Foreign Investments and Foreigners Opening an Establishment in Pakistan
The regulatory regime in respect of foreign investments in Pakistan is covered both through a regular statute as well as policy/administrative decisions of the Board of Investment (the “BOI”). The policies of the BOI are quite fluid and there is a great deal of space which one can achieve in working with it. The BOI has no statutory authority and in the commercial field the strict enforcement of its policies are not evidenced. The major element in the past that induced prompt compliance with BOI policies and the policies of its predecessor, Investment Bureau of Pakistan (“IPB”), was that remittance out of Pakistan could not be made except through the State Bank of Pakistan without IPB/BOI approval. The foreign exchange regime has been liberalized in Pakistan and is governed mainly through Foreign Exchange Regulation Act.
The statutory regulation is to be found in the Companies Act, 2017 (the “Act”). Part XII (Sections 434 to 445) of the Act deals with companies established outside Pakistan and provisions as to establishment of place of business in Pakistan. This Part requires all foreign companies that establish a ‘place of business’ in Pakistan to register with the Securities and Exchange Commission of Pakistan (“SECP”). Foreign companies have been defined to mean companies that are incorporated or formed outside Pakistan.
The Act requires certain reporting requirements, which have to be compiled with by the foreign companies. These reporting requirements include the submission of the copies of the Constitution, bye-laws, full address of the registered office, list of directors, audited balance sheets/profit or loss account, and the address of company in Pakistan. The consequences of non-registration are that the foreign company will not be able to file any suit or claim any set-off in any litigation in the courts of Pakistan although their contracts would be deemed valid. The expression ‘place of business’ has been defined in the Act and the definition is wide enough to include any form of office of a foreign entity in Pakistan may it be liaison office or branch office, therefore, the registration of any of these offices with Securities and Exchange Commission of Pakistan is necessary.In addition to the above statutory framework the BOI issues policy directives from time to time. For example, the BOI has required that foreign companies establishing a branch/liaison office in Pakistan must file an application with the BOI on a specimen provided by the BOI. The BOI also requires filling of application in respect of projects in the field of services, infra-structure, social and agricultural sectors in terms of another specimen requires that all foreign companies must register both with it as well as with the SECP as per the requirements of the Act noted earlier. For example, as per the policies of the BOI a liaison office is established for carrying out auxiliary activities such as maintaining quality control, provision of technical advice and assistance, exploring the possibility of joint collaboration and export promotion and educating the Pakistani users of the company product etc. It is not allowed to engage in any trading or commercial activities.
A foreign national or a foreign company can form a limited liability company incorporated in Pakistan in the following three ways subject to security clearance:
A shareholder or director of the Company who is a foreign national will have to submit additional documents with Securities and Exchange Commission of Pakistan, at the time of filing documents for registration of a company, for the purpose of seeking security clearance from the Ministry of Interior.
In case of transfer of shares in favor of the foreign national/company and appointment of foreign national as director/chief executive of company in Pakistan, security clearance is also obtained from the Ministry of Interior Pakistan. However, in case of acquisition of share by a foreigner, the company can resume business subject to the concerned foreign person (individual or company) submitting an undertaking to the effect that in case clearance is not granted, it will transfer its shares or resign from the Board of Directors, as the case may be.
For security clearance, following documents of proposed directors/chief executive/shareholders shall be required:
In case a foreign company is the shareholder of a company, the following will be required to be submitted to the Security Exchange Commission of Pakistan in respect of the same:
As security clearance from the Ministry of Interior Pakistan takes time, the documents filed for registration of new company and forms filed for transfer of shares and appointment of director are accepted by the Securities and Exchange Commission of Pakistan on the basis of Undertaking wherein the foreign director/shareholder/chief executive undertake that they will transfer their shares to any other person/resign as director/chief executive if their security clearance is not confirmed by the Ministry of Interior Pakistan.
The Company can repatriate the profits of the foreign investment by obtaining a prior ‘Entitlement Certificate’ issued by State Bank of Pakistan for investment in Pakistan on repatriate basis. The State Bank, on the request of the company, authorizes an authorized dealer for the purpose of remittance of dividend to non-resident shareholders as per procedure outlined in Foreign Exchange Manual. The authorized dealers are Schedule Banks and all inward and outward remittance should be done through the said dealer.
