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The Foreign Private Investment (Promotion & Protection) Act of 1976, ("FPIA")
has been enacted to “promote” and “protect” foreign private investments
in the country. FPIA provides protection
to foreign investors with respect to their "industrial undertakings" established
in Pakistan in or after September 1954.Industrial
undertakings are defined in FPIA as entities involved in the production,
distribution or processing of "goods." FPIA
precludes the Federal Government from acquiring foreign capital or foreign
investments in an industrial undertaking except under due process of law
which provides for adequate compensation to be settled in the currency
of the country of origin of the investments. FPIA
upholds the principle of Equal Treatment where equal treatment will be
accorded to local industrial undertakings and those with foreign ownership
in the application of laws, rules and regulations relating to import and
export of goods. FPIA, most importantly,
subject to some broad limitations, authorizes the Federal Government to
open-up new areas in the country to foreign investments.
From a legal standpoint this Act provides only limited security and certainty
to foreign investors as wide discretion has been granted to the executive.
For
instance, FPIA provides protection to foreign capital invested in an industrial
undertaking in the form of “foreign exchange” or “imported machinery” or
“equipment” or in any other form to be approved by the Federal Government
meaning thereby that the government has the discretion to either broaden
or restrict the applicability of this Act through a notification. In
case of “industrial undertakings” providing services, protection is granted
only to those industrial undertakings whose services are “specified in
this behalf by the Federal Government.”
In
case of the development and extraction of mineral resources only those
mineral resources and products are protected “as may be specified in this
behalf by the Federal Government.”
Under
section 3, the Federal Government has the authority to permit foreign investment
in any industrial undertaking, which translates into the authority of the
Federal Government to disallow foreign investment in any industrial undertaking.
Section
4, once again grants the government additional discretionary powers and
states that where Federal Government sanctions an industrial undertaking
having foreign private investment “it may do so subject to such conditions
as it may specify in this behalf.”
This
Act even allows the federal government a power to take over an industrial
undertaking provided it provides “adequate compensation”. Repatriation
facilities are allowed subject to the provisions of the Foreign Exchange
Regulation Act, 1947, under section 6.Under
section 7 remittances by foreign employees employed in Pakistan for the
“maintenance of their dependents” abroad is allowed in “accordance with
the rules, regulations or orders issued by the Federal Government or the
State Bank of Pakistan.”
The Protection of Economic Reforms Act, 1992, was subsequently enacted mainly
to provide legal cover to economic reforms relating to privatization and
deregulation and other fiscal incentives introduced on and after November
7, 1990, through various policies, programmes and regulations of the government.
In the wake of Pakistan's nuclear tests of May 28, 1998, and the anticipated
international economic sanctions (which were subsequently imposed) the
government introduced the Foreign Exchange (Temporary Restrictions) Act,
1998, to impose temporary restrictions in relation to foreign exchange. This
law sough to override certain provisions of Protection of Economic Reforms
Act, 1992, and the terms of any other "agreement" or "contract" and "suspended"
the rights of foreign currency account holders to, inter alia, withdraw,
transfer or take out of the country foreign exchange without the permission
of the central bank. It, however,
allowed the foreign currency account holders to convert their foreign exchange
into Pakistani currency at the "officially notified rate of exchange" (which
was considerably below the market rate).
SBP, pursuant to this Act and its predecessor Ordinance, directed the foreign
currency account holders to convert their foreign exchange holdings into
Pakistani currency. The Supreme Court
of Pakistan in June of this year declared this action of the SBP illegal. The
court, in addition, held:
a. The
foreign exchange account holders are entitled to receive interest/ profits
in foreign exchange at rates agreed to in their original agreements with
the banks;
b. The
non resident Pakistanis and foreigners may utilize the interest in any
manner including the right to remit it abroad; and
c. The
Federal Government and or the SBP shall evolve a scheme for the gradual
removal of restrictions on operation of foreign currency accounts imposed
by the Foreign Exchange (Temporary Restrictions) Act, 1998, and in any
case in every annual budget a reasonable provision in this regard shall
be made.
Pakistan
has so far entered into bilateral investment treaties with thirty-five
countries of the world (please see Annexure A for a list of these countries).
Direct investments by foreign investors have broadly been categorized into Manufacturing and Other sectors:
Foreign
investors are allowed 100% ownership of manufacturing units. Investors
are required to bring their investments from overseas through the regular
banking channels. Government approval
is required only if industry relating to following areas is to be established: -Arms
and ammunition -High
explosives -Radio
active substances -Security
printing, currency and mint Establishment
of new units for the manufacture of alcohol is prohibited except industrial
alcohol.
This
has been subdivided into following:
The
areas covered by this sector have been spelt out which, among others, include
real estate development, transportation and communications. There
is requirement of a minimum foreign equity component of US$ 0.5 million
or its equivalent. Pakistani nationals
shall hold 40% of the equity of these projects. Hence, if the total foreign
equity is US$ 1 million being 60% of the total equity, the Pakistani equity
should not be less than rupee equivalent of 0.667 million being 40% of
the total paid up capital. It, however, appears that the mandatory 40%
Pakistani equity requirement can be deferred for two years since the rules
permit offering of shares to the public "within two years time." There
is also a restriction on the repatriation of profits where repatriation
would be restricted to a maximum of 60% of the total equity or profits.
Industrial
zone development, telecommunication, hotels and tourism have been included
in the infrastructure sector. The
minimum foreign equity component required in this sector is US$ 0.5 million
on repatriable basis while the foreign investors can hold 100% equity of
these projects.
This
sector includes, inter alia, hospitals and educational institutions.
Minimum
foreign equity component should again be US$ 0.5 million to be invested
on repatriable basis.100% foreign
ownership is allowed.
This
sector includes, among other areas, land development, reclamation of barren
lands, farming, development of irrigation facilities, forestry, live stock
farming and breeding. The minimum
foreign equity component should be US$ 0.5 million while 40% of equity
of the project shall be owned by a Pakistani company or national. The
land for agricultural purposes will be available under long-term leases
- initially for a period of 30 years extendable to a further period of
20 years. The foreign company will
not be permitted to transfer this land to another foreign company without
permission of the Federal Government and the respective provincial government. There
is no ceiling on land holdings of registered agricultural companies.
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The law herein is stated as on November 1, 1999. |
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