thus simplifying it further for non-resident investors,

• NAV approach. First, under paragraph 2(a) of the New Circular, if the amount to be repatriated as sale proceeds of shares is determined using the net asset value (NAV) approach on the basis of the latest audited financial statements and tax return, prior approval of Bangladesh Bank will not be required anymore, and the Authorised Dealer (AD) bank can make the remittance, irrespective of the value of such proceeds. However, the New Circular lays down certain conditions for this provision to be applicable, which is that the audited financial statements should not include any revalued assets, intangible assets, expenses/losses shown as an asset, and companies will have to submit an undertaking countersigned by auditors to that effect to the AD bank. If the audited financial statements do not meet these conditions, the procedure of prior approval from Bangladesh Bank, as set out in the 2018 Circular will have to be complied with. The AD bank here has the responsibility to satisfy itself with the authenticity of the disclosures and documents and must also ensure that there is no abnormal growth in total assets of the company in any of the last three years, and particularly in the last year.

• 1 crore threshold. Second, according to paragraph 2(b) of the New Circular, irrespective of the valuation method (that is NAV approach, market value approach or discounted cash flow approach) prior permission from Bangladesh Bank and valuation report from independent valuer is no longer required to repatriate sale proceeds of shares up to Taka 1 crore equivalent of foreign currency and AD banks can affect such remittances.

• 10 crore threshold. Third, according to paragraph 2(c) of the New Circular, remittances of sale proceeds of shares above Taka 1 crore up to Taka 10 crore (except remittances of sale proceeds the valuation of which is based on net asset value approach not including any revalued assets, intangible assets, expenses/losses shown as an asset) can be remitted by AD banks upon determining fair value in the manner prescribed by the 2018 Circular. A valuation, therefore, is required in this case, and the AD bank is required to complete a post-facto reporting to the central bank within 30 days of remittance. However, in order to curb abuse of this provision by non-residents, this is a "one-time" facility for a particular deal and investor. Any subsequent remittance will require prior approval of Bangladesh Bank upon following the requirement of the 2018 Circular.

• Above 10 crores. Lastly, for remittances of sale proceeds of shares above Taka 10 crore, the fair value of which has been determined by using market value approach and/or discounted cash flow approach, or for remittances of sale proceeds of shares of any amount using the NAV approach but including any revalued assets, intangible assets, expenses/ losses shown as an asset in the audited financial statements, the procedure as laid down in the 2018 Circular and prior approval of the Bangladesh Bank shall be required in order to effectuate such remittances.

With the implementation of the New Circular, a lot of the responsibility of ensuring that remittance value against sale proceeds of shares is properly calculated has been shifted on to the AD banks from Bangladesh Bank. Even though this makes the entire process much simpler and faster for non-resident investors, it does increase the responsibility of AD banks to ensure due diligence of all transactions before effecting any remittance. For this reason, AD banks have been assigned a number of duties in order to ensure that due diligence is properly done of KYC, AML/CFT standards, filings and ensure compliance with relevant provisions of various foreign exchange and tax laws. In order to perform its required due diligence, AD banks can ask for additional documents to reasonably satisfy themselves of the soundness of the transaction and also have the right to refuse to undertake the transaction and report the matter to the Bangladesh Bank. Now, it remains to be seen whether the processing time for such repatriation actually speeds up now that AD banks are the front-runners in managing the process.

Anita Ghazi Rahman and Nauriin Ahmed are lawyers at The Legal Circle. anita@legalcirclebd.com and nauriin@legalcirclebd.com

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