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SECP issues draft of private equity fund rules

ISLAMABAD (August 14 2007): The Securities and Exchange Commission of Pakistan (SECP) has issued the draft 'Private Equity and Venture Capital Funds (PE&VCF) Regulations 2007' meant to attract foreign direct investment and provide capital to local corporate sector for its growth and expansion. An announcement in this regard was made by SECP on Monday.

The private equity is a distinct asset class that can play a vital role in transformation of the local economy by providing growth capital to the local corporate sector. Private equity will unlock the hidden value of the private companies by providing capital and managerial skills for growth and expansion. It will also assist in the turnaround of sick and badly managed companies and would help Pakistan attract foreign direct investment, the SECP said.

It said that the PE&VCF would be an unlisted closed-end unit-trust fund open only to high net worth individuals and institutions due to its intrinsic nature of being a high risk asset class. The fund will provide equity for seed/start-up capital, expansion, buyout and turnaround although primarily to private companies. However, it can venture into privatisation deals as well.

Through Finance Act, 2007, the Commission is empowered to make regulations pertaining to section 282 of the Companies Ordinance, 1984. The SECP offers financial products to the investors which are tailored to suit the prevailing market conditions and various segments according to their risk appetite. After Real Estate Investment Trusts (REITs), another recent development in this regard is the introduction of PE&VCF.

Under the proposed PE&VCF Regulations 2007, an entity set up outside Pakistan for managing or investing private equity or venture capital may invest in Pakistan after getting registered with the Commission.

Such foreign private equity and venture capital entities may hold, invest or manage in Pakistan only such funds as have been collected outside Pakistan and have been transferred to Pakistan for the purpose of investment here. Repatriation of the principal amounts, so transferred to Pakistan, and all gains accruing thereon shall be in accordance with the applicable laws of Pakistan.

Any entity that is incorporated outside Pakistan and has got registered with the Commission is exempt from compliance with these regulations and subject to the condition that it will not invite any investments from individuals or institutions in Pakistan.

Provided that a foreign private equity and venture capital entity shall disclose to the SECP the names, particulars and such other information as the commission may specify from time to time, with regard to its promoters and directors, major shareholders and key executives who are Pakistani nationals or foreign nationals of Pakistani origin.

Under the regulations, no fund shall be established unless the Fund Management Company (FMC) has registered the fund with the SECP. The Commission may register a fund specified in the constitutive documents, if it fulfils the following conditions: First, trust deed is in such form as specified by the commission and has been duly registered under the provisions of the Registration Act, 1908.

Second, the sole object of the trust is to carry out activities in furtherance of the objects of a Fund through a prudent strategy of investment in accordance with these regulations for maximising the return for unit holders.

Third, the fund, including all investments out of the fund, shall be managed in compliance with the provisions of the Companies Ordinance. Fourth, units of the fund shall, at all times, be held by at least ten persons and not more than 50 persons.

Fifth, the fund shall not be involved with any activity except those permitted under these regulations and the eligible financial activities associated with the primary objects of the Fund, provided that there is a full and fair disclosure in the Placement Memorandum; and the Trust Deed vests the Trustee with power to take all steps necessary for the liquidation of all or any investment made out of the Fund, to wind up the Fund and to also direct the FMC to take such steps as may be directed by the trustee.

Under the new procedure, an FMC would ensure that the fund as a closed-end Unit Trust is vested in the trustee, pursuant to provisions of the Trust Deed, for the benefit of Unit Holders and all transactions undertaken in furtherance of the objects of the Fund are undertaken in the name of the trustee.

The FMC would manage the Fund, in accordance with the Constitutive Documents and all applicable laws in the sole and exclusive interest of unit holders, in good faith and to the best of its ability without gaining any undue advantage for itself or any of its connected persons.

It would carry out all transactions involving the fund managed by it on an arm's length basis and account to the trustee for any loss in value of the assets of the Fund where such loss is attributable to the FMC. It would maintain proper record and books of accounts, during the life of the fund and for a period of five years and fulfil other conditions specified in the draft regulations.

Under the regulations, where the SECP is of the opinion that the FMC has contravened laid down rules and provisions, it may on its own motion or on the report of the Trustee by order in writing, FMC.

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