SBP plans convertible debts for startups

KARACHI: The State Bank of Pakistan (SBP) is working on a new type of loan scheme to meet the specific needs of startup companies keeping in view the issues they are facing in raising capital in the form of convertible debt from abroad.

According to a working paper titled “Raising of convertible debt from abroad by startup companies” issued by the State Bank on Tuesday, startups and venture capital firms maintain that foreign investors intend to invest in their companies in the form of convertible debt (ie loan convertible into equity) instead of directly investing as equity while the current foreign exchange regulations remain unable to provide this facility.

Startup firms also face funding issues due to unavailability of collateral or security. Foreign investors including equity funds and angel investors show interest in startups. However, they try to cover the risk through alternative means like high return on loan, the SBP noted.

“A company may raise funds from abroad in the form of convertible debt ie the lender shall have the option to convert the loan into equity of the borrowing company,” said the SBP.