ISLAMABAD: In a big decision on Wednesday, the government accepted a policy to encourage large companies, residents and firms to invest in equity abroad on the basis that it would encourage exports and allow local 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 advice of the State Bank of Pakistan.
A draught policy on equity investment by residents/companies abroad has been approved by the ECC, which addresses the needs of the business community and seeks to boost the ease of doing business, stimulate exports and promote resident companies in collecting capital from abroad. It would also meet individuals’ genuine investment needs,” said an official statement.
Move will facilitate stakeholders raising capital besides meeting legitimate needs
The SBP told the ECC that numerous stakeholders, such as the Pakistan Business Council, exporters of tech, venture capital firms and start-ups, had demanded a review of the current regulation that did not conform with valid business requirements.
At present, the SBP is empowered to determine and allow up to $10 million in investment proposals abroad. The proposal is reviewed by the SBP for sums over $10 million and then referred 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 demanded regulatory changes so that export-oriented companies could incorporate subsidiaries or liaison offices abroad to improve exports without the prior permission of the SBP.
Similarly, start-ups and venture capitals are planning to encourage citizens to set up overseas holding companies to collect money for their local operating companies. These stakeholders have called for the granting, without any monetary consideration, of general permission to resident persons to invest in equity option plans and to buy shares in corporations overseas against their efforts and services.
Based on meetings with key stakeholders, the proposed strategy will provide the current policy with three new types of investment abroad.
Under the first new group, the new policy requires exporters to remit up to 10% of their average annual export profits for the last three calendar years or $100,000, whichever is greater within the calendar year, without the prior permission 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 would allow market-oriented firms to set up branches or subsidiaries abroad and help to capture further export orders.
The second group is for resident holding firms and trading 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 adoption of the principle of holding company (Holdco) and operating company (Opco) in the regulation that allows Opco citizens to remit funds of up to $10,000 without SBP’s prior permission to incorporate a Holdco abroad. Once a Holdco is incorporated, oOco’s current owners may exchange their shares to represent Opco’s Holdco shareholding. Subsequently, Opco can collect investments from abroad through Holdco and channel the country’s foreign investment.
The third group is for resident persons to invest abroad. Currently, after approval of the SBP, resident individuals may invest in listed securities overseas. It will now be legal for approved dealers or banks to remit up to $25,000 on behalf of resident persons for the purchase of listed securities abroad with the approval of SBP in a calendar year.
The new policy also gives general approval for resident workers of foreign corporations’ subsidiaries in Pakistan to invest in their equity option schemes, subject to a maximum remittance of $50,000 per calendar year.
A new sweat equity model is being implemented to allow resident individuals without any monetary compensation to purchase 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 gain foreign exchange for the government.
The new policy maintains the current provisions regulating resident firms’ investment abroad for business expansion. However, recommendations for the banking sector and allied demands for waiver or exemption and regularisation, irrespective of the sum concerned, will be determined by SBP, as the criteria of this sector are time-bound and recurrent in nature.