Answer ... The following is a non-exhaustive list of the various laws, rules and regulations applicable to alternative investment funds (AIFs) in Pakistan:

• the Securities and Exchange Commission of Pakistan Act, 1997 (the ‘SECP Act’);
• the Securities Act, 2015 (the ‘Securities Act’);
• Part VIIIA of the Companies Ordinance, 1984, consisting of Sections 282A to 282 N (‘Part VIIIA’);
• the Companies Act, 2017 (the ‘Companies Act’);
• the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the ‘NBFC Rules’);
• the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (the ‘NBFC Regulations’);
• the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (the ‘Modaraba Ordinance’);
• the Modaraba Companies and Modaraba Rules, 1981 (the ‘Modaraba Rules’);
• the Prudential Regulations for Modarabas, 2004 (the ‘Modaraba Prudential Regulations’);
• the Private Funds Regulations, 2015 (the ‘Private Fund Regulations’);
• the Real Estate Investment Trust Regulations, 2015 (the ‘REIT Regulations’);
• the Voluntary Pension System Rules, 2005 (the ‘VPS Rules’);
• the Trusts Act, 1882 (the ‘Trusts Act’); and
• the Registration Act, 1908 (the ‘Registration Act’).

Further, various guidelines, circulars, directives, letters and clarifications and notifications (together with the statutes listed above, the ‘AIF regulatory framework’) are issued by the Securities and Exchange Commission of Pakistan (the ‘SECP’) from time to time to address specific issues relating to AIFs. The SECP is an independent statutory body established under the SECP Act to regulate the capital markets, supervise and control corporate entities and regulate related matters.

Answer ... The Companies Act, Part VIIIA, the NBFC Rules and the NBFC Regulations (collectively, the ‘NBFC regulatory framework’) apply to and regulate NBFCs, which are essentially companies licensed by the SECP to undertake the following forms of business:

• investment finance services;
• leasing;
• housing finance services;
• discounting services;
• venture capital investment;
• investment advisory services;
• asset management services; and
• any other form of business which the federal government may, by notification in the Official Gazette, specify from time to time.

The NBFCs listed in the first four bullets above are classified as lending NBFCs; while the NBFCs listed in the final three bullets fall within the category of fund management NBFCs, which can therefore be classified as AIFs.

Modaraba companies are licensed by the SECP to undertake the business of Modaraba - that is, “a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill and shall include Unit Trusts and Mutual Funds by whatever name called”.. They are governed by the Companies Act, the Modaraba Ordinance, the Modaraba Rules and the Modaraba Prudential Regulations (collectively, the ‘Modaraba regulatory framework’). Modaraba companies effectively perform the same function as fund management NBFCs, albeit with a Sharia-specific investment portfolio, in furtherance of Section 10 of the Modaraba Ordinance, which states that no Modaraba can indulge in businesses opposed to the injunctions of Islam.

Further, the REIT Regulations regulate REIT schemes - that is, listed closed-end funds registered under the REIT Regulations for investment in a single real estate project. The REIT Regulations contemplate the establishment of:

• rental REIT schemes - that is, REIT schemes established with the object of investing in industrial, commercial or residential real estate with the purpose of generating rental income therefrom; and
• developmental REIT schemes - that is, REIT schemes established for investment in real estate with the object of development, construction and refurbishment of such real estate for industrial, commercial, residential purpose or a combination thereof.

REIT schemes are also characterised as AIFs.

Finally, the VPS Rules govern pension funds - that is, funds made up of equity, debt, money market and other sub-funds created from contributions paid by pension fund participants and consisting of all assets for the time being held or deemed to be held by the sub-funds and pension fund managers (i.e. asset management companies or life insurance companies duly authorised by the SECP to manage pension funds). Pensions funds are also in the nature of AIFs.

Therefore, the noteworthy AIFs in Pakistan and the regulatory framework applicable thereto are as follows:

• Open-ended and closed-end mutual funds/collective investment schemes managed by asset management companies licensed by the SECP as NBFCs (AMCs) are governed by the NBFC regulatory framework;
• Private equity and venture capital funds (which can be sub-categorized as private equity and venture capital funds, venture capital funds, angel funds, small and medium enterprise funds, infrastructure funds, impact funds, hedge funds etc. through recent amendments in the Private Fund Regulations) managed by private fund management companies licensed by the SECP as NBFCs (PFMCs) are regulated by the NBFC regulatory framework and the Private Fund Regulations;
• REIT schemes implemented by public limited companies licensed by the SECP as NBFCs (RMCs) are subject to the NBFC regulatory framework and the REIT Regulations;
• Modaraba funds administered by Modaraba companies are governed by the Modaraba regulatory framework; and
• Pension funds managed by pension fund managers are regulated by the NBFC regulatory framework and the VPS Rules.

The AIFs listed above are also regulated by the other regulatory instruments outlined in question 1.1.

Answer ... As a general rule, the AIF regulatory framework applies to the territory of Pakistan and does not have extra-territorial reach. However, various laws, rules and regulations of Pakistan have extra-territorial implications relating to issues such as:

• marketing of AIFs incorporated in other jurisdictions in Pakistan;
• exchange of information between the SECP and financial authorities established in other jurisdictions; and
• taxation on dividends issued to foreign promoters of a domestic AIF.

Answer ... No bilateral, multilateral or supranational instruments relating to AIFs are in effect in Pakistan, other than double tax treaties regarding issues involving double taxation of income, which have financial ramifications for AIFs as well as other corporate entities.

Answer ... Securities and Exchange Commission of Pakistan: The SECP is the apex regulator of capital markets and corporate entities in Pakistan. In this capacity, the SECP is the ultimate governing authority of AIFs and has wide-ranging powers for governance of AIFs, including (without limitation):

• licensing AMCs, PFMCs, Modaraba companies, RMCs and pension fund managers (collectively, ‘AIF managing entities’);
• providing approvals for incorporation and registration of AIF managing entities;
• licensing AIFs;
• supervising AIF managing entities;
• issuing and modifying other regulatory instruments for the efficient governance and regulation of AIFs and AIF managing entities;
• prescribing investment and borrowing limitations and restrictions for AIFs and AIF managing entities;
• approving various documents and instruments proposed to be issued by AIF managing entities for investment solicitation, such as offering documents, prospectuses and placement memoranda;
• issuing directions to AIF managing entities in the public interest, to prevent the affairs of AIF managing entities from being conducted in a manner that is detrimental to the interests of investors/unit holders or persons whose interests are likely to be affected, or in a manner that is prejudicial to the interests of AIF managing entities and to secure proper management of AIF managing entities generally;
• removing from office chairmen, chief executives, directors and other officers of AIF managing entities in circumstances similar to those outlined in the preceding bullet point, or replacing the board altogether;
• conducting special audits and inquiries into the affairs of AIF managing entities for regulatory infringements;
• imposing penalties on AIF managing entities and their officers for statutory violations; and
• performing quasi-judicial functions to address grievances and complaints in relation to AIF managing entities.

State Bank of Pakistan: The State Bank of Pakistan (the ‘SBP’), incorporated under the State Bank of Pakistan Act, 1956 (the ‘SBP Act’), is the central bank of Pakistan. The SBP Act and other applicable laws, rules and regulations empower the SBP to regulate the monetary and credit system of Pakistan. The SBP has regulatory jurisdiction over AIFs and AIF managing entities within the ambit of its statutory powers. Furthermore, under the Foreign Exchange Manual and the Foreign Exchange Regulation Act, 1947, the SBP has the power to regulate, among other things, dealings in foreign exchange, securities and import/export of currency. Such authority become relevant in case of a foreign investment in AIFs, whereby inward and outward remittances and issuance of securities to foreign investors is contemplated.

Answer ... On 24 April 2020, the SECP issued ‘SECP Guidelines for Cooperation and Assistance to Foreign Regulatory Authorities’. The guidelines clarify that the SECP is bound to assist foreign regulatory authorities in carrying out investigations and inquiries by sharing information about regulatory issues, including (without limitation) financial/supervisory information, anti-money laundering information and public or non-public data of licence holders, companies and owners of companies. The guidelines have been issued in furtherance of Section 42D of the SECP Act, which authorises the SECP to seek assistance from and provide assistance to international regulators and other international organisations on a reciprocal basis, to facilitate inquiries or investigations on the contravention of financial services-related laws. The guidelines set out a mechanism for reciprocal information sharing and assistance between the SECP and international organisations.

Some have expressed concerns about the effect of Section 42D(7) of the SECP Act, which provides that any assistance provided to any foreign regulatory authorities or international organisations may be refused by the SECP on the grounds of national security and public interest, which exception may ostensibly be abused by the SECP. However, in practice, the SECP is liberal in information sharing with foreign authorities, to the extent that such obligation is reciprocated by the international counterpart.

Answer ... The alternative investment funds (AIFs) generally established in Pakistan include the following:

• mutual funds;
• private funds;
• Modaraba funds;
• REIT schemes; and
• pension funds.

Answer ... In terms of the AIF regulatory framework, AIFs (other than Modaraba funds) must be constituted in the form of a unit trust under the Trusts Act and registered under the Registration Act. However, under the NBFC Regulations a closed-end mutual fund may also be established as a public limited investment company. And under the Private Fund Regulations (as recently amended), a private fund may also be incorporated as a company under the Companies Act, as a limited liability partnership under the Limited Liability Partnership Act, 2017 or any other legal structure approved by the SECP.

Answer ... The key advantage of establishing an AIF as a trust under the Trusts Act, which is the structure mandatorily used in Pakistan to establish most AIFs, is the overall administrative convenience under the Trusts Act in terms of:

• ease of establishment and registration;
• macro-management by regulators;
• minimal reporting and statutory compliance obligations; and
• relative administrative ease of winding up.

From a legal perspective, there are no notable disadvantages of using the trust structure for establishment of AIFs in Pakistan.

Answer ... According to a report of the SECP of March 2020 summarising the NBFC, notified entity and Modaraba sector, mutual funds dominate the AIF landscape with a 53.53% share of the total assets of the industry; whereas private funds, real estate investment trust (REIT) schemes, Modaraba funds and pension funds account for 0.53%, 3.82%, 4.09% and 2.16% of the total assets, respectively. Discretionary and non-discretionary portfolios represent 17.3% of the total assets.

Answer ... Up until 2015, Pakistan had no specific regime for the creation of hedge funds. The Private Fund Regulations, promulgated in 2015, expressly recognize (through recent amendments) establishment of hedge funds. This category presumably covers hedge funds. Thus far, no hedge funds have been established in Pakistan. Establishment of private debt/credit funds is also not a prevalent practice in Pakistan.

However, the AIF regulatory framework contemplates the creation of various AIF structures with an element of private offering, including (without limitation) private funds (private equity and venture capital), mutual funds that invest in debt instruments, funds of funds and theme-based/industry-specific mutual funds.

Answer ... AIFs are managed and administered by AIF managing entities. The structure, registration and licensing requirements in relation to such AIF managing entities are discussed in question 4.

Answer ... The NBFC regulatory framework requires a banking company, a subsidiary trust company of such banking company or a central depository company with a prescribed credit rating approved by the SECP to act as the custodian and/or trustee (as applicable) of all assets owned or held by an asset management company or a closed-end mutual fund in the form of an investment company.

PFMCs must appoint trustees/custodians for private funds under the Private Funds Regulations. The trustees/custodians are under an obligation, among other things, to:

• take under their control all property of the private fund and hold it on trust for the unit holders;
• ensure that all transactions in respect of the private fund are implemented in accordance with the constitutive documents;
• carry out the instructions of the PFMCs; and
• issue reports regarding the compliance of the PFMCs with the applicable laws and the constitutive documents of the private fund.

Since Modarabas also invest in mutual funds, which are structured as trusts and employ trustees and/or custodians to safeguard investor interests, the benefit of such custodial role extends to investors in Modarabas.

REIT schemes and pension funds are similarly required to appoint trustees under their respective regulatory frameworks, to protect the interests of subscribers to such schemes and funds, among other things. REIT schemes must also have a custodian, to hold and safeguard the REIT assets and ensure that the REIT scheme is managed according to the applicable laws, rules, regulations and constitutional documents.

Answer ... Foreign investors wishing to establish a presence in Pakistan as AIF managing entities may incorporate a wholly owned subsidiary in Pakistan on a repatriable basis. The AIF regulatory framework and the tax laws of Pakistan contemplate foreign ownership of AIF managing entities. Such frameworks do not stipulate specific onerous conditions applicable to AIF managing entities with foreign ownership. Generally, there is a level playing field for foreign and local investors in terms of the conditions for registration, licensing and management of AIF managing entities and AIFs under the AIF regulatory framework.

Answer ... Alternative investment funds (AIFs), AIF managing entities, fund managers, trustees and custodians must be licensed in Pakistan by the SECP under the AIF regulatory framework.

Answer ... Mutual funds: The NBFC regulatory framework provides that no mutual fund may be offered to the public or continued unless:

• the AMC submits the draft trust deed together with the name and consent of the trustee of the mutual fund in the prescribed form for the principle approval of the SECP;
• upon receipt of principle approval of the SECP, the trust deed is executed and registered in terms of the Trusts Act and thereafter an application for registration is submitted to the SECP in the prescribed form together with evidence of payment of the requisite fee;
• upon receipt of the aforesaid application, it is authorised by the SECP and registered as a notified entity with the SECP.

Private funds: A private fund may be granted a licence by the SECP upon satisfaction of various conditions including the following:

• it is established as (a) a trust under the Trusts Act and registered under the Registration Act, (b) a company under the Companies Act, (c) a limited liability partnership under the Limited Liability Partnership Act, 2017, or (d) any other legal structure approved by the SECP;
• it has a minimum prescribed equity raised through private placement;
• for the purpose of managing its entire business, it has entered into a contract, in writing, with a duly licensed private fund management companies and a copy of which has been filed with the SECP;
• an application has been submitted in the prescribed form to the SECP, along with the relevant supporting documents;
• evidence of payment of the requisite application fee has been submitted to the SECP;
• it has been registered as a notified entity with the SECP;
• it is offered for subscription by statutorily defined eligible investors only (i.e. strategic investors and high-net-worth individuals); and
• its units are not listed on any stock exchange.

Real estate investment trust (REIT) schemes, Modarabas and pension funds: Similar SECP-regulated registration and licensing regimes apply to REIT schemes, Modarabas and pension funds under the AIF regulatory framework. While the registration and licensing regimes involve rigorous scrutiny of promoters, directors and other AIF stakeholders to protect the interests of investors/subscribers, the registration and licensing process is reasonably expeditious and transparent.

Answer ... Please see question 3.2 with regard to the registration and licensing process.

While the timelines for registration and licensing may vary depending on the type of AIF, the entire process is typically concluded within three to four months.

Answer ... Pursuant to the NBFC regulatory framework, AMCs, PFMCs and RMCs must be incorporated as public limited companies and licensed as NBFCs. Under the Modaraba regulatory framework, Modaraba companies may be companies registered under the Companies Act or bodies corporate formed under any law and owned or controlled, whether directly or through a company or corporation, by the federal government or a provincial government of Pakistan. Pursuant to the VPS Rules, a pension fund manager may be established as an AMC or an SECP-licensed life insurance company.

Answer ... This is a moot point, since all AIF managing entities must be created as companies with limited liability under the Companies Act and therefore there is no structuring freedom in this regard. However, limited liability companies are the preferred corporate structure for most investors/subscribers from an investor protection perspective, since such companies are closely monitored by the SECP to ensure compliance with applicable regulatory requirements. On the flipside, regular reporting and statutory compliance requirements are viewed as exceedingly cumbersome by some. The SECP has consistently made an effort to strike a balance between ease of doing business and investor protection. Amendments to existing legal frameworks and new regulatory regimes are in the offing to alleviate regulatory rigours and encourage start-ups and entrepreneurship in the AIF sector.

Answer ... Yes, AIF managing entities must be licensed by the SECP under the AIF regulatory framework to undertake the relevant regulated activity.

Answer ... Under the NBFC regulatory framework, an NBFC may be established (as an AMC, PFMC, RMC or pension fund manager) if each of its promoters, proposed directors, chief executive and chairman of the board of directors fulfils the fit and proper criteria prescribed by the SECP and complies with other statutory requirements.

Various conditions precedent must be satisfied for the establishment and licensing of an NBFC, including (without limitation) the following:

• incorporation of the NBFC as a public limited company;
• compliance with minimum equity requirements;
• allocation of at least 25% of the paid-up share capital to the promoters;
• deposit of the shares of the promoters, majority shareholders and directors with the Central Depository Company of Pakistan Limited in an account marked as blocked; such shares being transferable subject to the prior approval of the SECP;
• appointment of the NBFC’s chief executive, who much not hold such office in any other company, except for an investment company being managed by the NBFC;
• the NBFC furnishing evidence to the satisfaction of the SECP that the personnel employed by it for executive positions, research or other related functions possess sufficient educational qualifications and professional experience to undertake the proposed form of business;
• the NBFC, its promoters and major shareholders, its chief executive and its directors furnishing separate undertakings to the SECP that they shall comply with the requirements of the applicable laws, rules and regulations; and
• payment of the applicable fees.

Additional requirements apply to pension fund managers under the VPS Rules.

Similarly, Modaraba companies cannot operate in Pakistan without registration with the SECP. A company is eligible to be registered as a Modaraba company if:

• it is established in the required form (see question 4.1);
• it has complied with the minimum paid-up capital requirements;
• none of its directors, officers or employees have been convicted of fraud or breach of trust or of an offence involving moral turpitude;
• none of its directors, officers or employees have been adjudged an insolvent, has suspended payments or has compounded with its creditors;
• its promoters are persons of means and integrity and have knowledge of matters which the company may have to deal with as a Modaraba company;
• it is a company also engaged in business other than flotation and management of Modaraba;
• it has a paid-up capital of such amount and of such nature as may be prescribed by the SECP; and
• it has paid the applicable regulatory fees.

Answer ... An AIF managing entity is registered and licensed by submitting an application to the SECP and complying with the requirements stated in question 4.4. The registration and licensing process ordinarily takes between three and four months.

Answer ... In exercising its overarching power to seek additional information from the proposers of AIF managing entities, the SECP may, acting reasonably, require the submission of further information and documents deemed necessary as a prerequisite to the registration and licensing process.

Answer ... The AIF regulatory framework imposes various restrictions on the issue, redemption (including suspension of redemptions) and transfer of interests under AIFs. AIF managing entities may also impose additional restrictions, depending on the nature of the AIF, which must be clearly disclosed in the constitutive documents and private/public solicitation documents for such AIFs (e.g. trust deeds, placement memoranda, offering documents, prospectuses).

Answer ... AIF managing entities may have local and/or foreign owners/promoters. However, each such owner must comply with the requirements specified in questions 4.3 and 4.4 above.

Answer ... The NBFC regulatory framework envisages the delegation of some functions of NBFCs, such as delegation of the distribution function to distributors registered with the Mutual Funds Association of Pakistan. However, the AIF regulatory framework does not expressly contemplate the delegation of other specific functions by NBFCs without the prior approval of the SECP. Any delegation therefore requires the consent of the SECP, which may be obtained by including the necessary delegation in the constitutive documents of AIFs or on a case-by-case basis.

The REIT Regulations provide that an RMC must:

• obtain the written approval of the SECP before delegating one or more of its functions in relation to the REIT scheme (other than core functions such as investment decision making, risk management and compliance functions);
• ensure that in cases where it delegates any of its functions, the delegated person has sufficient experience and financial resources to carry out the delegated function;
• be responsible for the acts, omissions, defaults and negligence of all persons, along with resultant losses, to which it delegates any of its functions; and
• not delegate any of its duties unless the trust deed of the REIT scheme allows for the delegation.

Answer ... Under the AIF regulatory framework, NBFCs can only undertake one or more types of NBFC business as are permitted under their NBFC licences issued by the SECP. A fund management NBFC is not eligible to seek a licence for any form of business conducted by lending NBFCs; and a lending NBFC is not eligible to seek a licence for any form of business conducted by fund management NBFCs. However, the NBFC regulatory framework contemplates the issuance of multiple licences by the SECP to an NBFC to undertake one or more types of NBFC business. The SECP may even permit the issue of a single licence for both investment advisory and asset management services, in which case an NBFC can manage a mutual fund and provide services to manage discretionary or non-discretionary portfolios for both individual and institutional clients and advise others as to the value of securities or on the advisability of investing in, purchasing or selling securities.

Therefore, an NBFC may provide a range of regulated services to a host of investors/subscribers under a single licence or multiple licences issue by the SECP.

Answer ... Yes, the marketing of AIFs is subject to the approval of the SECP. NBFC Regulations require that the marketing plan of a proposed mutual fund be submitted with the application for registration of a mutual fund. In addition, the NBFC Regulations stipulate that offering documents, invitations to invest and advertisements in respect of mutual funds require the prior approval of the SECP.

With regard to private funds, the Private Fund Regulations prohibit public solicitation of interest for a private fund and state that no person or private fund management company may issue any document or advertisement inviting subscription from the public for the purchase of units of a private fund. Private funds are marketed privately through the issuance of a placement memorandum directly to eligible investors.

The REIT Regulations provide that a REIT scheme management company must:

• prepare marketing materials, advertisements and invitations to invest in REIT scheme units with appropriate disclaimers as approved by the SECP in relation to the REIT scheme; and
• obtain the SECP’s approval for all marketing materials, advertisements and invitations soliciting customer advances, after obtaining consent from the trustee and ensuring compliance with the minimum disclosures as stipulated in Regulation 26(3) of the REIT Regulations.

Similarly, the Modaraba regulatory framework and the VPS Rules require that any advertisements, invitations to the public to invest and prospectuses intended for public consumption in relation to Modaraba funds and pension funds, respectively, be pre-approved by the SECP.

Answer ... Various constituent laws, rules and regulations of the AIF regulatory framework prescribe the minimum information to be contained in investment solicitation documents in respect of AIFs such as offering documents, placement memoranda and prospectuses. Such information includes (without limitation);

• the name and registered address of the AIF;
• details of the investment objective and policy;
• investment restrictions;
• the names and registered addresses of directors, trustees, foreign promoters, auditors, registrars and legal advisers;
• the minimum investment;
• characteristics of units/certificates;
• the distribution policy;
• tax details;
• details relating to reports and accounts;
• warnings; and
• a summary of the circumstances in which the AIF will be wound up/revoked.

There are no specific guidelines on the criteria for approval by the SECP of other marketing materials. Approval of such documents is discretionary. However, such marketing material is fairly sophisticated and the SECP does not usually indulge in excessive nit-picking in approving the same. The fundamental objective of scrutinising such documents is to:

• ensure conformity with the law;
• confirm the accuracy and adequacy of the information; and
• avoid deceptive/misleading representations.

Answer ... Offering documents, placement memoranda and prospectuses are approved by the SECP upon submission of an application under the AIF regulatory framework. The approval of offering documents, placement memoranda and prospectuses and other marketing materials for AIFs is not an exceedingly time-consuming exercise, as most of this material is standardised. Such approvals can be obtained within one or two months.

Answer ... While private funds must be privately marketed to eligible investors, the target audience of other AIFs is much wider. Other AIFs may be marketed to, among others, retail investors, resident and foreign individuals, banks/development finance institutions/asset management companies, insurance companies, financial institutions, corporates, funds of funds, retirement funds, trusts, non-governmental organisations, societies, foundations and charities.

Answer ... Please see question 5.2.

Answer ... No additional requirements apply to marketing materials for AIFs. However, given that there is growing reliance globally on information technology, social media and artificial intelligence to market businesses, the SECP is actively working on regulatory changes to facilitate the deployment of digital marketing by AIFs, so that they can tap a largely unexploited cross-section of the Pakistani population.

Answer ... Section 446 of the Companies Act states that no one can issue, circulate or distribute in Pakistan any prospectus offering for subscription securities of a foreign company or solicit deposits of money – regardless of whether the company has established or, when formed, will establish a place of business in Pakistan – unless authorised to do so by the SECP under the relevant law. Therefore, the marketing of AIFs from other jurisdictions in Pakistan must be pre-approved by the SECP.

Answer ... Pursuant to the Securities Act, securities advisers, securities brokers and securities managers must be licensed by the SECP to provide their respective investment related services. A ‘securities adviser’ is someone who, among other things:

• provides investment advice on the purchase, sale or subscription of securities;
• issues analyses or reports for the purpose of assisting the recipients of the analyses or reports in making decisions as to whether, when or under what terms or conditions specific securities may be bought, sold, exchanged or subscribed for; or
• advises on the management of a portfolio of securities for another person.

A ‘securities broker’ is the holder of a trading right entitlement certificate who:

• concludes or offers to conclude with any person, or induces or attempts to induce any person to enter into or to offer to enter into, any agreement for or with a view to buying, selling, exchanging or subscribing for securities; or
• solicits or accepts any order for, or otherwise trades or effects transactions in, securities for clients or on its own account.

Finally, a ‘securities manager’ is a person who manages or offers or agrees to manage, with or without remuneration, a portfolio of securities belonging to another person, whether on a discretionary authority granted by that other person or otherwise.

To the extent that a person or entity intends to indulge in any activity that is in the nature of soliciting investment and falls within the scope of the services of a securities adviser, securities broker or securities manager, a licence must be obtained from the SECP. Therefore, foreign investors that wish to market foreign AIFs in Pakistan require necessary approvals and licences from the SECP.

Answer ... Although mutual funds, pension funds and Modarabas may be marketed to retail investors with investments as low as Pakistani Rupees Five Hundred to Twenty-Five Thousand, investment in private funds and REIT schemes may only be solicited from strategic investors and high net worth individuals willing to make an investment of at least Pakistani Rupees Fifteen Million in case of a private fund and Pakistani Rupees Three Million for a REIT scheme.

With regard to the marketing of foreign AIFs in Pakistan, please see question 5.7.

Answer ... The AIF regulatory framework delineates various investment and borrowing restrictions applicable to AIFs, some of which are discussed below.

Mutual funds: AMCs must state the investment objectives and policies of a closed-end or open-ended mutual fund in the offering document and of an investment company in the prospectus, including investment and borrowing restrictions applicable to such mutual funds. Some of the investment restrictions applicable to mutual funds under the NBFC Regulations, 2008 include the following:

• a mutual fund cannot invest in unlisted equity securities unless an application for listing of such securities has been accepted by a stock exchange;
• the exposure of a mutual fund to any single entity may not exceed an amount equal to 10% of the total net assets of the mutual fund, subject to applicable conditions;
• a mutual fund must not exceed the prescribed exposure limits in relation to various types of schemes, such as Sharia-compliant schemes, index funds, sector-specific funds, capital-protected funds and funds of funds;
• an AMC must not acquire 25% or more of the voting rights or control of a company on behalf of its mutual fund;
• an AMC cannot invest more than 25% of the total net assets of the mutual fund in securities in any one sector as per the classification of the stock exchange, subject to specified limits in respect of schemes stipulated in the NBFC Regulations;
• an AMC, on behalf of a mutual fund, may not take exposure of more than:
• • 35% of the net assets of the mutual fund in any single group; and
  • 10% of the net assets of the mutual fund in listed group companies of the AMC and such exposure shall only be made through the secondary market; Provided that an Asset Management Company, on behalf of sector specific fund shall not take exposure more than 20% of net asset of collective investment scheme in listed group companies of the asset management company; and
• a closed-end mutual fund may only invest in its own certificates or shares up to 20% of its issued capital from the secondary market in accordance with the requirements specified by the SECP.

With regard to borrowing restrictions, the NBFC Regulations stipulate that an AMC, on behalf of a mutual fund managed by it, must not in any form borrow, except with the approval of trustee, to meet redemption requests. Such borrowing must not exceed 15% or such other limit as specified by the SECP of the total net asset value of an open-ended mutual fund at the time of borrowing, and should be repayable within a period of 90 days.

Private funds: Under the Private Fund Regulations, a private fund may raise funds through eligible investors subject to the following investment restrictions:

• No subscription of less than Pakistani Rupees Fifteen Million may be accepted from an eligible investor; and
• The total number of eligible investors cannot exceed 50 or such number as defined in the Private Placement of Securities Rules, 2017. However, such restriction does not apply to investors categorized as qualified institutional buyers.

Additionally, a PFMC may only:

• invest in securities and portfolios of securities within Pakistan or any other financial asset approved by the SECP (however, foreign investments may be made subject to compliance with the regulatory requirements on foreign investment);
• make investments that conform with its investment strategy as disclosed in the placement memorandum; and
• change fundamental attributes of investment of the private fund only with the approval of 75% or more unit holders in terms of value of the private fund; the updated placement memorandum must further be submitted to the SECP and the trustee.

The placement memorandum of a private fund must also include, where borrowing is intended for the private fund, the calculation of the maximum amount of intended borrowing, duration of such borrowing, the security structure for raising the borrowing and a statement that the liability of unit holders in relation to such borrowing is limited to their investment. In addition, the borrowing may only be undertaken from a financial institution/company, short term borrowing by a private fund may not exceed 15% of the size of that private fund, and any long term borrowing by a private fund must only be repayable on the date of maturity of the private fund or may only be obtained against an instrument convertible into equity.

Real estate investment trust (REIT) schemes: Under the REIT Regulations, an RMC is under an obligation to ensure that a REIT scheme does not comprise more than one real estate project, and that the trust deed provides for this restriction. Furthermore, the REIT Regulations require that a REIT scheme primarily invest in real estate; however, it may invest any surplus funds in government securities or keep such funds as deposit with scheduled commercial banks with not less than an ‘AA’ long-term rating with a stable outlook.

With regard to borrowing by an RMC, the REIT Regulations provide that an RMC shall not borrow against any REIT assets. The RMC may arrange unsecured borrowing not exceeding 30% of the value at which the land has been transferred to a developmental REIT scheme or 30% of the value of the real estate in case of a rental REIT, to meet a shortfall arising from cost overruns in the case of a developmental REIT and for capex to keep the real estate in working condition in the case of a rental REIT.

Modarabas: The Modaraba Prudential Regulations specify various investment limitations for Modarabas. For instance, the total outstanding exposure by a Modaraba to any single person must not at any point in time exceed 30% of the Modaraba’s equity, subject to the condition that the maximum outstanding against fund-based exposure does not exceed 20% of the Modaraba’s equity. The total outstanding exposure by a Modaraba to any group must not exceed 50% of the Modaraba’s equity, subject to the condition that the maximum outstanding against fund-based exposure does not exceed 35% of the Modaraba’s equity.

Additionally:

• no Modaraba may make an investment in the shares of a listed company of an amount exceeding 5% of its own equity or 10% of the paid-up capital of that company, whichever is less;
• no investment in the stock market shall be made by a Modaraba except in its own name;
• no Modaraba shall allow unsecured facilities or facilities that are not backed by bank guarantees;
• no Modaraba shall allow facilities for speculative purposes;
• Modarabas may invest in shares of un-listed companies subject to the fulfilment of various conditions, including the following:
• • total exposure in such companies does not exceed 5% of the Modaraba’s equity;
  • the directors of the Modaraba have no direct or indirect interest in the investee company; and
  • the investee company has an operational track record of three profitable consecutive years preceding the decision; and
• the investment the of Modaraba fund in listed securities may not exceed 20% of its equity.

Pension funds: The SECP’s Circular 36/2009 (as amended), entitled ‘Investment and Allocation Policies for Pension Funds Authorized under The Voluntary Pension System Rules, 2005’, governs the investment policy of pension funds. The circular (among other things):

• requires that a pension fund manager make investments of the pension fund in a transparent, efficacious, prudent and sound manner;
• requires that a pension fund manager not invest assets of the pension fund in securities of the pension fund or any of its associated companies;
• states that exposure to a single group may not exceed 20% of the net assets of the pension fund;
• mandates that the pension fund shall be divided into sub-funds, to be called the ‘equity sub-fund’, ‘debt sub-fund’, ‘money market sub-fund’ and such other sub-funds as may be specified by the SECP; and
• states that the investment policy for the pension fund must be specified by the SECP from time to time.

The circular prescribes various other investment limitations in relation to the sub-funds of a pension fund.

Answer ... Please see question 6.1.

Answer ... Under the NBFC regulatory framework, AMCs must, on behalf of open-ended and closed-end mutual funds, make appropriate disclosures to investors, the SECP, the trustee, the custodian and other stakeholders. For instance, AMCs must disclose any information which may be necessary for investors to make an informed investment decision in the offering document of a closed-end mutual fund. Such information includes:

• the name, registered address and place and date of creation of the mutual fund, with an indication of its duration, if limited;
• details of investment objectives and policy, including a summary of the investment restrictions;
• the names and registered addressed of (as applicable):
• • the directors of the AMC;
  • the trustee;
  • foreign promoters, if any;
  • the auditor;
  • the registrar;
  • the legal adviser;
  • the Sharia adviser; and
  • the custodian;
• details and notes on the performance of mutual funds under the management of the AMC;
• the performance of the listed companies in which the directors hold a similar office;
• the characteristics of certificates;
• the minimum investment, if any;
• a description of the different type of certificates;
• the distribution policy;
• tax details;
• details relating to reports and account;
• warnings; and
• a summary of the circumstances in which the closed-end mutual fund may be wound up.

Similar information must be disclosed by AMCs to investors in the offering document of an open-ended mutual fund.

In addition, AMCs must make other disclosures on behalf of mutual funds being managed by them as part of their periodic reporting obligations, which are discussed under question 7.2.

As is the case with mutual funds, PFMCs must make necessary disclosures under the Private Fund Regulations to, among others, eligible investors and the SECP by way of the placement memorandum. The placement memorandum must contain relevant information relating to the private fund including (without limitation):

• the name of the private fund;
• key information of the PFMC;
• the type of private fund;
• key data and an overview of the private fund;
• the purpose and objective of the private fund;
• details of the trustee;
• a summary of the substantive provisions of the trust deed;
• the investment policy and strategy of the private fund;
• permitted investments and restrictions;
• general and specific risks;
• the benchmark of the private fund;
• the pricing policy;
• the income distribution policy;
• disclosures required under the Private Fund Regulations;
• an overview of the applicable regulatory framework; and
• the rights and liabilities of the unit holders.

RMCs, Modaraba companies and pension fund managers must also make disclosures under their respective legal frameworks similar to those made by AMCs and PFMCs, by way of offering documents and other marketing/investment solicitation materials. They also have routine reporting obligations which are discussed in question 7.2.

Answer ... Mutual funds: Regulations 38 and 52 read together with Schedule V of the NBFC Regulations detail the disclosure/reporting obligations of mutual funds. Such provisions oblige AMCs to issue an annual report to unit/certificate holders, the trustee, the SECP and stock exchanges. The annual report must contain the following:

• statement of asset and liabilities;
• income statement;
• cash-flow statement;
• distribution statement;
• statement of movement in unit or certificate holders’ funds;
• auditor’s report;
• report of the trustee;
• report of the fund manager; and
• all information required in Schedule V, the Companies Act, the NBFC Rules and the Code of Corporate Governance, and in accordance with the applicable International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS).

Private funds: Pursuant to the Private Fund Regulations, PFMCs must, in relation to a private fund, bi-annually disclose to investors:

• the details and composition of the investment portfolio;
• details of expenses charged and the expense ratio;
• benefits received during such period, including interest, dividend and bonus units; and
• a performance review.

With respect to the private fund, within three months of the end of each financial year, PFMCs must also prepare, in accordance with IAS and IFRS, and transmit to unit holders and the SECP the following:

• the balance sheet;
• the profit and loss statement;
• the cash-flow statement; and
• a statement of movement in net asset value (NAV) per unit of the private fund.

Real estate investment trust (REIT) schemes: A REIT scheme management company (RMC) must:

• disclose customer advances and any other liabilities of a REIT scheme in quarterly and annual accounts of a REIT scheme;
• disclose related-party transaction in the offering document and subsequently in annual as well as quarterly accounts of a REIT scheme; and
• within four months of close of the financial year, prepare and transmit to the unit holders, the trustee, the SECP and the stock exchange(s) on which the units of a REIT scheme are listed:
• • the balance sheet;
  • the profit and loss statement;
  • the cash-flow statement;
  • a statement of the movement in NAV;
  • the report of the trustee;
  • the report of the auditor;
  • the report of the Sharia adviser (where relevant);
  • the valuation report of the real estate; and
  • any other documents required by the SECP.

Modaraba funds: Under the Modaraba Ordinance, a Modaraba company must, within six months of the close of the accounting year of the Modaraba, prepare and circulate to the registrar and holders of Modaraba certificates:

• the annual balance sheet and profit and loss account, in such form and manner as may be prescribed;
• a report of the auditor on the balance sheet and profit and loss account; and
• a report by the Modaraba company on the state of affairs, activities and business prospects of the Modaraba and the amount of profits to be distributed to the certificate holders.

In addition, the Modaraba company must furnish to the registrar and to the holders of Modaraba certificates such reports, accounts and information as may be prescribed or as the registrar may at any time require by an order in writing.

Pension funds: Pursuant to the VPS Rules, a pension fund manager must prepare and transmit an annual report, together with a copy of the balance sheet and income and expenditure account and the auditor’s report of the pension fund, within four months of closing of the accounting period to the SECP and the participants. Furthermore, a pension fund manager must, within one month of the close of the first and third quarter of its year of account of the pension fund and within two months of the close of the second quarter, prepare and transmit to the participants and the SECP a balance sheet as at the end of that quarter and a profit and loss account for that quarter, whether audited or otherwise, of the pension fund.

Answer ... The AIF regulatory framework represents a watertight set of rules and regulations from a governance perspective, with the spirit and intention of protecting investor interests. AIF managing entities play the most critical role in the AIF context, since their management of and decision making in relation to AIFs has a direct impact on the profitability of an investment made by an investor/unit holder/subscriber in an AIF. Naturally, if such discretion is unbridled, investor interests can be undermined. Therefore, the SECP and industry stakeholders such as trustees and custodians serve as watchdogs to ensure that AIF managing entities discharge the fiduciary investment discretion vested in them by an investor/unit holder/subscriber in accordance with the AIF regulatory Framework and the constituent documents of the AIFs being managed by them.

As discussed above, key officers and promoters of an AIF managing entity must satisfy the prescribed fit and proper criteria prior to registration and licensing of an AIF managing entity. AIF managing entities must also undergo stringent due diligence during the registration and licensing process, and are subject to ongoing disclosure and reporting obligations. AIF managing entities must also comply with investment and borrowing restrictions stipulated by law and the SECP-endorsed constituent documents of AIFs. The AIF regulatory framework therefore captures and regulates the entire spectrum of activities and lifecycle of an AIF, with innate safety valves to guarantee investor protection.

Answer ... Mutual funds: Under the NBFC Rules, an NBFC must make satisfactory arrangements to insulate itself from exchange fluctuation risks associated with foreign currency obligations and transactions. In addition, pursuant to the NBFC Regulations, AMCs must establish and maintain sufficient risk management systems and controls to enable them to identify, assess, mitigate, control and monitor risks in best interests of unit holders of the mutual funds under their management. AMCs are also under an obligation to state in the trust deed and specify in the offering document of a mutual fund, or state in the prospectus of an investment company, the type of securities that the mutual fund will invest in and the risks associated with such securities.

Further, annual reports of mutual funds, discussed under question 7.2, should include the AMC’s financial risk management objectives and policies, including its policy for hedging.

Private funds: PFMCs are under a statutory obligation to:

• establish and maintain sufficient risk management systems and controls to enable them to identify, assess, mitigate, control and monitor risk in the best interests of unit holders;
• formulate and implement their boards’ approved internal control policies and procedures, ensuring appropriate segregation of duties and information barriers between trading, risk management and processing functions, among other things; and
• identify and assign a unit, department or personnel for carrying out the risk management function which is hierarchically and functionally independent of the operating units and is responsible for the identification, monitoring/measurement and proper management of all risks.

A placement memorandum issued by a private fund must contain a risk disclosure statement specifying risks that accompany the investment portfolio and investment strategy of the private fund.

REIT schemes: The offering document of a REIT scheme must contain:

• a summary of the entire REIT scheme, highlighting forecast benefits and risks; and
• a statement that investment in the REIT scheme is subject to risks and a detailed description of the risks involved.

An RMC is responsible for the effective management of any risks arising from delegation of any of its functions. However, the REIT Regulations expressly prohibit delegation of the risk management function by the RMC.

Modaraba funds and pension funds: Modaraba companies and pension fund managers have risk identification, disclosure, management and mitigation obligations similar to those discussed above in relation to mutual funds, private funds and REIT schemes.

Answer ... Taxation of AIFs is governed by the Income Tax Ordinance, 2001 (the ‘Tax Ordinance’). Under the tax laws of Pakistan, investments in AIFs have been encouraged by the introduction of various incentives, tax credits and tax exemptions. The tax treatment of AIFs and some of the tax incentives to which AIFs are entitled are as follows:

• Pursuant to Section 62 of the Tax Ordinance, a resident taxpayer, other than a company, is entitled to a tax credit on investments in new shares (including units of a mutual fund) offered to the public by a public company listed on a stock exchange in Pakistan. The tax credit is computed based on the lower of:
• • the total cost of acquiring the shares;
  • 20% of the person’s taxable income for that year; or
  • Pakistani Rupees Two Million.

In terms of Section 62, such tax credit is clawed back if the resident taxpayer undertakes a disposition of the units within a period of 24 months from the date of acquisition.

• Capital gains tax does not apply to the redemption of units of a mutual fund or a REIT scheme by domestic investors, to the extent that such units are held for more than four years. If the units are held for less than four years, a variable capital gains tax rate applies, depending on the nature of the investee and the investment.
• Any income derived by a mutual fund, a REIT scheme or a private fund from any instrument of redeemable capital is exempt from tax if not less than 90% of its income of that year is distributed among the unit holders.
• The profit and gains on the sale of immovable property to a developmental REIT scheme with the object of development and construction of residential buildings is exempt up to 30 June 2020.
• The profit and gains on sales of immovable property to a rental REIT scheme are exempt from tax up to 30 June 2021.
• Any distribution received by a taxpayer from a mutual fund, REIT scheme or private fund out of the capital gains of that fund or scheme is also exempt from tax, to the extent such fund or scheme is a debt or money market fund and does not invest in shares.
• The income of Modarabas (other than trading Modarabas) is fully exempt from income tax, as long as they distribute 90% of their profits among the certificate holders. For trading Modarabas, the maximum tax rate is 20%.
• Contributions made to pension funds during any tax year are entitled to a tax credit under Section 63 of the Tax Ordinance.
• The accumulated balance of up to 50% received from a pension fund at the time of an eligible person’s retirement, disability rendering him or her unable to work, or death is exempt from tax under the Second Schedule of the Tax Ordinance.
• Any profit or gain or benefit derived by a pension fund manager from a pension fund on redemption of the seed capital invested in the pension fund is also exempt from tax.

Answer ... Under the Tax Ordinance, the income of AIF managing entities is subject to corporate tax at the rate of 29% and minimum tax at the rate of 8% of the turnover. There have been proposals by the AIFs industry to abolish or reduce the rate of tax on AIF managing entities. In addition, the profits and gains of tech start-ups from the export of computer software, information technology (IT) services, or IT-enabled services have been exempted from tax until June 30, 2025.

AIF managing entities are also liable to pay sales tax on services at varying rates pursuant to the provincial sales tax on services laws of Pakistan. Such taxes are being actively contested by AIF managing entities.

Answer ... Please see question 8.1.

Answer ... The SBP, the Pakistan Banks Association, the SECP, the Federal Board of Revenue (the federal revenue/tax authority of Pakistan) (FBR), individual commercial banks, non-banking finance companies and other stakeholders in their respective capacities are taking steps to comply with the Foreign Account Tax Compliance Act. The SBP, through Circular 16/2014, advised banks/development financial institutions/microfinance banks to complete the registration process with the US Internal Revenue Service (IRS) as participating foreign financial institutions (PFFIs). In compliance with the SBP’s directions, several financial institutions have registered with the IRS as PFFIs.

In addition, the SBP, through Circular 10/2017 dated 19 April 2017, and the FBR, by way of SRO 166(I)/2017 dated 15 March 2017, now require all banks in Pakistan to ensure compliance with the Common Reporting Standard rules.

Answer ... Pakistan has entered into tax treaties with several countries with the objective of eliminating double taxation of income or gains arising in one jurisdiction and paid to residents of another. In the event of conflict, such treaties in most cases supersede the tax laws applicable in Pakistan with respect to taxation of Pakistan-source income of a non-resident person. Foreign investors that wish to invest in AIFs in Pakistan may seek to take advantage of the double tax treaties entered into by Pakistan with different countries, whereby withholding tax on dividends issued to foreign investors incorporated in such countries is reduced and/or capped. Generally, a resident entity pays tax at the rate of 15% on dividend income, while a non-resident pays withholding tax on Pakistan-source dividends at the rate of 15% or a reduced rate under the relevant tax treaty. In making their corporate structuring decision, investors can incorporate parent/holding companies of domestic AIF managing entities in tax-favourable jurisdictions.

Answer ... The sector update published by VIS Credit Rating Company Limited (a leading full service rating agency of Pakistan) in February 2020 in relation to AMCs set out the following key findings, which also have implications for other AIFs:

• The total assets under management (AUM) of the industry increased at a compound annual growth rate (CAGR) of 9.4% between 2014 and 2019. During this period, cumulative growth of AUMs in the conventional segment was 13.8%, while Sharia-compliant segment AUMs increased at a rate of 5.8%.
• After peaking during the first quarter of 2018, total AUMs have since declined, owing to the sluggish performance of the equity market, which in turn has been attributed to macroeconomics and political uncertainty in Pakistan.
• By the end of December 2019, total AUMs had increased to Pakistani Rupees Six Hundred Eighty Billion, while registering a cumulative growth rate of 16.8%.
• The mutual fund industry has witnessed significant consolidation over the years: while there were 76 mutual funds managed by 29 AMCs in 2007, today there are 276 mutual funds managed by 19 AMCs.
• Many AMCs have started offering diversified Sharia products, which has resulted in the number of Sharia-compliant funds growing substantially from 51 in 2014 to 114 in 2019.
• Institutional investors are the primary source of investment in mutual funds in Pakistan; however, the share of retail investors in overall AUMs increased by 12% between 2014 and 2019.
• In order to attract retail investors to the mutual fund arena, product innovation and use of technology have been the primary areas of focus in recent years, including the launch of insurance-based funds and funds (including daily dividend-based funds) launched in order to take advantage of tax arbitrage, introduction of theme-based funds (energy and financial sector funds) and funds such as real estate investment trust schemes and private funds. The shift from a sales-based model to greater reliance on digitisation has had a positive impact on the industry.
• Pakistan’s informal economy has clipped the mutual funds industry’s wings in terms of investment solicitation and constrained its ability to channel retail investment to mutual funds.
• Industry AUMs have remained below 5% of the total banking sector deposits in Pakistan, 2% of GDP or 6% to 7% of market capitalisation, which signifies a vast untapped market and considerable potential for growth in AUMs.
• In order to develop a larger customer base, AMCs are focusing on:
• • enhanced alignment with parent banks in order to leverage branch network and customer base; and
  • utilisation of digital marketing platforms for targeted marketing.
• Investment in national saving schemes (NSS) currently stands at Pakistani Rupees Four Point Zero Three Trillion, with an investor base of more than 7 million. CAGR over the past five fiscal years was reported at 8.4%. NSS investment represents around seven times the mutual funds industry AUMs. Higher returns offered on NSS along with lenient know-your-customer (KYC)/anti-money laundering (AML) regulations by the government have hindered the growth of the mutual funds industry.
• The Ministry of Finance has decided to impose the KYC/AML regime on NSS investors, which is expected to facilitate the growth of the mutual fund industry.

While the foregoing findings of the VIS Credit Rating Company Limited reveal a host of challenges faced by the mutual funds industry, which are equally applicable to other AIFs, they also highlight an immense opportunity to capitalise on the vast untapped investment source of retail investors through better planning and strategising, deployment of cutting-edge marketing tools and government/regulatory support.

Answer ... As discussed in question 9.1, the Ministry of Finance’s decision to subject NSS investors to the KYC/AML framework is likely to foster the growth of the mutual fund industry and to divert investments to other AIFs.

Furthermore, the SECP proposed a draft bill in March 2020 called the Non-Banking Finance Companies (NBFC) and Collective Investment Vehicles Act, 2020, ostensibly aimed at the beneficial regulation of NBFCs and collective investment vehicles, the development of a robust non-banking financial sector and the protection of investors. The NBFC Bill proposes to repeal Part VIIIA and Section 457 of the Companies Act, and serve as the parent legislative instrument for governance of AIFs and AIF managing entities. While the NBFC Bill does not introduce any critical changes to the existing AIF regulatory framework that are likely to have a notable impact on the AIF landscape, agriculture finance services, collateral management services and non-banking micro-financing services have been incorporated in the list of businesses that an NBFC may undertake, and there is now express contemplation of licensing of a branch of a foreign NBFC which is licensed by its respective regulatory authority to engage in a business regulated under the NBFC Bill.

The SECP continues to work on creating a conducive environment for AIFs. To this end, amendments to the Companies Act are proposed to facilitate start-ups by eliminating stringent regulatory requirements. The SECP is also working on:

• amendments to the Private Fund Regulations;
• the introduction of equity crowdfunding regulations;
• further development of the recently introduced start-up portal;
• the establishment of a Company Registration Office facilitation desk; and
• the launch of the first regulatory sandbox in Pakistan.

Notably, through recent amendments in the Companies Act by way an ordinance (i.e. a temporary law that requires ratification of the legislature to attain permanence), start-up companies have now been exclusively defined as companies existing for less than 10 years, having an annual turnover of less than Pakistani Rupees Five Hundred Million and working towards innovation, development or improvement of products or processes or services or being a scalable business model with a high potential of employment generation or wealth creation or for such other purposes as may be specified.

Through such amendments, the SECP has been empowered to implement measures for providing greater ease of doing business, improving regulatory quality and efficiency and facilitating innovation and the use of technology in conducting business by the corporate sector by, quote, unquote:

• formalizing existing practices through regulations and implementing other measures for attaining international standards of regulatory quality and efficiency for greater ease of doing business;
• specifying modes and procedures for enabling greater ease of entry into and exit from the market to start-up companies;
• constituting special task groups from the corporate sector for encouraging the use of financial technology in the conduct of business;
• creating environments for testing and examining the impact of innovation, new processes or technologies outside the existing regulatory framework including but not limited to crowdfunding, digital assets, open application programming interface (APIs), smart contracts, cloud based solutions and allowing the establishment and use of regulatory sandboxes;
• encouraging the use of technology for providing and meeting regulatory reporting requirements, risk assessment, customer due diligence, the issuance of suspicious transaction reports, keeping records and such other requirements as may be specified to meet anti-money laundering and counter-terrorism financing standards;
• improving regulatory compliance and specifying proportionate data-driven standards for the corporate sector to take measures for cyber-security, data sovereignty and algorithm supervision;
• specifying exemptions and incentives under the prevailing laws with the object of fostering innovation, promoting start-ups and entrepreneurship ecosystem in line with international best practices;
• improving regulatory monitoring, reporting and compliance requirements; and
• prescribing such other frameworks as may be notified by the SECP for stimulating innovation and financial inclusion in the conduct of business by the corporate sector through the use of financial technology, regulatory technology and supervisory technology.

Answer ... As discussed above, industry stakeholders are engaged in an ongoing dialogue to make the AIFs investment avenue more attractive for retail investors, who have conventionally invested in real estate and/or NSS. AIF managing entities are also constantly pushing for:

• greater regulation of NSS;
• the amendment of existing laws;
• the introduction of new regulatory regimes;
• the inculcation of tech-specific aspects of investment and marketing in regulatory regimes; and
• the introduction of tax relief measures in the AIF industry to incentivise re-routing of investment streams to financial products in the AIF business.

Although the Pakistani AIF industry is diminutive in the domestic and global context, the presence of an enormous untapped retail investor market represents a significant opportunity for domestic and foreign investors. It is likely that investors and AIF managing entities will strategise to channel retail investment in the AIF industry.

While the ongoing COVID-19 pandemic is a major hurdle to the development of the AIF industry in the immediate future, the results of the collaborative efforts of industry stakeholders may start becoming apparent once the pandemic subsides.

Answer ... Investors that wish to establish an AIF in Pakistan must first undertake comprehensive legal, technical and financial due diligence before making an investment in the AIFs industry, with the assistance of local advisers. A final investment decision should be guided by this detailed due diligence. Once an investor is satisfied of the financial viability of establishing an AIF in Pakistan, the legal due diligence will not only pave the way for a smooth establishment and licensing process, but also clarify the recurrent statutory and legal obligations of the AIF and the AIF managing entity. The regulatory requirements are sophisticated and modern, and an AIF investor thus should not encounter overwhelming procedural challenges during the establishment and management phases of the AIF.