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Securitization in Pakistan


Late breaking additions:

Added on 3 July 2003
Malik Naeem Khan gave the following inputs on market developments in Pakistan:

Pakistan over the last few months has seen a couple of securitization deals hit the local marketplace.One of the deal is from the Telecommunication sector while ORIX INvestment Bank recently concluded a securitization transaction from the oil & gas sector for Orient Petroleum Inc.

The transaction entails OPI selling part of its sales proceeds from its Oil & Gas interests to a Special Purpose Vehicle (SPV) called First Oil & Gas Securitization Company Limited. The First Oil & Gas Securitization Company Limited by acquiring the rights of sales proceeds of certain quantities of Oil & Gas produced at OPI’s interests in Ratana, Bhangali and Dhurnal fields of the company will be issuing debt paper of Rs. 1 Billion principal amount in the form of Term Finance Certificates (local name for bonds) with a maturity profile of three years. The debt paper has been rated ‘A’ by JCR-VIS rating agency.The transaction was advised by ORIX Investment Bank Pakistan & Access Financial Services.

Vinod Kothari comments Thanks to Naeem I also had the chance to see the information memoranda of these two deals. Pakistani market for securitisation seems to be a curious shape: both these deals are future flows-based, and are domestic future flows. In essence, future flow deals are no different from collateralised borrowings and cannot be given asset-backed ratings: hence, the very essence of structuring these as securitisation is difficult to understand.One of the deals clearly states that the SPV is non-bankruptcy-remote. Even more curiously, these deals are structured as public offerings, while it is difficult to believe that the investing public in Pakistan has attained the maturity to understand esoteric asset-based funding deals.

Added on 31st August, 2000
Asif Bukhari from Pakistan contributed the following comment on the latest developments in securitization: "Based on Govt policy to attract private sector for the development of infrastructure projects in Pakistan, various comforts and other attractions have been committed by the Government. BOT based projects to Road Building Operating Companies (RBOC) are being awarded for 25 years concessions. The roads users tolls would be the source of funding and mororway network of 2100 Kilometers is desired to be completed over a period of ten years.

PAMIC, a consortium of leading local builders and contractors, is first of its kind RBOC to under take first BOT project valluing PKRs 7290 million and Government has contributed upto 30 % of the cost to further partcicpate in the future net revenues of the Project at the rate of 30%. The balance is to be contributed at 70% and 30 % Debt Equity ratio. The future toll receivables are being securitised after incorporation of SPV company under SECP Rules 1999 to raise funding for the Project.

Government of Punjab has also started awarding contracts on same BOT/BOOT basis.

However the attempt to attract private sector to participate such projects might not become fruitful in the absence of desired umbrella protection as far as Tax and other regulatory provisions are concerned." -Asif Bukhari

Added on 21st June, 2000
SPVs in Pakistan are exempted from taxation – see in the tax issues below.

Added on 21st Sept., 1999:
Pakistan International Airlines has struck a deal with Citibank for securitisation of domestic aviation future flows. See the details of the news on Securitisation news page.


Securitisation draft rules framed by SEC:

The SEC has framed Draft rules on securitisation and put the same for public comment. The rules were put up on 29th June with a 14 day period for comments.

The basic thrust of the rules is regulatory rather than promotional. It would have been expected, in a country where securitisation has not taken off to any significant extent so far, that the government would clear the bottlenecks in process and promote securitisations. As is stands, Pakistani securitisations would be affected by the typical constraints of a country following common law system, and the naivete of the taxes and corporate laws to recognise securitisation. For example, the legal procedure for transfer of actionable claims, requirement for notices to obligors etc are not covered by the rules. The rules also do not cover the nature of securities issued by the SPV and the protection available to the investors. Attendant taxation complexities may not be coming within the purview of the SEC, but any amendment by the SEC would be futile unless all bottlenecks of all sorts are cleared. That is the reason why most countries have favoured an "umbrella legislation" for securitisations – that is, one that is a comprehensive code in itself and covers provisions dealing with law, regulation, as well as taxation.

The rules refer to only a non-recourse transfer by the Originator. Needless to elaborate, during the nascent stages of the market, credit enhancement by the originator by a limited recourse would be indispensable. The present definition of "securitisation" does not apparently admit any recourse to the originator.

Surprisingly, the rules allow a choice between the corporate form and the trust form, but while a minimum capital requirement is laid down for the corporate form, there is no corpus requirement for trusts. The tone of the Rules refer to an SPV which would be an ongoing specialised entity providing SPV services to different originators – normally, the market practice is different. An SPV is formed for a particular transaction and has only a limited life and a limited purpose. The continued existence of the SPV does not serve any purpose as it is merely a conduit for the investors whose money is pooled to acquire the receivables. This also makes the minimum capital requirement for the SPV (Rs. 1 million) meaningless.

The minimum capital requirement would have served some purpose where the capital was a subordinated debt by the originator by way of credit enhancement -that is, this money would have been available to meet the delays and defaults on the receivables acquired from the originator. But SPV by itself does not do any credit enhancements for the investors – hence its own capital is unfructuous. On the other hand, the fact that there is capital may create possibility of shareholder-driven bankruptcy of the SPV.

Public invitations to subscribe to asset-backed securities will be approved by the SEC. There is no provision at all for private placements – leaving it uncertain whether private placements will be permitted or not.

On balance, the rules leave most of the important areas in securitisations gray, and it is quite unlikely that the rules will be able to usher in securitisation activity in Pakistan.

State of the Market:

Securitisation has not taken off in Pakistan to any appreciable extent.

The only significant securitisation transaction in Pakistan so far is the 1997 securitisation of net settlements receivables by Pakistan Telecom. Pakistan Telecom in the country's overseas telephony monopoly, and net settlement receivables arise when there are inward calls into Pakistan. Pakistan Telecom, like most of the emerging Asian countries, would normally have such remittances as the inward calls by Pakistani residents abroad would exceed that outward calls, leading to a net settlement receivable. 6 international carriers such as AT&T who were expected to pay to Pakistan Telecom entered into notice-of-assignment agreements agreeing to pay into the collection account in favour of the SPV.

Legal initiatives:

Draft securitisation rules have been framed and put up for public comment. See above.

Taxation Issues:

  • addeThe government has exempted the income of Special Purpose Vehicle Company through its circular No. 8 of CBR dated 27th July 1999, and subsequent enactment in the income tax ordinance 1979 as follows:

    • Clause 184 of Part 1 of Second Schedule stated that income of Special purpose Vehicle Company will be exempt from tax.
    • These SPV Companies have also been exempted from 0.5% minimum tax under section 80D by virtue of clause (32A) of Part (iv) of the second schedule.
    • Tax withholding provisions of sub sections (2), (2A), (7D) of Section 50 shall also not apply to such Special Purpose Vehicle Company for that purpose a new clause (57) has been 

    d in part (iv) of the Second Schedule