KARACHI, Aug 1: The foreign exchange companies that are to be set up for carrying out the business of currency exchange are supposed to limit their daily exposure up to 50 per cent of their capital base.

In simple words these companies will not be allowed to overbuy or oversell foreign exchange at more than 50 per cent of their capital base.

This is one of the key conditions envisaged in the procedure announced by the State Bank for the working of these companies.

The procedure has been laid out in a SBP circular (FE no. 9) issued by the State Bank.

The exposure limit and such other conditions have been put in place to prevent speculative trading of foreign exchange — and to block possible money laundering through these companies.

The safeguards seem necessary given the nature of the business of these companies that are permitted not only to deal in cash but can also transfer funds through electronic means. The checks seem all the more necessary due to the fact that these companies are allowed to have up to 50 per cent foreign participation in the equity.

The SBP regulations say the exchange companies may repatriate profit in proportion to the extent of foreign equity.

Following are some of the key regulations aimed at checking possible speculative activities by the exchange companies and blocking money laundering:

(i) The exchange companies would be allowed to buy from and sell foreign exchange to individuals in ready value only. This means the companies cannot buy from or sell foreign exchange to the individuals in forward.

(ii) The exchange companies will issue official receipts in all dealings with its customers. The 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.

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

(iv) 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.

Central bankers say this is the toughest condition imposed on the exchange companies to ensure where the money is coming from and where it is going. Sources close to the central bank say this condition is the greatest source of satisfaction for the IMF that wants to make foreign exchange transactions completely transparent in Pakistan as the post-September 11 situation makes it a real possibility that terrorist outfits operating here may get foreign funding.