International Regulatory Considerations
Pakistan has bilateral trade agreements with China, Indonesia, Iran, Malaysia, Mauritius and Sri Lanka, although most of these agreements are limited to a few hundred tariff lines and do not cover all trade. Pakistan is currently negotiating additional trade agreements with Turkey, Thailand, and South Korea. It is a member of the South Asia Free Trade Area. In addition, Pakistani is a member of SAARC, the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).
Pakistan has been a World Trade Organization (WTO) member since January 1, 1995 and provides most favored nation (MFN) treatment to all member states, except India and Israel. Since 2012, the government has maintained a “negative list,” which specifies a list of products that cannot be imported from India. This list currently contains approximately 1,200 products. Pakistan does not recognize the State of Israel and thus does not trade with Israel.
In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA). Pakistan is also one of 23 WTO countries negotiating the Trade in Services Agreement.
Legal System and Judicial Independence
Pakistan’s legal system is based on British common law. Laws governing domestic or personal matters are also strongly influenced by Islamic Sharia Law. There are two classes of courts: the superior (high) courts and the subordinate (lower) courts. The superior judiciary is composed of the Supreme Court, the Federal Sharia Court, and five High Courts, Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court, whose decisions have national standing. The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government. Neither the Supreme Court nor a High Court has jurisdiction in matters relating to Pakistan’s Tribal Areas, except in limited circumstances. The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, smuggling, drug trafficking, terrorism, tax law, environmental law, consumer protection, insurance, and cases of corruption.
Laws and Regulations on Foreign Direct Investment
Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy, including manufacturing, trading, and service sectors, with full repatriation rights for capital and dividends remittable through a commercial bank.
Most of the foreign companies operating in Pakistan are “private limited companies,” which can be incorporated by a minimum of two shareholders and two directors by registering with the SECP. In order to attract additional FDI, the government eliminated in 2013 a previous requirement that foreign companies invest a minimum of $150,000.
While a company director does not need to be a resident in Pakistan, the chief executive is expected to reside in Pakistan to conduct the company’s routine affairs. If the chief executive is a foreign national, he/she is required to obtain a “multiple work visa,” which is a combination of “work permit” and “multiple-entry visa.” Companies are statutorily required to retain full-time audit services and legal representation. Changes to the name, registered address, directors, shareholders, CEO, auditors/lawyers, etc. must be registered with the SECP within 15 days of the change.
To address investors’ concerns about visa delay and uncertainty, SECP Instruction No. 4 of 2011 was amended in 2013 to permit the issuance of a provisional ”Certificate of Incorporation” prior to the final issuance of the NOC as part of the incorporation process. The Certificate has the provision that company shares would be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fail to obtain a NOC. SECP Instruction No.4 of 2011 had previously required companies with foreign shareholders and directors to obtain a “No Objection Certificate” (NOC) from the Ministry of Interior as a part of the company incorporation process. The process, which included a review by multiple Pakistani government agencies, took between 3-4 months to complete and negatively affected foreign investors’ perceptions of Pakistan’s business climate.
A variety of special courts and tribunals handle the issues of taxation, banking, labor, and IPR enforcement. Nonetheless, due to the weak and inefficient judiciary, many foreign investors include contract provisions that provide for international arbitration in order to avoid protracted disputes.
Pakistan’s Board of Investment (BOI) is the primary government entity that assists foreign investors in understanding applicable laws, procedures, and reporting requirements. The Board of Investment Ordinance 2001 establishes the BOI to promote, encourage and facilitate local and foreign investment inflow in Pakistan. In October 2009, BOI was placed under the administrative control of the Prime Minister’s Secretariat.
Competition and Anti-Trust Laws
The Competition Commission of Pakistan (CCP), established in 2007, is responsible for regulating the anti-competitive and monopolistic practices of both private and public sector organizations. The CCP was established on October 2, 2007, through the Competition Ordinance, which replaced 1970s-era anti-trust legislation. Complaints regarding anti-competition practices can be lodged with CCP, which is responsible for conducting the investigation and is legally empowered to award penalties, which are reviewable by the CCP’s appellate tribunal in Islamabad. The tribunal is bound to issue decisions on any anti-competition practice within six months from the date in which they become aware of the practice.
Expropriation and Compensation
The Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976 protect foreign investment in Pakistan from expropriation. In addition, the Investment Policy of 2013 reinforced the government’s commitment to protecting the interests of foreign investors.
Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). In 2005, Pakistan ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).
Foreign investors have noted, however, that the lack of clear, transparent, and timely investment dispute mechanisms directly impacts their investment calculations. Investors have also expressed concerns over the consistency, impartiality, and protracted duration of arbitration cases. Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but court cases typically take years to resolve. To mitigate these risks, most foreign investors include contract provisions that provide for international arbitration.
Pakistan does not have a single, comprehensive bankruptcy law. Currently, foreclosures are governed under the Companies Ordinance of 1984 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions. Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.
The Companies Ordinance of 1984 regulates mergers and acquisitions. Mergers are allowed between international companies, as well as between international and local companies. In 2012, the government enacted legislation providing a legal framework for friendly and hostile takeovers. The law requires companies to disclose any concentration of share ownership over 25 percent. There are no laws or regulations to authorize private firms to adopt articles of incorporation that discriminate against foreign investment.