FEPD Circular No. 32: Repatriation of sale proceeds of non-resident owned equity in unlisted companies purchased by residents

Foreign Exchange Policy Department
Bangladesh Bank
Head Office
Dhaka www.bb.org.bd
FE Circular No. 32 Date: August 31, 2014
All Authorized Dealers in
Foreign Exchange in Bangladesh
Dear Sirs,
Repatriation of sale proceeds of non-resident owned equity in unlisted companies purchased by residents Paragraph 3(B), chapter 9 of the Guidelines for Foreign Exchange Transactions-2009 currently states that the sale proceeds of non-resident equity investment in unlisted companies and private limited companies are repatriable abroad with prior Bangladesh Bank approval to the extent of net asset value of the shares as on the date of sales, based on latest audited financial statements.
02. It has now been decided that in such cases Bangladesh Bank will accept fair
value of the shares as on the date of sale based on appropriate combination of three valuation approaches (viz. net asset value approach, market value approach and discounted cash flow approach) depending on the nature of the company.
03. Application for repatriation of sale proceeds of shares shall be submitted to
Foreign Exchange Investment Department at head office of Bangladesh Bank with a Valuation Certificate of shares issued by a Merchant banker licensed by BSEC or a Chartered Accountant experienced in company valuation. Annexure-A to this circular provides indicative guidelines for arriving at fair value.
04. The valuation certificates by eligible valuers will have to be supported by full
explanation justifying the fair value arrived at. Full set of audited financial statements of the company will have to be submitted to Bangladesh Bank along with application for remittance approval. If not fully satisfied about appropriateness of the valuation arrived at, Bangladesh Bank reserves the right to obtain second opinion from another qualified valuer of its choice. Please inform all your concerned constituents accordingly. Yours faithfully, Enclosure: As stated (Md. Abdul Mannan) Deputy General Manager Phone: 9530319

Annexure-A
Indicative guidelines on determination of fair value of shares of unlisted company Bangladesh Bank has decided to consider the market value approach and discounted cash flow approach alongwith currently used net asset value approach in determining the repatriable value of shares of an unlisted company. Following is an illustrative example in determining the fair value of shares of an unlisted company using the three mostly used approaches:
Asset Based Approach
The underlying principle of asset-based approach is equivalent to the fair value of its assets less the fair value of its liabilities. This method is considered most appropriate for resource firms, financial services firms, investment companies (real estate investment trusts, closed￾end investment companies) and small businesses with limited intangible assets or early stage companies. In this approach, net asset value of the target unlisted company (net assets after meeting all the liabilities) is estimated as the fair value. Asset based approach often indicates the most conservative valuation as it does not take into account the value of intangible assets (such as goodwill). For ‘The Sample Company’, asset based approach gives us a fair value of BDT 22,370 million derived from the Balance Sheet as follows:
Balance Sheet (BDT million) 20AC
Current Assets
Cash & Cash Equivalent 981
Accounts Receivable & prepayments 3,561
Inventories 3,091
Total Current Assets 7,633
Total Long Term Investment 5,103
Total Fixed Assets 14,520
Total Assets 27,256
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Balance sheet (cont’d)
Balance Sheet (BDT million) 20AC
Current Liabilities
Accounts Payable 7
Liabilities for other expense 1,426
Short Term Bank Loan 1,302
Current Portion of Long Term Debt 540
Total Current Liabilities 3,275
Total Non-Current Liabilities 1,611
Total Liabilities 4,886
Shareholder's Equity
Share Capital (BDT 10 each) 3,708
Share Premium 2,035
Reserve 826
Retained Earnings 15,801
Total Shareholder's Equity 22,370
Total Liabilities & Shareholder's Equity 27,256 Net Asset Value of Equity = Total Assets – Total Liabilities = BDT 27,256 m – BDT 4,886 m = BDT 22,370 m Net Asset Value per share = BDT 22,370 m / 370.8 m = BDT 60.33 Market Value Approach Multiple based analysis or comparable analysis is one of the widely used tools in private company valuation. Comparable company trading multiples analysis utilizes the valuation multiples of similar or comparable publicly or privately traded companies to value a target unlisted company. Peers can be grouped based on any number of criteria, such as industry focus, private company size, or growth. The multiples can be equity based multiples like Price to Earnings (P/E), Price to Book Value of Equity (P/B) etc. The multiples derived from this type of analysis are for a given point in time and generally change over time. The most popular equity based multiple is earnings multiple. The price-to-earnings (P/E) ratio, which is equal to a company’s market price per share divided by its earnings per share (EPS), is the most widely used earnings multiple. It provides an indication of how much
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investors are willing to pay for a company’s earnings. For example, a company whose P/E ratio is 15 is said to be selling for 15 times of earnings i.e. fair market value of a share = EPS

• P/E Ratio.
  It is often difficult to find out the right comparable listed companies. Hence, adjustments need to be made to reflect differences, such as business mix, geographic spread and capital structure. For instance, conglomerates may have unrelated lines of businesses that probably will require multiples from two different unique companies and then deriving a blended multiple. To select the comparable universe or peer group for a given unlisted company it must be ensured that its peers share similar industry, business, and financial characteristics. Caution is also needed to get the correct valuation based on this method. It is advisable that at least three years average EPS of the target company to be used in valuation. The fair value of ‘The Sample Company’ is as follows Income Statement (BDT million) 20AA 20AB 20AC Sales 16,975 19,798 20,202 Cost of Goods Sold 9,401 10,872 10,364 Gross Profit 7,574 8,926 9,838 Administrative Expenses 2,668 3,077 3,521 EBITDA 4,906 5,849 6,317 Depreciation 1,088 1,234 1,228 Other income 454 420 378 EBIT 4,272 5,035 5,467 WPPF 191 220 247 Interest Expenses (income) 310 465 357 EBT 3,771 4,350 4,863 TAX @ 40% 1,508 1,740 1,945 Profit After Tax 2,263 2,610 2,918 No. Shares (in million) 196.20 264.80 370.80 EPS in BDT 11.53 9.86 7.87 Average EPS in BDT 9.75 P/E ratio of comparable company at the date of sale = 12 Fair Market Value per share = average EPS * P/E Ratio = BDT 9.75*12 = BDT 117.00
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Income Approach
Valuation of unlisted companies in the income approach is highly sensitive to assumptions of future cash flows. In practice, income approach is not used in isolation and used as one of the drivers to determine the final price. Income approach is primarily driven by three key inputs i.e. Free Cash Flow (FCF), Terminal Value and Discount rate; valuer needs to carefully verify all the inputs, validating these with rational assumptions. Making valuation for the target company involves the following steps:

1. The last recorded free cash flow in the audited financial statement is assumed to be
   the terminal perpetual cash flow for future. The free cash flow will be arrived at by taking operating cash flow from audited financial statement minus capital expenditure. The valuer must ensure that all overdue liabilities are deducted while arriving at free cash flow.
2. The discount rate should be the Weighted Average Cost of Capital (WACC) or the
   yield rate on 20-year BGTB as on the date of sale, whichever is higher.
3. Trend cash flow growth of the company (g) will be the average of annual cash flow
   growth over the past 3-5 years according to audited financial statements.
4. The valuation of the company would then be calculated by
   Fair value = FCF/(r-g)
   Where FCF r g
   = Operating Cash Flow – Capital Expenditure
   = Discount rate
   = Average growth rate of free cash flow in last available five years Following these steps, one may determine the fair value of ‘The Sample Company’ as below:
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DCF (BDT million) 20AA 20AB 20AC
EBIT*(1-TAX) (1) 2,563 3,021 3,280
Depreciation (2) 1,088 1,234 1,228
Capital Expenditure (3) 600 1,200 1,250
Change in working capital (4) 200 49 37
Net Cash Flow (1+2-3-4) (5) 2,851 3,006 3,221
Terminal Free cash flow 3,221
Free Cash Flow (FCF) (6) 2,851 3,006 3,221
Growth of FCF 6.00% 5.43% 7.15%
Average Growth of FCF (g) 6.19%
Discount Rate = 12.50% (WACC which is higher than the yield rate of 20-year BGTB has been applied) Fair Value = FCF/(r-g) = 3221/ (0.125-0.0619) = 51,046 m Fair Value per share = 51,046/370.80 = BDT 137.66 Finally, after taking into account all three approaches, we derived three separate values for ‘The Sample Company’ as follows:
Asset based approach (Net asset value) BDT 60.33 per share Market value approach (Earnings to P/E) BDT 117.00 per share Income approach (Discounted cash flow) BDT 137.66 per share
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