Printer Friendly

Foreign investment: it's role in industrial development.

Foreign collaboration is developing countries like Pakistan plays a vital role in industrial development of such countries and has a significant impact on: Creation of employment opportunities: Development of skills through training; Stimulation of local enterprise; Assistance to industries requiring expansion, balancing, modernisation or replacement; Increased availability of quality goods and services economic prices.

In Pakistan, the above considerations and potential spinoff effects were the stimulating factors for national policy makers and the availability of cheap labour and raw material couple with preferential treatment, concessions and incentives were obvious temptations for multinationals. An analysis of the types of collaboration bears out an interesting situation by highlighting the fact that 60 per cent of such investment consists of non-manufacturing sector and includes trading, banking, insurance and other service agencies and only 40 per cent represent manufacturing sector.

The political instability, deficient planning process and bureaucratic red-tapism in implementation process were the major obstacles in attracting the foreign investors in the specific hi-tech fields despite policy measures and otherwise positive potential for such investors. A potential foreign investor would base his investment decision at least on the following factors.

Potential market of the host country for its products with particular emphasis on the market size, its growth, competitors' capabilities and marketing cost of the entry.

Endowment features: (i) Availability of raw materials, (ii) Labour resources, their skills and costs, (iii) Management resources and skills, (iv) GNP Growth and other economic indicates.

Current investment policies: (i) Entry restrictions, (ii) Sanctioning procedures.

Exchange control measures.

Protection of investment and repatriation

Taxation levels

Tariff protection

Special incentives.

Pakistan has considerable potential in terms of its market and other endowment features. Furthermore, the |Foreign Private Investment Act, 1976. being the basic policy enactment, gives the investor absolute protection of his investment, provides for right to repatriate capital and its appreciation and right to remit dividends. The protection of foreign private investment has remained unaffected by the changes of Government and even when nationalisation was the order of the day, the industries with foreign investment were specifically exempted from nationalisation.

Government Policies

a) Background: Government of Pakistan attaches a great importance to the role of foreign collaboration in accelerating the pace of industrial development in Pakistan. In early fifties it was decided that the service sector was to be managed by locals and foreign investment would not be allowed in the field of banking, insurance and commerce. However, later the position was relatively liberalised and foreign banks were allowed to open branches in Pakistan. In 1976 an Act was passed for the promotion and protection of foreign private investment followed by Presidential Order in 1979 for protection of industrial property rights of investors. In 1984 a comprehensive Industrial Policy Statement was issued which indicated that foreign investment will be encouraged in industrial projects involving advanced technology and heavy capital outlay like engineering, basic chemicals, electronic and other capital goods industries. The package deals with foreign firms for the provision of capital, production of goods, technology, management and marketing know how backed up by their own international sales network would be encouraged in Pakistan.

The New Industrial Policy Package was issued in 1988 which was again revised in July 1989 which among other things included the following significant features. Greater reliance was continued to be placed on the private sector to achieve the objectives of the new industrial policy. To underline this fact, the 7th Five Year Plan provided Rs. 87.5 billion for investment in the private sector as against only Rs. 9.0 billion in the public sector. Thus allocated share for private sector was over 90 per cent of the total investment. To make this possible, effective monetary and fiscal incentives were given to attract private investment.

The Government was of the view that in order to attract private investment, specially from abroad, guarantees would have to be extended against policy of nationalisation. Moreover, to rationalise the investment strategy, a policy of privatisation was being gradually introduced in order to combine both the public and private sectors in the national development process. It was categorically declared that there will be no nationalisation of industry in future.

All proposals involving foreign private investment were upon 1988 required to be submitted to the Investment Promotion Bureau for processing and placing for approval and clearance of the Central Investment Promotion Committee (CIPC). A project approved by CIPC was followed by a permission letter issued by Investment Promotion Bureau containing conditions of the approval. Further, projects in which more than 60 per cent of the raw materials was importable provided the value of such import exceeded 20 per cent of the total investment in fixed assets required approval of the Economic Coordination Committee, which was a cabinet level policy making forum. Once the above approvals were obtained then prior to incorporation of a company having foreign investment, it was necessary to obtain the consent of the Controller of Capital Issues for issue of the capital.

Furthermore, on receipt of consent of the Controller of Capital Issues, the company was required to obtain the permission of the State Bank of Pakistan for issue and export of the shares.

The last government of the Peoples Party started the process of further deregulation and the requirements of approval of CIPC were relaxed for all projects having total cots of Rs. 1,000 million and where foreign investment was less than 50 per cent. However, requirements of obtaining consent of the Controller and permission from State Bank of Pakistan were maintained.

The relaxation as to the foreign investment was applicable to both new projects and existing projects where new investment was to be made in the form of Joint Ventures. However, foreign nationals including Pakistanis holding dual nationality were not allowed to make investments in the shares of any listed company by purchasing shares through the Stock Exchange.

b) Reforms Package Relaxation: The reforms package announced by the present government has been a major leap forward towards deregulation. UNder these reforms foreigners (including Pakistanis holding dual nationality) are allowed to invest without any approval in all industries except the following:

Industries for manufactures of alcohol

Specified industries: Arms & Ammunition, Security Printing, Currency & Bullion, High explosives and Radio active substances.

Foreigners can hold upto 100 per cent of equity in projects where no permission is required from the government and in all such cases no permission would be required for issues and export of shares from the Controller of Capital Issue and the State Bank of Pakistan as well.

Foreign nationals (including Pakistanis holding dual nationality) can now also invest in the shares of existing listed companies through the Stock Exchange on repatriable basis. State Bank of Pakistan has already issued several FE Circulars which contain the details of the revisions in the relevant provisions of the Exchange Control Manual for implementation of the following decisions announced by the Prime Minister.

(i) Freedom for investment by foreigners as well as non-resident Pakistani Nationals in shares of companies quoted on the Stock Exchange with the facility of transfer of dividends and capital in foreign exchange, provided the purchase price in paid in foreign exchange;

ii) Exemption from the requirement of State Bank's permission for sale of shares by one non-resident to another non-resident; and

iii) Exemption from the requirement of State Bank's permission for issue and export of share certificates in the above types of cases.

c) Revised General exemptions: The revised paragraph 6 of Chapter XX of the Manual summarises the General exemption from the provisions of Section 13(1) of the Act.

The significant provisions of the general exemptions can be summarised as follows: New Issues

Shares can be issued on repatriable basis to foreign investors by a manufacturing concern which is either a public or a private limited company through private placements provided payment is made by the investors in foreign exchange or through the supply of plant and machinery without any restriction on the proportion of equity investment.

Shares can be issued out of new public share offers made by any company on a repatriable basis provided the issue price is paid in foreign exchanges either by remittance from abroad or out of foreign currency accounts maintained in Pakistan to foreign citizens and foreign companies other than foreign branches operating in Pakistan or companies owned or controlled by a foreign Government.

NIT Units and Government securities can be issued to foreign nationals on the basis of repatriation of capital and profits.

NIT Units and shares of listed companies and all other securities can also be issued to non-resident Pakistanis on non repatriable basis, if payments are made in Pakistan rupees provided the securities and shares are registered at the Pakistan address of the purchasers.

Transfer of shares: There are no restrictions for the transfer of shares for the following:

i) Transfer of share or securities by a non-resident to other non-resident against payment outside Pakistan.

ii) Transfer of Pakistani securities issued on non repatriable basis by a non-resident Pakistanis to a resident or non-resident on the same basis provided the securities are registered at Pakistan address.

iii) Transfer of shares of listed companies to foreign nationals other than foreign branches operating in Pakistan and foreign companies directly and indirectly controlled by a foreign government. The shares price in case of purchase of shares through stock exchange would be as certified by the stock brokers and in case of private negotiations the price would be not less than the price quoted on the stock exchange which is to be paid in foreign exchange.

iv) Transfer of shares in favour of non-residents on repatriable basis by a manufacturing concern which is either a private limited company or an unlisted public limited company provided the purchase price is paid in foreign exchange and is not less than the break up value of shares as certified by a practicing Chartered Accountant.

Transfer of controlling interest: It would be pertinent to note that para 6 now provides for a general exemption from the provisions of Section 18(1) of the Exchange Control Regulations Act, 1947 Section 18(1) reads as follows: "Except with the general or special permission of the State Bank, no person resident in Pakistan shall do any act whereby a company, which is controlled by persons resident in Pakistan ceases to be so controlled. The general exemption now has excluded the issue or transfer of a controlling investment to non residents which previously required special permissions of the State Bank of Pakistan. In theory there is now a possibility of transfer of Controlling interest in a company from a resident to non-resident by purchase of shares by non-residents through Stock Exchange without any private arrangements with the sponsors of such company. However, there is still a confusion in respect sectors where foreign investment is restricted in terms of Industrial Policy whether investment through stock exchange in such sectors would be permissible or not. The relaxation in Exchange Control Regulations do not restrict any such investment and if required would need to be amended to cater to such situations.

Opening of foreign currency collection accounts: Companies issuing shares on repatriable basis are allowed to open foreign currency collection accounts with banks abroad for receiving the subscription and the procedure is similar to as was previously applicable to issue of shares to non-resident Pakistanis on repatriable basis. Companies are required to intimate/provide the designated banks after registering transfer of shares in favour of non-residents the following:

Name, nationality and address of the non-resident shareholders.

Number of shares registered in his name and the corresponding face value.

Copy of the Proceeds realisation certificate or certificate of transfer.

d) Issue of shares against the value of plant and machinery: In case shares are to be issued to non-residents against the value of plant and machinery supplied by them, company is required to submit an application to the Area Exchange Central Office for issue of "Exchange Entitlement Certificates" along with"

- Invoices

- Bills of landing

- Bills of entry and import permit.

The company can issue shares to the non-resident investors, once the Exchange entitlement certificate is issued, on surrender of these certificates in place of proceeds realisation certificate. Companies on complying with the specified requirements can issue/transfer shares in favour of non-resident and can export share certificates. Furthermore, Authorised Dealers have also been allowed to remit the following in relation to shares issued to non-residents. (i) Dividend net of applicable tax, (ii) Disinvestment proceeds provided the amount to be remitted is not in excess of the sale price as certified by a stock exchange broker and tax, if applicable has been paid.


Pakistan has a considerable potential for foreign investors both in terms of endowment features and the current Government policy of deregulation and liberalisation of economy. The |opening up' of the economic sector and deregulation of sanctioning procedure is bound to have a positive impact on the investment climate in the country.

Furthermore, the competition which is being provided in certain public sector monopoly areas like communications, airlines, shipping companies and the financial sector would also support the privatisation programme of the Government. The liberalisation in the sanctioning and regulating environment would also attract foreign investment. The removal of restriction on equity holding in industries is viewed as a major positive change by the foreign investment analysts but it could have repercussions on the development of local industries. The competition by foreign investors in lowtech and consumer products without any requirement for setting up Joint Ventures with local investors could have bearing on some of the well established domestic companies.

These companies would either have to opt for a joint venture with certain foreign investors and/or enter into franchise arrangements even for consumer products for their survival. The relaxations have made it possible for a foreign investor to take majority control in any company and as such foreign investment would tend to move towards more profitable ventures like utilities, consumer products, etc. rather than opting for Hi-tech products.

The note of the caution for the Government is to ensure that the policies as concerned are formulated in the form of notifications amendments or policy decisions and the implementation is carefully monitored so as to ensure that the noble objectives of the policies are not negated by the |crafty' implementation by bureaucracy. Furthermore, various policies should be compatible with the overall objective and should not be changed in the mid stream. In this regard a quotation from a senior executive of a leading multinational would be relevant.

"One should mention that perhaps the rules of the game that have been agreed before the first over is bowled, should not be changed during the lunch interval and applied retroactively to the first morning's play. I refer particularly to the way the game is scored i.e. the taxman, who has been known to disallow runs already legitimately made or even given batsman out flow, playing to leg breaks off the front foot."

The Government should make all possible efforts to create public awareness and publicise its policies through conferences, seminars, etc. In this context the Investment Promotion Conference designed to promote foreign investment which has been planned later this year is a right step in this direction. However, the frequent rumours about political instability, ever deteriorating law and order situation and conflicts in various policy decisions are the basic factors which have kept the foreign investors intent on the bay and the Government has not received the positive response both from local and foreign investors, as was expected. I would like to conclude with the quotations of an extract from a recent editorial of BR in this regard.

"An important aspect which seemingly needs to be taken care of by the Government is about the selection of a wide range of industries in which foreign investment is a prime importance. A list of such industrial projects as might be viable and profitable for foreign investors in addition to the usefulness to Pakistan's economic development, should better be made readily available to foreign participants in the proposed conference. Efforts should also be made to finalise concrete proposals before the departure of important foreign businessmen and industrialists.
COPYRIGHT 1991 Economic and Industrial Publications
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Naqvi, S. Masoud Ali
Publication:Economic Review
Date:Oct 1, 1991
Previous Article:Trends in foreign trade.
Next Article:Investment Corporation of Pakistan.

Related Articles
Factors inhibiting foreign investment in Pakistan.
Pakistan investment promotion conference.
Foreign investment in Pakistan.
Toward a New Foreign Policy.
GCC and Africa trade in focus.
Foreign Investment in Libya reached 220 projects 156 achieved approval.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters