To attract maximum foreign investment in the corporate sector, the Securities and Exchange Commission of Pakistan (SECP) has offered minimum regulatory framework and tax incentives to the foreign 'Private Equity and Venture Capital Funds' (PE&VCF), who are not raising money locally.
The Commission on Tuesday issued PE&VCF Rules, 2008 to provide conducive regulatory framework for the private equities to attract foreign direct investment. Under the new rules, the PE&VC Funds established outside Pakistan, have been offered the benefit of registration with the Commission to avail the tax advantages. Foreign funds not raising money locally will be subject to minimal regulation while those raising money locally are subject to the same level of regulation as are the local funds.
To foster the growth of these investment vehicles in Pakistan, the significant incentives have already been provided by the federal government on the fiscal side in the Finance Act, 2008. These include tax-free status for the fund up to 2014. Other tax incentives included reduced capital gains tax rate of 10 percent as against 35 percent on sale of assets and shares of a private company to a PE&VC Fund.
It is expected that the conducive regulatory framework combined with the tax incentives provided by the government for PE&VCF will attract large amounts of foreign direct investment in the country, the SECP said.
The Commission has approved the regulatory framework for registration and regulation of PE&VC Funds in Pakistan. These regulations are the result of a comprehensive consultative process that started about two years back and includes extensive market dialogue with domestic as well as international stakeholders.
According to the SECP, the private equity can play a vital role in transformation of the local economy by providing growth capital to the local corporate sector particularly the SME sector, besides patronising entrepreneurship and fuelling the privatisation process. The private equity will unlock the hidden value of the private companies by providing capital and managerial skills for growth and expansion.
Under the new rules, the PE&VCF will be an unlisted closed-end unit-trust fund open only to high-net worth individuals and institutions. The fund will provide equity for seed/start-up capital, expansion, buyout as well as turn around although primarily to private companies, however, it can venture into privatisation deals as well.
The management company or the FMC will be an NBFC licensed by the Commission to undertake the PE&VC Fund Management Services with a paid-up capital requirement of Rs 30 million.
The promoters, directors, and key executives of the FMC will have to comply with the fit and proper criteria made part of these regulations by the Commission. The minimum fund size has been fixed at Rs 250 million. The minimum number of investors has been fixed at five with a minimum subscription amount of Rs 10 million per investor that can only be raised through private placement. The fund is not allowed to list and has a maximum fixed life of 15 years.
The SECP said the Commission continuously strives for offering financial products to the investors, which are tailored to suit the prevailing market conditions and various segments according to their risk appetite. After Real Estate Investment Trusts (REITs) another development in this regard is the introduction of (PE&VCF).
When contacted, experts said that the foreign funds "not raising money locally" covers funds, which are registered board and also raised funds from their investors aboard. These funds are trading in listed stocks at Pakistani stock exchanges, but not raising any funds directly from resident investors or local public. As these foreign funds are not generating money directly from resident investors, therefore, there is minimum regulatory requirement by the SECP.
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