Chapter XIX

CHAPTER XIX

LOANS, OVERDRAFTS AND GUARANTEES

1. Regulations governing Loans and Guarantees.

Extension of loans, overdrafts and credit facilities to companies (other than Banking Companies) which are by any means controlled directly or indirectly by persons resident outside Pakistan and to residents against guarantees or collaterals lodged outside Pakistan, extension of loans and overdrafts in foreign currencies and giving of guarantees on behalf of residents of Pakistan in favour of non-residents or on behalf of non-residents in favour of residents, are regulated under sub-section (2) of Section 18 and Sections 4 and 5 of the Act. This chapter contains the general regulations covering grant of such loans, overdrafts, credit facilities and guarantees.

2. Definition of Foreign Controlled Companies.

Section 18(2) of the Act imposes restrictions on [endings to any company, not being a banking company, which is by any means controlled, whether directly or indirectly, by persons resident outside Pakistan. For the purposes of this section a company, which term includes a firm, branch or office of a company or firm, is deemed to be controlled directly or indirectly by persons resident outside Pakistan, if

(i) it is a branch office of a company incorporated outside Pakistan,or

(ii) in the case of partnerships, if

(a) 50% or more of the capital of the partnership is owned by foreign nationals, or

(b) the majority of the partners are foreign nationals, and

(iii) in the case of companies incorporated in Pakistan, if

(a) 50% of the shares or more are subscribed by foreign nationals, or

(b) 50% of the Directors on the Board of Directors or more, are foreign nationals. In the case of equal share-holding a company is deemed to be a Pakistani controlled if its Chief Executive is a Pakistan National.

3. Categories of Foreign Controlled Companies.

For the purpose of borrowing, foreign controlled companies are classified in the following four categories:-

Manufacturing companies including oil distribution companies.

Semi-manufacturing companies including construction companies.

Non-manufacturing companies involved in trade, and, services, social and agriculture Sectors as allowed under Government’s Investment Policy; and

Investment Banks.

Above Paragraph 3 is Substituted via F.E. Circular 36, dated 29th December, 1997.

4. Borrowing Entitlement of Foreign Controlled Companies.

The State Bank has accorded general permission to the Authorized Dealers to grant rupee loans and credits to the foreign controlled companies in all the four categories to the extent of the following specified percentages of their paid-up capital, reserves, undistributed profits and un-remitted dividends in case of companies incorporated in Pakistan, and of Head Office permanent investment and un-remitted profits, in case of branches of foreign companies, as disclosed by their last audited annual balance sheet provided the loans and credits required by them are intended exclusively for meeting their working capital requirements and not for capital expenditure:

Category (I) No limit

Category (ii) 75%

Category (iii) 50%

Category (iv) 100%

For calculating the borrowing entitlement,the following pointswill be kept in view :

The word 'reserves' used above refers to general reserve or other free reserve of the company available for declaration of dividend or issue of bonus shares.
Where unremitted profits and dividends are taken into consideration for determining the borrowing entitlement,the entitlement will be reduced proportionately as and when the remittance of profit or dividends is effected.
If the company has any adjusted from its paid-up capital or head office investment, as the case may be, for the purpose of working out its borrowing entitlement.
Where a company having a negative net worth,raises its paid-up capital,its borrowing entitlement may be worked out with reference to the additional capital injected.This facility would be available for a period of three years from the date of increases in capital after which the normal rules shall apply.

Above Paragraph 4 is Substituted via F.E. Circular 36, dated 29th December, 1997.

Above Paragraph 4 (iv) is Added via F.E. Circular 24, dated 3rd September, 1997.

Paragraph 4 (d) Updated via F.E. Circular 45, dated 8th June, 1993.

5. Reference to the State Bank in Cases of Doubt about Borrowing Entitlements.

For the purposes of borrowing entitlement, companies which are partly manufacturing and partly trading are treated as manufacturing or semi-manufacturing depending upon the extent of their manufacturing activity. Companies which are largely engaged in manufacturing are considered as manufacturing companies and those in which manufacturing does not constitute bulk of their activity shall be treated as semi-manufacturing. In case of doubt whether a company should be treated as a manufacturing or a semi-manufacturing company for the purposes of borrowing entitlement, reference should be made to the State Bank. If there is doubt on any other point concerning the borrowing entitlement State Bank should be consulted immediately.

6. Borrowing Entitlement inclusive of Borrowings from other Sources in Pakistan.

If a company has taken loans and advances from other sources in Pakistan, the amounts outstanding on the date of sanction should be adjusted from its borrowing entitlement and the company should be granted loans and advances to the extent of the balance only. In other words, the Authorised Dealers have to ensure that the borrowings by companies from them and other sources in Pakistan do not together exceed their borrowing entitlement indicated in para 4 above. As an exception, the Rupee loans sanctioned on the basis of foreign currency borrowings are treated as additional to the normal borrowing entitlement and should not be adjusted against it. In this regard reference may also be made to para 12 below.

7. Borrowing Entitlement subject to Credit Control Restrictions imposed by the State Bank.

Like other companies, the borrowings in Rupees by foreign controlled companies operating in Pakistan are also subject to credit control restrictions as imposed by the State Bank from time to time. While sanctioning limits, therefore, the Authorised Dealers should ensure observance of such restrictions.

8. Processing and Reporting of Loans and Advances to the State Bank.

Applications for Rupee loans and advances should be made on the prescribed form "L" (Appendix V-92). Information under columns (7) and (8) of the form relating to existing borrowings and borrowing entitlements respectively, should be certified by qualified auditors. Authorised Dealers will maintain companywise record and as at 31st December each year the Head/Principal Of fires of Authorised Dealers will submit a consolidated statement in the prescribed form (Appendix V-93) to the State Bank showing particulars of loans and advances granted by their different offices and branches to foreign controlled companies during the year in terms of para 4 above.

9. Loans against Commodities intended for Export or for Purchase of Raw-Material.

Authorised Dealers have general permission of the State Bank to grant loans, overdrafts and credit facilities to foreign controlled companies in the following cases also in addition to normal borrowing entitlements referred to in para 4 above:

(a) Where commodities intended for export are pledged or are proposed to be pledged by business houses who handle such commodities as dealers, the commodities should be taken as being intended for export out of Pakistan, although the actual export may be made by those business houses or by others to whom the stock may be subsequently sold.

(b) Where funds are required for purchase of raw material or for meeting other expenditure connected therewith provided the raw materials are directly related to the production of goods intended solely for export. This facility is subject to the condition that the borrowing company will undertake to produce to the Authorised Dealer a certificate from qualified auditors in the prescribed form (Appendix V-94) within a period not exceeding twelve months from the date the loan is utilised.The auditors' certificate should confirm that the amount of the loan has been utilised for the purchase of raw material required solely for the production of goods, which have been exported. It will be the responsibility of the Authorised Dealers to see that this certificate is furnished by the borrowing company within the prescribed period. They should refer all those cases to the State.Bank where they feel that facility has not been utilised for export or where the borrower has not furnished the certificate within the stipulated period.

10. Release of D. P. Bills against Trust Receipts.

In the case of imports on D.P. basis the import documents are ordinarily released by the Authorised Dealers against payment by the importers. There may be occasions where Authorised Dealers may have to release the documents to the importers against Trust Receipts without collecting payment from teem. If in such cases, the Authorised Dealer has effected remittance, it would result in extension of credit to the importers till such time as the payment is made by them. Such facilities should not, therefore, be extended to foreign controlled companies except by adjustment of their borrowing entitlement. This, however, would not be necessary where documents are released against Trust Receipt under instructions from the drawer or the exporter's bank, as in such cases no remittance from Pakistan will be involved till the bills are paid for by the importers and the credit will be deemed to have been extended by the exporters of goods.

11. Purchase of Usance Import Bills.

In the case of imports into Pakistan on usance, the letters of credit sometimes provide that the usance is on account of the importers in Pakistan. In these cases the overseas negotiating bank makes payment to the exporter by debit to the account of the opening bank in Pakistan. On receipt of documents, Authorised Dealers respond the entry and deliver the documents to the importers against acceptance without collecting any payment from them. This results in the extension of credit to the importers in Pakistan. In the case of foreign controlled companies, therefore, the Authorised Dealers should establish letters of credit providing for usance on openers account only after effecting proportionate adjustment from the borrowing entitlement of the importing company. This will not be necessary in the case of sight bills or where usance is on exporter's account.

12. Foreign Currency Loans and Rupee Borrowings on Matching Basis.

(i) With the permission of the State Bank foreign controlled companies and branches of foreign companies can contract foreign currency loans on repatriation basis for meeting their working capital requirements. Additional Rupee loans/overdrafts on matching basis are also permitted by the State Bank against such foreign currency loans. Requests to borrow Rupee funds should be made to State Bank on form "L" (Appendix V-92).

(ii) Pakistani firms and companies functioning in Pakistan may obtain foreign private loans on non-repatriable or repatriable basis for their working capital subject to the following terms and conditions:

(A) NON-REPATRIABLE BASIS:

The loans are contracted on non-repatriable basis on the clear understanding that such loans would be treated as rupee loans to the extent of rupees generated out of the inward remittance, neither the principal nor interest/profit would be remittable abroad at any time and repayment of the loan and payment of interest/profit would be made in Pakistan.

(B) REPATRIABLE BASIS:

(i) The loan is interest free and for a period not less than one year.

(ii) No bank guarantee for securing such loans would be provided from Pakistan.

(iii) No forward cover shall be provided.

(iv) The Government of Pakistan will not provide the facility of absorption of exchange risk in such cases.

Agreement for foreign private loans on repatriable basis should be submitted to the State Bank for registration. After the State Bank has registered the agreement and the loan amount has been remitted to Pakistan, the repayment schedule (Appendix V-38) should be submitted to the State Bank for registration alongwith proceeds realization certificate. After the repayment schedule has been registered, the Authorised Dealers would be free to remit the installments of principal on the due dates quoting reference of the repayment schedule, in accordance with the procedure laid down in paragraph 69(i) Chapter XIII of the Exchange Control Manual. No pre-payments would be permissible.

13. Bridging Facility to Foreign/Foreign Controlled Companies.

In special circumstances foreign and foreign controlled companies are also allowed Rupee borrowings by way of bridging facility for short periods. This facility is in addition to the normal borrowing entitlement and borrowings allowed on matching basis in terms of paras 4 and 12 above. Requests for bridging facility should be made by the applicant companies through the Authorised Dealers to Investment Division of the Exchange Control Department, State Bank of Pakistan, Karachi justifying the need for the special facility and the period for which it is needed.

14. Local Borrowings for Capital Expenditure.

Foreign controlled companies are normally required to meet their requirements of capital expenditure out of their Rupee resources or from loans raised abroad with the permission of the Federal Government/State Bank. In special circumstances such companies are allowed to raise Rupee resources through medium and long term local borrowings, which will not count towards their normal entitlement as laid down in paragraphs 4 and 12 above. As an exception, foreign controlled companies engaged in manufacturing are permitted to meet their requirements of capital expenditure by taking loans from banks, development finance institutions and other financial institutions or by issuing participation term certificates etc.

15. Guarantees on behalf of Foreign Controlled Companies.

For the purposes of Section 18(2) of the Act, guarantees which are issued in lieu of earnest money, security or other cash deposits are treated as extension of credit to the extent these are not backed by 100% cash deposit. Authorised Dealers may issue such guarantees on behalf of foreign controlled companies only by adjustment of the amount from their borrowing entitlement. This, however, would not be necessary where guarantees required to be issued are not in lieu of cash deposit but are either in the nature of performance bond etc., or required to be given alongwith the tender documents in lieu of earnest money deposit. In the latter case, the validity of the guarantee would be restricted to the period upto which decision about acceptance or rejection of the relative tender is taken. The State Bank's prior approval will become necessary if the guarantee is to remain valid even after the decision on the tender has been taken.

16. Loans and Overdrafts against Guarantees of Non-Residents or against
Collateral held outside Pakistan.

Authorised Dealers are given general permission under the Foreign Exchange Regulation Act, 1947 to grant rupee loans to their clients (including foreign controlled companies) against guarantees of non-residents/guarantees received from banks functioning abroad, subject to compliance with the credit restrictions imposed by the Banking Control Department, State Bank of Pakistan. Such rupee loans to foreign controlled companies will be allowed within their normal form 'L' (Appendix V-92) entitlement.

17. Borrowings by Individual Foreign Nationals.

Authorised Dealers have general permission to grant Rupee loans/overdrafts to foreign nationals upto the extent of their two months salary. Request for advances in excess of this should be referred to the State Bank.

18. Loans and Overdrafts to Non-Residents Including Loans for Purchase of Residential Plots / Houses / Flats by Overseas Pakistanis.

(i) Authorised Dealers may grant purely short term Rupee loans or overdrafts to their overseas branches and correspondents, in the normal course of their business, without reference to the State Bank, provided such loans or overdrafts are created as a result of negotiations under Rupee Letters of Credit, established by the overseas banks to finance exports from Pakistan, and are liquidated within a period not exceeding two weeks.

(ii) Authorised Dealers may grant Rupee loans to those Pakistan nationals resident outside Pakistan, who are maintaining Foreign Currency Accounts with them, against the security of the balances held in such accounts.

(iii) Authorized Dealers / Development Financial Institutions / Housing Finance Institutions may grant rupee loans to those Pakistani nationals who are working outside Pakistan, for purchase of residential flats / plots / houses in Pakistan up to 90% of the cost / price of the flat / plot / house subject to the condition that the loan will be liquidated by the borrowers through remittances from abroad in foreign exchange through normal banking channel or by debit to their Foreign Currency Accounts. The initial down payment of the purchase price of the flat / plot / house up to 10% of the total price can be financed by the purchaser / borrower from his savings in Pak rupees.

The above permission is, however, subject to the following terms and conditions

The rupee loan shall be extended to those non-resident Pakistanis only who are working abroad and do not own immovable property outside Pakistan, for the purpose of purchasing a residential plot or house / flat and not for any commercial purposes.

Loans will be extended by the banks / DFIs / Housing Finance Institutions subject to observation of the normal rules and prudential regulations.

Sale proceeds of the residential plot / flat / house on dis-investment shall not be eligible for repatriation in foreign exchange or for credit to a Foreign Currency Account / Convertible Rupee Account of the purchaser / owner.

Paragraph 18 (iii) Added via F.E. Circular 14, dated 10th February, 1993.

19. Short term Borrowings in Foreign Currency by Authorised Dealers.

Authorised Dealers may, if it becomes necessary in the normal course of their business but not for the purpose of carrying speculative exchange position etc., obtain short term loans and overdrafts from overseas branches and correspondents for period not exceeding seven days at a time. If such loans or overdrafts are required to be secured by collateral to be lodged in Pakistan or else where, full details of the proposed arrangements should be furnished to the State Bank for prior approval.

Interest on short term loans and overdrafts taken under this para may be remitted by Authorised Dealers without the prior approval of the State Bank.

20. Long Term Loans by Authorised Dealers.

It is not permissible for Authorised Dealers to obtain long term loans in foreign currencies without the prior approval of the State Bank. Application for this purpose should be made to the State Bank, giving the terms of the proposed loan and the reasons why it is considered necessary to contract such a loan.

21. Loans and Advances by Authorised Dealers in Foreign Currency.

Authorised Dealers will not grant any loans or overdrafts in foreign currencies, whether secured or unsecured, without the prior approval of the State Bank. Applications for this purpose should be made by letter, giving full details of the purpose for which such loans or overdrafts are required as also the particulars of the guarantee or collateral, if any, and the manner in which the loans or overdrafts are expected to be liquidated.

22. Guarantees on behalf of Residents of Pakistan in favour of Non-Residents.

(i) Except in cases covered by paragraphs 25 and 27 below, prior approval of the State Bank is required for giving any guarantee or undertaking or opening of a letter of credit, the implementation of which may involve payment to a non-resident either in foreign currency or Rupees. Applications seeking permission for giving such guarantee or undertaking should be made by letter giving full particulars of the guarantee or under-taking viz., the amount, the period and the purpose of the guarantee and the terms of payment in the event of the guarantee being implemented. These restrictions also apply to renewal of such guarantees, undertakings, letters of credit etc. While forwarding applications for renewal to the State Bank, Authorised Dealers should state the extent upto which the facilities covered by the guarantees were utilised during the previous twelve months or during the validity of the guarantees etc., if the period involved is less than 12 months.

(ii) Authorised Dealers may, however, issue guarantees in favour of foreign suppliers/lenders to cover repayment of loan and payment of interest under Foreign Private Loan/Suppliers Credit including credits under PAYE Scheme in accordance with the terms and conditions of the agreement as registered by State Bank, under intimation to Investment Division, Exchange Control Department, State Bank of Pakistan, Central Directorate, Karachi.

23. Guarantees on behalf of Non-Residents in favour of Residents of Pakistan.

Prior approval of the State Bank is required for giving guarantees or undertakings in favour of residents in Pakistan either on behalf of non-residents or against overseas guarantees or collaterals lodged outside Pakistan. This restriction does not, however, apply to cases covered under paras 28 and 29 or where the guarantee is being extended by the Authorised Dealer on the basis of a back-to-back guarantee from its overseas branch or correspondent. Applications for this purpose should be made by letter giving full particulars including the amount, the period and the purpose of the guarantee and the manner in which the Authorised Dealer will be reimbursed in the event of the guarantee being implemented. Renewal of such guarantees also requires the prior permission of the State Bank. While forwarding applications, Authorised Dealers should state the extent to which the facilities covered by the guarantee or undertaking etc., have been utilised during the previous 12 months or such shorter period for which the facilities have been available.

24. Rupee Guarantees on behalf of Foreign Controlled Companies in favour of
Residents of Pakistan.

For Rupee guarantees on behalf of foreign controlled companies in favour of residents of Pakistan a reference is invited to para 15 of this chapter.

25. Performance/Bid Bond Guarantees.

Authorised Dealers, National Insurance Corporation, Pakistan Insurance Corporation and those Insurance Companies whose exposure limits have been fixed by the Controller of Insurance for the above purpose (particulars of Insurance Companies could be obtained from the Controller of Insurance) may issue Performance or Bid Bond Guarantees on behalf of exporters, members of recognized Consultancy/Construction Associations and Companies approved by Pakistan Engineering Council (PEC) in Pakistan subject to the following conditions:

(a) Tenders specifically call for furnishing of such guarantees.

(b) The beneficiary abroad is a foreign Government or a Government sponsored Organisation or private company or a firm.

(c) The tenderer is a bonafide exporter or a manufacturer of the commodity which is specified in the tender and there is no restriction on its export from Pakistan.

(d) In case of Consultancy/Construction firms and Engineering firms recognized by Pakistan Engineering Council, the organisation issuing the performance or bid bond must satisfy itself that the tenderer is a bonafide Consultancy/Engineering firm,having the requisite financial and technical resources and there are reasonable prospects of their being able to successful execute the contract. Companies with poor track record will not be eligible.

26. Remittances under Guarantees or Performance Bonds and their Reporting to
the State Bank.

Authorised dealers may make remittances against the Performance Guarantees or bonds issued by them or the Pakistan Insurance Corporation or National Insurance Corporation or those Insurance Companies whose exposure limits have been fixed by the Controller of Insurance in terms of Para 25 above, if remittances become necessary for the implementation of such Performance Guarantees or bonds. In these cases, Authorised Dealers should minutely scrutinise the terms of the Performance Guarantees or bonds and satisfy themselves that the amount has become payable to the beneficiaries due to the default of the party in Pakistan. While reporting remittances made against such Performance Guarantees/Bonds to the Control in their monthly foreign exchange returns, the Authorised Dealers will bunch Forms 'M' with the documents given below alongwith the covering statement in duplicate as per Form (Appendix V-95):

(i) Photo copy of the Guarantee or Performance Bond.

(ii) Photo copy of the claim received by the foreign bank from the concerned Government or the Government institutions or a private company or a firm demanding such payment.

(iii) Copies of correspondence, if any, exchanged between the foreign bank and foreign government or Government Institution or a private company or a firm.

(iv) Copies of correspondence exchanged by the firm in Pakistan on whose behalf Guarantee/Bond was issued with the concerned foreign Government or Government Institution or a private company or a firm about invoking of the Guarantee/Bond by the latter.

27. Opening of Letters of Credit and Advising of Negotiations under Export Letters of Credit.

Restrictions imposed under para 22 of this chapter shall not apply to the establishment of letters of credit or similar undertakings by the Authorised Dealers to finance imports into Pakistan in accordance with the provisions of Chapter-XIII. Similarly restrictions imposed under para 23 shall not apply to advising of export letters of credit established by non-resident banks nor to negotiation of documents thereunder.

28.Guarantees which may be given without Prior Approval.

The restrictions in paragraphs 22 and 23 do not apply to guarantees given by Authorised Dealers in favour of non-residents on behalf of their customers in the ordinary course of their business in respect of missing documents, authentication of signatures, release of goods on Trust Receipts and defects in documents negotiated by them under letters of credit etc.

29. Guarantees and Collaterals in favour of Overseas Bank Branches and Correspondents.

Authorised Dealers should not, without the prior approval of the State f Bank, furnish guarantees to the overseas bank branches or correspondents or hold collaterals on their behalf in respect of any credit facilities or guarantees the latter may give or for any other purpose. All applications for this purpose should be made to the State Bank by letter giving full details of the guarantees or collaterals, as the case may be, and of the transaction in cover of which guarantee is proposed to be given or collaterals deposited.

30. Renewal of Loans and Overdrafts.

In cases where the grant of any loans or overdrafts or issue of guarantees requires the prior approval of the State Bank, the renewal of such loans, overdrafts or guarantees shall also require the prior approval of the State Bank.