Kanwar Muhammad Dilshad
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 global economy is $3 trillion with a proportion of employment as high as 21% in OECD countries. Startups are recognized the world over as disruptive businesses that have thrown out 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 efficient ones is what sets them apart. This cognizance is reflected in 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 first set of formal regulations around the establishment of PE/VC Companies were introduced in 2008, the growth on the financing side was very sluggish. These regulations went through a round of changes in 2015 but it was not until 2016 that the first PE/VC Company was granted a license. 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 financing 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. Conclusion Legal Framework for Startups in Pakistan 10 Concurrently, as part of the state’s initiative to promote startup culture in Pakistan, SECP amended the Companies Law in 2020 to provide legal status to innovative businesses through a formal definition, introduction on provisions to protect the interests of founders, employee stock options and compliance. This paper analyzed SECP’s initiatives in light of 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 definition across countries but the overarching themes are quite common. It was also found that countries with an 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 benefits in the form of tax breaks or holidays to investors and businesses, easy compliance, protection of intellectual property, financial support through government sponsored programs and access to knowledge networks and mentorship programs. While the end objective is the same, a well-defined legal form is very necessary for new businesses. Such structure will have important bearings on fundamental issues related to personal liability, taxation and financing 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 benefits 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 with those requirements. Aside from the implications, startups rarely have enough resources to bear legal and consulting fees that will need to be incurred to find the best fit 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 making simultaneous changes to the Companies Law and VC/PE Regulations, SECP has provided strong support to the eco-system on both the business and its financing side. Provisions in such as buy-back options for startups have a dual 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 fiscal 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.—Concluded
—The writer is former Federal Secretary Election Commission of Pakistan and currently Chairman National Democratic Foundation.
