SBP mulls relaxing FE regulations for startups to raise convertible debts

SBP startups

The State Bank of Pakistan (SBP) is considering relaxing rules for startups and fintech companies to raise foreign capital, as it may allow the firms to raise “convertible debt” from abroad, according to the working paper.

SBP is working on a new type of loan scheme that will bring amendments to the current foreign exchange regulations regarding borrowing from abroad, keeping in view the issues faced by companies in raising capital in the form of convertible debt from abroad under current regulations.

According to a working paper titled “Raising of convertible debt from abroad by startup companies” issued by SBP on Tuesday, startups and venture capital firms maintain that foreign investors are willing to invest in their companies in the form of convertible debt (i.e. loan convertible into equity) instead of directly investing as equity while the current foreign exchange regulations remain unable to provide this facility.

Read more: Pakistan launches first national investment platform for startups

Also, startup firms are facing issues regarding funding due to the unavailability of collateral or security. Meanwhile, foreign investors are showing interest as well as, equity funds and angel investors also want to invest. SBP noted that they try to cover the risk through alternative means like high return on loan.

“A company may raise funds from abroad in the form of convertible debt i.e. the lender shall have the option to convert the loan into equity of the borrowing company,” said the SBP.

Moreover, SBP has also made it convenient to make investments in countries that allow capital and profits to be repatriated to Pakistan.

Moreover, the expectations are that when Pakistanis will make investments abroad to make their subsidiaries, profits can be repatriated. SBP has allowed banks to pay funds abroad on behalf of export-oriented companies, up to 10% of their average annual export earnings from the last three calendar years, or $100,000, whichever is higher.

Banks have been allowed to remit $30,000 from the second year onwards so that they can meet the annual budgeted expenses of a representative office established or acquired abroad with an annual increase of 10% in expenses, subject to a valid justification.

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