New SBP rules for A company operating in multiple locations or offering more than one different service will often restructure itself as a group. This is usually conclude to ensure that any liability or debt incurred by one such operating company. The OpCo, does not spill over to its holding company, the HoldCo. However, another important reason to opt for a HoldCo/OpCo structure is the added advantage of operating in another jurisdiction or raising funds from another jurisdiction.
As of February 2021, the State Bank of Pakistan (SBP) has allowed Pakistani citizens to hold shares in holding companies abroad, a big step in the name of modernizing the old Foreign Exchange (FX) regulations. But before we can consider the significance of this move, let us quickly recap the situation under the previous law.
Prior to the February 2021 circular, Pakistani citizens who founded startups in Pakistan were not allowed to hold shares in any foreign holding company. Therefore, startup founders struggled to incorporate foreign HoldCos which are attractive vehicles for raising capital from abroad. Some foreign investors are comfortable investing in companies incorporated in jurisdictions. They are familiar with (such as their home jurisdiction), or in jurisdictions. which are considered to have investor-friendly courts and regimes.
Therefore, the notification is great news coupled with the fact that venture capital investment and interest in Pakistani startups is on the rise. Not only will this change allow direct foreign investment into Pakistani startups as venture capitalists invest in our holding companies, but it will also encourage entrepreneurs to explore new and unfamiliar avenues and subsequently capture a greater share for Pakistan in the export market. Furthermore, as citizens of Pakistan can now invest in foreign holding companies. Any repatriation of their capital gains will also bring in greater foreign exchange for the country for New SBP Rules.
The circular, however, also includes some terms and conditions which must be abided by when investing abroad. Generally, the investment must be in a country that allows repatriation of profits and any proposed funds. This must be legitimate with tax records. Furthermore, the investor must have a clean record of loan repayments. And no pending investigations related to money laundering or terror financing. Provided that these general requirements are met, the specific requirements mentioned in the circular must be fulfilled as well.
For startups looking to establish a holding company abroad, the circular designates that Authorized Dealers (for example a bank) may be granted a general permission to allow foreign investment transactions concerned with injecting capital into the holding company and/or hiring any personnel abroad and remitting their expenses.
An application must be made to the Exchange Policy Department of the State Bank of Pakistan to acknowledge the Authorized Dealer as designated by the applicant. Once acknowledged, the Authorized Dealer. Then becomes responsible to ensure that all terms and conditions. Which stipulate for each type of foreign investment are compile with and a record is maintained. The Authorized Dealer will then vet the applicant and process the application. During the process, it may confer with the State Bank or the Exchange and Policy department.
The circular is proving to be a very positive development for Pakistani startups. We hope it accelerates foreign VC investment in Pakistani startups.