Pakistan's emergence as a lucrative ABS market for foreign investors


(Afridi, Shah & Minallah, Pakistan)

May 05 - 18, 2003



Following the October 1999 incident, the government unveiled a reform driven agenda causing an unprecedented amount of regulatory and enabling legislation in Pakistan. Law making in Pakistan has now become a more consultative and transparent process with cluster participation and input being a key feature. However, state policy has often defeated by persistent bottlenecks in the administrative machinery and wherever official and lower level corruption are endemic.

In some ways ABS is not a whole new feature in Pakistan. Indeed, corporate debt issues by leasing companies that were secured by way of assignment of specific lease rentals had an uncanny resemblance to ABS. However, these did not qualify as true ABS since the assignment of lease receivables did not constitute a 'true sale' by way of an SPV. Assigned receivables also, were not removed from the balance sheet of the issuer.

In what can best be called a piecemeal effort, THE COMPANIES (ASSET BACKED SECURITIZATION) RULES, 1999 open up the securitization market in Pakistan through Statutory Regulatory Order 1338(I)/99. Only eleven sections long, the Rules fail to cover much ground in terms of detail but open up tremendous scope of ABS activity in their interpretation. The skeletal law leaves therefore, tremendous room for expansion and development of ABS in Pakistan where securitization provides a means of liquidating certain assets (normally long-term receivables) on the balance sheet of a financial institution by issuing marketable securities against these assets. It, therefore, represents a process whereby the balance sheet can be unlocked by freeing up capital tied-up in long-term assets that are essentially illiquid in nature.


Aside from government owned entities, the Rules allow any Public Limited Company (SPC) or a Trust (SPT) to register with the Securities & Exchange Commission of Pakistan (SECP) for the purposes of becoming an SPV.

The SPC must adhere to the comprehensive provisions of the Companies Ordinance 1984, which created the now defunct Corporate Law Authority (CLA). The CLA has since been replaced by the SECP (created under the Securities and Exchange Commission of Pakistan Ordinance, 1997); which now continues to be a strong regulator of Equity and Investment in Pakistan. The Ordinance governing SPCs also covers matters of Winding up & Insolvency, Schemes for Amalgamation and Disclosure. In addition to this, an SPC must have a paid up capital of at least one hundred thousand rupees (approx. US$1666).

The Trusts Act in Pakistan dates back to 1882 and has thus developed rich case law offering an appropriate vehicle for entities including non-profit organizations, charities and grant foundations. The Ordinance also applies in some cases to SPTs as prescribed in the Rules.


An aspiring SPV with directors, officers or employees that have been adjudged as insolvent, have suspended payment, compounded with creditors, have been convicted of fraud or breach of trust or of an offence involving moral turpitude is precluded from Registration with the SECP. The Rules do not address jurisdictional issues where the above-mentioned offences are committed in foreign law jurisdictions, by foreign entities. Arguably, it appears that such entities may not be barred from registration by the SECP.



The Rules give the SECP powers to bar an entity where the promoters, directors and trustees of such person are, in the opinion of the SECP, not persons of means and integrity and do not have special knowledge and experience of matters to be dealt with by a SPV. Such discretion may be founded in bad policy where necessary opinions of the regulator may lie well against an entity for personal reasons and indeed the global lessons of Enron might be hard learnt by such entities.

Upon application for registration by the Trust or Company, a fact finding inquiry ensues which leads to the SECP granting a certificate of registration. In addition to the eligibility criteria prescribed in the Rules, information relating to the Originator, Obligator, Trustee and other related parties in the transaction along with the details of the securitization transaction are also required upon application. The Rules place certain obligations of periodic reporting upon the SPV and give the SECP powers to cancel the registration if the SPV fails to make a public offering of securities within such time frame and in such manner as may be specified by it while granting the certificate of registration. If the SECP is satisfied that it would be in the public interest so to do, it may on its own motion, or on the application of the investors holding not less than ten per cent of the securities issued by such SPV, by order in writing, cancel the registration. However, the SPV has been given the right of hearing before any such order is passed within the Rules. To rule out possible conflicts of interest, the ABS Rules also require that the Originator and the SPV not be "connected persons" defined as any person or company beneficially owning, directly or indirectly, ten per cent or more of the share capital of that SPV or able to exercise directly, or indirectly, ten per cent or more of the voting rights in that company.


A Trust is by far the most appropriate choice of SPV to issue Asset Backed Certificates by process of ABS which has been defined in the Rules as:

"a process whereby any SPV raises funds by issue of Term Finance Certificates (TFCs) or any other instruments with the approval of the Commission (SECP), for such purpose and uses such funds by making payment to the Originator and through such process acquires the title, property or right in the receivables or other assets in the form of actionable claims"

The Pakistan Code of Good Corporate Governance, notified by the SECP in the wake of Enron's collapse, has no applicability to SPTs although it is a mandatory requirement to implement for all public listed companies since early this year. Any securitization activity in Pakistan must also be in conformity with the Islamic principles of finance and investments which prohibit interest based lending, but encourage management of risk in expectation of profit or mark-up.

The Rules define "future receivables" to include all such receivables against which income may accrue or arise at a future date. An inclusionary structure therefore leaves the playing field for ABS wide open. External credit enhancement can be obtained for the securitization structure by means of Pool & bond insurances (to cover any losses on the pool of assets), Letters of credit from banks (to cover losses up to a certain amount) and Corporate guarantees (either from a third party or from the Originator).

Advertisements, prospectuses and other invitations to the public to invest in a scheme, including public announcements, must be submitted to the SECP for approval prior to their issue. The approval may be varied or withdrawn but not before a hearing. SPVs may at all times take legal recourse against the orders of the SECP.


An SPV in Pakistan is generally prohibited from:

i. merging with, acquiring or taking over any other company or business, unless it has obtained the prior approval of the Commission in writing to the scheme of such merger, acquisition or take-over;

ii. pledging any of the assets held or beneficially owned by it except for the benefit of the investors;

iii. making a loan or advancing money to any person except in connection with its normal business;

iv. participating in a joint account with others in any transaction;

v. applying any part of its assets to real estate except property for its own use;

vi. making any investment with the purpose of having the effect of vesting the management, or control, in the Special Purpose Vehicle; and

vii. giving guarantees, indemnities or securities for any liability of a third party;




The rather hastily drafted Rules leave much to be desired in terms of emphasizing a true sale for adequate bankruptcy remoteness and leave definitional issues mostly nebulous and left to the better practice of industry. The Rules do not explicitly state that the assets must be owned by a Special Purpose Vehicle (SPV), whose ownership of the sold assets is likely to survive the bankruptcy of the Seller. Thus the conceptual understanding of a true sale is alien to many investors in Pakistan.

Trusts are by far the most convenient vehicle for securitization in Pakistan, although the Rules prescribe no minimum standards for them. Being a single purpose entity, the Rules do not provide for any voluntary deregistration mechanism or a renewable operational timeframe for the SPV. Neither do the Rules specify any servicing or liquidity support obligations inter se the Originator and the SPV although secure originators assigning lease receivables in Pakistan operate with certain negotiable minimum standards for servicing, credit enhancement and non-interest based lending. The ABS Rules are also silent on the issue of private placement though the SECP has allowed certain strong financial companies to make private placements for lease receivables and thereby issue TFCs.


Securitization is at a nascent stage in Pakistan. Indeed, Income Tax and Islamic Jurisprudence have been the most persistent retardants for growth and development of the debt market. A lack of legal and regulatory framework coupled with tax obstacles in the transfer of financial assets and issuance of TFCs have further impeded ABS. Given that Pakistan's inherent sovereign risk considerations have hindered cross border transactions in the past, the newly ushered government and US interests in the region promise some stability of governance, law and order.

The income of a SPV is now exempted from tax through the Finance Ordinance 2000 and they also receive preferential withholding treatment. Although stamp duties are still applicable to the transfer of assets, the stamp duties in respect of issuance of TFCs have been greatly reduced. As a matter of policy the SECP is dedicated to the facilitation of venture capital, corporate debt and securitization. The Board of Investment's Policy now allows foreign investment on a repatriable basis is in the Service, Infrastructure, Social and Agriculture Sectors subject to certain conditions. The dependable presence of Fitch Ratings and the International Finance Corporation (IFC) as a Credit Rating agency has added to investor confidence in the Capital and Debt markets of Pakistan. Most promising for the ABS market are guidelines for the relaxation of Prudential Regulations for Banks and DFI in respect of investment in securities issued by SPVs are currently being drafted by the State Bank of Pakistan (SBP).


Though it is clear that the ABS Rules are an enabling law which open up a vast array of innovative transactions (Rs.100 Million to date), its bare bones may become too weak in supporting structured finance that is said to be changing the global face of corporate finance and banking. After the finalization and implementation of these guidelines, it is expected that Securitization would grow as an important instrument for financial intermediation, especially for those companies looking to increase their balance sheet liquidity and to obtain additional working capital at a lower cost.

The wheels turn slow in Pakistan, but they do turn. And where packaging the parts and selling them leads to a value greater than the whole, Pakistan's emergence as a lucrative ABS market for foreign investors heralds an important stage in the evolution of its financial sector and economy.

Mr. Ghazali is an attorney with the law firm of Afridi, Shah & Minallah, Lahore, Pakistan. His areas of practice include international trade, corporate law and finance. Mr. Ghazali received his LLb. degree from the University of London with special interest in company law, contracts and international law. If you have any questions about this article or securitization in Pakistan Mr. Ghazali may be reached via e-mail at lexmagna@hotmail.com