Alternative Investment Funds Comparative Guide

• Published date: 18 September 2020
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Fund Management/ REITs, Compliance, Corporate and Company Law, Securities
• Law Firm: Farooq, Khan & Mirza, Advocates & Corporate Counsel
• Author: Omer Farooq

1 Legislative and regulatory framework

1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?

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.

1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?

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.

1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?

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.

1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?

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.

1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?

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.

1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?

On 24 April 2020, the SECP issued 'SECP Guidelines for Cooperation and Assistance to Foreign Regulatory...