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Legal Framework For Startups in Pakistan
Legal Framework For Startups in Pakistan
While they exist in all sectors of the economy, startups are often synonymous with nascent
businesses that have a technology component either in their production processes or service
delivery. This understanding is derived from the manner in which countries around the world
de�ine, classify and categorize startups to confer certain bene�its through legal frameworks and
policies. Aside from policy makers, stakeholders in the ecosystem such as incubators,
accelerators and trans-country networks like the Global Entrepreneurship Network (GEN)
conceptualize startups as businesses with a strong technological component that is essential to
scalability of its operations. This is re�lected in the type of businesses that are nurtured and
incubated, and the manner in which data are collected and analyzed.
There are similarities in the way countries classify businesses as Startups. The most common
features include a threshold on the number of years an enterprise has been in operation; the
requirement that the product or service is an innovation and improvement upon the current or
mode of offering in the market; and the businesses is scalable in terms of the markets it operates
in and the number of employees on its payroll.
The Global Competitiveness Report 2018 ranked Pakistan 28 out of 140 countries on the availability of venture capital
which is higher than Bangladesh, Sri Lanka and Nigeria.
5
IInvest2Innovate. Ambareen Baig, Kalsoom Lakhani and Areej Mehdi. Pakistan Start up Ecosystem Report, 2019. October 29, 2019.
https://invest2innovate.com/download/1280/.
Ibid 2
Legal Framework for Startups in Pakistan
68 13 8
13 98
28
5
India Sri Lanka Nigeria
While this indicator is encouraging, Pakistan still has a lot of ground to cover in the access to �inance area. Between
2016-18, Pakistan received only $0.06 per capita of VC funding from 20 formal investors. This is 3 times less than Nigeria
($0.18 per capita) and 62 times less than India ($3.72 per capita).
India 3.72 69
Based on Global Innovation Index’s 2020 report, Pakistan ranks 77 out of 81 countries on venture capital deals sliding 5
places down from 72 in 2019, and below all its South Asian peers except Sri Lanka. Moreover, a breakdown of the deals
from 2015-19 shows that most investments were not in the early or pre-seed stage when founders are often reliant on
personal sources of funds. Over 11% of investments were seed stage (when the company has been launched and
working on proof of concept) or Series A (54% - when a startup expands its user base and product offerings) compared
to pre-seed (6%).
3
Legal Framework for Startups in Pakistan
In 2017, the government, through the Finance Act 2017 made amendments to the Income Tax Ordinance, 2001. One of
these amendments was related to the introduction of the concept of startups [Section 2(62A)]. A startup was de�ined as:
“a business of a resident individual, Associations of Persons (AOP) or a company that commenced on or after �irst day
of July, 2012 and the person is engaged in or intends to offer technology driven products or services to any sector of
the economy provided that the person is registered with and duly certi�ied by the Pakistan Software Export Board
(PSEB) and has turnover of less than PKR 100 million in each of the last �ive tax years;”
To provide incentives to startups, a tax exemption was granted on the pro�its earned by businesses (incorporated on or
registered after July 1, 2012) in the year in which they are certi�ied by PSEB and two subsequent years. An exemption
from levy of minimum tax was also granted to startups through the Finance Act, 20177.
The de�inition in the Income Tax Ordinance, 2001 is very narrow and restrictive as it only covers technology related
companies that are certi�ied with PSEB. After extensive stakeholder consultations in 2019, SECP has proposed several
changes in the Companies Act, 2017 that include the introduction of a de�inition of a startup (Note: The proposed
amendments and introduction of new clauses will be made directly to the Companies Act that will be rati�ied by
the Parliament. At the time of writing, these changes are yet to be passed). SECP’s proposed de�inition for a startup
has been broadened compared to the one in the Income Tax Ordinance, 2001 to be sector and industry agnostic, the
ceiling for annual revenue has been increased (from PKR 100 million to PKR 500 million) and a limit placed upon the
number of years of incorporation (up to 10).
A “startup company” is a company that a) is in existence for not more than 10 years of its incorporation; b) has an
annual turnover of not more than PKR 500 million or any other amount speci�ied by SECP; and c) is working towards
the innovation, development or improvement of products or processes or services or is a scalable business model with
a high potential of employment generation or wealth creation or for such other purposes as may be speci�ied or d)
such other companies or classes of companies as may be noti�ied by the Commission: Provided that a company formed
by the splitting up or reconstruction of an existing company shall not be considered as a startup company.
Aside from a broadened de�inition, other changes relate to employee stock options, issuance of relaxation of compliance,
share buy-back and protection of minority shareholders. They are brie�ly discussed below.
• Stock Options (Section 83A) and Buy Back (Section 88): Previously, employees’ stock options were only
allowed for private limited companies and shares could only be issued to the business’s founders. Under the
new changes, startups can now set up an employee stock option pool to reward valuable and high preforming
employees. Similarly, share buy-back was also allowed for public limited companies. With the amendments,
the business can now buy back shares from founders who decide to leave the company. These shares are
either cancelled or held as treasury shares.
• Fund Raising (Amendment to Section 17): The changes have also allowed founders to delay putting money
in the business if they have a shortage of funds. This was done with the removal of the condition that
required subscription money to be paid within thirty days. This measure will enable businesses to focus on
product development before fund raising.
• Compliance (Amendment to Section 17): The requirement to immediately engage a chartered account has
been eased. This will enable the business to incorporate itself without bearing the burden of such costs.
• Minority Shareholders (Section 140): To protect minority shareholders, the changes allow owners with
5% of voting power to have a say in the resolutions that are put forth at a general meeting. Previously, only
shareholders having 10% of voting rights were eligible.
The aforementioned changes will provide an enabling environment for a startup culture in Pakistan through focused
interventions, regulatory frameworks and regulatory relaxations for startups. The set of amendments will provide legal
cover to startups in the negotiation and execution of contracts.
7
Federal Board Revenue (FBR). Finance Act 2017 – Explanation of Important Amendments Made in The Income Tax Ordinance, 2001.
September 6, 2017. http://download1.�br.gov.pk/Docs/201796149402990CircularNo04of2017.pdf
4
Legal Framework for Startups in Pakistan
The clubbing of VC/PE Regulations is not dissimilar to legal framework in other countries but there are some exceptions.
In India for example, funds are classi�ied as Alternative Investment Funds (AIF) and regulated under Alternative
Investment Funds Regulations (with the exception of funds in existence before these regulations came into effect. They
are grandfathered under a separate regulation). VC (and other early stage funds) are AIF Tier 1, PE funds are AIF Tier 2
with complex trading such as Hedge Funds falling under Tier 3. The difference between the tiers is the tax treatment, life
of the fund and rules around using funds raised through foreign investment8.
However, in USA, both PE and VC funds are registered as limited partnership with no differentiation in the governing
rules9. Similarly, in the UK, both PE and VC funds operate under a GP/LP structure10.
In the 2008 PE/VC Regulations in Pakistan, the fund was required to have PKR 30 million paid up capital with a
minimum fund size of PKR 250 million. It was required to incorporate with SECP as an unlisted Non-Bank Finance
Company (NBFC) with a maximum life of 15 years. Moreover, minimum investment per investor was set at PKR 10
million. The bene�its for PE/VC Funds were provided through the Finance Act 2008. They included reduced capital gains
tax from 35% to 10% on sale of assets and shares of a private company, alongside a tax free status for the fund for 6
years11.
In 2015, SECP introduced the Private Fund Regulations to replace the PE and VC Regulations 2008. Like the previous
regulations, the fund was required to be managed by an unlisted NBFC. The primary aim was to provide further
easement to the investment landscape. As per the amendments the minimum investment amount per investor was
reduced from PKR 10 million to PKR 3 million12. Following the amendments of 2015, Pakistan’s �irst ever PE/VC fund
was granted a license in 201613.
The restructured legal framework circa 2015 still did not have the desired impact. As of June 2020, only 4 PE/VC
Companies and 5 PE/VC Funds had been licensed by the regulator. In 2019 SECP undertook another review of the
regulations. As a result of industry-wide consultations with startups, fund managers and companies, amendments to the
2015 regulations were introduced in 2020. The minimum investment amount per investor was increased from PKR 3
million to PKR 15 million while the paid up capital requirement was decreased from PKR 30 million to PKR 10 million.
8
Thomson Reuters Practical Law. Pratish Kumar, Sumitava Basu and Diya Dhage, Juris Corp. Private equity in India: market and regulatory overview. July 01,
2020. https://content.next.westlaw.com/Document/Ieb4a24e91cb511e38578f7ccc38dcbee/View/FullText.html?transition
Type=SearchItem&contextData=(sc.Search)&�irstPage=true
9
Thomson Reuters Practical Law. Daniel S. Kim and Young-Nam Jun, Orrick Herrington & Sutcliffe LLP. Venture capital investment in the United States: market
and regulatory overview. May 01, 2020.
https://content.next.westlaw.com/7-501-0057?__lrTS=20200815130655605&transitionType=Default&contextData=%28sc.Default%29
10
British Private Equity & Venture Capital Association. FAQs in Private Equity.
https://www.bvca.co.uk/Our-Industry/Private-Equity-Explained/FAQs-in-Private-Equity.
11
Securities and Exchange Commission of Pakistan (SECP). Internal & External Communication Unit. SECP’s Major Initiative – Private Equity & Venture Capital
Fund Regulations, 2008. August 19, 2008. https://www.secp.gov.pk/wp-content/uploads/2016/05/PE_VC_initiative.pdf
12
SECP. Private Funds Regulations, 2015. November 25, 2015. http://mufap.com.pk/pdf/secpnoti�ications/2015/Noti20152.pdf.
13
Dawn. First License for Private Equity Fund Approved. October 19, 2016 https://www.dawn.com/news/1290814. 5
In addition, startups were required to be valued every two years instead of every quarter14.
The Income Tax Ordinance, 2001 was updated to exempt all PE/VC funds from tax on pro�its and gains from 1 July 2000
to 13 June 202415. This change was enacted in 2012 when the exemption deadline was increased to 2024.
It should be noted that the rules around creating PE/VC funds meant to facilitate �inancing in startups are not completely
divorced from how funds are raised and the ease of their mobility. The latter falls into the domain of the State Bank of
Pakistan (SBP) under the Foreign Exchange Manual. This manual has guidance around how foreign domiciled funds can
make invest in businesses based in Pakistan. Due to the macroeconomic conditions, particularly those relating to
adverse balance of payments, the repatriation of foreign investment, dividends and pro�its is laden with complex
documentation and procedural issues. As an example, in the case of convertible debt, investors have to wait at least 3
years till the investment can be converted into equity16. Even for capital in�low, PE/VC companies have to go through
registration and approval processes of SBP that have no speci�ic timelines on the part of the regulator. These rules also
have to be reviewed for expedience and degree of complexity if access to �inance is to be eased for startups. Otherwise,
investors will prefer other jurisdictions over Pakistan for incorporating their funds.
In addition, both since the startup legislation encompasses both SECP and SBP, the staff in both organizations should be
provided with the requisite training in enforcing training to administer the policy in accordance with its true spirit. In
SBP’s case this would be the Foreign Exchange Manual while in SECP’s case, this would be the Company Law as well as
the Private Fund Regulations.
Country Context
A number of countries have policies that aim to improve the ecosystem within which Startups are nurtured and
operated. These policies include rules around procurement, tax incentives, winding up, and patent applications, among
others. There is also an important component relating to access to �inance.
To become eligible for bene�its under these policies, startups have been given a de�inition. However, in some instances
the de�inition is not rooted in any legal framework. This is the point of departure in the way startups are de�ined in
countries within a legal framework (e.g. Startup Law, Company Law) and those with enabling policies only. In the former,
new businesses are required to be structured in accordance with their country’s Company Law e.g. sole proprietorship,
partnership, corporation, etc.
14
SECP. Amendments to Private Funds Regulations, 2015. June 10, 2020.
https://khilji.net.pk/wp-content/uploads/2020/06/Noti�ication-PF-Regulations.pdf
15
Federal Board of Revenue, /Income Tax Ordinance 2001, Second Schedule, Part 1, Clause 101. https://www.ma-law.org.pk/pd�law/ITO%202001.pdf
16
State Bank of Pakistan, Foreign Exchange Manual Chapter 19. http://www.sbp.org.pk/fe_manual/pdf/2018/Chapter-19.pdf 6
Legal Framework for Startups in Pakistan
In addition, certain sectors such as gambling and tobacco are excluded. All programs and
assistance schemes for funding startups and providing mentorship have been consolidated
under SG Singapore. It is worth mentioning that the Singaporean government will co-invest
with 11 partners in businesses that require signi�icant capital outlay and may take a longer
time to be commercially viable17.
Australia: IIn Australia, Early Stage Innovation Companies (ESIC) with high growth potential are provided
with tax incentives if they have been incorporated in the previous 3 years, have an assessable
income of no more than $200,000 in the prior year and have been locally incorporated. There
is also a cap on the total expenditure stated in the tax return and a requirement to have an
Australian Business Number18.
Bangladesh: Government of Bangladesh’s Startup Bangladesh Program provides mentorship, advisory and
�inancial assistance through a fund to provide seed and growth stage funding to local
businesses. Eligible businesses are required to demonstrate technology based innovation
through product or service delivery. The fund also invests in training programs to create a
skilled resource pool in the technology sector19.
United Kingdom: UK’s Seed Enterprise Investment Scheme (SEIS) matches startups with investors that get
equity in return for their investment. A business that is not more than 7 years old from the time
of its �irst sale can raise GBP 5 million each year (for a maximum of GBP 12 million) if it is an
unlisted UK based company that does not control or is controlled by another company. There
is a limit on the amount of gross assets (GBP 15 million before issuance of shares) and number
of employees (maximum of 250 full-time employees). Investors get a variety of tax breaks 3
years after their initial investment that include income tax relief (45% of initial investment),
capital gains exemption (100% exemption), capital gains tax exemption from liquidating other
investments into SEIS startups (50% exemption), loss of investment relief (loss off-set against
other tax on other income) and inheritance tax relief (100% relief against value of shares after
two years)20.
Malaysia: In Malaysia, there are two funds that invest in startups at the seed and pre-seed stage--Cradle
Fund and Malaysia Venture Capital Management Bhd (MAVCAP), both under the purview of the
Finance Ministry. As a VC, MAVCAP makes direct investments with fund size ranging from RM
1 million to RM 20 million and even participates actively in the management and operations of
these companies. Cradle offers a maximum seed funding of up to RM 500,000 to help
technology companies attain commercialization.
The Government of Malaysia has also introduced tax breaks to encourage private investments
in startups as well as promote the setting up of high-tech companies in Malaysia. For example,
the Angel Tax Incentive allows angel investors who have invested in early-stage startups to
qualify for tax exemption. This would indirectly see more fund �lows to startups and also
encourage eligible angels to participate in the ecosystem. Additionally, there are incentives for
ventures that have obtained MSC status21- a recognition by the Government of Malaysia for ICT
and ICT-facilitated businesses that develop or use multimedia technologies to produce and
enhance their products and services. These incentives include a 100% investment tax
allowance and duty-free importation of multimedia equipment.
Israel: Foreign investors that invest in Israel based VCs can get exemption from capital gains, interest
and dividend through a tax ruling provided that the VC �irm invests in a non-listed technology
company. In addition, an amendment was made to the Israel Income Tax Ordinance in 2011 to
allow investors to deduct their investment in a qualifying Israeli company from their taxable
income from all sources. This deduction was capped at 5 million Israeli Shekels and can be
taken in the year the investment was made and two subsequent years22.
17
Enterprise Singapore. https://www.enterprisesg.gov.sg/about-us/overview
18
Australian Taxation Of�ice, Australian Government. Tax incentives for early stage investors. August 20, 2020.
https://www.ato.gov.au/Business/Tax-incentives-for-innovation/In-detail/Tax-incentives-for-early-stage-investors/.
19
Startup Bangladesh. https://startupbangladesh.gov.bd/.
20
Seedrs. Seed Enterprise Investment Scheme (SEIS) Tax Relief Explained – The Complete Guide. https://www.seedrs.com/learn/guides/seis-tax-relief.
21
MSC Malaysia status is a recognition by the Government of Malaysia through the Multimedia Development Corporation (MDeC), for ICT and ICT-facilitated
businesses that develop or use multimedia technologies to produce and enhance their products and services.
22
Thompson Reuters Practical Law, Venture Capital Investment in Israel: Market and Regulatory Overview, December 2015 7
Countries with Enabling Legislation
Some countries with enabling legislation are discussed below. These can be split into two categories: In the �irst
category, a custom made law exists around startups; and the second where amendments have been made to the
country’s Company Law to insert speci�ic provisions on startups.
Italy: Italy was the �irst country to introduce a specialized legislation23– Italian Startup Act in 2012 to
spur innovation and growth through an entrepreneurial culture. The legislation de�ines startups as
private limited companies that have been incorporated for 5 years or less, have an annual turnover
not more than €5 million and must not distribute their pro�its. In addition, these businesses must
be working towards the development of innovative products and services with a clear technological
component. There are numerous bene�its provided to qualifying businesses. They include free
digital incorporation, some relief from �inancial and reporting compliance, exemption of annual
duties and fees, stock options for employees as remuneration, tax incentives for equity investors,
fundraising through equity crowdfunding campaigns and access to a public SME guarantee fund
(that covers up to 80% of loans issued by �inancial institutions) among others24.
Tunisia: Tunisia passed a Startup Act in 2018 to support startups in funding, provide exemptions from
corporate taxes, �iling international patents and a government stipend for the founders who have
taken time off from their jobs. The Act de�ines a startup as a company that: has not more than 8
years old from the time of incorporation; not more than 100 employees; more than two-thirds of
the founders as investors; have an innovative business model that is preferably technology based;
and contributes to economic growth25.
Senegal: Senegal passed a Startup Act in 2019 to support startups in myriad ways that include tax relief,
subsidization of registration cost, protection of intellectual property and facilitating support from
incubators. On the �inancing side, a major bene�it is government guarantee on loans, equity
�inancing made by private institutions or individuals. Fiscal relief includes a 3-year tax exemption.
To qualify as a startup under the Act, a company must be an innovative and disruptive private or
public company that has been registered for not more than 8 years, founded in Senegal with
one-third owners of Senegal nationality, residence or conducting business in Senegal. Expats can
also create a startup under the law if they have 50% ownership26.
India: Although India doesn’t have a specialized legislation, it has made changes to its Company Law to
accommodate startups. Amendments to this law in 2017 resulted in a de�inition of a startup which
is a business incorporated as a private limited company, a partnership �irm or a limited liability
partnership in India. Further, it is required that the business should not be in existence for 10 years
from the date of incorporation and its annual revenue must not exceed INR 100 Crores (increased
from INR 25 Crores in 2019 through another amendment27) for any of those 10 years. The business
must be working on an innovative product or service with a scalable business model that has
potential for employment generation and creation of wealth. Major bene�its to qualifying entities
are provided under Indian’s national policy – Startup India which provides tax exemption for three
years, easy winding up, fast tracking of patent application and access to the online portal for
exchanging knowledge and forming partnerships28.
Egypt: In Egypt, amendments were made to the Companies Act to allow for incorporation of single
member companies or sole proprietorship with all provisions of a limited liability company. This
allowed the business to operate as a separate legal entity from its owner. Under the amendments,
the owner of the business was empowered to hold general meetings, take decisions regarding the
increase of decrease of capital, make employment appointments, wind up or convert the company
into another structure29.
23
Disrupt Africa. Tom Jackson. Senegal becomes 2nd African nation to pass Startup Act. December 30, 2019.
https://disrupt-africa.com/2019/12/senegal-becomes-2nd-african-nation-to-pass-startup-act/.
24
Italian Ministry of Economic Development. Directorate General for Industrial Policy, Competitiveness and SMEs. The Italian Startup Act Italy’s policy
framework to support innovative startups. July 8, 2019. https://www.mise.gov.it/images/stories/documenti/Executive%20summary%20ISA%2007_2019.pdf
25
Arabnet. Roudy Chamy. Tunisian Startup Act Rede�ines Entrepreneurship in the Country. November 30, 2018.
https://www.arabnet.me/english/editorials/entrepreneurship/tunisian-startup-act-rede�ines-entrepreneurship-in-the-country
26
African Heroes. Charles Rapulu Udoh. How Senegal ’s New Startup Act Intends To Help Startups Succeed. March 2, 2020.
https://afrikanheroes.com/2020/03/02/how-senegal-s-new-startup-act-intends-to-help-startups-succeed/
27
Khurana & Khurana Advocates and IP Attorneys. Shubham Borkar and Lakshay Kewalramani. India: All New 2019 Startup Policy Of The DPIIT/DIPP
(Widened De�inition And Modi�ied Norms). March 11, 2019.
https://www.mondaq.com/india/corporate-and-company-law/787456/all-new-2019-startup-policy-of-the-dpiitdipp-widened-de�inition-and-modi�ied-norms
28
Startup India. Ministry of Commerce and Industry, India. https://www.startupindia.gov.in/
29
Riad-Riad. Substantial Amendments To Egypt’s Companies Act. February 01, 2018.
http://www.riad-riad.com/en/publications/substantial-amendments-egypts-companies-act 8
Legal Framework for Startups in Pakistan
Zambia: Similarly, a reform in the Companies Act in Zambia increased the protection of minority
shareholders30 and reduced the discretionary powers of the government with regards to
business entry and exit. For instance, amendment of articles of association that has an impact
on shareholder rights requires a special resolution. Additionally, a resolution has to be passed
by a three fourth majority of votes cast by members entitled to vote for the alteration of
company’s share capital31.
Exhibit 7: Summary of Bene�its to Startups due to Enabling Policy and Regulatory Frameworks
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Conclusion
There is ample evidence that shows startups are important to a positive paradigm shift in economies all over the world.
Even with a high level of attrition, startups that cross a certain time threshold of years in operation have a high tendency
of continuity. This enables them to contribute through income generation, tax contribution and employment creation. As
a collective, their contribution to the global economy is $3 trillion with proportion of employment as high as 21% in
OECD countries.
Startups are recognized the world over as disruptive business that have thrown out the playbook on traditional ways of
doing business by introducing technology oriented scalable businesses models. The evolution through which old
businesses processes become obsolete and are replaced by new and ef�icient ones is what sets them apart. This
cognizance is re�lected in the manner through which regulators and policy makers create, support and nurture startup
eco-systems of incubators, accelerators, investors, academics and innovative businesses.
Even though the �irst set of formal regulations around the establishment of PE/VC Companies were introduced in 2008,
the growth on the �inancing side was very sluggish. These regulations went through a round of changes in 2015 but it
was not until 2016 that the �irst PE/VC Company was granted a license in 2016. As of 2019, there are 20 formal investors
but only 4 are registered as PE/VC Companies. While there have been 101 deals in the last 5 years, Pakistan lags behind
its peers in �inancing contribution on a per capita basis. The PE/VC Regulations went through another round of changes
in 2020 with revised provisions on minimum capital requirement and investment amount per investor alongside other
changes.
30
A record number of 24 economies strengthened minority investor protections in 2018/19 under World Bank’s Ease of Doing Business Reforms.
31
OECD. Africa Investment Initiative. Highlights of the Policy Framework for Investment in Zambia. April 27, 2011.
https://www.oecd.org/investment/investmentfordevelopment/47662751.pdf. 9
Concurrently, as part of the state’s initiative to promote startup culture in Pakistan, SECP has proposed amendments to
the Companies Law in 2020 to provide legal status to innovative businesses through a formal de�inition, introduction on
provisions to protect the interests of the founders, employee stock options and compliance. This paper analyzed SECP’s
initiatives in light of the efforts made by other countries through enabling policies and regulatory frameworks. The
thinking around classifying and categorizing startups is strikingly similar across the globe – they are nascent entities
(number of years’ threshold) with a cap on revenue (revenue threshold) and have a scalable and innovative business
model that results in creation of wealth and employment generation. There is a slight deviation on the de�inition across
countries but the overarching themes are quite common.
It was also found that countries with enabling environment can be split into two – ones that have a structured legal
framework around startups and others that recognize startups through policy alone. The former can further be split into
– countries that have made changes to their Companies Law or Act while others that have introduced a specialized
legislation e.g. Startup Act to classify startups as legal entities. The incidence of specialized legislation is high in African
and is still increasing.
The objective of such initiatives is the same i.e. to confer bene�its in the form of tax breaks or holidays to investors and
businesses, easy compliance, protection of intellectual property, �inancial support through government sponsored
programs and access to knowledge networks and mentorship programs. While the end objective is the same, a
well-de�ined legal form is very necessary for new businesses. Such structure will have important bearings on
fundamental issues related to personal liability, taxation and �inancing among others. As an example, if a single member
company is allowed to operate with limited liability company (LLC) provisions, it is important to understand at the
forefront on how long can those bene�its be enjoyed. Similarly, some governance provisions relating to are very onerous
e.g. appointment of company secretaries and board of directors. It is not feasible for a new business to comply to those
requirements.
Aside from the implications, startups rarely have enough resources to bear legal and consulting fees that will need to be
incurred to �ind the best �it for their business in terms of structuring an entity. A strong Companies Law can help
businesses save time and resources through a predictable process of incorporation.
By proposing simultaneous changes to the Companies Law and revising the VC/PE Regulations, SECP has provided
strong support to the eco-system on both the business as well its �inancing side. Provisions in such as buy-back options
for startups have a duel effect of positively impacting startups as well its investors. The implications of the changes as
whole remain to be seen but there is evidence from other countries that shows that startup culture can potentially thrive
when both businesses and investors have proper legal cover, a friendly �iscal regime and are able to raise funds from
jurisdictions other than their country of domicile. For the latter, SBP’s rules around investment from foreign funds will
need to be reviewed. For now, SECP has put a strong building block in place that can potentially provide an immediate
impetus to startups in Pakistan.
10
About Karandaaz
KARANDAAZ PAKISTAN is a Section 42 company established in August 2014 and focuses on fostering
economic growth and creating jobs through financial inclusion of unbanked individuals and unserved
enterprises, with a special focus on women and youth. The company has four verticals: