ISLAMABAD: In a major decision, the government on Wednesday approved a policy to allow equity investments abroad by big businesses, residents and firms on the premise that it would promote exports and allow resident firms in raising capital from abroad.

A decision to this effect was taken here at a meeting of the Economic Coordi­nation Committee (ECC) of the Cabinet presided over by Finance Minister Dr Abdul Hafeez Shaikh on the recommendations of the State Bank of Pakistan.

The ECC “approved a draft policy on equity investment abroad by residents/firms, which caters to the needs of the business community and aims to improve the ease of doing business, promote exports, facilitate resident companies in raising capital from abroad. It will also fulfill legitimate investment needs of the individuals,” said an official statement.

Move will facilitate stakeholders raising capital besides meeting legitimate needs

The SBP reported to the ECC that various stakeholders like Pakistan Business Council, software exporters, venture capital firms and start-ups have requested revision of the existing policy that did not meet legitimate business requirements.

At present, the SBP is empowered to evaluate and allow investment proposals abroad of amounts up to $10 million. For amounts above $10m, the request is evaluated by the SBP and then forwarded to the Ministry of Finance for a formal approval by the ECC.

In its summary to the ECC, the SBP reported that export-oriented companies had requested changes in regulations so that firms engaged in exports can incorporate subsidiaries or liaison offices abroad for boosting exports without prior approval of SBP.

Likewise, start-ups and venture capitals propose that residents should be allowed to establish holding companies abroad for raising capital for their local operating companies. These stakeholders also called for granting general permission to resident individuals to participate in share option plans and to acquire shares of companies abroad against their efforts and services, without any monetary consideration.

Based on consultations with relevant stakeholders, the new policy would have three new categories of investments abroad to the existing policy.

Under first new category, the new policy allows exporters to remit up to 10pc of their average annual export earnings of the last three year calendar years or $100,000 whichever is higher during a calendar year to set up subsidiaries or branch offices without prior approval of the SBP. This will benefit export-oriented companies to set up branches or subsidiaries abroad and help capturing more export orders as international buyers prefer dealing with subsidiaries and representative offices in their countries.

Second category is for holding companies and operating companies abroad by residents for raising capital from abroad to facilitate resident companies, especially venture capital, fin-techs and startup firms.

The SBP proposed introducing the concept of holding company (Holdco) and operating company (Opco) in the policy whereby a resident Opco can remit funds of up to $10,000 to incorporate a Holdco abroad without prior approval of SBP. Once a Holdco is incorporated, the existing shareholders of oOco can swap their shares to mirror the shareholding of Opco in Holdco. Subsequently, investment can be raised from abroad by Opco through Holdco and chanelise foreign investment in the country.

The third category is for investments abroad by resident individuals. At present, resident individuals can invest in listed securities abroad after approval of the SBP. Now the authorised dealers or banks would be allowed to remit up to $25,000 in a calendar year on behalf of resident individuals for acquisition of the listed securities abroad with SBP’s approval.

The new policy also allows general permission to resident employees of subsidiaries of foreign companies in Pakistan to participate in their share option plans subject to remittance of a maximum amount of $50,000 in a calendar year.

A new concept of sweat equity is being introduced to allow resident individuals to acquire shares of companies abroad against their efforts and services without any monetary consideration. This will allow resident individuals to acquire equity stakes in international firms through various instruments and earn foreign exchange for the country.

The proposed policy retains the existing provisions governing investment abroad by resident firms for expansion of business. However, banking sector proposals and allied requests for waiver or exemption and regularization would be decided by SBP irrespective of the amount involved as the requirements of this sector are time-bound and recurring in nature, especially capital injections.

Published in Dawn, January 21st, 2021