How money moves in capital account transactions
In the past, a controlled exchange rate regime prevailed for all external transactions. in light of the Foreign Exchange Regulation Act 1947 (FER).
Restrictions on current account transactions continued until the early 1990s.
With the development of the country’s economic reform philosophy in the early 1990s, a major shift in external sector reform took place in Bangladesh.
The change led to Bangladesh accepting Article VIII of the International Monetary Fund Articles of Incorporation in the early 1990s and adopted current account convertibility with relaxation in the FER Act of 1947.
During a decade of easing in current transactions, the taka exchange rate was declared floating with market-based flexibility in the first decade of the current century.
Some safeguards have, however, been built into the regulatory framework to protect capital outflows by residents in the name of current transactions.
These are – the requirement for repatriation and surrender of export proceeds, with provision of an Exporter Retention Quota (ERQ) for their use in good faith in the present nature; proof of arrival of goods in Bangladesh against import payment; current account transactions beyond the authorization are subject to good faith checks by the central bank; Bank reporting requirements for all foreign exchange transactions for post-monitoring.
Capital account transactions are partially open.
No restrictions are imposed on direct foreign investment, with the exception of a few reserved sectors such as arms and ammunition and other defense equipment and machinery, forest plantations and mechanized extraction within the limits of classified forests, the production nuclear energy, printing and security mining.
Foreign portfolio investments are open to non-resident investors.
Investment in the form of debt capital is subject to the prior approval of relevant authorities such as the Bangladesh Investment Development Authority and the central bank.
Investments abroad are however subject to the approval of the competent authority since the taka is not convertible on capital transactions.
Recently, the government formulated a rule on the “Capital Account Transactions (Overseas Equity Investment) Rules, 2022”.
The rule allows exporters to have sufficient balances in currency accounts known as Exporter Retention Quota (ERQ) accounts.
The investment proposal outside Bangladesh should not exceed 20% of the applicant’s average annual export earnings over the previous five years or 25% of net worth as per their latest audited balance sheet, whichever is lower, subject to the availability of funds in the applicant’s ERQ holding accounts.
For the approval of overseas investments, there will be a high-level committee.
However, the exchange regulations in force allow resident companies to open offices abroad, with annual payment facilities of 30,000 dollars.
In this case, exporters have additional advantages since they can use the foreign currency funds from their ERQ accounts for maintenance offices abroad.
With respect to foreign investment, permission from the central bank is not required for the disbursement of proceeds from the sale of shares of listed companies in Bangladesh.
However, the repatriation of proceeds from the sale of shares of unlisted companies and limited liability companies from non-residents to residents is subject to compliance with the procedures established by the central bank which accepts the fair value of the shares for determined delivery by calculating the weighted average of valuation approaches such as net asset value approach, market value approach and discounted cash flow approach; or on one of the appropriate steps depending on the nature of the business, having a justified reason.
Repatriation of profits
The central bank has also simplified the process of repatriating divestment proceeds.
Currently, no authorization is required for the remittance of proceeds from the sale of shares, regardless of the amount, provided that the fair value is determined by the net asset value approach based on the latest statements audited financial statements and that the financial statements do not contain any revalued assets.
Permission is not required to repatriate proceeds of stock sales up to Tk 10 lakh without valuation reports.
Sales proceeds in excess of Tk 1 crore, up to Tk 10 crore are transferable abroad on the basis of fair value determined on the basis of appropriate valuation methods.
Investment by external sources in the form of term loans is subject to approval formalities.
However, loan repayments, including interest, are repayable without approval.
The FER law defines the capital account as an operation to create, modify, transfer or liquidate a fixed asset, including, but not limited to, securities issued on the capital and money markets, instruments negotiable debt, non-securitized debt, shares in mutual funds or collective investment. investment securities, commercial credits and loans, financial credits, sureties, guarantees, deposit account transactions, life insurance, personal capital movements, real estate, foreign direct investments, portfolio and institutional investments.
Portfolio investing is basically buying equity securities in the secondary markets.
As mentioned earlier, the Bangladesh wallet market is open to foreign investors, including non-resident individuals. Similarly, individuals in Bangladesh can make portfolio investments abroad if officially permitted.
Without travel, individuals can use foreign currencies for online purchases without travel rights.
Similarly, portfolio investments may be authorized within the annual travel quota.
This can be a productive way to use travel rights, instead of purchasing virtual content.
The authorities should certainly think about it.
Residents exporting goods are required to repatriate payments.
The same is true for service exporters.
Despite this, there is no foolproof tool to secure service payments if they are not repatriated voluntarily.
Service exports are delivered virtually, no regulatory registration is required in the manner necessary for the export of physical goods.
Thus, repatriation depends on the attitude of service exporters towards the economy.
No tool works for the application to do the check-in.
In accordance with article 19 of the law, citizens may be invited, by means of a notification, to return their assets in foreign currencies, foreign securities; and any immovable property or industrial or commercial enterprise or company outside Bangladesh owned, owned, established or controlled by it or in which it has any right, title or interest.
Under this provision, exports of services may be permitted for investment purposes abroad without repatriation, but subject to the information required in the notification if announced.
Parallel exchange market
There are all the possibilities to prevail in the parallel foreign exchange markets in the controlled regimes.
The market works because of the demand for capital account transactions.
Wage rebates and invisible service revenues become targets for shadow operators. It is not possible to eradicate operations, but it can be kept within a controlled limit.
This is possible if capital account transactions are permitted within the regulatory framework.
The new rule is expected to facilitate foreign investment by exporters.
In the same way as for the opening of offices abroad, a threshold limit on the value of the net assets of a company or an absolute figure, whichever is lower, may be authorized for the establishment subsidiaries abroad automatically.
These subsidiaries will function as export promotion or material supply stations.
In addition, individuals may be permitted to make portfolio investments abroad under their travel rights.
Last but not least, service exporters may be permitted to invest abroad as part of the declaration under Article 19 of the Act, as mentioned above.
The authorities should take an interest in it and be aware of the prospects and the constraints.
Whatever the outcome, outward capital movements must be facilitated in order to bring transparency to cross-border transactions.
This will create opportunities to generate income from external sources in the form of dividends, profits, technical fees, management fees, etc., as an alternative window.
Do not miss the train in the name of “wait and see”.
The author works in the development sector and can be reached on [email protected]