Foreign Investment and Foreign Exchange Reforms

Foreign Private Investment The Government of Pakistan attaches great importance to the role of foreign collaboration in accelerating the pace of industrial development in Pakistan, as it helps in inflow of capital technology, managerial and technical skills.In 1976 "Foreign Private investment (Promotion and Protection)" Act (FPIA) was passed to provide for the promotion and protection of foreign private investment in Pakistan. "Foreign Private Investment" has been defined as investment in foreign capital by a person

who is not a citizen of Pakistan or who, being a citizen of Pakistan is also a citizen of any other country or by a company incorporated outside Pakistan, but does not include investment by a foreign government or agency of foreign government. "Foreign Capital'' in turn has been defined as "investment by a foreigner or by a person who, being a citizen of Pakistan, is also the citizen of any other country, in an industrial undertaking in Pakistan.

In the form of foreign exchange, imported machinery and equipment; or
In any other form which the Federal Government may approve for the purpose.''

Almost all fields are now open to foreign investment including power generation, transmission, oil and gas exploration and mining. The only exceptions are:

Agricultural land
Forestry
Irrigation
Real estate
Radioactive substance

A foreign investment project is entitled to the following repatriation facilities which are guaranteed by Government of Pakistan:

Foreign private Investment to the extent of original investment.

Profits earned on such investment: and
Any additional amount resulting from reinvested profits or appreciation of capital investment.

In addition to above repatriation guarantees the following guarantees and facilities are also available to Foreign Private investment.

Equal treatment with citizens of Pakistan in matters of taxation, and import / export of goods.
Relief from double taxation in case of countries with which Pakistan has agreement for avoidance of double taxation
concessions of duty free import of plant and machinery and income tax holidays on the same basis as these are available to local investors.

Exchange and Payment Reforms

1n addition to the measures for attracting foreign investment. The measures taken to liberalize the foreign exchange and payment procedures include:

Foreign currency accounts

All Resident and non-resident Pakistanis including resident firms and companies can maintain foreign currency accounts.

No Restriction on holding of foreign currency

Restriction on holdings of foreign currency has been removed , except where these have been obtained from the Authorized Dealers for specific purposes and the un-spent balance are required to be surrendered to the Authorized Dealers with in the prescribed time limit.

Remittance allowed for international trade fairs, exhibitions, advertisement

Restrictions on foreign remittances relating to payments for foreign advertisements, education. Professional institutions membership, publications, trade fairs, exhibitions etc. have been removed.

Dollar Bearer Certificates

US Dollar denominated Bearer Certificates have been introduced. These can be purchased by resident or non-resident Pakistanis and foreign investors against payment in foreign exchange.

Foreign loans

Access to borrowings has been greatly liberalized and permission of Federal Government or SBP is not required for rate of interest and repayment period for foreign loans.

Trade in the shares quoted on the Stock Exchanges

Non-residents are allowed to trade freely on the Stock exchanges in Pakistan. For this purpose a special Convertible Rupee account with any scheduled bank in Pakistan can be maintained.

Registration of Agreements

All agreements for loan, credit, royalty or technical fee are required to be registered with State Bank of Pakistan.

Borrowings by Foreign Controlled Companies and Branches of Foreign Companies

Loan for working capital

Foreign controlled manufacturing companies and oil distributing companies in Pakistan can borrow for working capital requirements upto 100% of the aggregate of their paid-up capital, reserves, undistributed profits/ un-remitted dividends.

Additional loans/credit facilities

In addition to the loan entitlement as above, general permission has been granted to authorized dealers for loans, overdrafts and credit facilities to foreign controlled companies, which are as follows:

Against commodities intended for export out of Pakistan either by a foreign company or any business house and are pledged with bank.
For purchase of raw materials or for meeting other expenditure connected therewith, provided raw materials purchased for production of goods are intended solely for export. In this case, certificate of auditor is required to confirm utilization.

Foreign private loans

Pakistani firms and companies functioning in Pakistan can obtain foreign private loans for working capital, on the following basis:

Non-repatriable basis

Such loans are treated as Rupee loans and neither principal nor interest/ profit would be remittable abroad. Repayment of loan and interest would be made in Pakistan in Pak Rupees.

Repatriable basis
The loan is interest free and for a period of not less than one year.
No bank guarantee to secure such loan would be provided from Pakistan.
No forward cover shall be provided.
Government of Pakistan will not provide any facility for absorption of exchange risk.

Agreement on repatriable basis should be registered with State Bank of Pakistan.

Short term loans from abroad by exporters

The exporters who have firm contracts with foreign buyers or are holding letters of credit received from abroad, can contract foreign currency loans from abroad to the extent of value of contract or L/C, provided that:

The foreign exchange proceeds of the loan shall be repatriated to Pakistan.
Exporter shall bear the exchange risk.
The Authorized dealer may issue the guarantee to secure such loan.
Borrower will be free to negotiate the rate of interest on such loans.
The maximum tenure of such loan shall be 180 days.
The loan will be repaid out of export proceeds.
The exporter will not be entitled to obtain export finance in local currency from a bank in Pakistan.

Bridging facility

In special circumstances. State Bank of Pakistan may allow Rupee borrowing as bridging facility for short term.

Loan for capital expenditure / fixed investment

A foreign controlled manufacturing company can borrow any amount from local banks and financial institutions, without prior permission of State Bank of Pakistan

Loans against guarantees of non-residents or against collateral held outside Pakistan

Authorized Dealers have general permission under the Foreign Exchange Regulations to grant rupee loans to their clients (including foreign controlled companies) against guarantees of non-residents /guarantees received from banks functioning abroad. Subject to compliance with the credit restrictions imposed by the State Bank of Pakistan.

Exchange Regulations Relating to Remittance of Royalty and Technical Fee

From time to time numerous steps have been taken by the Government to improve the access of private sector to foreign currency resources and to facilitate transfer of technology.

Royalty

Royalty is a fee paid by a local firm to the foreign collaborator in consideration of License to use the foreign manufacturers' patent/ brand name for marketing the product(s).

Technical fee

It is a fee paid by the local firm to the foreign collaborator in consideration of

Engineering and Technical Services including assistance on manufacturing process, testing and quality control.
Technical training of local personnel.

Remittance of Royalty/Technical Fee would be allowed by the Authorized Dealer designated for the purpose. Without the prior approval of the Stale Bank subject to the following:

Application for remittance of Royalty Technical Fee is submitted by the firm concerned in the prescribed form.
The correctness of the information furnished in the application must be certified by the Auditors of the firm in the space provided for the purpose.
Payment of income tax supported by a certificate from auditors of the paying firm. In case it is claimed that the payment is exempt from levy of income tax, then relevant exemption certificate from the competent tax authorities would be required.
The applicant company must be incorporated and operating in Pakistan.

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