IT exports: Changes in equity investment abroad policy okayed by ECC

ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has approved amendments in policy for equity investment abroad to facilitate IT exports, official sources told Business Recorder.

On May 23, 2024, Finance Division briefed the forum that the ECC on January 20, 2021 had approved major revision in equity investment abroad policy, which was implemented by State Bank of Pakistan (SBP) through F.E Circular No.01 of February 10, 2021. One of the purposes of the revision in equity investment abroad policy was to simplify the process of equity investment abroad especially for exporters to boost country’s exports. The said policy contained four investment categories - A, B, C and D.

Accordingly, a specific category was added in the policy; i.e., category “A” to allow exporters to establish entities abroad to facilitate exports. In terms of category “A” of investment abroad policy, as contained in Para 13(11) (A), Chapter 20 of Foreign Exchange Manual (FEM), general permission was granted to the designated Authorized Dealers to allow equity investment abroad transactions enlisted therein subject to the condition that total amount of remittance during a calendar year should not exceed the 10% of average annual export earnings of last three calendar years of the applicant, or $100,000 whichever is higher. This category is applicable to all kinds of exporters including IT exporters.

The Finance Division noted that the SBP had stated that it had been receiving requests from export-oriented companies operating in the IT sector for upward revision of the said threshold limit of 10% of average annual export earnings of last 3 years.

Besides, such companies also requested to do away with the restriction of setting up/acquiring one entity per jurisdiction, as this restriction hinders widening the footprints of Pakistani IT sector companies looking to acquire specialist entities, which were mostly concentrated in a few countries.

Moreover, similar other requests had been received from stakeholders to make the existing policy of equity investment abroad more conducive for export-oriented companies operating in the IT sector in particular and other sectors in general.

The Finance Division further noted that in view of the foregoing, following changes were being proposed by SBP in the existing equity investment abroad policy to facilitate exports especially IT exports and promote ease of doing business:(i) basic terms and conditions of the existing investment abroad policy, contained in Para 13(1), Chapter 20 of FE Manual, have been simplified and the term “firms” has been excluded from the policy to encourage companies to expand their footprints abroad; and (ii) specific category for equity investment abroad by export oriented companies operating in IT sector may be introduced and the existing category A of current equity investment abroad policy has been bifurcated into two categories; i.e.; “A1” for IT exporters and “A2” for other exporters.

Salient features of category A1: This category would specifically facilitate the export-oriented companies operating in the IT sector in expanding their footprints abroad. Main features of proposed category as well as the terms and conditions under this category are as follows: (i) export-oriented companies operating in IT sector may be permitted to undertake equity investment abroad transactions from their Exporters Special Foreign Currency Accounts (ESFCAs) as well as Special Foreign Currency Accounts (SFCAs) to the extent of funds available in such accounts.

Further, those IT companies which have not yet entered in export business or they do not have sufficient balances in their ESFCAS or SFCAs may be allowed to remit funds up to 100% of average net profit of the last three financial years or $ 100,000, whichever is higher, from the interbank market for investment abroad; (ii) IT sector companies may also be permitted to establish standby letters of credit to facilitate the offshore entity for raising funds from offshore jurisdictions, within the parameters/ limits; (iii) the requirement of designation of bank, where IT sector companies undertake equity investment abroad transactions from their ESCAs and SFCAs may be done away with.

The requirement of designation of bank would only apply in the case where funds are to be remitted from the interbank market; Boosting IT exports; (iv) the restriction of establishing/ acquiring one entity per jurisdiction for export oriented companies in the IT sector is being relaxed.

However, for establishing acquiring multiple companies in a single jurisdiction, the applicant will have to provide justifications to the satisfaction of its Authorized Dealer; (v) reporting requirement is being added whereby Authorized Dealer will report equity investment abroad transactions for export-oriented companies operating in IT sector; (vi) existing regime pertaining to remittance of annual budgeted operating expenses of representative/ liaison/ marketing office (cost centres), as contained in the existing category A of the policy, is being replicated in category A-1.

Moreover, the regime is being proposed to be further liberalised whereby banks would be able to remit funds, on behalf of export oriented companies, beyond the threshold defined in the policy, without obtaining approval.

Salient features of Category A-2: The existing category A of prevailing equity investment abroad policy is being renamed as “A-2” after the insertion of category “A-1”. Various provisions of the category-2 have been proposed to be relaxed to promote ease of doing business.

Salient features of changes proposed in category A-2 were highlighted as under: (i) The requirement of designation of bank is being proposed to be done away with for export oriented companies operating in other sectors, as well, where such companies utilise funds from ESFCA for undertaking equity investment abroad.

However, if such companies require funds from interbank market for investing abroad the requirement of designation of bank shall apply; and (ii) the regime pertaining to remittance of annual budgeted operating expenses of representative/liaison/marketing office (cost centres) is being further liberalized whereby banks would be able to remit funds, on behalf of export oriented companies, beyond the threshold defined in the policy, without obtaining approval from SBP.

The Finance Division, in its summary sought waivers/ exemptions from the provisions of proposed category A-1 and A-2 and regularisation of investment already made under the proposed categories may be decided by SBP irrespective of the amount involved. All other terms and conditions of the existing equity investment abroad policy and ECC decision of January 20, 2021 shall remain unchanged.

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