How To Get More Of It

Legal framework: An enforcement issue

Ashraful Hadi

Bangladesh now offers perhaps the most liberal Foreign Direct Investment (FDI) regime in South Asia. Thus there are presently no prior approval requirements or limits on equity participation or restrictions on the repatriation of profits and income. These opportunities are reflected in the inflows FDI which increased radically from virtually zero in the 1980s to over $300 million in the late 1990s, and in the net rise by 72% of FDI from US$ 195 million in 2003 to US$ 460 million in 2004 (The Daily Financial Express, 30 September 2005). This article seeks to briefly highlight key aspects of the legal regime concerning promotion of private investment and FDI in Bangladesh.

The basic policy framework
The Industrial Policy 1999 provides broad policy guidelines to achieve the objectives of accelerated industrial growth and increasing the share of the industrial sector in GDP to build an industrialised economy. Its primary objectives include attracting FDI in both the export and domestic market oriented industries to make up for deficient domestic investment resources, and to acquire evolving technology and gain access to export markets.

Under the microscope

The Industrial Policy declares 16 areas as 'thrust sectors' for attracting investment, entitled to special incentives and support, including, among others, agro-based industries, artificial flower-making, computer software and information technology, electronics, frozen foods, infrastructure, jute goods, leather, oil and gas, sericulture and silk industry, stuffed toys, textiles, tourism.

The legal framework for foreign investment is based on the Foreign Private Investment (Promotion and Protection) Act, 1980, which provides for:
- non-discriminatory treatment between foreign and local investment;
- protection of foreign investment from expropriation by the state; and
- ensuring repatriation shares and profit of proceeds from sales.

Under this Act, 'foreign capital' means capital invested in Bangladesh in any industrial undertaking by a foreign citizen or company in the form of foreign exchange, imported machinery and equipment.

All sectors are open for private investment (excluding the four sectors of (i) arms and ammunition and other defence equipment and machinery, (ii) forest plantation and mechanized extraction within the bounds of reserved forests, (iii) production of nuclear energy, and (iv) security printing and mining). Such investments can be made independently (i.e. 100% foreign investment) or through joint ventures with local investors on mutually beneficial terms and conditions with no limitation on local-foreign equity ratio.

Key national institutions
The major national institutions dealing with investment promotion and facilitation bodies are:
(a) The Bangladesh Small & Cottage Industries Corporation (BSCIC), a statutory body established in 1957 and concerned with small and cottage industries. Any inves tor may set up a small or medium sized enterprise on industrial estates maintained by the BSCIC upto a maximum investment of Tk. 100 million (US $2 million).

(b) The Bangladesh Export Processing Zones Authority (BEPZA), is a statutory body, established under the BEPZA Act, 1980 to set up and operate EPZs with a view to provide an investment climate free from procedural complications. EPZs are export-oriented industrial enclaves that provide infrastructural facilities, administrative and support services to the investors with incentives. They generally offer the following facilities and incentives :

(c) The Privatisation Commission, set up in 1993 under the Privatization Act, 2000, is concerned with the privatization of State Owned Enterprises (SOEs) identified as such by the Government. The available infrastructure and facilities of SOEs make them a potentially attractive investment option.

(d) The Board of Investment (BOI), a statutory body established by the Investment Board Act 1989, is the first point of contact for most investors (other than those investing in EPZs or via BSCIC). It s objectives include to encourage and facilitate private investment. Its functions include registration of industrial projects, approval of payments for royalties and other fees when they exceed prescribed limits, issuance of work permits to expatriates, allotment of land in industrial areas, approval of terms and conditions for loans and credit, and assisting investors in acquiring infrastructure facilities. The BOI also includes a one stop- service centre that offers pre-investment counseling, facilitation of utility connections and assistance with import clearance and warehousing licenses. (see http://www.boibd.org/)

Procedures
All FDI needs to be registered. If the business is to be set up in an EPZ or industrial estate (note above), registration must take place with BEPZA or BSCIC; if it is to be set up elsewhere, registration with the BOI is required.

In addition, any manufac turing firm employing ten or more workers must also register with the Chief Inspector of Factories and Establishments.

Pre-registration clearance is required for investment with respect to certain areas namely ready-made garments, banks, insurance companies, and other financial institutions. (FDI is discouraged in these areas.)

Further, all industrial and other projects that may be potentially polluting are required, in accordance with the Environment Conservation Act 1995, to undertake some form of environmental impact assessment. Environmental clearance must be obtained from the Department of the Environment.

Tax incentives and facilities
Tax holiday: Tax holiday facilities are available for 5 years for the Dhaka and Chittagong Divisions (excluding the 3 hill tract districts of Chittagong Division), and for 7 years for the Khulna, Sylhet, Barisal and Rajshahi Divisions and 3 Chittagong hill tract districts. Special tax holidays of 15 years are given currently for power generation enterprises.

Accelerated depreciation: Industrial undertakings not enjoying tax holiday will enjoy accelerated depreciation allowance in accordance with the existing laws.

Concessionary Duty on Imported Capital Machinery: Import duty, at the rate of 5% ad valorem, is payable on capital machinery and spares imported for initial installation or BMR/BMRE of the existing industries. The value of spare parts should not, however, exceed 10% of the total C & F value of the machinery. For 100% export oriented industries, no import duty is charged in case of capital machinery and spares. However, import duty of about 5% is secured in the form of bank guarantee or an indemnity bond to be returned after installation of the machinery. Value Added Tax (VAT) is not payable for imported capital machinery and spares.

Other issues
Bilateral Investment Treaties (BIT) and Double Taxation Treaties (DTT):
Bilateral treaties on investment promotion and protection (BITs) have been concluded by Bangladesh with several countries, including China, France, Germany, Indonesia, Iran, Italy, Japan, Malaysia, Pakistan, The Netherlands, United Kingdom, United States of America. Separate bilateral agreements for avoidance of double taxation have been signed by Bangladesh with several countries, including Belgium, Canada, China, Denmark, France, Germany, India, Italy, Japan, Malaysia, Pakistan, Poland, Romania, Singapore, Sweden, Thailand, The Netherlands, UK, USA, Republic of Korea, Sri Lanka.

Investment protection and arbitration
The legal regime for FDI is based on the Foreign Private Investment (Promotion and Protection) Act of 1980. In addition, Money Loan Courts (Artha Rin Adalat Act, 2003) and Bankruptcy Courts (The Bankruptcy Act, 1997) have been established to deal with debt default. The Arbitration Act, 2001 is intended to encourage and facilitate alternative dispute resolution. Sections 7 and 10 of the Arbitration Act, 2001 require any court in Bangladesh to stay proceedings before it and refer the parties to arbitration where the proceedings have been initiated despite the existence of an arbitration agreement in respect of the subject matter of the proceedings. However, some recent judicial interpretations on section 3 of the Arbitration Act, 2001 tend to provide that section 10 of the Arbitration Act has no manner of application regarding foreign arbitral proceedings and therefore, recourse cannot be made to section 10 to stay proceedings in Bangladesh where the arbitration is to take place outside Bangladesh. It is respectfully submitted that such interpretation of section 3 of the Arbitration Act is rather unfortunate as it appears inconsistent with the overall scheme of Arbitration Act and could well be a discouraging factor for potential investors. The legislature should urgently consider amendment of the law to clarify the issue.

International agreements
Bangladesh is a founding member of the World Trade Organization, and a member of the Multilateral Investment Guarantee Agency (MIGA). It signed the World Bank's Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which provides for the international arbitration of disputes with foreign investors. Bangladesh is a member of several regional organizations, one of which is SAARC. The South Asia Free Trade Agreement (SAFTA) was agreed to among the seven South Asia countries that form the South Asian Association for Regional Cooperation (SAARC), i.e. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. SAFTA will come into effect in January 2006. It envisages phased tariff liberalization for promoting intra-regional trade among the SAARC members.

Intellectual property rights
Bangladesh has been a member of the World Intellectual Property Organization (WIPO) since 1985 and signed the Paris Convention on Intellectual Property in 1991. However, existing national legislation in this area primarily dates from the British colonial period, and includes the Patent and Design Act of 1911, the Patent and Design Rule of 1933, the Trademark Act of 1940. These legislations enacted during the early period of protectionist regime need urgent revision by the legislature in order to meet the current international obligations of Bangladesh and to adequately protect the investor's interests in the context of present global market economy. The Government has recently enacted the Copyright Act, 2000 to ensure compliance with the WTO's Agreement on Trade Related Aspects of Intellectual Property (TRIPs). However, there is much criticism on the effectiveness of the provisions of Copyright Act, 2000.

Conclusion
One important element in facilitating the flow of private capital from one country to another is the role of law and reliability of the legal institutions of the host country. Although Bangladesh already has favourable statutory legal framework for the facilitation of private investment, much needs to be done to ensure effective enforcement of this, and it is hoped that the concerned authorities would be more attentive to some of the, often neglected, issues highlighted above.

Illustration : Sabyasachi Mistry

....................................................
The author is a barrister practising in the Supreme Court of Bangladesh, and an associate at the law firm of Dr. Kamal Hossain & Associates, Dhaka. ahadi@khossain.com