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.