Exchange companies sector: MCR enhanced to Rs500m as SBP introduces major reforms

KARACHI: The State Bank of Pakistan (SBP), introducing the structural reforms for the Exchange Companies, on Wednesday announced increase in the minimum capital requirement from Rs 200 million to Rs 500 million and decided that various types of existing Exchange Companies and their franchisees will be consolidated and transformed into a single category of Exchange Companies with a well-defined mandate.

The licenses of franchisees and Exchange Companies of category ‘B’ (ECs-B) will be cancelled in the next three months, if existing ECs-B and franchisees are not consolidated and transformed into a single category of Exchange Company. In addition, leading banks actively engaged in foreign exchange business will establish wholly owned Exchange Companies to cater to the legitimate foreign exchange needs of the general public.

As per previous instructions, money changers were allowed to establish Exchange Companies and ECs-B, respectively. Exchange Companies, in addition to full-fledged branches, payment booths, and currency exchange booths, were also allowed to have franchise arrangements with other entities. However, now the SBP has decided to wind up the business of franchises and ECs-B.

ECs can import dollars in cash through cargo or security companies

According to fresh directives issued by the SBP on Wednesday, during the last few years, frequent regulatory issues/weaknesses have been observed in the Exchange Companies’ sector, particularly in the operations of ECs-B and franchises of Exchange Companies. Since the desired level of quality of governance, internal controls and compliance with laws and regulations has not been achieved, there is a need for introducing structural reforms in the sector.

As per reforms in order to strengthen the solvency of Exchange Companies and enable them to have robust infrastructure and systems, the minimum paid-up capital requirement of Exchange Companies is being enhanced by 150 percent from PKR 200 million to PKR 500 million (free of losses).

Accordingly, Exchange Companies having paid-up capital (free of losses) below PKR 500 million, are advised to enhance their paid-up capital to the required level latest by December 31, 2023.

As part of these reforms, it has been decided that various types of Exchange Companies will be consolidated and transformed into a single category with a well-defined mandate.

In exercise of powers conferred on the State Bank Pakistan under Section 3AA of the Foreign Exchange Regulation Act, 1947, it has been decided to offer the multiple options to ECs-B and franchises of Exchange Companies.

All ECs-B shall have the option of conversion into Exchange Companies within three months of the issuance of this directive, after fulfilling all legal and regulatory requirements. For this purpose, ECs-B may merge into an existing Exchange Company or upgrade from EC-B to a dull fledge Exchange Company or may merge with one or more ECs-B to establish an Exchange Company.

For the purpose, ECs-B shall approach SBP to seek NOC for exercising any one of the above options, within one month of issuance of this circular. All such applications for NOC must contain a conversion/merger plan, proposed shareholding structure, particulars/information/ affidavit of shareholders and directors/board resolution(s)of the relevant company(ies), where applicable.

SBP may, after scrutinizing the application, grant or refuse to grant the NOC if the applicants do not meet the regulatory requirements. The licenses of ECs-B, which do not approach SBP for the NOC within the stipulated time period, shall stand cancelled after the expiry of one month’s deadline.

After receiving the NOC from SBP as per point (b) above, ECs-B shall fulfill all legal and regulatory requirements for a formal license/authorization, as applicable, for commencement of operations as required under Para 2, Chapter 2 of Exchange Companies Manual (ECM) within three months. The licenses of those ECs-B which fail to complete the formalities within the stipulated time period of three months will stand cancelled.

For conversion of Franchises into Branches of the Exchange Companies, all franchises of the Exchange Companies shall have the option of conversion into branches of their respective franchisers within three months of the issuance of this circular.

For the purpose, franchises of Exchange Companies may merge with the Exchange Company (franchiser) or sell the franchise to the Exchange Company (franchiser).

Franchises, exercising the option of merger, will approach the concerned Exchange Company providing it with the relevant details to submit the application to SBP, within one month, along with the relevant documentary requirements. SBP may, after scrutinizing the application, grant or refuse to grant the approval for the merger.

In case of sale of franchise by the franchisees, the concerned Exchange Company would also approach SBP, within one month of the issuance of this circular, along with relevant regulatory documentation for conversion of the franchise license to branch category. SBP may, after scrutinizing the application, grant or refuse to grant the approval for conversion of franchise license into a branch.

The licenses of all those franchises, which do not opt for either merger or sale within the aforesaid stipulated time period of one month would stand cancelled.

The SBP said that the above reforms have been introduced to provide better services to the general public and bring transparency and competitiveness in the Exchange Companies’ sector. This is expected to strengthen governance, internal controls, and compliance culture in the sector.

Copyright Business Recorder, 2023