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FDI incentives and regulations

Regulation:

Bangladesh is a signatory to the

Multilateral Investment Guarantee Agency (MIGA)

The Overseas Private Investment Corporation (OPIC).

This provides a guarantee to foreign investors against loss

caused by non-commercial risks

The risks of currency transfer

War and civil disturbances.

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The foreign Private Investment

(Promotion and Protection) Act 1980 Legal protection to FDI in the country againstnationalisation and expropriation and guaranteesrepatriation of capital and dividend.

The various types of insurance facilities

offered by nationalised and private companiesseem to provide adequate facilities for coverageof operational risks.

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The Foreign Private Investment (Promotion andThe Foreign Private Investment (Promotion and

Protection) Act of 1980Protection) Act of 1980

The Bangladesh Export Processing ZonesThe Bangladesh Export Processing Zones

Authority Act of 1980Authority Act of 1980

The Investment Board Act of 1989The Investment Board Act of 1989

The Companies Act 1994The Companies Act 1994

The Bangladesh Private Export Processing ZonesThe Bangladesh Private Export Processing Zones

Authority Act of 1996Authority Act of 1996

The Industrial Policy 2005The Industrial Policy 2005

The Import Policy Order 2003The Import Policy Order 2003--20062006

Bangladesh Export Policy 2003Bangladesh Export Policy 2003--20062006

Private Sector Infrastructure Guideline 2004Private Sector Infrastructure Guideline 2004

Major laws related to private investmentMajor laws related to private investment

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Procedures

The standardised set of procedures required to be followed forFDI in a new venture in Bangladesh starts with

meeting of the foreign investor with BOI member tocommunicate the investment proposal and

submission of an application for registration.

The BOI issues the registration letter after scrutiny andcollection of clearance from the Department of Environment.

The company is then asked to submit a Memo and Articles ofAssociation for incorporation with the securities and exchangecommission and registration with Registrar of the Joint StockCompanies and also with the Chief Inspector of Factories andEstablishments.

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Upon completion of registration formalities, thecompany can purchase and acquire land, constructfactory and office premises,

open letter of credit in any commercial bank forimport of machinery and equipment and release ofconsignment at customs point.

This apparently easy looking process however, is

often difficult to put into practice. Foreign investorsoften find problems in infrastructure, law and order,and enforcement of contracts.

Procedures Cont.

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Incentives

The industrial policy of the government provides extensive incentives andfacilities to attract FDI in Bangladesh. These include tax holidays,concession in import duty on machinery, repatriation of profits dividends,invested capital and capital gain, and salaries of foreign personnel andexemption of tax on these incomes, exemption of export oriented industries

from paying local taxes, up to 90% financing of theL/

C value of exportproducts. The government has liberalised the trade regime and significantlyreduced non-tariff restrictions. Foreign investors in Bangladesh have accessto domestic capital markets for working capital in the form of loans fromcommercial banks and development financial institutions. They also haveaccess to the services of the country's stock exchanges. Export-orientedindustries of the thrust sector (toys, luggage and fashion articles, leather

goods, diamond cutting and polishing, stationery goods, silk cloth, giftitems, cut and artificial flowers and orchid, vegetable processing, andengineering consultancy services) are provided cash incentives, venturecapital, and other facilities.

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The establishment of export processing zones (EPZ) proved tobe an effective step in attracting FDI in Bangladesh andgovernment permission to allow creation of private EPZs inthe country has been a welcome decision.

The cultural environment in Bangladesh has a number ofelements that can be identified as favourable for FDI. The

population has a high degree of ethnic and communalharmony. Conservatism on religious grounds is not extremeand foreigners are exempted from restrictions on this count.

Major political parties of the country have almost identicaleconomic programmes. All of these favour liberalisation,which will enable the country to fit in the globalisation

process.

Incentives Cont.

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Existing policies for FDIExisting policies for FDI Tax holiday from 5Tax holiday from 5--10 years depending on10 years depending on

location of industrieslocation of industries

15 year's tax holiday for private power generation15 year's tax holiday for private power generation

companiescompanies Facilities for repatriation of invested capital, profitFacilities for repatriation of invested capital, profit

and dividendand dividend

Exemption of tax on interest on foreign loanExemption of tax on interest on foreign loan

Tax exemption on royalties, technical knowTax exemption on royalties, technical know--howhowand technical assistance feesand technical assistance fees

Avoidance of double taxation on the basis ofAvoidance of double taxation on the basis of

bilateral agreementbilateral agreement

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Six months multiple entry visa for the investorsSix months multiple entry visa for the investorsTaka, the nation's currency, is convertible forTaka, the nation's currency, is convertible for

international payments in the current accountinternational payments in the current account

ReRe--investment ofinvestment of repatriablerepatriable dividend treated asdividend treated as

new investmentnew investment

Working capital loan, as well as term loan, fromWorking capital loan, as well as term loan, from

local commercial banks allowed to the industries setlocal commercial banks allowed to the industries set

up with foreign capitalup with foreign capitalCitizenship by investing a minimum of us$Citizenship by investing a minimum of us$

5,00,000 or by transferring us$ 10,00,000 to any5,00,000 or by transferring us$ 10,00,000 to any

recognized financial institution (nonrecognized financial institution (non-- repatriablerepatriable).).

Existing policies for FDIExisting policies for FDI

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Bangladesh offers conducive investment climate compared toBangladesh offers conducive investment climate compared to

the other South Asian economies.the other South Asian economies.

Bangladesh is a largely homogenous society with no major internalBangladesh is a largely homogenous society with no major internalor external tensions and a population with great resilience in the faceor external tensions and a population with great resilience in the face

of adversity (e.g. natural calamities).of adversity (e.g. natural calamities).

Bangladesh is a liberal democratic country. The people irrespectiveBangladesh is a liberal democratic country. The people irrespective

of race and religion have been living in harmony for years.of race and religion have been living in harmony for years.

It enjoys broad nonIt enjoys broad non--partisan political support for marketpartisan political support for market--orientedoriented

reform and offers the most investorreform and offers the most investor--friendly regulatory regime infriendly regulatory regime in

South Asia.South Asia.

Bangladesh owns a trainable, enthusiastic, hardworking and lowBangladesh owns a trainable, enthusiastic, hardworking and low--costcost

(even(evenby regional standards) labor force suitable for anyby regional standards) labor force suitable for any laborlabor--intensive industry.intensive industry.

FAVOURABLE INVESTMENTFAVOURABLE INVESTMENT

CLIMATE IN BANGLADESHCLIMATE IN BANGLADESH

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Geographical location of the country is ideal for global trades withGeographical location of the country is ideal for global trades with

very convenient access to international sea and air routes. Bangladeshvery convenient access to international sea and air routes. Bangladesh

is the bridge between ASEAN and SAARC nations.is the bridge between ASEAN and SAARC nations.

Bangladesh is endowed with abundant supply of natural gas, coal,Bangladesh is endowed with abundant supply of natural gas, coal,water and very fertile soil.water and very fertile soil.

AlthoughAlthough BanglaBangla is the official language, English is widely spoken asis the official language, English is widely spoken as

second language.second language.

As a result of low per capita GNI of only US$ 482, present domesticAs a result of low per capita GNI of only US$ 482, present domestic

consumption is not significant. However, it may be considered thatconsumption is not significant. However, it may be considered thatthere exists a middle class with significant purchasing power. Asthere exists a middle class with significant purchasing power. As

economic growth picks up, the purchasing power will also groweconomic growth picks up, the purchasing power will also grow

substantially. And in a country of more than 138.8 million people,substantially. And in a country of more than 138.8 million people,

even a small middle class may constitute a significant market.even a small middle class may constitute a significant market.

FAVOURABLE INVESTMENTFAVOURABLE INVESTMENT

CLIMATE IN BANGLADESHCLIMATE IN BANGLADESH

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All Bangladeshi products other than armamentsAll Bangladeshi products other than armaments

enjoy complete duty and quota free access to EU,enjoy complete duty and quota free access to EU,

Japan, Canada, Australia, Norway and most of theJapan, Canada, Australia, Norway and most of thedeveloped countries. However, for apparel export todeveloped countries. However, for apparel export to

USA, Bangladesh had a quota regime which endedUSA, Bangladesh had a quota regime which ended

on 1st January 2005. Despite quota phase out,on 1st January 2005. Despite quota phase out,

Bangladeshi apparel has successfully taken up aBangladeshi apparel has successfully taken up abetter position in US market and experiencingbetter position in US market and experiencing

substantial growth in an even competitive market.substantial growth in an even competitive market.

FAVOURABLE INVESTMENTFAVOURABLE INVESTMENT

CLIMATE IN BANGLADESHCLIMATE IN BANGLADESH

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FINDINGS & CONCLUSIONFINDINGS & CONCLUSION Develop a set of priorities in guiding FDI decisions.Develop a set of priorities in guiding FDI decisions. Promote longPromote long--term sustainable economic growthterm sustainable economic growth

through labourthrough labour--intensive economic activities, whichintensive economic activities, whichis the primary goal of any investment.is the primary goal of any investment.

Issues of advanced technology and its diffusion,Issues of advanced technology and its diffusion,strengthening of the countrys comparative advantagestrengthening of the countrys comparative advantageand hence export growth, help develop the domesticand hence export growth, help develop the domesticcapital market are among the elements at the nextcapital market are among the elements at the nextlevel of focus.level of focus.

Recently, Bangladesh Bank has put directives toRecently, Bangladesh Bank has put directives toforeign owned/controlled firms/companies seekingforeign owned/controlled firms/companies seekingdomestic currency term loans regarding thedomestic currency term loans regarding thecomposition of their investment (FE Circular no.07,composition of their investment (FE Circular no.07,dated 14 August, 2006).dated 14 August, 2006).

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FINDINGS & CONCLUSIONFINDINGS & CONCLUSION

The FDI can undoubtedly play an important role in theThe FDI can undoubtedly play an important role in theeconomic development of Bangladesh in terms of capitaleconomic development of Bangladesh in terms of capitalformation, output growth, technological progress, exports andformation, output growth, technological progress, exports andemployment. The relatively small share of FDI in GDP,employment. The relatively small share of FDI in GDP,however, indicates that the potentials are far from beinghowever, indicates that the potentials are far from beingrealized in the Bangladesh experience thus far. Nevertheless,realized in the Bangladesh experience thus far. Nevertheless,concerns remain about the possible negative effects of FDI,concerns remain about the possible negative effects of FDI,including the question of market power, technologicalincluding the question of market power, technologicaldependence, capital flight and profit outflow. The limiteddependence, capital flight and profit outflow. The limitedevidence gathered above tends to support some of theseevidence gathered above tends to support some of these

apprehensions. On a positive note, service sector growthapprehensions. On a positive note, service sector growthappears well correlated with FDI flow to this sector. Further,appears well correlated with FDI flow to this sector. Further,this has a linkage effect to the rest of the economy.this has a linkage effect to the rest of the economy.