In a major decision, the government approved a policy on Wednesday to allow large corporations, residents and firms to invest in equity abroad on the basis that it will encourage exports and allow resident firms to collect capital from abroad.
A decision to that effect was taken at a meeting of the Cabinet’s Economic Coordination Committee (ECC) chaired by Dr Abdul Hafeez Shaikh, Minister of Finance, on the recommendations of the State Bank of Pakistan.
A draft policy on equity investment by residents/companies abroad has been approved by the ECC, which addresses the needs of the business community and aims to boost the ease of doing business, encourage exports and promote resident companies in raising capital from abroad. It will also meet individuals’ legitimate investment needs,” said an official statement.
The SBP told the ECC that various stakeholders, such as the Pakistan Business Council, exporters of software, venture capital firms and start-ups, had demanded a revision of the existing policy that did not comply with legitimate business requirements.
At present, the SBP is empowered to determine and allow up to $10 million in investment proposals abroad. The request is assessed by the SBP for sums over $10 million and then forwarded to the Ministry of Finance for formal approval by the ECC.
The SBP disclosed in its overview to the ECC that export-oriented companies had requested regulatory changes so that export-oriented companies could incorporate subsidiaries or liaison offices abroad to improve exports without the prior consent of the SBP.
Similarly, start-ups and venture capitals are proposing to encourage citizens to set up overseas holding companies to raise money for their local operating companies. These stakeholders have called for the granting, without any monetary consideration, of general permission to resident individuals to engage in share option plans and to buy shares of companies overseas against their efforts and services.
Based on consultations with key stakeholders, the new policy will provide the current policy with three new categories of investment abroad.
Under the first new category, the new policy allows exporters to remit up to 10% of their average annual export earnings for the last three calendar years or $100,000, whichever is greater during the calendar year, without the prior approval of the SBP, to set up subsidiaries or branch offices. As foreign customers tend to negotiate with subsidiaries and representative offices in their countries, this will allow export-oriented companies to set up branches or subsidiaries abroad and help to capture further export orders.
The second group is for resident holding companies and operating companies abroad to collect capital from abroad in order to promote resident companies, in particular venture capital companies, fintech companies and start-up companies.
The SBP introduced the implementation of the concept of holding company (Holdco) and operating company (Opco) in the regulation that allows Opco residents to remit funds of up to $10,000 without SBP’s prior permission to incorporate a Holdco abroad. Once a Holdco is incorporated, Holdco’s current shareholders may swap their shares to represent Opco’s Holdco shareholding. Subsequently, Opco can raise investments from abroad through Holdco and channel the country’s foreign investment.
The third group is for resident individuals to invest abroad. Currently, after approval of the SBP, resident individuals may invest in listed securities overseas. It will now be appropriate for approved dealers or banks to remit up to $25,000 on behalf of resident individuals for the acquisition of listed securities abroad with the approval of SBP in a calendar year.
The new policy also gives general permission for resident employees of foreign companies’ subsidiaries in Pakistan to engage in their share option schemes, subject to a maximum remittance of $50,000 per calendar year.
A new sweat equity concept is being implemented to allow resident individuals without any monetary consideration to acquire shares in companies overseas against their efforts and services. This will allow resident individuals via different instruments to acquire equity stakes in international companies and earn foreign exchange for the country.
The new policy maintains the current provisions regulating resident firms’ investment abroad for business expansion. However, proposals for the banking sector and allied requests for waiver or exemption and regularization, irrespective of the amount involved, will be determined by SBP, because the requirements of this sector are time-bound and recurrent in nature, in particular with regard to capital injections.