Foreign investors should up equity

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Bangladesh Bank (BB) has asked the foreign investors to increase their equity and offload primary shares in the local stock market, with a view to contain higher outflow of profit from the country, the central bank governor said yesterday.

“The FDI (foreign direct investment) in our country depends heavily on bank-borrowing. With only 30 per cent of their own capital, the foreign investors manage the rest of the amount by borrowing from banks,” said BB Governor Dr Salehuddin Ahmed.

It’s quite natural that profit repatriation would take place. The rationale behind the bank’s move is to make sure that the profit outflow from our country remains within acceptable limits, he added.

Salehuddin was talking to journalists at his office after a meeting with non-bank financial institutions.

He said many foreign companies while registering with the Board of Investment (BoI) say they would operate on an equity-debt ratio of 60:40, but in practice they do the opposite, keeping the ratio at 30:70.

“We have suggested that they maintain a debt-equity ratio of 50:50,” he said.

Besides, the BB has asked the foreign investors to offload a portion of their shares in the local capital market to increase the equity, added the governor.

He observed that in many countries the foreign companies take advantage of large profit repatriation in the early years of investment and offload their shares only when the profit becomes thinner.

“Eyeing a long-term benefit for the country’s economic health, we are trying to persuade the companies to offload their shares in the local stock market,” he said.

Regarding the BB measures, he said the central bank has already issued letters to different companies. But it is not possible to set any rigid guidelines or force the multinationals to offload shares, he said.

“We have already asked many companies to start the process of off-loading,” Dr Salehuddin said adding that some of the companies have been asked to float shares by 2007 and some by 2008.

Commenting on the external balance sheet, he said in the last fiscal, the country’s balance of payments suffered a deficit due to a decline in FDI and lower aid inflow.

In FY 05-06, FDI declined by 15 per cent while foreign aid by 2 per cent, according to BB statistics.

The balance of payments in the last fiscal reported a deficit of $ 24 million while in the preceding year it had a surplus of $784 million.

The BB governor noted that the investment inflow into the country last year decreased because of lower fresh investment and slowdown in fresh reinvestment of the foreign companies

“The lower external aid has also contributed to the dip in FDI,” he said adding that despite the setback, the trend of FDI is still good.

Speaking on the country’s previous records, he said that FDI inflow made a ‘quantum jump’ in FY 04-05. It rose to $800 million from $385 million in FY 03-04.

However, the FDI coming down to $675 million is not worrisome, he noted.

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