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Pakistan lays framework for private equity

Pakistani authorities have reportedly approved a regulatory framework that provides more clarity with regards to private equity fund formation, registration and fundraising.

The Securities and Exchange Commission of Pakistan (SECP) has approved a regulatory framework for the regulation and registration of private equity and venture capital funds in the country, Pakistan’s Daily Times has reported.

Until now, private equity activity in the country was governed by the Non-Banking Finance Companies and Notified Entities Regulations of 2007. From hereon, however, matters pertaining to the formation of fund management companies, the raising of private equity funds and their investments in Pakistan will be governed by the newly approved Private Equity and Venture Capital Fund Regulations.

According to the new regulations, private equity funds will only be open for investments to high-net-worth individuals and institutions. Fund management companies will be classified as non-banking financial companies and they will be licensed by the SECP to undertake management services.

The minimum size of funds has been fixed at 250 million Pakistani rupees ($3.3 million; €2.2 million). Each fund is required to have at least five investors with a minimum commitment of 10 million Pakistani rupees per investor. Funds will have a maximum life of 15 years and they are not allowed to be listed at any point.

Simultaneously, the government, through the Finance Act of 2008, has been providing incentives to promote private equity activity in the country, the report said. Under the provisions of the Finance Act, private equity funds enjoy tax-free status until 2014. Furthermore, taxes on capital gains have been reduced from 35 percent to 10 percent in the case of assets or shares of private companies that are sold to private equity funds.

Under the new private equity regulatory framework, the SECP has provided for overseas private equity funds to avail of these tax benefits as well. Foreign funds raising money overseas will be subject to minimal regulation, the report says, while foreign funds raising money from domestic investors will be given the same treatment as domestically domiciled funds.

The new regulatory framework provides more clarity with regards to the private equity activity than the existing regulations did.

A growing number of international investors are beginning to invest in Pakistan, a large market with a population of over 160 million and rapidly rising middle class incomes. The new regulatory framework, coupled with the tax incentives being provided to private equity firms, is only likely to accelerate the inflow of foreign capital into the country.

One of the funds investing in Pakistan at the moment is the Pakistan Infrastructure Fund, which is managed by Dubai-based infrastructure firm International Infrastructure Financing and hopes to raise between $300 million and $400 million.

Separately, in June this year, the Pakistan Private Equity and Venture Capital Association of Europe (PVCAE) was launched in London. PCVAE aims to promote Pakistan as a favourable investment destination in Europe and to simultaneously relay to the Pakistan government the views and requirements of European investors looking to invest in the country.