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ISLAMABAD: The Federal Government is all set to approve a new policy on equity investments from abroad aimed at improving ease of doing business, facilitating resident companies in raising capital from abroad and meet the legitimate investment needs of individuals, sources close to Finance Minister told Business Recorder.

The Federal Cabinet, in its decision of May 16, 2001, allowed resident Pakistanis including firms and companies to make equity investments abroad if they meet the laid down criteria. The Economic Coordination Committee (ECC) of the Cabinet, in its meeting of August 29, 2002, delegated the function of evaluating and deciding investment proposals of up to $ 5.0 million to State Bank of Pakistan (SBP).

The sources said this limit has recently been enhanced to $ 10 million by the ECC through its decision of July 15, 2020. Cases beyond $ 10 million are evaluated by SBP and referred to the Ministry of Finance for placement before the ECC for decision.

SBP has noted that various stakeholders such as Pakistan Business Council, software exporters, venture capital firms a start-ups have requested revision of the existing policy as it does not cater to legitimate business requirements. The export-oriented companies have proposed to introduce regulations whereby firms and companies engaged in exports can incorporate subsidiaries/liaison offices abroad for boosting exports without prior approval of SBP. Similarly, start-ups and venture capital firms propose that residents should be allowed to establish holding companies abroad for raising capital for their local operating companies. These stakeholders also request for granting general permission to resident individuals to participate in share option plans and to acquire shares of companies abroad against their efforts and services, without any monetary consideration.

After holding extensive consultations with all relevant stakeholders, SBP has formulated a detailed draft policy on equity investment abroad which caters to the needs of the business community and aims to improve the ease of doing business, facilitate resident companies in raising capital from abroad and meet legitimate investment needs of individuals.

The proposed policy introduces three new categories of investment abroad to the existing policy. The salient features of these new categories and the resultant benefits are: (i) for establishment of subsidiary/branch office abroad by export-oriented companies/firms for promoting exports, SBP has proposed that exporters may be allowed to remit up to 10% of their average annual export earnings of the last three calendar years or $ 100,000 whichever is higher, during a calendar year, to establish subsidiaries/branch offices abroad without prior approval of SBP.

SBP is of the view that this will enable export-oriented companies to establish subsidiary/branch offices abroad which will play a vital role in capturing more export orders as international buyers prefer dealing with subsidiaries and representative offices in their countries.

ii) For establishment of holding companies abroad by residents for raising capital from abroad-to facilitate resident companies, especially venture capital and startup firms, in raising capital from abroad, SBP has proposed that "holding company (holdco) and operating company (opco) structure may be introduced in the policy whereby a resident opco can remit funds of up to $ 10.000 to incorporate a holdco abroad without prior approval of SBP. Once a holdco is incorporated, the existing shareholders of opco can swap their shares to mirror the shareholding of opco in holdco. Subsequently, investment can be raised from abroad by opco through holdco.”

According to SBP, this will enable companies, especially fin-tech and start-up firms, already operating in Pakistan to channelize foreign investment in the country by establishing holding companies abroad.

Investment abroad by resident individuals- As per existing policy, resident individuals can invest in listed securities abroad after approval of the SBP. However, now the central bank has proposed that authorized dealers (banks) may be allowed to remit up to a maximum of $25,000 in a calendar year on behalf of resident individuals for acquisition of the listed securities abroad with SBP's approval.

The existing instructions allow resident employees of subsidiaries of foreign companies to participate in their share option plans with prior approval of SBP. The proposal is to grant general permission to resident employees of subsidiaries of foreign companies in Pakistan to participate in their share option plans subject to 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 against their efforts and services without any monetary consideration.

SBP maintains that this will enable resident individuals to acquire equity stakes in international firms through share option plans, sweat equity or through investment in listed securities, thereby providing opportunities to earn foreign exchange for the country in the form of repatriation of dividend and capital gain to Pakistan.

SBP has further proposed that any waiver/exemption from the proposed policy for the three categories and the regularization of investments already made by residents may be decided by SBP irrespective of the amount, on the merits of each case.

The proposed policy retains the existing provisions governing investment abroad by resident companies/firms for expansion of business. However, SBP has proposed that banking sector proposals and allied requests for waiver/exemption and regularization may be decided by SBP irrespective of the amount involved as the requirements of this sector are time-bound and recurring in nature, especially capital injections.

Once approved, the policy will be disseminated by SBP through an FE Circular and will become part of Chapter 20 of the Foreign Exchange Manual of SBP.

Copyright Business Recorder, 2021