Foreign investors having stakes in Bangladeshi private companies will now get higher returns if they sell their shares, as the central bank has introduced globally-accepted approaches to value such firms.
Analysts say the move will encourage overseas investment in local companies.
Along with the currently practised 'net asset value approach' for determining the repatriable value of shares, Bangladesh Bank has adopted two more methods: market value approach and income approach or discounted cash flow approach.
Take an illustrative example under the three methods: If the price of a company's share stands at Tk 50 based on net asset value, it could be valued at Tk 100 in market value and Tk 200 in the income approach.
The BB will accept any of the three approaches or an average of the three in valuing the shares, depending on the nature of the company, it said in a notice yesterday.
“This is an important change which will contribute to a rise in foreign investment via the private equity channel as we have adopted global best-practised valuation methods,” said Hassan Zaman, chief economist of the central bank.
It is part of the process of prudently liberalising the foreign exchange regime and the access to equity capital will lead to companies expanding and creating jobs, he added.
Another BB official said the previous method is conservative and allows foreign investors to repatriate a small amount of their investments in Bangladeshi private companies.
Under the old system, overseas investors could not repatriate the true value of a company, he said.
Net asset value is estimated by deducting all liabilities of a company from its total assets. It is a conservative valuation, which does not take into account the future potential of a company.
However, the method can be used in certain cases, for example, when a company is not currently operating. The market value approach is mostly based on the price earnings (PE) ratio, which is a company's market price per share divided by its earnings per share (EPS).
The PE ratio provides an indication of how much investors are willing to pay for a company's earnings. For example, 15 PE ratio of a company means investors or buyers are ready to pay 15 times higher than the company's EPS to get a share.
Valuation of unlisted companies in the income approach or discounted cash flow approach is highly sensitive to assumptions of future cash flows. In practice, the method is not used in isolation and used as one of the drivers to determine the final price, the BB said. The income approach is primarily driven by three key inputs such as free cash flow, terminal value and discount rate.
Application for repatriation of sale proceeds of shares will have to be submitted to the foreign exchange investment department of the central bank with a valuation certificate, issued by a merchant bank or a chartered accountant.
The valuation certificates will have to be supported by full explanation justifying the fair value. Audited financial statements of the company will also have to be submitted along with the application for remittance approval, the BB said.
The central bank, however, can scrutinise the valuation by another chartered accountant, if it is not satisfied about the appropriateness of the valuation of shares, the notice added.