One important factor in facilitating foreign capital (investment) inflow into the country is to allow it to move out easily. Lesser the friction, better is the investor confidence. The capital flowing into Pakistan never had any restriction; but historically, there were hiccups for money to move out of the country through formal channels, especially for businesses.
Long approval processes from the regulator (State Bank of Pakistan) and the government for any potential investment abroad had limited the scope of exporters to explore new markets and to integrate into the downstream value chain. Start-ups and tech ventures faced difficulties in attracting venture capital firms and angel investor’s interest. That hindered growth of start-up culture in Pakistan.
State Bank of Pakistan (SBP) has been consulting with market players for a few months to ease those restrictions. Last week, landmark changes in foreign exchange manual were made. These revisions have significantly liberalized the investment regime bringing it in sync with modern world realities. These changes have a potential to go a long way in developing the start-up culture in Pakistan; and in attaining the value addition in the exporting sector, especially textiles.
Exporters need no regulatory approvals for investment in any country up to 10 percent of average annual exports earnings for past three years. If a company is not an exporter and is looking for potential export, it can invest up to $100,000 without needing prior approvals.
It is pertinent to note that investment abroad was always possible; but was subject to tough regulatory approvals. The approval process was around 6-12 months and there was no guarantee that permission would eventually be granted. Nonetheless, non-exporting businesses still need to convince SBP for investment abroad. Ideally, this should be frictionless. But it’s better to gradually liberalize in a country with low and volatile foreign exchange reserves.
A few leading exporters are excited about this liberalization. There are many foreign brands and companies up for grab. Many SME businesses in the West are facing trouble and looking for acquisition. Big textile players can buy financially weak businesses abroad. For example, one leading player is eyeing a fabric dying business in a European country; this player wants to bring the operations in Pakistan. One denim company is downward integrating into washing business in California to manage just in-time delivery.
Textile industry can potentially acquire assets abroad – brands, warehouses, small processing units etc. One idea floated is that a few exporters can join hands to acquire a sick brand abroad. Debenhams was recently sold at £55 million. There are other opportunities. A consortium of Pakistani companies can buy brands. There would be gains from brand name to users’ data. Think about Pakistani exporters selling directly on Amazon.
The real juice of the revised foreign exchange manual is in creating space for the start-up culture to nurture. Earlier, there were implicit restrictions on resident Pakistanis to access capital from venture capital hubs. There is learning by doing for the SBP. When Bykea after getting funding went for registration, the limitation of regulation was red flagged, and now a vibrant policy is in place.
HoldCo and OpCo structure has been brought into place. A resident OpCo can remit up to $10,000 outside without any approval in foreign HoldCo. These funds have to be used to raise funding outside. The shareholding structure can be mirrored. The investment would come in Pakistan in the OpCo (venture). Subsequent repatriation would be possible based on company’s financials and shareholding structure.
In simpler words, the VC fund and other form of start-up investors would have confidence in investing in Pakistan ventures. Start-ups have incentive to showcase their ideas in investor hubs. Market experts are of the view that investment in fin-tech and tech space would mushroom in Pakistan in the next few years.
With an ecosystem in place, now domestic big groups could be receptive in investing in the start-ups. The first investment layer usually comes from specialized VC funds. These have the expertise to bring an idea into reality. Once a start-up reaches a reasonable scale, local investors can jump in subsequent rounds.
The start-up industry is happy with the efforts of Securities and Exchange Commission of Pakistan (SECP) as well. Amendments have been proposed in the Companies Act to bring ease in issuance of employees’ stock options, share buyback and other matters. A regulatory sandbox has been formed to encourage and nourish start-ups. The era of funding ideas is finally coming home.Ali Khizar, "Liberalizing foreign exchange regime," Business Recorder. 2021-02-14.
Keywords: Economics , State Bank , Textile industry , Foreign exchange , Bykea , SECP