Answer ... The funds generally established in Bangladesh include private equity funds, venture capital funds, impact funds and any other types of funds declared by the Bangladesh Securities and Exchange Commission (BSEC) to be alternative investment funds (AIFs). Section 2(2) of the Alternative Investment Rules defines an ‘AIF’ or ‘fund’ as any fund established or constituted in Bangladesh in the form of a trust which:
- is a private equity fund, a venture capital fund, an impact fund or any other type of fund that BSEC declares to be an AIF;
- is a privately pooled investment vehicle which collects funds from eligible investors for investing, in accordance with a defined investment policy, for the benefit of its investors;
- is a closed-end fund with specific tenure;
- collects subscriptions by way of private placement only and does not offer units for public subscription; and/or
- is not covered under the Securities and Exchange Commission (Mutual Funds) Rules, 2001 or any other rules of the BSEC that regulate fund formation and management activities.
Answer ... An AIF must be constituted in the form of a trust under the Trust Act, 1882 and registered under the Registration Act, 1908. The AIF must obtain registration from the BSEC prior to commencing operations.
An AIF must have the following structure:
- The minimum fund capital must be at least BDT 100 million and any subscription by a sponsor must not be less than 10% of the capital. The sponsors must also pay up at least 20% of the total subscription to the fund prior to registration.
- The minimum investment from the fund manager must be at least 2% of the fund capital. If the fund manager also acts as a sponsor of a fund, this investment must be made in addition to the 10% required as sponsor.
- Together with its connected persons, the fund manager must not hold more than 25% of the fund’s units at any point in time.
Sponsors must maintain a continuous investment of at least 2.5% of the fund capital and an AIF must declare cash dividends to unit holders only.
All investments are locked in for a period of three years from the date of issuance of the units. Funds are established for a specific period from five to 15 years, which may be extended for a period of up to two years. No AIF may have more than 200 subscribed investors.
Answer ... It is too early to outline the specific pros and cons of the various forms of AIFs. However, in the event of a buyout, private equity funds are not subject to restrictions on investments, compared to other types allowed under and defined in the Alternative Investment Rules.
Answer ... The most widely used AIF structure is the venture capital fund. This structure has become increasingly popular due to the momentum built up in Bangladesh with regard to IT-based businesses, platforms and services. Droves of young people are developing sustainable business models in e-commerce, IT, health, hospitality, leisure and B2B and B2C services, such as logistics and transportation.
As start-ups continue to emerge – in the e-commerce, ICT and health technology sectors in particular – investment in venture capital funds in Bangladesh is likewise gaining momentum. China, India and the United States appear to be the main investors in these areas. However, private equity funds are generally slow in growth as compared to venture capital funds, due to the applicable regulatory framework.
Answer ... For buyouts only, the private equity structure is preferred, due to the minimal restrictions on the use of funds.
Answer ... There are no specific rules with regard to non-local service providers such as administrators, directors and services providers. However, the trustee of an AIF must be registered by the BSEC.
Further, in order to be eligible for registration, the trustee must be either a bank, a financial institution or an insurance company under the applicable laws of Bangladesh.
Answer ... If a foreign fund intends to operate as an AIF in Bangladesh, it must register with the BSEC or invest through a fund registered in Bangladesh under the Alternative Investment Rules.
Further, in order to be eligible for registration, the trustee must be either a bank, a financial institution or an insurance company under the applicable laws of Bangladesh
Answer ... Foreign investors wishing to establish a presence in Bangladesh may incorporate a subsidiary in Bangladesh. For most foreign businesses, a subsidiary may be the preferred choice of registration in Bangladesh, as it is regarded as a separate legal entity from the parent company.
If a foreign entity or foreign fund management company applies to register a fund manager through a wholly owned subsidiary, the applicant must have a paid-up capital of at least BDT 150 million.