Recently. in a major development, the State Bank of Pakistan (SBP) has allowed startup companies to avail foreign loans as convertible debt. Previously, this restriction proved to be a major impediment that has been plummeting the growth of startup companies.
Now SBP Allows Startups to Avail Foreign Loans as Convertible Debt
According to the SBP, to facilitate the startup companies to raise revenue from abroad, it has enabled them to avail loans as “convertible debt”.
Currently, the law doesn’t allow individuals to borrow the loans from foreign investors and only allows Pakistani companies to do so under very limited circumstances. However, it restricts the whole purpose of raising convertible debt for a startup company since the point is to get money fast from existing investors. According to the SBP,
Convertible debt is a type of financing with the option that it may be converted into equity shares of the borrowing company, subject to certain terms and conditions.
For a long time, Startup companies were demanding to allow foreign loans that may be converted into equity. In case of successful startups, they carry out an initial round of funding and start selling their products to their targeted customers. However, if they want higher growth for startups then they require more funding.
Prior to the latest development, companies were authorized to borrow foreign currency loans within the parameters defined in the Foreign Exchange Manual (FEM). However, there was no particular category that rendered the option of convertibility of the loan into the equity of the borrowing company. In relation to the new development, the State Bank said,
It is expected that this initiative will help in attracting more foreign investment as it will provide another option to international investors to invest in startup companies operating in Pakistan.