The State Bank of Pakistan has amended Regulation R-6 of its Prudential Regulations for Corporate and Commercial Banking, revising the limits on how much banks and development finance institutions can invest in shares, startups, mutual funds, real estate investment trusts, and private equity funds. The central bank also requires them to have a formal policy for such investment decisions. The changes were set out in Circular Letter No. 22 of its Banking Policy and Regulations Department, addressed to the presidents and chief executives of all banks and development finance institutions, and they revise Paras 1(A) and 1(B)(iv) of the regulation. The amendment builds on earlier changes made through Circular No. 06 of 2014 and Circular Letters No. 07 of 2021 and No. 04 of 2022.
The new limits are set by comparing a share of a bank’s own capital with a share of the investee. For the shares of a single company, a bank’s aggregate investment must stay within the lower of 5 percent of its Tier-I capital, as reported in the preceding half-yearly reviewed or annual audited financial statements, or 10 percent of the paid-up shares of the investee company. For any single startup, including fintech startups, the limit is the lower of 5 percent of Tier-I capital or 500 million Pakistani rupees. For units of any single mutual fund, real estate investment trust, or private equity fund, the limit is the lower of 5 percent of Tier-I capital or 20 percent of the units of that fund.
The central bank is also asking banks and development finance institutions to have an approved policy with an internal evaluation process for objective analysis and assessment of their equity investment decisions. The process must weigh the institution’s financial standing, its aggregate investment portfolio, its risk appetite and expected return, its level of expertise, and its business strategy, including an exit strategy. That last element matters for startup and fund investments, where returns depend on how and when an investment can be sold, and it pushes banks to plan an exit before they commit capital.
On aggregate limits, the central bank said exposure from strategic investment, together with investment in units of all forms of mutual funds and private equity funds, will count towards the aggregate investment limits set out in the paragraphs on single companies and on startups and funds. Units of the National Investment Trust are excluded until its privatization. All other instructions on the subject remain unchanged. For startups, the circular makes explicit how much a single bank may put into one company, and the cap of 500 million rupees or 5 percent of Tier-I capital, whichever is lower, sets a ceiling on direct bank exposure to any one young company, while the policy requirement means banks must show a reasoned process behind each decision.
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