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SECP offers Private Equity and Venture Capital Funds

Staff Report

ISLAMABAD: After the Real Estate Investment Trusts (REITs), the Securities and Exchange Commission of Pakistan (SECP) is offering another development in this regard with the introduction of Private Equity and Venture Capital Funds (PE&VCF).

SECP continuously strives to offer financial products to the investors which are tailored to suit the prevailing market conditions and various segments according to their risk appetite.

The Commission has approved the regulatory framework for registration and regulation of PE&VC Funds in Pakistan. These regulations are the result of a comprehensive consultative process that started about two years back and includes extensive market dialogue with domestic as well as international stakeholders.

Private equity can play a vital role in transformation of the local economy by providing growth capital to the local corporate sector, particularly the SME sector besides patronising entrepreneurship and fuelling the privatisation process. It will unlock the hidden value of the private companies by providing capital and managerial skills for growth and expansion.

To foster the growth of these investment vehicles in Pakistan, significant incentives have already been provided by the government on the fiscal side in the Finance Act 2008. These include tax-free status for the fund up to 2014 and reduced capital gains tax rate of 10 percent as against 35 percent on sale of assets and shares of a private company to a PE&VC Fund. It is expected that the conducive regulatory framework combined with the tax incentives provided by the government for PE&VCF will attract large amounts of foreign direct investment in the country.

The PE&VCF will be an unlisted closed-end unit-trust fund open only to high net worth individuals and institutions. The fund will provide equity for seed/start-up capital, expansion, buyout as well as turn around although primarily to private companies, however, it can venture into privatisation deals as well. The management company or the FMC will be an NBFC licensed by the Commission to undertake the PE&VC Fund Management Services with a paid-up capital requirement of Rs 30 million. The promoters, directors and key executives of the FMC will have to comply with the fit and proper criteria made part of these regulations by the Commission. The minimum fund size has been fixed at Rs 250 million. The minimum number of investors has been fixed at five with a minimum subscription amount of Rs 10 million per investor that can only be raised through private placement. The fund is not allowed to list and has a maximum fixed life of fifteen years.

The PE&VC Funds established outside Pakistan have been offered the benefit of registering with the Commission to avail the tax advantages. Foreign funds not raising money locally will be subject to minimal regulation while those raising money locally are subject to same level of regulation as are the local funds.

Meanwhile, another press release of the SECP revealed that in exercise of the powers granted pursuant to Section 32E (1) and (1A) of the Securities and Exchange Ordinance, 1969, the SECP in consultation with the stakeholders has drafted the Stock Exchanges (Corporatization, Demutualization and Integration) Rules, 2008 (‘the draft Rules’).

The draft rules are necessary for the development of the capital markets of Pakistan and shall provide for the corporatisation and demutualisation of the stock exchanges in Pakistan and to facilitate the integration of these stock exchanges along with all other matters ancillary thereto.

The draft Rules have been placed on the official website of SECP for information of persons likely to be affected and notice is hereby given that any comments and suggestions received on the draft rules within the next 15 days will be taken into consideration by the SECP.

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