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Legal Aspects of Investment in Bangladesh Capital Market




by:
Nasirud Doulah
ABM Doulah Doulah - Dhaka Office

 
September 6, 2013

Foreign Investment Limits and procedures for Private Equity / Pre IPO / Listed investments

1.  Please provide details of the disclosures and reports which shareholders are required to make in the local market. Please include the following information:

For holding Shares in Private Limited Companies disclosure is required only to the Office of the Registrar of Joint Stock Companies & Firms and Income Tax Authority.  

For holding Shares in Public Limited Companies no explicit disclosure to Security Exchange Commission is requires as the disclosure is obvious. However, disclosure to Income Tax Authority would be required.

“Every person who is directly or indirectly the beneficial owner of more than ten percent of any class of such securities shall submit to the Commission such returns pertaining to the beneficial ownership of such securities”  

2. Is there any requirement on the beneficial owner to further notify the Commission after this initial notification of 10% ownership? For example, if the beneficial owner continued to purchase shares up to 20% or 30%, or if the beneficial owner ceased to own 10% or more?

No, there is no further requirements to report after the initial notification, also there is no cease imposed after 10% share accumulation.

3.  What is the penalty for failure to report?

No penalty has been specified by laws. However, in practical situations SEC has order to halt those accounts until the issue is resolved.

4.   Are there any general ownership thresholds, so that any person holding more than a particular amount of shares must report this?

No, no such restriction has yet been imposed by the Bangladesh Government. However Law says

“Private placement or allotment of securities may be made to Foreign Investors (FIs) subject to a ceiling of one-third of the issues share capital sanctioned for the public in the Initial Public Offering (IPO)”

For private equities specifically only aviation sector is subject to a limit of maximum 50% shareholding by FIs

(a)        Who must such reports be made to - the company whose shares they hold, a local stock exchange, or local regulator, or any other entity?

I. Security Exchange Commission

II. Stock exchanges listing the shares of the concerned company

III. Concerned Company

(b)        Please specify all amounts of shares which require to be reported, and whether reports are required for both purchase and sale of such shares.

Reporting is required only in case of accumulation of 10% or more shares by one individual .

(c)        For reporting purposes, is a shareholder treated as holding or having an interest in shares (or other interests in shares) held by its subsidiaries, parents or other entities in the same group?

No, the law does not refers to so. It says only of a single person/company holding more than 10% shares.

5.  Are there any ownership thresholds for specific types of company or areas of industry, for example aircraft or electricity companies?   Please provide the same information as requested for general ownership thresholds.

There are no ownership thresholds that require reporting for specific types of company or areas of industry. However for Aviation Service industry Foreign Investments cannot be in excess of 50% of the capital. Also no reporting formalities has been imposed in such cases.

6.  What are the requirements for the form and timing for these disclosures or reports? Please detail.

FORM- 117 : Instrument of Transfer of Shares - Within 15 days of the executed share transfer

FORM- IV : Increase in Capital - Within 15 days of issuing new shares

Annual Income Tax Form - Within the next due date of income Tax for running fiscal year

7.  Who is responsible for reporting to the authorities, the owner of the shares, the company's registrar, or some other entity?

“Every person who is directly or indirectly the beneficial owner of more than ten percent of any class of such securities shall submit to the Commission such returns pertaining to the beneficial ownership of such securities”  

8.  Where shares are held by a custodian for a client, is the custodian required to report the shareholding of the client, or is the client required to do so?

The only reporting that is required to be reported is indicated as follows.

“Every person who is directly or indirectly the beneficial owner of more than ten percent of any class of such securities shall submit to the Commission such returns pertaining to the beneficial ownership of such securities”  

Ideally the client should do such reporting but the custodian may also do the same if so empowered by the client.

9. Is the report filed in the name of the client or in our name as custodian?

This is a quite complex issue. If you act as an custodian under the auspicious of Bangladesh law, then the report has to be filed in the name of each of your clients. If you have a cross-boder custodian agreement with another local custodian and the custodian is maintaining a single account in your name, then the report has to be filed in your name.

B. Repatriation & Currency

1.      Are there any restrictions on the conversion of the local currency into other currencies, either generally or for FIs? If so, please explain in detail :

Exchange Control is regulated by Foreign Exchange Regulation Act, 1947 and covers payments and dealings in foreign exchange and securities and import and export of currency and bullion. No person except an authorized dealer may deal in foreign exchange without previous general or special permission of Bangladesh Bank. This includes buying, borrowing, selling lending, or exchanging any foreign exchange with any person who is not an authorized dealer. No exchange is permitted except at rates authorized by Bangladesh Bank. Remittance of money must be dealt with proper banking channel. No person should operate any banking account in other countries to receive remittance relating to any service in Bangladesh. Restrictions exist on import and export of currency, gold, or silver jewellery or precious stones without prior approval.

(a)        The nature of the foreign exchange restrictions, for example is conversion of currency only permitted in connection with securities transactions?

Conversion of foreign currency to local currency is permitted while investing in Bangladesh. Conversion from local to foreign currency is permitted for repatriation but through proper Banking Channel and against proof of exact dividend against the foreign investments made earlier.

(b)        The nature of permitted foreign exchange transactions, for example are such transactions permitted where settling on the day agreed, or settling at a future date, and are swaps permitted?

The nature of the foreign exchange transaction would depend on the mechanism of transaction. Opening an account with a Custodian Bank for investment in securities would result in a quick repatriation. Merchant Bank would require time for such transfers. Such transactions permitted both where settling on the day and settling at a future date agreed depending on the scenario. Swaps are not permitted.

(c)        Are there liquidity issues with any of these types of transactions?

Yes there would be liquidity issues with these types of transaction as it is required to convert the investment to local currency first and then re-conversion while re-transferring though there are be exceptions. In case of IPOs the rate would be imprinted on the share application from. 

(d)        The repatriation restrictions/requirements/process, for example are specific approvals or tax sign-offs required, are there any relevant lock-up periods.

The repatriation process is quite straight forward as follows.

A.      An application to the Bank is to be submitted against returns shown against the foreign investments and Tax clearance.

B.     The Bank would then co-ordinate with Bangladesh Bank, the central Bank of Bangladesh

C.     Once, Bangladesh Bank approves the transactions, the Bank transfers the money.

Alternatively

A.     The FI may invest through its custodians by way of opening a FC / NITA Account

B.     The Balance of the NITA account that is derived from dividends and trading after tax is free for repatriation.

(e)        Are there pre-funding requirements/restrictions, for example a requirement to provide funds before trade execution or settlement?

In all cases the only one pre-funding requirement is the remittance of the foreign currency to local bank and issuance of an “Encashment Certificate” from the bank.

C. Pre-Investment Requirements / Account Opening

1.      Are there any advance approvals required to be obtained by FIs before buying shares in the local market or opening a custody account with a local custodian?

No, advance approvals are not required to be obtained by FIs before buying shares in the local market or opening a custody account with a local custodian.

2.      Are residents or FIs required to have more than one share account with the local custodian because of any requirement of law or local market regulations? For example, are separate share accounts required if the custodian's client is:

No such stipulations have been imposed by Bangladesh Laws.

(a)        trading in different types of shares?

No such stipulations has been imposed by Bangladesh Laws.

(b)        holding the shares on behalf of a number of different clients, or different types of client?

No such stipulations have been imposed by Bangladesh Laws. However, The Sub-custodian as a Portfolio Manager has to maintain different Accounts in its different clients’ name as Article 26 of Securities & Exchange Commission Regulations dated April 24, 1996 says:

“The Portfolio Manger would maintain each of its client’s account separately and appropriately show all of the Client’s income including the Income Tax and other expenses deduction associated with the account.”

3.      If separate share accounts are required as set out in 2, are there any restrictions on the name in which the accounts should be opened (for example, should it be the name of the custodian's client, or the name of the person for whom the custodian's client holds the shares)?

Separate accounts may be bypassed on the light of the following provision in the Securities & Exchange Commission Regulations dated April 24, 1996 which permits maintenance of such omnibus account.

“If it is stated in the agreement that the Portfolio Manager can keep the securities of the client in his account, then he can do so on due notification to the Client.”

If the custodian’s client holds such an agreement with its clients, then the custodian can open only one account in the name of the custodian’s client.

4.      What are the requirements for NRBs & Foreign Investors to invest in Bangladesh?

A Foreign Currency (FC) Account is needed for inward and outward remittance. A Non-resident Investor’s Taka Account (NITA) is required for converting foreign currency into Taka. All Capital Market investors are required to conduct trading through a Stock Broking Account maintained with any Stock Broker/Member of the respective Stock Exchange. In order to trade dematerialized shares listed with the Stock Exchanges, investors must have a Beneficiary Owners (BO) Account with CDBL. NRB & Foreign Investors may choose to appoint a Custodian to ensure trade execution and safe custody of shares.

According to Chapter 14.9 (Sec-1 of Vol-1) of the Bangladesh Bank’s Foreign Exchange Transaction Regulations, 1947 Non-resident persons/institutions including NRBs may buy securities in Bangladesh against freely convertible foreign currency remitted from abroad through the banking channel. Non-resident investors shall open a NITA with any Authorized Dealer (AD) in Bangladesh (i.e. an authorized commercial bank/ bank branch). Balances in NITA may freely be used to buy Bangladeshi shares and such balance including dividend and sale proceeds is freely remittable abroad in equivalent foreign exchange. Purchase and sale of shares listed in Bangladesh Stock Exchanges shall be made only through a member /registered broker of the Stock Exchange & purchase of new public issues not yet listed with the stock exchange may be made directly from the issuing company. No local funds except dividend/interest earning on securities, share sale proceeds & freely convertible foreign currency remitted from abroad can be credited to NITA. No loan facilities shall be allowed in NITA.

5.      What are the requirements for investment through a custodian in Bangladesh?

Open a FC account and NITA with any AD of the Bangladesh Bank. Open a Custodian Account with any of the SEC registered Securities Custodian. Your Custodian will open a Stock Broking Account with any member of the Stock Exchange. Custodian will act as an Operator of your Stock Broking Account. The Custodian will also open a BO Account with CDBL in order to trade dematerialized shares and act as a POA to your BO Account. Remit foreign currency in the local FC Account from abroad with instruction to the Custodian for crediting NITA. The Custodian will arrange payment to the member for crediting Stock Broking Account. Send securities trading instruction to your Custodian through e-mail or fax. Receive securities transaction statement through e-mail or fax from your Custodian. Instruct your Custodian for remitting fund from Bangladesh to you. You can open FC Account, NITA, BO Account & Custodian Account with the same bank and your Stock Broking Account can be opened at the same place provided the bank has Custodian license, Subsidiary Brokerage & Authorized Dealership.

 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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