Alternative Investment Funds Comparative Guide -

1 Legislative and regulatory framework

1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?

In 2015 the Bangladesh Securities and Exchange Commission (BSEC) issued the Alternative Investment Rules on the registration and regulation of alternative investment funds (AIFs), fund managers and trustees, and any related matters.

1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?

The Alternative Investment Rules apply to:

private equity funds, venture capital funds, impact funds and other types of funds that the BSEC declares to be AIFs from time to time;
privately pooled investment vehicles which collect funds from eligible investors to invest in accordance with a defined investment policy for the benefit of investors or closed-end funds with a specific tenure; and
funds rendered by collection and subscription by way of private placement that do not offer their units for public subscription.

No other special regimes apply to AIFs specifically.

1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?

The Alternative Investment Rules do not have extra-territorial reach, as they apply only to "alternative investment funds or funds established or constituted in Bangladesh".

1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?

The Alternative Investment Rules are a new set of rules promulgated by the BSEC under the Bangladesh Securities and Exchange Commission Act 1993. No bilateral, multilateral or supranational instruments are in effect; however, the rules are modelled on international laws and best practices.

1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?

The BSEC has jurisdiction over AIFs. Its powers are wide ranging and it has total autonomy.

1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?

The BSEC generally cooperates with its counterparts in other jurisdictions – not only to learn and stay informed in relation to regulatory and market developments, but also to import best practices.

2 Form and structure

2.1 What types of alternative investment funds are typically found in your jurisdiction?

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.

2.2 How are these alternative investment funds typically structured?

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.

2.3 What are the advantages and disadvantages of these different types of structures?

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.

2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?

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.

2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?

For buyouts only, the private equity structure is preferred, due to the minimal restrictions on the use of funds.

2.6 Are alternative investment funds required to have a local administrator appointed?

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.

2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?

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

2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?

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.

3 Authorisation

3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?

Yes, the Alternative Investment Rules require registration of all funds, trustees and fund managers in Bangladesh. Registration is granted by the BSEC on application.

3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

An alternative investment fund (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.

A sponsor must maintain a continuous investment of at least 2.5% of the fund capital and an AIF may declare cash dividends to unit holders only.

All investments in an AIF must be locked in for a period of three years from the date of issuance of the units. Additionally, an AIF must be established for a specific period of between five and 15 years, which may be extended for a further period of up to two years. Further, no AIF may have more than 200 subscribed investors.

In order to constitute an AIF, the requisite approval must be obtained from the Bangladesh Securities and Exchange Commission (BSEC).

3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?

The fund manager and trustee must jointly apply to the BSEC to register the fund, submitting the requisite documents and the application fee. On receipt of the application, the BSEC will examine it for compliance with all requirements of the Alternative Investment Rules. If it considers that these have been fulfilled, it will register the fund and issue a registration certificate within 30 days of receipt of the application.

If the BSEC finds that any requirements set out in the Alternative Investment Rules have not been fulfilled, or that any additional submissions are required, it may, within 25 days of receipt of the application, direct the applicant to fulfil such requirements within such time as the BSEC may determine. Once the applicant has responded accordingly, the BSEC has 30 days in which to register the fund.

4 Management and advisory relationships

4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?

An alternative investment fund (AIF) must have a fund manager in order to be registered. The fund manager must be a company or statutory body, and should be registered by the Bangladesh Securities and Exchange Commission (BSEC) in accordance with the Alternative Investment Rules.

If a foreign entity or foreign fund management company intends to act as a fund manager in Bangladesh, it must establish a fund management company incorporated in Bangladesh, which must be registered under the Alternative Investment Rules.

Where 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.

If a foreign entity or foreign fund management company applies to register a fund manager under the Alternative Investment Rules through a partially owned subsidiary, the applicant must have a paid-up capital of at least BDT 100 million.

The Alternative Investment Rules include no specific requirements for local directors or local general partners with regard to AIFs. Nor do they shed light on any other specific requirements regarding local substance, local directors or local general partners of an AIF.

4.2 What are the advantages and disadvantages of these different types of structures?

It is too early to address this question, as the industry is still in its infancy.

4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?

Yes, they must be registered by the BSEC.

4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

A fund management company must be registered by the BSEC under the Alternative Investment Rules; no one can act as a fund manager to an AIF without such registration.

The fund manager must be a company or statutory body. The fund manager must have a paid-up capital of at least BDT 50 million. If an asset manager seeks registration as a fund manager under the Alternative Investment Rules, it must have a paid-up capital of BDT 50 million in addition to its paid-up capital requirements to operate as an asset manager, and must maintain a separate team with the required expertise and capacity to carry out fund management activities.

4.5 What is the process for obtaining authorisation and how long does this usually take?

The fund management company must apply to the BSEC for registration and submit the necessary documents, together with the application fee.

The fund manager must maintain financial statements as per International Accounting Standards and International Financial Reporting Standards, as applicable in Bangladesh, and must be audited as per Bangladesh Standards of Auditing.

Additionally, the fund manager must maintain satisfactory internal controls, written compliance and risk management procedures addressing all applicable regulatory requirements.

On receipt of the application, if all conditions have been satisfied, the BSEC will register the fund manager within 30 days of receipt of the application.

4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?

No other requirements are known. However, given the authority of and power accorded to the BSEC, it may seek further clarification and documentation other than those specified in the schedule of the Alternative Investment Rules.

4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?

The AIF manager may transfer the management of a fund to another licensed fund manager, subject to the approval of a majority of unit holders and approval of the BSEC.

While the rules do not specifically address whether the fund manager can impose restrictions on issues and redemptions, these may be subject to the fund's investment guidelines and policy, which must also be approved by the BSEC.

4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.

The fund manager may be a foreign entity or a foreign fund management company. However, it must apply for registration under the Alternative Investment Rules and must establish and register a subsidiary company in Bangladesh with a paid-up capital of BDT 100 million.

4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.

Under the Alternative Investment Rules, a fund manager cannot delegate its fund management functions to any other person. It is thus our understanding that fund managers cannot outsource any fund management functions.

4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?

Section 2(2) of the Alternative Investment Rules defines an ‘alternative investment fund' or ‘fund' as any fund established or constituted in Bangladesh in the form of a trust which 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.

It may be deduced from above that the regulators have chosen to keep fund managers as a separate class under the Alternative Investment Rules.

5 Marketing

5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?

Alternative investment funds (AIFs) established in Bangladesh may be marketed to all local and foreign investors. Generally, fund managers network with potential foreign and local investors, as well high-net-worth individuals. They subsequently assess the proposals, financial statements and projections, and collect and analyse various related market information to determine whether the business is scalable or worth investing in.

5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

The Alternative Investment Rules include no specific rules on the marketing of AIFs.

5.3 What is the process for obtaining authorisation and how long does this usually take?

The Alternative Investment Rules include no specific rules on the marketing of AIFs.

5.4 To whom can alternative investment funds be marketed?

AIFs may be marketed to all potential local and foreign investors.

5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?

There are no specific regulations on the marketing materials of AIFs.

5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?

There are no specific regulations on the marketing materials of AIFs.

5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?

There are no specific regulations on the marketing of AIFs. However, there is no specific bar preventing international fund managers from marketing AIFs in Bangladesh. If any investor intends to subscribe, it may apply to the Bangladesh Bank for approval.

5.8 Is the appointment of local marketing entities required in your jurisdiction?

There are no specific regulations regarding the marketing of AIFs.

5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?

There is no specific bar, but the Alternative Investment Rules do not allow for fund raising through public issues or initial offerings; this is limited to private placements only. AIFs also may not be listed or traded on stock exchanges in the same way as other mutual funds.

6 Investment process

6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?

Investments in an alternative investment fund (AIF) cannot take the form of pure debt securities; nor can the AIF provide any loans. In addition, the AIF fund may not borrow funds, directly or indirectly, or engage in leverage activities.

Section 18(4) of the Alternative Investment Rules states as follows: "investment of an alternative investment fund in non-listed portfolio companies shall be made only in equity and equity linked instruments but shall not invest in pure debt securities nor provide any loan."

In addition, the rules further provide that an AIF may carry out only those activities permitted under its registration certificate and the fund manager may make only those investments which confirm with the investment and fund management guidelines.

6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?

The Alternative Investment Rules provide that at least 75% of the fund capital must be invested in non-listed securities of portfolio companies; in case of a delay in this kind of investment, the unused portion of the realised fund may be invested in money market instruments for a maximum period of one year. A maximum of 25% of the fund capital may be invested in listed securities and units of AIFs managed by other fund managers, of which a maximum 10% may be invested in money market instruments; however, investment in a single listed security must not exceed 5% of the fund capital. In addition, no AIF may invest more than 25% of the fund capital in a single, non-listed portfolio company. The above investment restrictions shall not apply in the event of a buyout by a private equity fund.

7 Reporting, governance and risk management

7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?

The fund manager and sponsors must disclose the investments of the alternative investment fund (AIF) to the trustee when such investments are made. In addition, the Bangladesh Securities and Exchange Commission (BSEC) may, at any time, request any information and documents from an AIF and unit holders with respect to any matter relating to the AIF, or for the assessment of risk or prevention of fraud.

With regard to investors, the fund manager must ensure the transparency and disclosure of financial, risk management, operational, portfolio and transactional information regarding:

fund investments;
any fees ascribed to the fund manager or trustee; and
any expenses charged to the fund or any inquiries or legal actions by legal or regulatory bodies of any jurisdiction, as and when they occur.

The Foreign Account Tax Compliance Act, enacted in 2010 in the United States, requires a ‘foreign financial institution' to report to the US Internal Revenue Service information about certain accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest.

Bangladesh does not participate in the Common Reporting Standard. The Institute of Chartered Accountants in Bangladesh (ICAB) is the national professional accounting body and sets accounting standards in Bangladesh. The Financial Reporting Standards prescribed ICAB are known as the Bangladesh Financial Reporting Standards (BFRS), and include Bangladesh Accounting Standards. The BFRS are closely modelled on the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.

7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?

The fund manager must prepare reports for each accounting year. Within 90 days of the end of the accounting year of the AIF, the fund manager must prepare financial statements of each fund as per IAS and IFRS, as applicable in Bangladesh, and ensure that all financial statements are audited as per Bangladesh Standards of Auditing. Accordingly, the fund manager and sponsors must disclose their investments in the AIF to the trustee when such investments are made, and to investors through annual reports.

After completion of the audit, the fund manager must forward the following to unit holders:

annual report;
balance sheet, stating details of investments setting out the cost and realisable value of such investments;
income statement;
cash-flow statement;
auditors' report;
any comments on the investments made by the fund; and
a statement of movements in net asset value per unit of the fund.

These documents must be certified by the trustee and sent to the BSEC as well as the unit holders.

7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?

The fund manager must ensure that it, its directors and employees and members of the investment committee have no material interest in any portfolio company. Where such a material interest exists, the fund manager must disclose it accordingly. The fund manager and sponsors must disclose their investments in the AIF to the trustee when the investments are made, and to the investors through annual reports.

The fund manager must act responsibly in a fiduciary capacity towards investors and must disclose and report to investors all conflicts of interests as and when they arise or seem likely to arise.

Additionally, non-resident investors, foreign companies and companies incorporated outside Bangladesh investing in an AIF established in Bangladesh are subject to disclosure and reporting requirements under the foreign exchange laws and regulations of Bangladesh.

No separate filings need be made in respect of the marketing of AIFs established in Bangladesh.

7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?

Together with the annual report, the fund manager must provide a report to investors setting out:

the financial information of the portfolio companies;
investments made in each portfolio company/security and the return on such investments; and
material risks and how they are managed, including:
- concentration risk at fund level;
- foreign exchange risk at fund level;
- leverage risk at portfolio company level;
- realisation risk (ie, change in exit environment) at fund and portfolio company levels;
- strategic risk (ie, change in or divergence from business strategy) at portfolio company level;
- reputation risk at portfolio company level; and
- extra-financial risks, including environmental, social and corporate governance risks, at fund and portfolio company levels.

At six-month intervals, the fund manager must also provide unaudited financial statements and a fund report to unit holders, the trustee and the BSEC in electronic form. In addition, the BSEC must be informed of any special resolution passed by the unit holders and of any change of note.

8 Tax

8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?

The Alternative Investment Rules include no specific provisions on alternative investment funds (AIFs) that do not have a permanent establishment in Bangladesh.

We are not aware of any exemption or other rules which would prevent AIFs from having a permanent establishment or a taxable presence in Bangladesh.

Under the Income Tax Ordinance 1984, the term ‘permanent establishment' in relation to income from a business or profession means a place or activity through which the business or profession is wholly or partly carried on. It includes:

a place of management;
a branch;
an agency;
an office;
the furnishing of services, including consultancy services, by a person through employees or other personnel engaged for such purpose, if activities of that nature continue (for the same or a connected project) in Bangladesh; and
any associated entity or person that is commercially dependent on a non-resident person, where the associated entity or person carries out any activity in Bangladesh in connection with any sale made in Bangladesh by the non-resident person.

The term ‘person' includes an individual, a firm, an association of persons, a trust, a fund, a local authority, a company, an entity and every other artificial juridical person.

Further, under the Income Tax Ordinance, 1984, the term ‘resident' is defined as "a trust, a fund or an entity, the control and management of whose affairs is situated wholly in Bangladesh in that year". An AIF established in Bangladesh shall be regarded as a permanent establishment.

8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?

Fund management companies shall pay corporate tax at the rate of 35% for income earned from the income derived from management of the funds. The reasoning behind this decision is that the income is not directly derived from the profits of the investment itself.

8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?

The income earned from any AIF recognised by the Bangladesh Securities and Exchange Commission (BSEC) is exempt from taxation and shall be excluded from the computation of total income under the Income Tax Ordinance, 1984.

Any income earned from an AIF recognised by the BSEC shall be excluded from the computation of total income under the Income Tax Ordinance, 1984. As a result, the fund manager shall be entitled to an exemption from tax on any income earned from carried interest.

8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?

‘Banks', as defined in the Bank Company Act, 1991, fall within the provisions of the Foreign Account Tax Compliance Act (FATCA). As the government of Bangladesh has not yet decided to execute an intergovernmental agreement with the United States, these obligations may alternatively be discharged at individual bank level by registering and signing participation agreements with the Internal Revenue Service (IRS). Therefore, banks which conclude that FATCA may have implications for their customers and operations should register with the IRS and implement appropriate processes and controls to ensure compliance with FATCA. The National Board of Revenue has also consented to register with the IRS if a bank has US taxpayer accounts on its books.

As the agreement requires disclosures which would normally constitute breaches of the bank's general duty of confidentiality under Bangladeshi law, including the Bankers' Books Evidence Act 1891, banks must obtain written consent from their customers before reporting the requested information to the IRS. Banks should communicate with existing customers well in advance of executing a participation agreement with the IRS, enabling account holders to comply with reasonable requests for information or to provide acceptable documentation to meet the FATCA obligations.

8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?

The effective tax rate on profit and income is high. There is a 35% corporate tax along with 2% stamp duty on the total capital of the fund. As yet, it is unclear which tax strategies should be adopted, as the Alternative Investment Rules came into force in 2015 and the industry is still in its infancy. Therefore, businesses are still engaging with the regulators to introduce efficient and effective changes that would provide an impetus for investors to come forward and subscribe and entrepreneurs in investments to take risks.

9 Trends and predictions

9.1 How would you describe the alternative investment fund landscape and prevailing trends in your

Alternative investment funds (AIFs) are a large, ever-growing and increasingly important part of the economy in Bangladesh. The sectors benefiting most from this investment capital are high-growth sectors such as ICT, e-commerce, manufacturing and energy. Investor confidence in these sectors is high, due to their strong historical performance and future growth prospects. The government has identified both ICT and energy as priority sectors, further driving interest in these areas.

9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?

Stakeholders are lobbying for an exemption from the 2% stamp duty on the fund capital, which is a precondition for registration of an AIF. As yet, their efforts have not borne fruit; but they may potentially succeed in the future.

9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?

No. As yet, registered firms have made few notable or sizeable investments or exits.

10 Tips and traps

10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?

There are no real difficulties in establishing an alternative investment fund, but it is crucial to allow them the space to run their business as they see fit. Stamp duty is a burden and the tax structure should also be considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Bangladesh: Alternative Investment Funds Comparative Guide