ISLAMABAD, May 26: The Ministry of Privatization and Investment has accepted a proposal of the SBP to enhance foreign equity repatriation ceiling from 60 per cent to 100 per cent in the services sector with a view to further promoting foreign investment in the country.

Officials told Dawn here on Wednesday that a special meeting of the Cabinet Committee on Investment (CCoI) was being convened shortly to formally approve the SBP's proposal. Prime Minister Mir Zafarullah Khan Jamali would chair the meeting.

The ministry is of the view that foreign equity in the services sector may remain 100 per cent and the condition of its dilution to 60:40 within five years may be done away with.

"Similarly, the foreign equity repatriation ceiling of 60 per cent should be enhanced to 100 per cent and that in services and infrastructure sectors, minimum limit for foreign investment of $300,000 be revised downward to $150,000.

Also, limit of maximum initial fee payable to the franchiser of $100,000 be abolished and that the maximum of five per cent of net sales allowed as franchise fee should be increased to seven per cent."

However, the ministry of interior and the Punjab government maintained that removal of foreign equity investment of $300,000 would render small local investors to stiff competition resulting in uneven level-playing field.

The finance division, the Balochistan government and the Overseas Chamber of Commerce and Industry generally supported the proposal of removal of equity restriction as an incentive for foreign investors.

The ministry of industries and production and the NWFP government, nevertheless, recommended removal of equity/ restrictions only in activities of human service value and excluding banks, hoteling, insurance, etc., which involved big investments.

Sources said that the service sector was one of the vital and vibrant sectors of the economy for which the Board of Investment was of the view that equity restrictions in this sector were a disincentive to the foreign investors.

The apprehension that it will result in stiff competition for local investors is unfounded as many businesses do not require large upfront capital investments. Competition in business results in better performance, quality products and competitive prices, which ultimately benefits the customers.

Prior to the announcement of Investment Policy 1997, only the manufacturing sector was open to foreign investment without any restrictions on size and percentage of foreign equity. However, in services and social sectors, the foreign investors were allowed entry on case to case basis.

Since 1997, the investment regime for the services sector has been liberalized and the foreign investors are now required to fulfil the following conditions which included: Amount of foreign equity in a company/project shall be at least $300,000.

And foreign investors can hold 100 per cent equity subject to the condition that (a) repatriation of profits will be restricted to a maximum of 60 per cent of total equity or profit, (b) a minimum of 40 per cent equity will be held by Pakistani investors (including sale of shares in stock exchange) within 5-years.

The federal cabinet in its meeting held on July 19, 2003 approved the following: "The Board of Investment will remove equity restriction from investments in the services sector."

A foreign investor who already has 60 per cent shareholding in a service sector company, due to liberal policy, can buy shares from the stock exchange and enhance his equity beyond 60 per cent and the company (or its subsidiary) can repatriate profits in excess of 60 per cent.

However, sources said that the plea of the State Bank was accepted that the foreign equity holding/profit repatriation ceiling of 60 per cent needed to be enhanced and investors be allowed 100 per cent repatriation to attract foreign investment in Pakistan.