The government has approved a draft policy on equity investment abroad by residents/firms, which caters to the needs of the business community, and aims to improve the ease of doing business, promote exports, facilitate resident companies in raising capital from abroad.
Finance Minister Dr. Abdul Hafeez Shaikh presided over a meeting of the Economic Coordination Committee (ECC), whereby the decision to approve the new investment policy was made, as per recommendations of the State Bank of Pakistan.
It will allow businesses, residents, and firms to hold foreign investments on the premise that this will help in improving local exports, and attracts venture capital from other countries.
At the meeting, SBP reps reminded the ECC that entities such as the Pakistan Business Council, software exporters, venture capital firms, and local players from the start-up culture, have repeatedly requested revisions of the existing policy as per international standards.
In their summary to the ECC, the central bank explained the change in investment regulations was imperative for allowing local players to engage with international firms abroad for boosting exports without lengthy approval proceedings as per SBP regulations.
Currently, investment proposals amounting to $10 million are evaluated by the central bank. For equity holdings surpassing $10m, the proposals attached with them have to be evaluated by the SBP, who in turn forward their reports to the Ministry of Finance for the ECC to give the final nod.
This is genuinely a lengthy and dismal affair, for it wastes too much time and prior valuations for businesses abroad can easily take financial hits if not dealt with in time.
According to the SBP report, startups and venture capitalists suggest local residents should be allowed to raise capital by setting up shops in international markets. They’ve also requested permissions that allow state residents to purchase shares of companies abroad, at the expense of their own time and money, without going through a formal review from the government.
In lieu of underlined requests and queries, the new investment policy has been approved, as per the terms and conditions of the finance ministry.
What is the new policy?
As per the new investment policy, the first category allows exporters to remit up to 10 percent of their average annual export earnings of the last three calendar years, or $100,000, whichever is higher, to set up shop without asking the central bank for approval. This will benefit export-oriented companies to set up branches abroad and attract export orders, as international buyers prefer dealing with branches and representative offices in their countries.
The policy’s second category allows local players to set up holding companies overseas for raising capital for resident companies, especially venture capital, fin-techs and startup firms.
The SBP proposed introducing the concept of holding company (Holdco) and operating company (Opco) in the policy which allows a resident Opco to remit funds of up to $10,000 to incorporate a Holdco abroad, without seeking permission from the central bank.
Once a Holdco is operational, the existing shareholders of Opco can swap shares to mirror the shareholding of Opco in Holdco. Subsequently, the investment can be raised from abroad by Opco through Holdco, and steer foreign investment across Pakistan.
The third category is for investments abroad by resident individuals. Currently, resident individuals can invest in listed securities abroad after being okayed by the SBP. With the new policy, the authorized dealers or banks could remit up to $25,000 in a calendar year on behalf of resident individuals for buying shares in listed securities abroad, after the bank approves.
The new policy also allows general permission to resident employees of subsidiaries of foreign companies in Pakistan to participate in their share option plans subject to the remittance of a maximum amount of $50,000 in a calendar year.
A new concept of “sweat equity” is being introduced to allow resident individuals to acquire shares of companies abroad at their discretion. This will allow resident individuals to acquire equity stakes in firms overseas, through various instruments and earn foreign exchange for Pakistan.
The proposed policy retains the existing provisions governing investment abroad by resident firms for expansion of business. However, banking sector proposals and fee exemptions would be decided by SBP, irrespective of the amount involved, as the requirements of this sector are time-bound, especially capital injections from local or international pipelines.