Investing in Bangladesh : Strategies for Foreign Companies

Bangladesh is currently emerging as a robust economy, showcasing steady GDP growth and maintaining a stable BB- credit rating, a testament to its economic resilience and attractiveness to investors. This assessment is echoed by reputable agencies such as S&P and Fitch in recent years. The nation's appeal is further underscored by its substantial labour force and a burgeoning consumer market, making it an enticing investment destination for both manufacturing and services industries. Notably, Japanese investors have taken a leading role in capitalizing on the opportunities presented by the country's economic landscape.

⦿ AREAS OF INVESTMENT

In the realm of foreign investment, Bangladesh adopts a generally open stance, with private investment being permissible across most sectors except arms, defence equipment, forest plantation, nuclear energy, and security printing. Additionally, specific sectors, such as banking, energy, mining, and telecoms, are subject to controls and licensing requirements. Further nuances arise in sectors where there are limitations on maximum beneficial shareholding, and some industries outright prohibit 100% foreign investment, exemplified by freight forwarding and e-commerce.

⦿ INVESTMENT VEHICLES

Diverse business vehicles are available to prospective investors. Foreign companies can establish branches for non-industrial purposes, particularly prevalent in the services sector, encompassing activities like sales, marketing, customer services, and construction. However, these branches must operate based on remittances from parent companies, requiring an initial remittance of USD 50,000. Approval from the Bangladesh Investment Development Authority, followed by registration with the Office of the Registrar of Joint Stock Companies and Firms (RJSCF), is mandatory and typically takes one to two months. Furthermore, a country representative is a requisite, and quarterly accounts must be filed with various authorities, with an annual report submitted to the RJSCF.

Companies, serving as a prevalent form of business vehicle, are suitable for manufacturing, physical infrastructure, and businesses with a local revenue stream. The incorporation process involves a minimum of two persons for a private limited company and seven individuals for a public limited company, with the latter requiring a minimum of two and three directors, respectively. The process, from initial name clearance to finalization, may take up to four weeks. The board of directors must conduct quarterly meetings, and annual general meetings are mandatory, with subsequent filings of annual returns and audited accounts with the RJSCF. Notably, multiple classes of shares, as well as convertible or redeemable preferred shares, are permitted.

⦿ GREENFIELD & BROWNFIELD STRATEGIES

Delving into investment strategies, foreign investments are typically made in cash equity or capital machinery. For fresh investments, shareholder agreements play a pivotal role, outlining obligations, rights, governance standards, and dispute resolution methods. Strategies bifurcate into greenfield and brownfield approaches. Greenfield strategies emphasize fresh investments, with shareholder agreements as a cornerstone. Conversely, brownfield strategies involve mergers and acquisitions of shares or asset-based acquisitions.

⦿ PUBLIC-PRIVATE PARTNERSHIPS (PPPs)

Public-private partnerships (PPPs) are integral to Bangladesh's economic landscape, particularly in infrastructure development. Concession contracts, tendered by the government, cover various sectors, including physical infrastructure, large mills or plants, and economic zones. PPP concessions are awarded under the PPP Act of 2015 through public tender, with payment methods based on tolls or annuity, incorporating viability gap financing when deemed appropriate. Unsolicited proposals undergo similar screening processes, with feasibility analysis and competitiveness validation.

In the power and energy sector, project concessions, such as independent power plants (IPPs) and LNG terminals, are generally awarded under special policies like the Private Sector Power Generation Policy. The government also has the flexibility to exercise direct procurement, limited tendering, or accept unsolicited proposals under the Power and Energy Fast Supply Enhancement (Special Provision) Act. The renewable energy sector, in particular, stands out as a lucrative avenue for investment.

In the development of economic zones, a license from the Bangladesh Economic Zones Authority is requisite under the Bangladesh Private Economic Zones Policy of 2015. However, economic zone development proposed on a PPP basis follows the PPP framework, as outlined in the Bangladesh Economic Zones (Appointment of Developers) Rules of 2015, incorporating additional requirements such as developer qualifications.

⦿ FINANCING OPTIONS FOR PROJECTS IN BANGLADESH:

Foreign investment faces limited liquidity in the local market for large-scale projects, necessitating dependence on multilateral development and offshore commercial banks. Various sources of financing include shareholders' loans, preferential shares, bonds or debentures, local and foreign term borrowing, and government assistance through viability gap financing, details of which are as follows:

1.    Shareholders' Loan:

o   Purpose: Working capital for industrial and services companies.

o   Duration: Maximum of three years.

o   Interest Rate: Up to 3%.

2.    Preferential Shares:

o   Nature: Quasi debt-equity securities.

o   Issued to: Existing shareholders, new shareholders, and private equity firms.

o   Syndication: In some cases, a syndicate of local banks and financial institutions may also subscribe to these securities.

3.    Bonds or Debentures:

o   Type: Debt securities.

o   Offered: Private placement or public listing.

o   Subscribed by: Local or foreign institutional investors, local banks, and financial institutions.

4.    Local Term Borrowing:

o   Debt-to-Equity Ratio: Up to 50:50 in general.

o   Foreign-Owned Companies: Foreign-owned companies can avail such loans only after three years of operation.

5.    Foreign Term Borrowing:

o   Debt-to-Equity Ratio: Up to 70:30.

o   Projects: Limited to industrial and physical infrastructure projects.

o   Backing: Sometimes backed by export credit agencies.

o   Basis: Recourse or limited recourse basis.

6.    Government Assistance:

o   Available In:

§  Viability gap financing.

§  Linked components in some Public-Private Partnership (PPP) projects.

Note: While local financial institutions may provide bridging loans for large projects up to financial close, international sources, including multilateral development institutions and offshore commercial banks, play a significant role in financing substantial infrastructure and industrial projects in Bangladesh. Understanding the specific terms, conditions, and eligibility criteria associated with each financing option is crucial for project developers and investors.

⦿ TAX HOLIDAYS & EXEMPTIONS IN BANGLADESH:

To incentivize investment, Bangladesh offers tax holidays for industrial undertakings in thrust sectors and physical infrastructure established between July 1, 2019, and June 30, 2024. The duration and rates of tax holidays vary based on factors such as the sector and the development status of the area.

Here's a detailed breakdown of the tax benefits provided:

These measures are designed to encourage investment, foster economic development, and facilitate the growth of key sectors in Bangladesh.

⦿ TAXATION IN BANGLADESH: AN OVERVIEW

Note: The Double Taxation Avoidance Agreement between Bangladesh and Japan, established in 1991, provides exemptions or preferential tax rates for instances such as interest, capital gains, dividends, and royalties. This agreement further fosters a conducive environment for bilateral economic collaboration.