Often overshadowed in such a powerhouse neighbourhood, this populous nation has scripted an unlikely economic success story, creating lucrative opportunities for pioneering foreign investors. Miao Sha reports
Most would be reaching to bring any iconic endearing image to mind that portrays Bangladesh, a nation more often in the past associated with struggle and hardship. Yet this relatively small nation has experienced phenomenal economic growth in recent years, posting an 8.13% GDP growth rate in the 2019 fiscal year, surpassing India (4.2%) and making it South Asia’s fastest-growing economy.
More surprisingly, this impressive growth was not an aberration, but the result of sustained efforts. Bangladesh’s GDP growth has averaged 6.5% in the past decade, according to official estimates.
The World Bank, in its Bangladesh Development Update report published in April last year, says: “Sound macroeconomic policies – such as keeping the budget deficit below 5% of GDP – and resilient domestic demand have led to growth in the manufacturing and construction industries.”
Bangladesh also offers perhaps the most liberal foreign direct investment (FDI) regime in South Asia, with generally no prior approval requirements for issues of shares and almost no limits on foreign equity participation. The bulk of the country’s exports consist of ready-made clothing, while a strong domestic agricultural sector is another pillar of the economy.
BEHIND THE SUCCESS
“One of the key factors [of Bangladesh’s fast-growing economy] is the political stability,” says Shahwar Nizam, a partner of DFDL Bangladesh, a full-service international law firm in Dhaka. “We have had the same government in power for more than a decade, which has given much confidence to foreign and domestic investors.” Sheikh Hasina, the longest-serving prime minister in Bangladeshi history, has held office since January 2009.
ABM Shamsud Doulah, the senior partner at Doulah & Doulah, a full-service law firm established in 1965, also partly attributes Bangladesh’s success to political stability. “Some of the government’s initiatives have yielded results, including forward-looking infrastructure strategy, an energy sufficiency plan, productivity enhancement initiatives for unskilled labour and encouragement for private participation in publicly sponsored projects,” says Doulah.
But although these lawyers point to stable government, other views can differ. Another World Bank report titled “Bangladesh’s Journey to Middle-Income Status: The Role of the Private Sector”, released in April this year, notes that a survey conducted by the Bangladesh Investment Climate Fund of 103 companies (90% of which were local) from February to April 2019 cited access to finance, corruption and political instability, respectively, as the top three challenges they are facing.
On the positive side, an affordable labour market is another of the factors that make Bangladesh an attractive manufacturing hub and investment destination.
Suhan Khan, the managing partner of Accord Chambers in Dhaka, says: “The key drivers of the country’s economy include an abundance of a highly competitive, skilled workforce at a low cost, export-oriented industrialization with the ready-made garments (RMG) sector at the forefront, and a large number of Bangladeshi workers overseas.”
Bangladesh is enjoying the demographic dividend of having a very young population. The Bangladesh Bureau of Statistics hasn’t done a census since 2011, but according to The Daily Star, an English-language newspaper in Bangladesh, 30% of the country’s population in 2014 was between 10 and 24 years old.
“The work done in the last few decades in improving human development indices is resulting in a young and skilled workforce,” says Nizam. “This has also resulted in a huge consumer boom, increasing demand for products and services.”
But Saqeb Mahbub, a partner at litigation and corporate services-focused firm Mahbub & Company, sees problems. “There is downward pressure from African countries who offer cheaper labour,” he says. “This, along with covid-19, will certainly drive down demand for RMG in the European and North American markets.”
Bangladesh has also opted for strategies to minimize gender disparity and encourage women to participate in the economy. The International Labour Organization’s statistics show that the female employment participation rate has grown steadily from 32.8% to 36.2% from 2016 to 2019, and is expected to reach 36.4% in 2020.
Bangladesh’s geography also offers the country a strategic advantage over its peers. “Bangladesh has a balanced sharing of land and sea, meaning the country can take advantage of land transport with India, Nepal, Bhutan and Myanmar,” says Kazi Ershadul Alam, a senior associate at Tanjib Alam & Associates, a litigation specialist firm in Dhaka.
“There is also the geopolitical advantage of being in the middle of two large economic giants, India and China – there has been many spillovers from these two economies,” adds Nizam. China and India have developed government-to-government (GtoG) economic zones with Bangladesh.
Another big earner for the country is the remittances from migrant workers in the Middle East, Europe and the Far East. According to the country’s central bank, Bangladesh Bank, the country had remittances of US$16.4 billion in the 2018-2019 fiscal year, an all-time high.
As a lower-middle-income country, Bangladesh also gets financial aid from multilateral agencies such as the World Bank and the International Labour Organization.
COMPETITIVE INVESTMENT CLIMATE
The country is one of the leading FDI targets in the Asia-Pacific region. According to the International Monetary Fund, the Bangladeshi economy is projected to grow from US$180 billion to US$322 billion by 2021.
“Bangladesh had come a long way from the ’80s and ’90s, when it first sowed the seeds for an investor-friendly climate by enacting investment protection laws,” says Nizam of DFDL.
It actively seeks foreign investment in many sectors, particularly in the agribusiness, garment and textiles, energy, IT, and infrastructure sectors. “The present government has undertaken a multitude of reforms to provide an extraordinary investment climate to foreign investors,” says Khan, of Accord Chambers.
According to Bangladesh Bank, foreign and domestic private entities can establish, own, operate and dispose of interests in most types of business enterprises. Four sectors, however, are reserved for government investment:
- Arms and ammunition, and other defence equipment and machinery;
- Forest plantation and mechanized extraction within reserved forests;
- Production of nuclear energy; and
- Security printing.
Foreign investment is especially sought in the following major industry categories:
- Export-oriented industries;
- Industries in export processing zones (EPZs); and
- High-technology products as import substitutes, or for export.
Bangladesh allows tax holidays and exemptions such as the repatriation of technical know-how and technical assistance fees, repatriation facilities of dividends and capital at exit, and incentives like permanent residence permits on investing US$75,000.
The government provides up to 100% tax exemptions in export EPZs. There are 11 economic zones for business, and two GtoG economic zones, with India and China.
There are several agencies to better facilitate FDI. The Bangladesh Investment Development Authority (BIDA) is the principal authority tasked with promoting, supervising and promoting private investment, while the Bangladesh Export Processing Zone Authority (BEPZA) is the investment supervisory authority in the EPZs.
“A company incorporated in Bangladesh may have 100% foreign shareholders and directors,” says Abu Saeed Ainul Bari, the managing partner at full-service law firm AS & Associates, and a legal adviser for BIDA. “The remittance of sale proceeds of shares and dividends owned by a foreign shareholder is permissible, subject to certain terms and conditions applicable for the shares of non-listed entities,” he says.
The government is also keen to support large infrastructure projects undertaken by international companies and financed by foreign lenders. “With the public and private partnership (PPP) policy framework revamped in 2018, the government has opened up a large avenue of infrastructure and industry development opportunities on PPPs, especially on a GtoG basis,” says Doulah.
Bangladesh is currently 38% urban. “A growing middle-class consumer base is encouraging FDI investment into e-commerce and tech platforms providing logistics, transport and payments solutions,” adds Mahbub, from Mahbub & Company.
Khan, of Accord Chambers, says the local consumer market “is quite big to lure foreign investors owing to its population, increasing demand for gadgets and brand consciousness amongst the younger generation”.
“Ride-sharing platforms Pathao and Shohoz, e-commerce sites Daraz and Chaldal, and payments app bKash have attracted sizeable investment in recent years,” notes Mahbub. Big names such as e-commerce platform Alibaba and technology company Gojek have bought stakes in Bangladeshi homegrown startups.
A series of new laws are under discussion to improve the regulatory regime and investment climate. Bangladesh’s legal system relating to contracts, company law, banking, bankruptcies and other commercial laws has been under development.
“The adoption of international templates for contracts, a pragmatic approach by regulatory bodies, has helped the development of more and more sophisticated and sizable transactions in the already existing common law-based jurisprudence,” says Nizam from DFDL.
The nation’s parliament also passed an amendment to the Companies Act, 1994, on 25 February 2020, which makes specific changes to the company registration process. A critical section was withdrawing a mandatory requirement for companies to have a company stamp in order to get registered.
Al Amin Rahman, the managing partner at FM Associates, a firm based in Dhaka and Chittagong, says: “This shows the current government’s loyalty towards the idea of development and investment.”
The country’s central bank is also in the process of drafting an amendment to the existing Bank Company Act, 1991, to modernize the banking system and its governance in Bangladesh.
Digitalization is also a hot trend, and the government, policymakers and regulators are working on introducing reforms conducive to investment.
Several government regulators have initiated digitalizing their processes, and the government has introduced the One-Stop Service Act, 2018, to assist foreign investors and offer faster services for visas, investment clearance, work permits, and permits for local sales and purchases.
“The government of Bangladesh has also revisited its taxation policy for the mobile telecommunications industry, creating an opportunity for them to reach out to the poor population of rural Bangladesh,” says Bari, of AS & Associates.
The digitalization of land records and the judiciary is expected to be a top priority, especially since covid-19. This will include introducing digital systems in the judiciary, automating administrative systems, trial processes, establish e-courts and increasing IT and efficiency of judges and lawyers.
Despite some exciting regulatory developments, invisible challenges can thwart progress. Bureaucratic delays, corruption, lack of geographical diversification of industrialization, slow judicial processes and inadequate facilities continue to hinder FDI.
The Corruption Perceptions Index offered by Transparency International shows that Bangladesh ranked 146th out of 180 in 2019, while India and China both ranked 80th.
Khan says that the concentration of industrial clusters in a few cities and the lack of diversification in urbanization are also challenges for the country.
“The lack of coherence and coordination among different government and regulatory bodies, their regulations, and lack of automation and sophistication all create difficulties for foreign as well as local businesses,” says Nizam of DFDL. “The local financial industry is also suffering as a result of lax corporate governance and transparency.”
Most businesses revolve around the capital, Dhaka, and the port city of Chittagong, and the majority of the factories and industries have been set up in these vicinities. The remaining parts of the country have fallen behind the pace of industrialization and urbanization.
Another big obstacle towards Bangladesh’s development is an ineffective justice system, says Alam, of Tanjib Alam and Associates. He says the dispute resolution mechanism in Bangladesh has proven to be massively time-consuming, while enforcement of contracts remains a significant challenge since domestic litigation involves costs, delays and complexity. Weak physical and other infrastructure is much more visible. Roads, ports, connectivity and other physical infrastructure are still under development, and it remains a challenge for growth in manufacturing and logistics.
There are currently several mega infrastructure projects in Bangladesh, including the Rampal power plant, a partnership between the Indian and Bangladeshi governments, the Padma multi-purpose bridge, and the Padma Bridge Rail Link project.
While the government is encouraging PPP work, safety concerns remain a big issue for foreign investors. According to a US official report, international brands and the global community continue to press the government to meaningfully address workers’ rights and factory safety problems in Bangladesh.
“The challenges in the past few years have been maintaining adequate safety standards, says Ehsan Siddiq, a barrister-at-law from the Law Counsel, a firm based in Dhaka. “There have been several high-profile accidents in Bangladesh resulting in permanent disability and loss of lives for workers.”
There is a legal agreement between global brands, retailers and trade unions designed to build a safer and healthy working environment. The Accord on Fire and Building Safety in Bangladesh was signed in May 2013, responding to the collapse of the poorly constructed Rana Plaza building in April that year, which led to the death of more than 1,100 garment workers.Bangladeshi lawyers remain positive about the country’s growth and investment environment.
“While the government has strived to improve physical infrastructure, such as the availability of electricity, the legal infrastructure, like dispute resolution mechanisms and minority shareholder protection, have been largely ignored,” says Mahbub. “However, the investment climate is certainly a work in progress. In the meantime, investors are not shying away as the highly populous country is a huge market with great opportunities for growth and profits.”
SNAPSHOT OF BANGLADESH LEGAL MARKET
Bangladesh, being a common law jurisdiction, has a rich jurisprudence, and the influx of both foreign and domestic investment in sectors, like energy, construction development, aviation and real estate, is placing a high demand on law firms.
“The legal industry of Bangladesh has evolved around individual private practitioners, mainly veteran senior counsel, in the past decade. And most prominent law firms were one-person shows,” says Suhan Khan, managing partner at Accord Chambers.
“[But] with a large consumer base, increasing purchase power, upcoming foreign investment and a good number of investment opportunities, the local legal market is expanding fast, and we see a steeper growth opportunity and market expansion in coming days,” says Khan.
High-value and complex M&A activity is thriving in the country’s legal industry, adds Kazi Ershadul Alam, a senior associate of Tanjib Alam & Associates.
“While there are very few experts in this field, it is anticipated that more and more ground-breaking M&A deals will be happening soon,” says Alam. “The legal industry needs to adapt to these changes in the volume of deals, and be prepared to deliver quality services.”
Arbitration and mediation are on the rise. “Lawyers are coming out of their litigation mindset and shifting their focus to arbitration, mediation and other forms of alternative dispute resolution, especially in corporate, transactional and M&A practices,” says Khan.
Saqeb Mahbub, a partner from Mahbub & Company, says that with its expansion the legal industry, which was primarily made up of litigation experts, is becoming more sophisticated. “Arbitrations are emerging, particularly in the construction and real estate sectors, advisory work in M&A, IP, banking, and finance,” he says.
Despite the friendly investment climate for foreign investors, the legal industry has not yet caught up in an era of globalization. International law firms are not allowed to operate in Bangladesh, so they need to reach internal agreements with local firms for co-operation.
Al Amin Rahman, a partner at FM Associates, says there is no specific regulatory requirements or guidelines that are applicable on the operations of international law firms. “In the absence of such guidelines relating to law firms, the guidelines and regulations of the Bangladesh Bar Council that deal with legal professionals suggest that in order to practice in Bangladesh, one has to be a citizen of Bangladesh and duly enrolled as an advocate,” says Rahman.
“There is no concept of a ‘registered foreign lawyer’ in Bangladesh,” he says. “Therefore, foreign individuals or firms cannot operate as partners on the books of the management of any law firm in Bangladesh. However, Bangladesh law firms or lawyers are allowed to use names, trademarks, copyrights or patents upon obtaining the due permission from the foreign law firms or lawyers, but ownership of the Bangladeshi law firm shall belong to a Bangladeshi lawyer only.”
Adds Khan: “Even though a few firms such as ourselves are working in close association with international law firms, formal associations remain a target yet to be achieved.”
There are other aspects of the legal sector that need improvement. Shahwar Nizam, a partner of DFDL Bangladesh, says: “Because of the inherent due process mechanisms built into the laws and procedural codes, the whole court system in Bangladesh is not the fastest.”
Adds ABM Shamsud Doulah, the senior partner at Doulah & Doulah: “Local companies, in particular, still avoid the transaction structuring phase, which tends to result in inefficient structures and frequent disputes.”
Khan says a relatively high reliance on hard copies and traditional forms of manual practice management are critical challenges for the industry. Most of the major firms in Bangladesh are still family run and individual-centric. “Business development, practice management and recruitment are all in the hands of lawyers instead of assigning tasks to the experts,” he says.
While mid-sized and boutique law firms are emerging, some ambitious young professionals are leaving existing firms to start their own with their peers.
“Large companies have bigger in-house legal teams than many law firms,” says Mahbub, adding much work is being diverted from individual lawyers and law firms to these in-house legal teams. “Law firms need to align their services with corporate needs, provide high salaries for lawyers and introduce innovative business development techniques to firms.”
The Bangladesh economy continues to grow at an impressive scale, with a GDP growth rate of 8.1%, surpassing that of its neighbouring countries and making it one of Asia’s most remarkable success stories. The growth is being driven by manufacturing and construction on the supply side, and increasing private consumption backed by strong remittances and rural income growth on the demand side. The rapid growth of electricity generation has energized the economy, while export growth has also accelerated, benefiting from low-cost production facilities, export benefits, numerous investment incentive packages and miscellaneous other geopolitical factors.
While the covid-19 pandemic is expected to cause a decline in the country’s growth rate, Bangladesh has the potential to attract foreign direct investment (FDI) in the region as Japan, Korea, the US, UK and EU countries consider relocating their factories from China.
Chinese investment is also continuing to arrive in Bangladesh under the Belt and Road Initiative (BRI) and ensuing agreements on economic and technical cooperation between the two countries. Accordingly, the influx of FDI into Bangladesh will continue.
A World Bank report has judged Bangladesh to be the most liberal among South Asian FDI regimes, with no prior approval requirements or limits on equity participation, or on the repatriation of profits and incomes. Legislation aimed at promoting and protecting foreign investment provides for non-discriminatory treatment between foreign and local investment, protection of foreign investment from expropriation by the state, and repatriation guarantees of proceeds from the sale of shares and profit.
Foreign investment is allowed in almost all sectors, excluding a few reserved industries. Investment may be undertaken either independently or under joint ventures, either with the local private or public sector. The capital market is also open for portfolio investment.
Wholly owned subsidiaries. Foreign investors can gain full access to the Bangladesh market by establishing wholly owned subsidiaries under the Companies Act, 1994. Such companies may be formed as a private limited or public limited company. Foreign equity ownership may be up to 100% in almost all the sectors, with very few exceptions. However, Bangladesh is yet to allow a “one-person company”. The shareholders or their representatives, as well as directors, including nominee directors, may all be foreign nationals.
The incorporation process is handled by the Registrar of Joint Stock Companies & Firms and begins with obtaining name clearance. The parent/investing company is then required to transfer the paid-up capital to a temporary bank account. There is no minimum investment requirement, except that companies willing to employ expatriates requiring work permits are required to invest a minimum of US$50,000.
On receipt of the investment fund, the concerned bank issues an encashment certificate, following which the company set-up process is completed. No prior approval from regulators is required for foreign investors to incorporate subsidiary companies in Bangladesh. There are some intimation formalities with the regulators, such as the Bangladesh Investment Development Authority (BIDA), Bangladesh Economic Zones Authority, etc., following the company formation, depending on the type and location of the business being set up.
The newly formed company shall obtain a trade licence, and income tax and VAT registrations. Additional permits, approvals or no-objection certificates (NOCs) and licences, including export-import licences, may be required depending on the nature of the business. Membership with a business chamber or relevant trade body is also often necessary.
Joint venture companies (JVCs). Foreign companies can incorporate a JVC with a local investor, or with another foreign company, or its Bangladeshi subsidiary. The authors recommend investors to first enter into a joint venture agreement (JVA) with such partners before the incorporation of the JVC, which will address all other intricate details relevant to the context of the business. The memorandum and articles of association of the JVC are drafted in line with the JVA.
Acquisition of shares. Foreign investors can also invest via the acquisition of shares in existing Bangladeshi companies. A share purchase agreement (SPA) may be executed to address all aspects of the acquisition. The transaction is consummated and share transfer is effected at closing, in light of the SPA.
If a foreign investor is not acquiring all the shares of the company, it may either acquire a portion of existing shares of the target company from existing shareholders (also under an SPA) or inject capital into the target company in the form of a share money deposit for issuance of new shares. In both cases, the shareholders should enter into a shareholders’ agreement (SHA) and the articles of association of the target company may be amended in alignment with the SHA.
Special purpose vehicles (SPVs). In many cases, a foreign investor may want to go for a joint venture with a local investor or company that already owns existing projects. The foreign investor may only want to invest in a particular project, and not be a stakeholder of other existing or prospective projects, their assets or liabilities. A suitable structuring solution in such an event would be to incorporate what is termed an SPV, or a project company, which will be a freshly incorporated company for the specific project in question.
Branch or liaison office. Foreign companies can also set up a limited presence in Bangladesh as a foreign entity through a branch office or liaison office on obtaining approval from the BIDA. Unlike subsidiary companies, the activities that a branch office or liaison office may undertake are relatively limited. Ordinarily, no outward remittances of any kind from Bangladesh through the branch or liaison offices are allowed unless specific exemptions are obtained from the BIDA, and the same is aligned with the central bank’s regulations. These offices are required to bring inward remittance of at least US$50,000 as establishment costs.
Branch offices usually represent the parent company and undertake specific activities such as the export or import of goods, rendering of professional or consultancy services. However, branch offices are generally not permitted to carry out manufacturing activities. Liaison offices, on the other hand, mainly act as the liaison and communication channel for the parent entity. It cannot engage in any income-generating activity in Bangladesh.
Financing in Bangladesh
Debt-based financing. Foreign investors, through their subsidiary companies in Bangladesh, may obtain debt-based financing from local banks and non-banking financial institutions (NBFIs). This includes loans for working capital and various funded credit facilities including cash credit, secured overdraft, various types of term loans and demand loans, loans against the central bank’s Export Development Fund, lease finance and hire purchase.
Syndication loans and other structured finance are also available in Bangladesh. Non-funded credit facilities such as letters of credit, accepted bills for payment and bank guarantees can also be availed of by companies incorporated in Bangladesh.
Private borrowings from foreign sources. Industrial enterprises in the private sector may obtain borrowings/credit from recognized lenders including international banks, international capital markets, multilateral financial institutions such as the International Finance Corporation, the World Bank, the Asian Development Bank, the Organization of the Petroleum Exporting Countries Fund, etc., as well as export credit agencies and suppliers of equipment.
Borrowing from foreign equity holders for bridge financing may also be availed. The range of loans covers commercial loans including financial loans, bank loans, buyer’s credit, supplier’s credit from institutions and individuals, and debt issues in the capital market abroad. Such loans can be utilized for investments to import capital machinery for new projects, or modernization or expansion of existing production units in industrial sectors, but not for working capital purposes or investment in capital markets.
Foreign borrowings will require prior approval from the BIDA, and the process also involves approval from the central bank’s scrutiny committee. The proposed rate of interest must be competitive, with prevailing lending rates in the international markets in the concerned currencies for the relevant tenure. Usually, the interest rate should be based on the prevailing government treasury bond rate in that currency for that tenure, plus a reasonably modest country risk premium.
Equity financing. Investors may also consider equity-based financing from Bangladesh’s capital market, which has two stock exchanges. Investors have to comply with the securities laws of Bangladesh, and are subject to prior approval from the Bangladesh Securities and Exchange Commission.
Bonds. The corporate bond market in Bangladesh is still in its infancy, with very few publicly placed corporate bonds. The lack of demand for such debt instruments has, therefore, discouraged companies from floating the option.
Bangladesh offers various investment routes and financing modalities. It is worth mentioning that the most recent budget has immensely relied upon FDI, which is indicative of the fact that the Bangladesh government will continue to give further incentives to attract FDI. Now is, therefore, the time to invest in Bangladesh.