KARACHI, Jan 19: The State Bank has finalized the draft rules of business for the proposed (foreign) exchange companies. These rules would be notified after having been vetted by the Ministry of Finance and after making some changes in the State Bank Act.

Once the rules are cleared by all relevant quarters, these would be made public at the time of inviting applications for proposed exchange companies that would phase out the existing 400 and odds licensed money changers. The rules are as follows:

1. The minimum paid-up capital of the Exchange Company would be Rs 100 million.

2. The Exchange Company shall be authorized to deal in foreign currency, notes, coins, postal notes, money orders, bank drafts, travellers’ cheques and transfers.

3. It will be prohibited from engaging in any other business such as deposit taking and lending, etc., directly or indirectly.

4. The company would be allowed to have foreign exchange participation in equity with a maximum of 50 per cent. The SBP would permit repatriation of profits up to the extent of foreign equity.

5. In addition to full-fledged branches, the company will be allowed to have franchise arrangements with other entities.

6. The company shall also be allowed to open Currency Exchange Booths all over the country at public places such as airports, hotels, etc. But the scope of activities of these booths would be limited to exchange of currency notes and coins and encashment of travellers’ cheques.

7. The company will be allowed to open up to 15 branches, booths and franchise (inclusive of central office) anywhere in the country.

8. To mitigate excessively high risk, the company shall limit its exposure at the close of business each day to 50 per cent of its capital base. The method to determine exposure shall be the same as has been prescribed for banks i.e. higher of the overbought or oversold positions at the close of the day.

9. All dealings between the Exchange Company and its customers shall be supported by official receipts. All such receipts shall be prepared for every transaction in duplicate, one of which shall be provided to the customer and the other shall be kept in record for a period to be specified by the SBP.

10. For currency exchange transactions exceeding $10,000 (or equivalent in other currencies) the name, address and ID/passport number of the customer shall also be mentioned on the receipt after due verification.

11. For transactions involving transfers/remittances, the names, addresses and other particulars of both the remitter and beneficiary shall be mentioned on the receipts regardless of the amount.

12. The company shall appoint only those external auditors that are on the approved list of the SBP.

13. The company shall invariably submit to the SBP, within a period not exceeding three months from the date of closing of its financial year, a signed copy of its year-end audited accounts.

14. The SBP reserves the right to inspect the activities of Exchange Company at any time it finds appropriate to ensure adherence to the provisions of this or any other regulation issued by the SBP.

15. Any change in the Memorandum and/or Articles of Association of the company shall only be made after obtaining prior approval from the SBP.

16. The SBP will issue licence to the Exchange Company for a period of three years, renewable thereafter for the same period.

17. SBP shall have the right to revoke a licence at any time.

18. The licence may be revoked if:

(i) The SBP is provided with false, misleading or inaccurate information by or on behalf of the Exchange Company;

(ii) It appears to the SBP that the Exchange Company has violated this or any other regulation, instruction or circular issued by it or if any of the conditions of licence has not been fulfilled or is incapable of fulfilment;

(iii) The interests of the customers of the company are in any way threatened, whether by the manner in which the company is conducting or intends to conduct its affairs or for any other reason; and

(iv) The company did not commence its exchange business within three months from the date of the issuance of the license by the SBP.

The SBP officials say the exchange companies may start working from next financial year. They say that the SBP would allow the existing money changers to continue to operate along side these companies for some time. But it would introduce such regulatory changes that may eventually phase out the existing money changers over a period of time.

Such changes may include restricting the scope of their activities and enhancing the capital requirements, etc. They say that the existing money changers’ licences would be renewed only for next two years after observing all the rules laid down for the same.

Bankers say whereas most of the rules of business laid down for the setting up of proposed exchange companies seem appropriate, the real thing would be their implementation in letter and spirit. Some senior bankers say the minimum paid-up capital is too low and the number of the proposed exchange companies is too high. Central bankers also say that initially the State Bank wanted to fix the minimum paid-up capital for these companies at Rs 500 million and restrict the number of the companies to less than half a dozen. But they say these figures were revised after debating the issue at a recent meeting of the State Bank’s corporate management group.

The group that meets every fortnight to take important decisions with consensus made a final discussion on January 12 about creation of exchange companies.

That day opinions were divided about the minimum paid-up capital. Those who were in favour of Rs500 million capital held the view that higher capital would ensure that only large and financially sound parties with a clear business strategy and proper system would venture into this field. They believed that if the capital requirement was cut, more parties would come up for setting up exchange companies and their effective monitoring would be difficult for the SBP.

Furthermore, since large financial groups and banks were target entities for setting up of exchange companies, a high paid-up capital seemed appropriate even from the investors’ point of view. But the most important point in favour of high paid-up capital was this: Overseas Pakistanis are likely to switch a significant part of their remittances from Hundi to the proposed Exchange Companies. Since these remitters are generally not aware of the various types of risks involved in such transfers, a higher capital should encourage the Exchange Companies to adopt proper procedures and systems to minimise the risks.

Those who were in favour of a low paid-up capital believed that a higher capital may discourage investors and they may shy away from venturing into exchange companies’ business. They also believed that because of higher capital requirement most of the existing money changers would not be able to convert themselves into exchange companies thereby frustrating one of the basic objectives for setting up such companies. Another argument was that a high paid-up capital of Rs500 million was not feasible from a profitability point of view.