The State Bank of Pakistan (SBP) on Wednesday removed the main obstacle to the development of start-ups, allowing them to take advantage of external loans such as convertible bonds. Financing from abroad allows them to take advantage of loans such as ”convertible debt”.
In order to obtain loans from foreign investors, the current form of law once again prohibits people from obtaining such loans, and only allows Pakistani companies to do so in very limited circumstances.
It limits the entire purpose of generating convertible debt for startups, because its goal is to quickly make money from existing investors. Start-up companies have always asked for foreign loans that can be converted into shares.
Changes were made to the currency manual.
If the startup is successful, they will raise the first round of funding and start selling products or services to target customers. However, in the case of higher growth requiring more financing, startups hope to obtain loans from abroad, but the regulations of the National Bank are hindered.
Convertible debt is a form of financing that can be converted into stocks. SBP said that the shares of the borrowing company are subject to certain terms and conditions.
Before the last instruction, the entity is allowed to define in the Trading Manual (FEM) Obtain foreign currency loans from abroad within the parameters, but it is not a specific category that provides the option of converting loans into company equity. Start-ups are facing financing problems due to the inability to obtain collateral or collateral.
Foreign countries including equity funds and angel investors Investors have shown interest in start-ups, but they will try to hedge risks through alternative methods such as high loan yields.
“It is expected that this initiative will help in attracting more foreign investment as it will provide another option to the international investors to invest in startup companies operating in Pakistan,” said the SBP.
Those who are hesitant to participate in the equity of startups in the early stage can provide financing under this category and in the later stage. Decided to participate in equity in order to implement these changes, the relevant provisions of FEM Chapter 19, SBP said.
In early February this year, the Bank State released a working paper on Start-ups to release convertible bonds from abroad, which stated that it is designing a new type of Loan program to meet the specific needs of companies and emerging companies.
According to this working document, startups and venture capital companies believe that foreign investors intend to invest in their companies in the form of convertible debt (that is, loans that can be converted into equity) , Rather than directly as equity investment, and current foreign exchange regulations still cannot provide this convenience.