The Mergers & Acquisitions Review: Bangladesh
Overview of M&A activity
Bangladesh has emerged as one of Asia's remarkable economies poised to become the new 'Asian Tiger' having undergone phenomenal economic growth. Classified as a 'Next Eleven' emerging market and one of the 'Frontier Five' emerging economies in the world by Goldman Sachs2 and JP Morgan,3 respectively, Bangladesh is slated to achieve Middle Income Country status by 2021 and is projected to become the 24th largest economy by 2033.4 Unsurprisingly, Bangladesh has been attracting an abundance of foreign direct investments (FDI) and an increase in inbound merger and acquisition (M&A) transactions and activities.
An abundance of highly competitive workforce, export-oriented industrialisation and an investment-friendly environment have paved the way for foreign investments in Bangladesh. Between the years 2018 and 2019, Bangladesh experienced some of the largest FDIs in the country's history. The US$1.47 billion acquisition of Dhaka Tobacco by Japan Tobacco Inc (JTI) was at the forefront of notable M&A activities.
Bangladesh has witnessed some of the largest intra-group, private and public M&A deals in the country's history this year during the appalling time of the worldwide covid-19 pandemic. This includes Unilever's acquisition of GSK Bangladesh for the Dhaka Stock Exchange (DSE)'s record trade value of 20.2075 billion Bangladeshi taka5 and Akij Group's acquisition of Janata Jute Mills for about 7 billion Bangladeshi taka.
While Bangladesh's astounding GDP growth above 8 per cent on an average during 2018 and 2019 has expectedly declined to 5.2 per cent in 20206 during the covid-19 pandemic, Bangladesh has the potential to attract increased FDI into the region given that Japan, Korea, the United States, the United Kingdom and European Union countries are considering relocating their factories from China. Chinese investments also continue to arrive in Bangladesh under the Belt and Road Initiative (BRI).7 Accordingly, the influx of FDI into Bangladesh and M&A activities therewith will not only continue but escalate as the actions of ameliorating the impact of the covid-19 pandemic have already gained notable momentum.
General introduction to the legal framework for M&A
i The broad legal framework
Mergers and acquisitions in Bangladesh are governed by a combination of commercial laws and industry-specific laws. The key set of statutes that govern M&A transactions in Bangladesh include the Contract Act 1872, the Companies Act 1994 and the Competition Act 2012. Additionally, public limited companies including listed companies are required to ensure compliance with the Bangladesh Securities and Exchange Commission Acts 1993, Securities and Exchange Ordinance 1969, the Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rules 2018 alongside other security laws and by-laws promulgated by the regulators from time to time. Deals involving foreign investments and foreign currencies should also comply with the Foreign Exchange Regulations Act 1947, the Guidelines for Foreign Exchange Transactions (GFET) and other regulations, circulars and guidelines of Bangladesh Bank, which is the central regulatory bank of Bangladesh.
Additionally, industry-specific laws have to be complied with. Examples of such industry specific laws include the Bank Companies Act 1991, the Financial Institution Act 1993, the Bangladesh Telecommunication Act 2001, Telegraph Act 1885, Petroleum Act 2016 and the National Digital Commerce Policy 2018, and relevant rules and by-laws promulgated thereunder.
Acquisitions that involve rebranding, IP rights on innovations, transfer of trademarks, designs patents etc., will further require compliance of the Trademark Act 2009, Trademark Rules 2015, Patent and Design Act 1911 and Rules of 1933.
Accordingly, a range of laws and regulations govern M&A transactions in the absence of a specific exhaustive M&A statute. The following sections broadly outline some of the key laws.
ii The law of contract
Transaction documents in an M&A deal including shareholders' agreement (SHA), share purchase agreement (SPA), joint venture agreement (JVA) etc., as the case may be, are in general governed by the law of contract. The laws in relation to contracts in Bangladesh are governed and regulated by the Contract Act 1872. It enumerates certain key elements behind the formation of the contract, which includes requirements with respect to the parties to the contract, capacity of the parties, offer and acceptance, lawful consideration, free consent, intentions to create legal relationship, lawful purposes and object, certainty, specific subject matter, possibilities of performance, formalities and that the contract has not been declared as void by or under any existing laws of Bangladesh.
iii Company laws
All companies in Bangladesh, including wholly owned subsidiaries of foreign companies and joint venture companies are governed by the Companies Act 1994, which is the key piece of legislation in Bangladesh. The Companies Act 1994 together with the Companies Rules 2009 encompasses detailed laws governing most if not all aspects of company law including rules and procedures for distribution of share capital of companies and the provisions for reduction of share capital, management and administration of companies, procedures and rules for holding requisite meetings, appointment of company directors, etc.
Mergers and acquisitions generally will have to comply with the corporate compliance requirements of the target company and that of its stakeholders including those required by the memorandum and articles of association of the companies and the Companies Act and Rules. In particular, mergers require the steps enumerated in the Companies Act 1994 to be followed and the Company Bench of the High Court Division of the Supreme Court of Bangladesh holds the jurisdiction to pass necessary orders in connection thereto. Merger proposals are first placed before the board of directors of the respective companies for approval. After due approval from the board, an application under Sections 228 and 229 of the Companies Act 1994 has to be filed before the Company Bench.
The jurisdiction under Sections 228 and 229 is supervisory in nature. The court shows deference to the business decisions of the proposed M&A deal subject to compliance with legal requirements.8 The order of the court sanctioning the merger thereafter needs to be submitted to the registrar for joint stock companies and firms (RJSC) for necessary action at implementation phase.
The court in sanctioning the merger of Bangladeshi operations of Axiata and Bharti Airtel in 2016 was mindful of its responsibility to protect public interest as the subscriber base of the two telecoms was around 32 million and thus considered socio-economic factors like consumer interest, employee interest and government revenue.
iv Security laws
If one or more parties involved in an M&A transaction, including asset acquisitions, share acquisitions, amalgamation etc., is listed with a stock exchange or is otherwise a public limited company, the transaction will also come under the purview of the applicable security laws of Bangladesh. This includes the Bangladesh Security and Exchange Ordinance 1969, and the various by-laws enacted from time to time thereunder by the Bangladesh Security Exchange Commission (BSEC).
BSEC plays a key regulatory role in the regulation and approval of M&A transactions involving public limited companies including listed ones and to some specific private limited companies. However, BSEC has granted exemption to companies under public–private partnership (PPP), public limited companies having a total capital not exceeding 10 million Bangladeshi taka and private limited companies having a total capital not exceeding 100 million Bangladeshi taka at any given time after making an issue of capital.9 The key instrument governing M&A transactions in the public sector is the BSEC (Substantial Acquisition of Shares and Takeover) Rules 2018,10 which affords unprecedented ease and flexibility to such transactions and provides a simplified procedure of substantial acquisitions.
v Foreign exchange and the central bank regulatory regime
The Foreign Exchange Regulation Act 1947 requires foreign investors to obtain prior permission before taking over a Bangladeshi company owned by Bangladeshi residents.11 The Bangladesh Bank, being the country's central bank, and its Banking Regulations and Policy Department (BRPD) play a pivotal role in regulating financial transactions associated with M&As, including granting of general or specific exemptions.
While the rules pertaining to foreign exchange, including those on the repatriation of profits and share sale proceeds, have been relaxed by the central bank in recent years, few decisions of Bangladesh Bank in relation to approving foreign transactions regarding M&A transactions have exemplified undesirable precedents. For instance, in the global merger between Holcim and Lafarge, two of the leading cement giants globally, the Bangladesh Bank designated the agreed transaction price of US$117 million between the two parties and their respective subsidiaries in Bangladesh as 'too high' and only approved repatriation of US$62.5 million. Despite the Bangladesh Bank retaining the discretion in purchase price determination, some uncertainties therefore exist as to the valuation methodology governing the exercise of discretion rendering remittance of sale proceeds sometimes difficult.
Developments in corporate and takeover law and their impact
i BSEC (Substantial Acquisition of Shares and Takeover) Rules 2018
The new 2018 Rules on substantial acquisition of shares and takeover have replaced the 2002 rules which has been a welcome change in the M&A laws. The Rules allow for substantial acquisitions of shares in a public listed company through cash purchase from security exchange and through negotiated deals, within and outside the trading system of the exchange. The Rules also provide for an application for exemption from restrictions imposed therein.
ii BSEC Security and Exchange Rules 2020
The BSEC notification dated 31 December 202012 issued the Security and Exchange Rules 2020 which amended the rules regarding the manner of business transaction of stockbroker and stock dealers. The Rules require particulars of foreign investments to be audited including the particulars and details of foreign remittance (inward or outward), if any, with its purpose and to verify whether proper legal procedures and accounting treatment have been followed.
iii Companies (Amendment) Act 2020
An amendment to the Companies Act 1994 was passed by the National Parliament of Bangladesh on 25 February 2020. The key legislative object achieved with this amendment is scrapping the mandatory requirement for a company to have a seal to get registered thereafter.
iv Companies (Second Amendment) Act 2020
The Second Amendment Act 2020 introduced the concept of the one-person company (OPC) in the Companies Act, 1994. The Act is likely to result in enhanced foreign direct investment in Bangladesh and pave the way for a higher number of M&A transactions. One limitation of the Act is the requirement for the sole shareholder of the one-person company to be a natural person.13 The Companies (Second Amendment) Act 2020 has introduced Chapter 10 (Sections 392A–392L) governing the establishment and operation of the OPC. As per the Act, the OPC also has to have a minimum paid-up capital of 2.5 million Bangladeshi taka to a maximum of 50 million Bangladeshi taka. The minimum turnover for the firms should be 10 million Bangladeshi taka in the past year. The purpose for such a requirement may, however, be to safeguard against the incorporation of shell companies and prevent money laundering. This might, however, act as a deterrent to foreign corporations to incorporate an OPC that often prefers to hold an entire shareholding. The OPC has to hold at least one meeting of the board in a year. If the sponsor of an OPC dies, then as per the memorandum concerned, the nominated person will get its full shares. The RJSC started registration of OPCs from 23 May 2021.14
v Secured Transaction (Moveable Collateral) Bill 2018 and Asset Management Company Bill
The government is in the process of improving the Foreign Direct Investment climate of the country by introducing (1) the Secured Transaction (Moveable Collateral) Bill 2018 (2018 Bill); and (2) the Asset Management Company Bill 2020 (2020 Bill). Even though the draft of the 2018 Bill has been in the pipeline for some time, it is expected that the Bill, if passed this year, shall be comprehensive and recognise movables both tangible and intangible, as opposed to immovable assets only, as security.15,16 The 2020 Bill shall establish the Bangladesh Asset Management Corporation (BAMCO). BAMCO would set up a trading platform to buy and sell default loans and create a competitive market to trade distressed assets. It would be able to raise funds from the capital market by issuing bonds.17
vi Bangladesh Bank FEID Circular No. 01 (16 May 2021)
The circular is aimed at facilitating the change of Authorised Dealers of Branch Offices, Liaison Offices and Representative Offices of Foreign Companies. As per the circular, the current nominated authorised dealers (ADs) of branch, liaison and representative offices have been advised to issue a no objection certificate in favour of branch offices, liaison offices and representative offices of foreign companies without any delay in the event of a change of AD.
vii Bangladesh Bank Circular FEID Circular No. 02 (20 December 2020)
This circular made an addendum to the Operating Guidelines for Two-Step Loans (TSL) Component of the Foreign Direct Investment Promotion Project (FDIPP) in Bangladesh. Considering significant Japanese investment in Bangladesh, the interest rates of the on-lending loan (OLL) and sub-loan at the end-borrower level for the TSL component of the FDIPP in Bangladesh were revised as follows: (1) the interest rate of the OLL (Bangladesh Bank to participating financial institutions (PFIs)) to be 1.5 per cent; (2) maximum spread or margin for PFIs to be 3.5 per cent; and (3) the maximum interest rate of a sub-loan at end-borrower level (PFIs to end borrower) to be 5.0 per cent.
viii Bangladesh Bank FEID Circular No. 1 (18 June 2020)
This circular intended to simplify the repatriation of sales proceeds of non-listed shares. The circular allows authorised dealers (ADs) to effect remittances on account of sales proceeds of shares regardless of amount, the fair value of which is determined by the management of the target companies through a net asset value (NAV) approach based on the latest audited financial statements submitted together with tax returns. It also stipulates that no permission from Bangladesh Bank would be required to repatriate sales proceeds of shares up to 10 million Bangladeshi taka in equivalent foreign currency without valuation reports from independent valuers.
ix National Digital Commerce Policy 2018
The government in 2018 introduced the National Digital Commerce Policy 2018,18 which restricted acquisition of digital commerce business by a foreign company without forming a joint venture with a local company.19,20 Such a policy deterred potential entrants like Amazon and Alibaba from making an entrance into the digital marketspace of the country. The government, in the wake of growing e-commerce platforms amid the covid-19 pandemic, issued the National Digital Commerce (Amended) Policy 2020, scrapping the requirement of forming a joint venture with a local company and allowing wholly foreign-owned e-commerce entities, provided they complied with the laws and regulations of the country.21
x National Digital Commerce Operation Guidelines 2021
The government introduced the National Digital Commerce Operation Guidelines 202122 pursuant to the National Digital Commerce Policy 2018 (as amended in 2020). The guidelines (Chapter 3 of Digital Commerce Operation Guidelines 2021) lay down certain rules of operation for digital commerce businesses, including the requirement of listing the detailed conditions of purchase and return, displaying the quantity of goods, their ingredients, price, delivery or other charges, etc., and further requires that the image, video, etc., of the goods to be sold are provided so as to enable the buyer to make an informed decision. Furthermore, the Guidelines reaffirm certain restrictions on the types of products that can be sold and commercial transactions that can be carried out. Concerns relating to digital transactions have also been addressed in the Guidelines. No digital wallet, gift card, cash voucher or other alternatives to payment may be implemented by the digital commerce businesses without the permission of Bangladesh Bank (where applicable) or in contravention to the directions of Bangladesh Bank (Clause 3.19 National Digital Commerce Operation Guidelines 2021). An important addition is that under the Guidelines, steps are to be taken so that all digital commerce platforms are gradually required to obtain a unique business identification number (UBID). Under the said 2021 Guidelines, all foreign digital commerce platforms that conduct business in Bangladesh must be registered in Bangladesh and must obtain necessary approvals from concerned authorities (Clause 3.1.18 of the National Digital Commerce Operation Guidelines 2021). However, the new Guidelines are completely silent on the cross-border e-commerce policy issue.
xi Key covid-19 stimulus
Furthermore, to facilitate export trade amid the covid-19 pandemic, the restrictions on refinancing from the Export Development Fund (EDF) have been relaxed.23 To enhance foreign investment to combat the financial crisis prompted by the pandemic, balances held by non-residents in non-resident investors' taka accounts (NITA) have been allowed to be used for purchase of foreign end mutual funds.24 Furthermore, non-resident Bangladeshis have been allowed to deposit money earned abroad in Bangladeshi banks' taka accounts.25 Non-banking financial institutions (NBFIs) have been allowed to increase the tenure of term loan and leases.26
Foreign involvement in M&A transactions
Outbound acquisitions by Bangladeshi nationals or investors are rare in Bangladesh largely because of the conservative stance of the regulators coupled with the lack of legal framework for such outward investment. Most M&A transactions involve foreign corporations acquiring local or foreign companies by means of inbound remittance in the form of FDI.
As per the report27 of the Foreign Investment and External Debt (FIED) Management Cell of the Statistics Department of Bangladesh Bank, the economic slowdown brought about by the covid-19 pandemic caused a major decline in the FDI inflow. In 2020, gross FDI inflows were US$3378.49 million, recording a decrease of US$613 million or 15.4 per cent over its level in 2019. In 2020, net FDI inflows were US$2563.58 million, recording a decrease of US$296.09 million or 10.8 per cent over its level in the year 2019 and decreased 29.1 per cent over its level in the year 2018. Net FDI equity capital inflows were US$842.29 million in the year 2020, whereas net FDI equity capital inflows were US$803.70 million and US$1124.13 million in the years 2019 and 2018, respectively, marking an increase of US$38.59 million or 4.8 per cent over its level in 2019 and a decrease of US$281.84 million or 25.1 per cent over the 2018 level. Stock in Bangladesh was US$19394.76 million at the end of December 2020, recording an increase of 9.1 per cent over the level at the end of December 2019. Cumulative net FDI inflows (equity capital inflows + re-invested earnings + intra-company loans) in Bangladesh stood at US$25508.51 million from December 2006 to December 2020, of which net equity capital was US$9120.95 million.
As far as net FDI inflows are concerned, in 2020, the Netherlands topped the chart with US$400.21 million or 15.6 per cent, followed by the UK at US$396.63 million or 15.5 per cent, the United States at US$296.35 million or 11.6 per cent, Norway at US$211.2 million or 8.2 per cent, Singapore at US$157.00 million or 6.1 per cent and India at US$134.59 million or 5.3 per cent, accounting for a total of 62.3 per cent towards the contribution of total FDI inflows (net).28
Bangladesh recorded a gross FDI outflow of US$48.66 million in 2020, of which US$10.94 million was recorded as equity capital, US$24.14 as reinvested earnings and US$13.58 million as intra-company loans, which resulted in a net outward FDI of US$27.58 million.29
Foreign investment flow during the financial years 2018–19 and 2019–20 stood at US$2.88 billion and US$3.88 billion.30 The total FDI stock was estimated at US$16.4 billion in 2019 by the UNCTAD31. The main investors in the country are China, South Korea, India, Egypt, the United Kingdom and the United Arab Emirates.
Significant transactions, key trends and hot industries
Some of the notable M&A transactions in Bangladesh include the following deals.
- Evercare and CDC Group, the UK's development finance institution, has recently acquired the controlling interest in STS Holdings Ltd – the infrastructure owner and operator company of Apollo Hospitals in Dhaka, marking an FDI of over 10 billion Bangladeshi taka. The transaction was consummated during the first half of 2020 despite the covid-19 pandemic.
- Bangladesh's Akij Group, which has the world's largest jute yarn manufacturing unit, has acquired Janata Jute Mills for around 7 billion Bangladeshi taka during the covid-19 pandemic.32
- Despite the ongoing covid-19 crisis, Anchorless Bangladesh – a US-based venture capital firm – has invested in digital logistics platform startup Loop Freight, with an initial seed fund of US$600,000 in May of 2021.33
- In June 2020, Unilever acquired an 81.98 per cent stake in GlaxoSmithKline (GSK) Bangladesh Ltd from Setfirst, a GSK Group member, marking a record trade value of an individual company in the history of the DSE, valued at a total of 20.2075 billion Bangladeshi taka.34
- In December 2019, Heidelberg Cement completed acquiring 100 per cent shares of Emirates Cement Bangladesh Limited and Emirates Power Company Limited from UltraTech Cement Middle East Investment Limited for around 1.83 billion Bangladeshi taka. Reportedly, they have also expressed an interest in acquiring Meghna Energy, a captive power plant in the Narayanganj district.35
- Bangladesh saw some of the most gargantuan M&A transactions during 2018 and 2019. It broke the record when Akij Group sold its entire tobacco business, Dhaka Tobacco, to Japan Tobacco Inc (JTI) at a mammoth US$1.47 billion in November 2019.36
- In April 2018, an interesting M&A transaction took place between Alipay, an affiliate of Alibaba Group, and bKash, when 20 per cent of the latter was bought by Alibaba Group. Neither bKash nor Alipay gave any financial figure on the deal.
- A Chinese consortium that includes the Shenzhen and Shanghai stock exchanges, bought 25 per cent stakes in the Dhaka Stock Exchange for US$125 million, which also took place in 2018.37
- Beximco Pharmaceuticals Limited is also part of the list as it also completed the acquisition of about 85 per cent of Nuvista Pharma Limited in the same year.38
- There have been few major acquisitions in the telecom sector in the recent past that are worthy of mention: the purchase by Malaysia's Axiata of telecom operator company Aktel, which was later rebranded as Robi, the acquisition of Warid Telecom by India's Airtel, the purchase of Sheba Telecom by Egypt's Orascom Telecom and acquisition of significant shares of City Cell by SingTel and AKTEL's shares by NTT DoCoMo, were all among notable acquisitions in the sector.
- Bangladesh's ride-sharing app startup Pathao closed equity financing from a number of investors including Indonesia's Go-Jek, reportedly at a valuation of over US$100 million.39
- In 2016, Siam City Cement, one of Thailand's largest cement producers, acquired Cemex Cement Bangladesh Ltd.40
- Bangladesh's leading conglomerate Transcom acquired local Philips and Pepsi business from its previous foreign owners.
- Comparatively, M&As are rare in the financial sector. Reportedly, three local groups of companies have been discussing with Bangladesh Bank to take over the operation of People's Leasing and Financial Services (PLFS).41 Previously, Oriental Bank was acquired by ICB Financial Group – another Malaysia-based group. In 2010, Summit acquired ICB Bank's stake.42 ICB Banking Group acquired Oriental Bank and renamed it ICB Islamic Bank Bangladesh has decided to sell its entire shareholding for US$55 million.
Intra-group M&As are increasingly being used for group restructuring and commercial strategy to maximise profit and reduce operational costs. For example, the Board of Directors of the publicly listed United Power Generation and Distribution Company Limited (UPGDCL) has decided to acquire two power plants of the United Group: the United Anwara Power Ltd and United Jamalpur Power Ltd.
As the trend suggests, construction and engineering, healthcare, power development, digital commerce, telecommunication, communication, ready-made garments and banking and finance are currently generating most interest for possible M&A transactions. Furthermore, foreign investors have been demonstrating increasing interest in the power, energy and petroleum sector.
Financing of M&A: main sources and developments
i Debt-based financing
The acquirer company may obtain debt-based financing from local banks and NBFIs to finance acquisition. Foreign investors may avail themselves of this financing through their subsidiary companies in Bangladesh. This is, however, subject to furnishing satisfactory collaterals. Upon acquisition of the target company, a wide range of debt-based financing can pave the way for pursuing the ambitions of the acquirer. This includes loans for working capital and various funded credit facilities.43
Syndication loans and other structured finance are also available in Bangladesh. Debt restructuring is often relevant in M&A transactions. Furthermore, non-funded credit facilities such as bank guarantees may also be relevant and availed upon, depending on the transaction structuring.
ii Private borrowings from foreign sources
Industrial enterprises in the private sector may obtain borrowings or credit from recognised lenders including international banks, international capital markets, multilateral financial institutions as well as export credit agencies and suppliers of equipment. Borrowing from foreign equity holders for bridge financing may also be utilised.
Foreign borrowings will, however, require prior approval from the Bangladesh Investment Development Authority (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.44
iii 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.45
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.46
The labour and employment law of Bangladesh is fairly codified substantially by the Labour Act 2006, as amended, and the Labour Rules 2015. The Labour Act 2006 addresses the conditions of employment and service, maternity benefits, health, hygiene and safety of workers, working hours, leave, wages and payment thereof, compensation for injury caused by accident, trade unions and industrial relations, settlement of dispute, participation of workers in the profit of the companies, provident fund, apprenticeship, dismissal, termination and separation, among other relevant provisions.
There are no provisions in the Labour Act 2006 or concerned rules that apply specifically to M&A transactions. However, as far as intra-group M&A transactions are concerned, there has not been much concern that would necessitate legislative intervention. However, in private and public transactions, the impact of M&A transactions on the employees and the safeguarding of their rights and interests needs to be addressed. Presently, as has been seen in the Robi merger case, the High Court plays a pivotal role in ensuring the rights and interests of the employees in M&A transactions that may potentially have adverse impact on employee rights. Parties to an M&A deal are necessitated to undertake comprehensive due diligence on employment law compliance of the target company.
The principal legislation governing income tax in Bangladesh is the Income Tax Ordinance 198447 (ITO), which undergoes annual amendment and additions through the Finance Acts promulgated every year. The Income Tax Ordinance 1984 is complemented by the Income Tax Rules 198448 enacted by the National Board of Revenue (NBR) which is the regulatory authority for the tax administration in Bangladesh. Additionally, the NBR from time to time promulgates Statutory Regulatory Orders (SROs) and General Orders (GOs) as and when required.
i Taxations in connection with M&A transactions
Acquisition involves purchase of shares. A stamp duty at a rate of 1.5 per cent49 of the agreed purchase consideration is payable on the share transfer. However, there is no stamp duty on transfer of dematerialised shares. The seller is required to pay 15 per cent capital gains tax.50 The capital gain is calculated by subtracting the acquisition cost and development cost from the sale consideration.51
A lower tax rate of 10 per cent applies on capital gains made by firms and companies from transferring public company shares listed on stock exchanges, and 5 per cent for sponsor shareholders and directors of banks, financial institutions, insurance companies, merchant banks, leasing companies, portfolio management companies, stock dealers or stockbrokers. For other individuals, these gains are exempt from tax. Capital gains made from transferring stocks or shares in a publicly listed company made by a non-resident assessee are exempt from tax if similar exemptions may be availed by them in their country of residence.
For sale of other assets in the course of a M&A transaction, a stamp duty is levied of 3 per cent of purchase price for the transfer of any immovable or movable property. In addition, a local government tax of 1 per cent and a registration fee of 2 per cent of the property value is payable for transfer of immovable properties. There is no exemption from stamp duty on an asset sale or transfer with the exception of a demerger.52
An asset sale structured as a merger in accordance with the income tax rules can be tax neutral for the parties involved if it satisfies certain conditions.53 A demerger is tax neutral by its structure. Following a demerger, the undertaking's transfer is dealt with in the same way as a share sale.
All other asset sales, including slump sales and item-wise sales, attract a 15 per cent capital gains tax. In addition, there is a potential 15 per cent VAT obligation triggered by an asset sale. Individuals holding an asset for less than five years are required to pay capital gains tax at the highest applicable income tax rate. The only exemptions are mergers and demergers.
ii Corporate income tax (CIT)
The Finance Act 2021 has brought about a few changes to the corporate income tax rates (CIT), which have been brought down to 30 per cent for non-publicly-traded companies and to 22.5 per cent for publicly-traded companies. The tax rate on artificial entities and taxable entities other than companies and associations has been fixed at 30 per cent. The tax rate of OPCs has been fixed at 25 per cent. Business turnover tax rates for individual taxpayers have gone from 0.5 per cent to 0.25 per cent.
Some sector-specific businesses attract higher CIT rates, such as banks and NBFIs (37.5 per cent to 42.5 per cent) and cigarette manufacturers (45 per cent) etc. If any non-publicly traded company transfers a minimum of 20 per cent shares of its paid-up capital through an initial public offering (IPO), it would get a 10 per cent rebate on total tax in the year of transfer.
iii Income-tax incentives
To facilitate and promote export-oriented trade, decentralisation of industries and FDIs in Bangladesh, a range of income tax incentives are available for investors. This includes a tax holiday for industrial undertakings established in export processing zones (EPZ), tax benefits for investment in special economic zones (SEZ), tax rebates for manufacturing companies set up in places other than city corporation areas and tax holidays for certain industrial undertakings. Industries and projects funded by foreign investments may also avail themselves of deemed export tax benefits and refunds. Export-oriented industries can take advantage of bonded warehousing facilities for importing raw materials and packaging materials.
The tax at source at the import stage has also been changed as follows:
- 2 per cent on the cement industry's raw material instead of the existing 3 per cent;
- 1 per cent on ocean liners instead of the existing 2 per cent;
- 5 per cent on:
- all types of sales through electronic cash registrars generating automated results; and
- propellers, instead of zero; and
- 3 per cent on coconut fibre instead of the existing 5 per cent.
At the supply stage, the tax rate on cement, iron and iron products has been reduced from 3 per cent to 2 per cent. For a resident contractor providing any service in Bangladesh to a non-resident contractor, the rate of withholding tax has been decreased from 10 per cent to 7.5 per cent.
An automobile (three wheelers and four wheelers) manufacturing company established with an investment of at least 1 billion taka or more shall enjoy 20-year tax exemption. The washing machines, blenders, microwave ovens, electric sewing machines, induction cookers, kitchen hoods, kitchen knives and kitchen appliances industries will enjoy 10 years' tax exemption. Entrepreneurs manufacturing agricultural machinery have been given tax exemption for a period of 10 years. Power generation entities enjoy, subject to commencement of operation, up to 15 years' income tax exemption. Royalty, technical fees and capital gains on transfer of shares are also exempted. Expatriates working in power plants also enjoy three-year tax exemption. Investment in industrial enterprises and physical infrastructures allows for regressive tax exemption of 5 to 10 years.54
iv Covid-19 tax incentives
In the past year and amid the covid-19 pandemic, with a view to rejuvenating the economy and promoting development in the power sector, a number of tax incentives have been declared by the government, which include:55
- the income of private power generation companies (PPGCs) is exempted from tax liabilities up to 31 December 2034;
- the income of foreign nationals is exempt for three years;
- interest payments on foreign loans can be paid off without withholding tax (WHT);
- royalty, technical know-how and technical assistance fees payments can be made without WHT;
- capital gains arising from divestment are exempted; and
- if commercial production of a PPGC starts during the period 1 January 2023 to 31 December 2024, there is a 100 per cent exemption from tax if available for the first five years, and then a 50 per cent exemption for the next three years followed by a 25 per cent exemption for the next two years for a total of 10 years of some type of exemption.
Additionally, in response to the covid-19 pandemic, on 22 March 2020, the NBR exempted 12 types of safety products and test kits from import duties and taxes until 30 June 2020. Moreover, steps are being taken to extend the time-limit for filing of necessary VAT returns and tax returns. Taxpayers complying with the extended deadlines shall not be subject to penalty or interest.
The NBR plans to modernise the Bangladesh integrated tax or BiTAX system of the tax department involving digital tax payments as well as online tax return submission facilities.56
Bangladesh, being a developing country with promising economic features, has always felt the necessity of a legal framework for maintaining a free, open and sustainable market to ensure an affable atmosphere for the competition in trade. Accordingly, the Competition Act 2012 was enacted to prevent, control and eradicate activities adverse to the competition.
Bangladesh's Competition Act strictly prohibits 'anti-competition agreement' and 'abuse of dominant position' due to the adversarial impact it may have on the fair competition of trade. It further states that no person shall directly or indirectly enter into any agreement or collusion57 that causes or may cause adverse effects on competition or creates monopoly or oligopoly in the market in respect of production, supply, distribution, storage or acquisition of any goods or services.
Parties to an M&A deal must give due regard to the competition laws of Bangladesh and undertake due diligence in connection thereto. The Competition Act refers to various Anti-Competition Agreements that include a tie-in arrangement, exclusive supply agreement, exclusive distribution agreement, refusal to deal, resale price maintenance.58
Most importantly for mergers, the Competition Act specifically prohibits the combination that causes or is likely to cause an adverse effect on competition in the market of goods or services.59 Combination, under the said Act, refers to acquisition or taking control or amalgamation or merger in trade.60 Accordingly, combination transactions may require prior approval of the relevant regulator upon satisfying that such combination is not likely to cause any such adverse effect on the competition.
The Competition Act has established the Bangladesh Competition Commission to investigate complaints under the Act and to promulgate further rules in this regard. However, the Competition Commission is yet to become fully operational but is soon expected to eliminate anticompetitive practices as well promote competition for ensuring freedom of trade.61
As mentioned earlier, it can be concluded that Bangladesh has witnessed some of the largest M&A transactions in 2020 notwithstanding the covid-19 pandemic. The impact has complicated the processes involved in M&A transactions but it definitely has not prevented deals from being fulfilled. Smaller enterprises don't make it to the media, but numerous acquisitions are taking place every day in Bangladesh.
As of the date of writing, there has not been any codified set of laws or regulations that can regulate M&A transactions and it can be said that the laws and regulations in relation to M&A are rather scattered. A set of guidance in relation to M&A is a much-needed initiative that should be taken by the government as soon as possible. Possible reforms may include enactment of a single codified M&A law or code consolidating the different scattered provisions and guidelines with reference to the various industry-specific laws in it. This would have an important bearing on the perception of adequacy of the legal framework.
Till then, a comprehensive due diligence, legal and financial, is of utmost importance before embarking on a deal. Also, a compliant, enforceable and tax-efficient deal structuring is of the essence.
1 Suhan Khan is a managing partner at Accord Chambers (Bangladesh), and Syeda Faiza Hossain and Ahmed Farzad are associates at the firm.
2 Goldman Sachs, 'Global Economics Paper No. 153' (1 December 2005).
3 JP Morgan Frontier Five (2007).
4 KPMG, 'Investment Guide - Bangladesh', July 2020.
5 Ahsan Habib Tuhin, 'Unilever acquires 82 per cent stake of GSK Bangladesh', The Business Standard (Dhaka, 28 June 2020).
6 Asian Development Bank (ADB), 'Asian Development Outlook (ADO) 2020 Update' (September 2020).
7 Suhan Khan, Mamun Chowdhury, 'Structuring and Financing Foreign Direct Investment (FDI) in Bangladesh', ABLJ May/June 2020, https://www.vantageasia.com/bangladesh-fdi-structuring-financing/, accessed on 30 September 2020.
8 Tabarak Hossain Bhuiyan, 'Legal environment for mergers and acquisitions in Bangladesh', The Financial Express (1 October 2020).
9 See the order dated 20 September 2020 bearing reference number BSEC/CMRRCD/2009-193/Admin-73 https://www.sec.gov.bd/slaws/Order_related_to_granting_exemption_on_companies_under_PPP.PDF.
10 Rules 3, 4, 5 and 6 of BSEC (Substantial Acquisition of Shares and Takeover) Rules 2018.
11 Foreign Exchange Regulation Act, 1947, Section 18.
12 See the notification dated 31 December 2020 bearing reference No. BSEC/CMRRCD/2001-80/18/Admin/115 https://www.sec.gov.bd/slaws/Notification_02.03.2021.pdf.
13 Section 2(1)(bb) of the Act.
14 Jasim Uddin Haroon, 'One Person Company registration starts Sunday', The Financial Express (22 May 2021).
15 Raczynska Magda, 'Reform in other jurisdictions-Bangladesh', The Secured Transactions Law Reform Project (August 2020) https://securedtransactionslawreformproject.org/reform-in-other-jurisdictions/asia/bangladesh/.
16 AKM Zamir Uddin, 'Loans against movable assets on the cards', The Daily Star (23 April 2019).
17 Rejaul Karim Byron, Md Fazlur Rahman, 'Govt to set up company to salvage soured loans', The Daily Star (6 July 2020).
18 National Digital Commerce Policy 2018, http://e-cab.net/wp-content/uploads/2019/02/Digital-Commerce-policy-2018.pdf, accessed 4 October 2020.
19 Clause 3.6.7 of the National Digital COmmerce Policy 2018.
20 Jasim Uddin, 'Govt issues digital commerce policy making JV must for foreign investors', New Age (5 May 2019).
21 WTO Cell, Ministry of Commerce Notification No. 26.00.0000.133.93.024.19-04 dated 3 June 2020.
23 Bangladesh Bank FE Circular No. 36 dated 27 August 2020.
24 Bangladesh Bank FE Circular No. 33 dated 20 August 2020.
25 Bangladesh Bank FE Circular No. 32 dated 9 August 2020.
26 DFIM Circular No. 04 dated 9 August 2020.
27 Foreign Direct Investment and External Debt, Bangladesh Bank (July–December 2020)
30 KPMG, Investment Guide – Bangladesh, July 2020.
31 Country Profile, 'Foreign Direct Investment (FDI) in Bangladesh', Nordea (updated September 2020).
32 Sajjadur Rahman, 'Janata Jute Mills changes hand in Tk 700 cr deal', The Business Standard (28 June 2020).
33 Ahmed Hasam Rabbi, 'Anchorless Bangladesh: Investing in the country's future', The Business Standard (30 August 2020).
34 Ahsan Habib Tuhin, 'Unilever acquires 82 per cent stake of GSK Bangladesh', The Business Standard (28 June 2020).
35 'Heidelberg Cement Bangladesh completes acquisition of Emirates Cement and Emirates Power', BIZDATA INSIGHTS (9 December 2019).
36 'Japan Tobacco buying Bangladesh Akij's tobacco business for $1.5 billion', Thomson Reuters (6 August 2018).
37 'Dhaka Stock Exchange sells 25 pct stake to Chinese consortium', Thomson Reuters (15 May 2018).
38 Completion of the acquisition of Nuvista Pharma Limited, Beximco Pharmaceuticals Ltd Press Release (3 April 2018).
39 'Pathao mobilises foreign funds', The Financial Express (28 April 2018).
41 Shamsul Huda, 'Three local groups likely to take over bankrupt PLFS', The Daily Observer (10 March 2020).
42 Sajjadur Rahman, 'Summit buys ICB bank stake', The Daily Star (6 June 2010).
43 Suhan Khan, Mamun Chowdhury, 'Structuring and Financing Foreign Direct Investment (FDI) in Bangladesh', ABLJ May/June 2020, https://www.vantageasia.com/bangladesh-fdi-structuring-financing/, accessed on 30 September 2020.
47 Ordinance No. XXXVI of 1984.
48 SRO No. 39-L/85.
49 Stamp Act 1899, Article 62 of Schedule 1.
50 Income Tax Ordinance 1984, Section 56 (1) Sl No. 17.
51 Income Tax Ordinance 1984, Section 32 (1).
52 Doulah, ABM Nasirud, Khatoon, A, 'Private mergers and acquisitions in Bangladesh: overview', Thomson Reuters Practical Law (accessed 1 February 2020).
53 ibid. The conditions include: (1) all the property of the amalgamating company or companies immediately before the merger becomes the property of the amalgamated company; (2) all the liabilities of the amalgamating company or companies immediately before the merger become the liabilities of the amalgamated company; (3) the shareholders with no less than nine-tenths in value of the shares in the amalgamating company or companies (other than shares already held in it immediately before the merger by the amalgamated company, its subsidiary or a nominee) become shareholders of the amalgamated company.
54 KPMG, Investment Guide, Bangladesh, October 2020.
55 KPMG, Bangladesh: government and institution measures in response to covid-19, https://home.kpmg/xx/en/home/insights/2020/04/bangladesh-government-and-institution-measures-in-response-to-covid.html, accessed on 9 November 2021.
56 'Bangladesh gearing up for new era of taxation', The Financial Express (4 July 2020).
57 As per Section 2(q) of the Competition Act, 2012, 'Collusion' means any written or unwritten agreement or understanding with mala fide intention to control the market by destroying the environment of congenial and usual competition.
58 Competition Act, 2020, Section 15(3).
59 Competition Act, 2020, Section 21.
60 Competition Act, 2020, Section 2(h).
61 Competition Act, 2020, Section 8.