Repatriation of Capital from Pakistan: Practical Barriers under SBP regulations
Author: Hamza Hayat
For foreign investors seeking to invest in Pakistan the ability to repatriate profits efficiently is perhaps as critical as the decision to invest itself. Unlike the jurisdictions of United States or United Kingdom which, notwithstanding tax and corporate compliance, effectively exert no formal control over repatriation of capital, the Pakistani legal framework establishes a restrictive codified structure accompanied with significantly broad exemptions. Therefore, it is essential to understand the legal structure, regulatory framework, and potential practical barriers that may arise in repatriation of profits from Pakistan.
The primary legislation governing repatriation in Pakistan is Foreign Exchange Regulation Act, 1947 (“FERA”) and the delegated law of Foreign Exchange Manual (“FE Manual”). Under Section 13 FERA, no person is permitted except with the general or special permission of the State Bank of Pakistan (“SBP”) to undertake transactions involving securities in relation to a non-resident. In particular, FERA prohibits the issuance of any security, which is registered or to be registered in Pakistan, to a person resident outside of Pakistan without the permission of the SBP. Notably, a ‘person resident outside of Pakistan’ includes not only a foreign national, but also a company registered in Pakistan which may be controlled, directly or indirectly, by a person resident outside Pakistan.
However, this restrictive approach of Section 13 FERA is substantially tempered under the FE Manual. Para 6, Chapter 20 of the FE Manual establishes a general exemption for the issuance, transfer and export of securities to non-residents on a repatriation basis subject to certain compliance requirements.
The application of the general exemption is dependent upon the investment being made through normal banking channels through inward remittance or foreign currency accounts maintained in Pakistan. Additionally, the general exemption requires the purchase price of the security to be not be less than the quoted market price for listed securities, or the break-up value certified by a Chartered Accountant for unlisted shares. Despite the seemingly straightforward nature of the exemption, foreign investors should be aware that the compliance requirements governing its applicability may at times prove burdensome. It should be noted that the company issuing shares is required to initiate the issuance to the concerned Authorized Dealer (i.e. financial institution so authorized by the SBP) within sixty days of issuance of shares on the form prescribed in Appendix V-95 or Appendix V-96, for registration with the SBP along with supporting documents including the memorandum of association, certificate of incorporation, proceed realization certificate and auditor’s certificate.
While the above general exemption applies to the registration of shares to non-residents on a repatriable basis, corporate foreign investors should also note that the FE Manual imposes additional compliance requirements for the remittance of net profits by branches of foreign companies operating in Pakistan to their respective head offices abroad. Under Chapter 14, applications for remittance of net remittable profits to foreign head offices are to be submitted on Form ‘M’ to designated Authorized Dealers accompanied with an extensive set of supporting documentation. Without delving into the full extent of the requirements, such supporting documentation includes: (a) audited financial statements with complete notes, (b) audited consolidated balance sheet and profit & loss account of the head office, (c) reconciliation of head office accounts certified by external auditor, (d) tax provision made during the year for the current year and prior years along with computation, and (e) a certificate from auditors in Pakistan that tax provision in the accounts is sufficient to meet all current and contingent tax liabilities in Pakistan.
Therefore, despite the liberal legal framework under the FE Manual, the actual repatriation and remittance of profits process in Pakistan is often constrained by practical and operational barriers rather than legal prohibitions. One of the most significant barriers being the heavy documentation required which is subject to strict scrutiny by Authorized Dealers. Any inconsistency or omission can result in delays or rejection of the request. To mitigate these challenges, it is essential that for the foreign shareholder to ensure that all income flows from proper route via the formal banking channels and the entire process is duly documented as per procedural requirements under the FE Manual.
