Private & Confidential
MEMORANDUM
TO:
TS TECH Bangladesh Limited
Sheltech Venus
Flat 4C, House 7, Road 33, Gulshan 2, Dhaka
Attention: Mitsuo Kaneko-san
Mika Kitaguchi-san
FROM:
Fox Mandal (FM) Associates
RE:
Paid-up Capital Increment/Share Allotment of TS Tech Bangladesh
DATE:
28 April 2016
This Memorandum should be read not in conjunction to any other purpose apart from the scenario mentioned.
BACKGROUND:
TS TECH BANGLADESH LIMITED (Hereinafter, it will be called “TSBD”) is manufacturing company (private company) which located in Adamjee EPZ.
Currently paid up capital of TSBD is 260,000,000 BDT and authorized capital is 1,000,000,000 BDT. TSBD is planning to increase paid up capital and its amount will be equivalent to 273,000,000 BDT (approx. 400,000,000JPY). Its newly issued share will be accepted by TS TECH CO., LTD. (Hereinafter, it TSJP). After capital enhancing, total paid up capital of TSBD will be 533,000,000BDT.
TSBD has USD account in Prime Bank.
For enhancing the capital, TSBD want to follow a step as stated below.
1. TSBD will receive the capital amount from TSJP in USD account.
2. TSBD will collect Banker’s Certificate from Prime Bank.
Mainly the contents of Banker’s Certificate are;
how much USD was received in USD account,
purpose of remittance, and
how much BDT will be equivalent to its USD amount received as capital
3. Capital amount of TSBD will be deposited and kept in USD account. And its amount will not convert into BDT. However capital amount will be registered by BDT amount based on the Banker’s Certificate which is stated converted capital amount by rate of arrival date of remittance.
4. TSBD will apply for capital enhancement to Bangladesh Securities Exchange Commission (BSEC), Registrar of Joint Stock Companies and Firms (RJSC).
5. Capital amount of TSBD will be BDT amount based on Banker’s Certificate.
Regarding previous point IV-5, TSBD raised inquiry to RJSCB. TSBD got following answer from RJSC.
“In allotment of shares of the registered company Taka will be regarded as currency.”
TSBD cannot get any answer whether TSBD can keep capital amount in USD account or not. Additionally, through the interview to Bangladesh Bank, TSBD got the answer from Bangladesh Bank that paid up capital can enhance without encashing.
In Bangladesh Bank Guideline Chapter9 2(A)-(a), following provision is stipulated.
“foreign exchange thus brought in must be encashed in taka before issuance of shares.”
However, there is no clear notification whether this regulation is applicable for EPZ Type-A company or not.
Now, the following queries have been raised to FM Associates, which are clarified beneath.
ISSUES: Confidential legal advice in relation to Capital Enhancement
Regarding Point Nos. IV-5 and V of the background above, the Companies act 1994 is silent for capital currency. Whether keeping capital amount by USD in USD account is illegal or non-compliance for any law or regulation.
FMA: As per Bangladesh Bank Guidelines, interpretation of Companies Act 1994 (CA 1994) provision and general practice, encashment/conversion of the remitted amount (the paid-up capital amount which is going to be increased) from USD to BDT is required prior to filing the allotment of share capital with RJSC. In accordance with the Bangladesh Bank Guidelines foreign exchange amount brought in USD needs to be encashed or converted in Taka (i.e. BDT) before issuance of shares. Besides, though the CA 1994 does not clearly specify about the currency requirement; it implies that encashment/conversion from USD to BDT prior to filing the allotment with RJSC is required. The relevant provisions of CA 1994 require the company notifying the RJSC about the numbers of shares to be allotted or increased and the value of the same calculating based on the par value of each share. Here it should be mentioned that the par value or each share is mentioned in BDT with the RJSC record and company’s Memorandum and Article of Association; thereby, to keep the coherence in calculating the value based on par value of the share and to avoid the exchange rate volatility the remitted amount (i.e. paid-up capital to be increased) need to be encashed/converted from USD to BDT. Hence, BDT is the suggested currency.
However, the proposed arrangement in the background as to keeping the amount in USD in the USD account at the first instance would not be illegal or non-compliant as long as the amount is equivalent to the paid up capital amount (which would be enhanced/increased) in BDT.
Legal basis of answer of (a)
FMA: Our legal bases for the aforementioned proposition are Bangladesh Bank Guidelines, Foreign Exchange Guidelines, Volume 1, Chapter 9, Section 1, Guideline 2A (a), (c) iii; and Section- 151 (1) (a) of the Companies Act 1994.
Whether Prime bank will issue Banker’s certificate which is stated point no IV-2 is illegal or non-compliance for regulatory basis or not. Especially whether Prime bank can issue the statement stated “how much BDT will be equivalent to its USD amount received as capital” is illegal or non-compliance for regulatory basis.
FMA: As per the general practice and Bangladesh Bank Guidelines, foreign currency, which is brought in the USD account, need to be encashed or converted in Taka (i.e. BDT). As per the RJSC practice the Encashment Certificate needs to be filed with the RJSC to complete the filing formalities and effectuation of the share allotment. Besides, upon the encashment of the remitted amount, your Bank (Prime Bank Limited) shall provide an Encashment Certificate which the Bank shall also forward to Bangladesh Bank within 14 (fourteen) days from such issuance.
Alternatively, proceeding with Banker’s Certificate (keeping the title as Encashment Certificate) and mentioning the wording as you specified in the question would not be illegal or non-compliant. The company may proceed with such arrangement and write-up as mentioned in the background and this question. Many companies in Bangladesh may follow such arrangement. However, it is totally the RJSC’s discretion whether to accept or record the allotment with such documentations. If the RJSC is not satisfied with the submitted/filed documents then the RJSC shall ask for further documents (i.e. the encashment certificate upon encashing or converting the USD amount to BDT). Hence, it is advised that the Encashment Certificate is obtained, rather than Banker’s Certificate at the first place to avoid any prospective delay or rejection by the RJSC; despite the fact that your proposed arrangement would not be rendered illegal or non-compliant under the laws of Bangladesh.
Legal basis of answer of (c)
FMA: The legal bases of our reply are as follows-
The Bangladesh Bank Guidelines, Foreign Exchange Guidelines, Volume 1, Chapter 9, Section 1, Guideline 2A (c); and
RJSC Guidelines on Return Filing.
If Banker’s Certificate which was stated in point no IV-2 is not illegal or non-compliance for regulatory basis, how much rate should be used for BDT conversion. (Rate of Bangladesh Bank or Prime Bank, remitted date should be used or capital registration date should be used.)
FMA: Foreign exchange rates for BDT transactions are set by the dealer banks, based on the demand-supply interaction based on the Bangladesh Bank Guidelines. Bangladesh Bank (BB) does not deal with the rates on a day-to-day basis, and undertakes USD purchase or sale transactions with dealer banks at prevailing inter-bank exchange rates only as needed to maintain market conditions. Inter-bank foreign exchange rates are used by Bangladesh Bank for purchase and sale transactions with the Government and different International Organizations. The cross rates of BDT with other foreign currencies are based on New York and Dhaka closing exchange rates.
Therefore, the exchange rate shall be as set by Authorized Dealer (AD) Bank (i.e. Prime Bank Limited; and the exchange rate shall be the rate of either remittance date or certificate issuance date.
Whether remitted USD can be used before completion of paid up capital registration or it is illegal or non-compliant.
FMA: Though there is no stringent rule as to utilization of the capital amount beforehand, which is about to be allotted; it is advised, based on the general practice, that the capital amount in the account is not used prior to the filing and effectuating such allotment with the RJSC. In this regard we would also like to mention that the company is obliged to file the required documents and effectuate the allotment with the RJSC within 60 (sixty) days from the date of board resolution whereby the increase of the paid-up capital was decided by the company.
Further, in case the company fails to comply with the 60 (sixty) days requirement then there shall be sanction imposed by the RJSC and the company shall require seeking permission from the Company Bench of the High Court Division of Bangladesh as to proceeding with the formalities with the RJSC.
As to utilization of the amount prior to registering with RJSC, the company may use the amount beforehand which would not be illegal or non-compliant.
TSBD wants to book remitted capital amount as “Share money deposit” before completion of registration of RJSC. After completion of registration of RJSC, its capital amount will be “Paid up capital” from “share money deposit”. Whether such accounting treatment is non-compliance or violation of accounting standard in Bangladesh.
FMA: When remitting the amount the purpose of the remitted amount initially must be clarified in the remittance instructions. Afterwards, in the Encashment Certificate the purpose of the remittance and whether it is encashed or not needs to be specified. Therefore, we are of the view that such wording shall not be in violation of accounting standards in Bangladesh provided the document clarifies the remittance and encashment purpose clearly.
Whether all the mentioned laws apply to EPZ companies or not. Whether there is any possibility of waiver or exemption for TSBD.
FMA: The Bangladesh Bank Guidelines and CA 1994 shall remain applicable for the EPZ companies. In accordance with the BANGLADESH EXPORT PROCESSING ZONES AUTHORITY ACT, 1980, all sort of banking facilities provided shall always be in consultation with the Bangladesh Bank.
Should you require further information, please feel free to contact us.
Sincerely,
Al Amin Rahman
Partner, FM Associates