Convertible Note Requirements in Pakistan (SECP, SBP & Companies Act Updates 2026)

Pakistan’s startup ecosystem has matured rapidly, and convertible notes have become the instrument of choice for early-stage founders who need capital without locking in a premature valuation. Understanding the convertible note requirements in Pakistan is essential because the regulatory landscape sits across multiple authorities: the Securities and Exchange Commission of Pakistan (SECP) introduced the Issuance of Convertible Debt Securities through Right Offer Regulations in September 2022, the State Bank of Pakistan (SBP) controls how foreign convertible debt enters the country, and the Companies Act 2017, read alongside the Companies Regulations 2024 and subsequent S. R. O. 328(I)/2026, dictates filing obligations and book-entry conversion.

This guide walks founders, CFOs and investor-side counsel through the complete compliance pathway: stepwise issuance, cross-border foreign-debt mechanics, tax and accounting treatment under the Finance Act 2026, a head-to-head SAFE comparison, and a Shariah-compliance note.

Convertible Note Requirements Pakistan, Quick Facts at a Glance

Before diving into full procedural detail, the following summary captures the key regulatory dates, thresholds and authorities that shape convertible note issuance in Pakistan today.

Key Dates, Numbers and Authorities

Regulatory Framework, What Governs Convertible Notes in Pakistan

Three distinct regulatory pillars together define the convertible note requirements Pakistan founders must satisfy. Each pillar operates independently but interacts with the others at the point of issuance, conversion and repatriation.

SECP, Right Offer Regulations 2022

On September 23, 2022, the SECP announced that it would allow listed companies to issue convertible debt securities through a right offer, marking a formal regulatory path for convertible instruments. The full framework is codified in The Issuance of Convertible Debt Securities through Right Offer Regulations, 2022, published by the Ministry of Law and Justice. Under these regulations, a listed issuer may offer convertible debt to its existing shareholders on a pro-rata basis, following disclosure and pricing rules similar to those governing ordinary rights issues. The regulations specify the disclosure documents, pricing methodology and timeline that issuers must follow.

For unlisted startups, the right-offer regulations do not apply directly; however, they provide the template against which SECP evaluates any convertible-debt structure. Early indications suggest that the SECP is using this framework as a reference benchmark when reviewing convertible instruments proposed by private companies, making it essential reading for all founders.

Companies Act 2017 & Companies Regulations 2024

The Companies Act 2017 remains the primary corporate statute governing share issuance, allotment and conversion in Pakistan. The Companies Regulations 2024, as updated up to July 25, 2025 and reviewed on April 14, 2026, provide the detailed procedural rules, including Schedules, statutory forms and filing deadlines, that apply whenever a company issues new securities or converts debt into equity. Critically, S.R.O. 328(I)/2026 now mandates that certain securities transactions must be processed in book-entry form through the Central Depository Company, eliminating the option to issue physical share certificates for those categories. Pakistan convertible note law 2026 is therefore shaped as much by these operational filing rules as by the headline regulations.

SBP & Foreign Convertible Debt

Where a Pakistani startup receives convertible financing from a non-resident investor, the transaction falls within the State Bank of Pakistan’s foreign-exchange regime. SBP FE Circulars govern the classification, approval and reporting of foreign loans, including SBP foreign convertible debt for startups. The company must obtain prior SBP approval, register the loan and comply with repatriation conditions upon repayment or conversion. This layer is frequently overlooked by founders and can delay closings by weeks if not addressed early in the deal timeline.

How to Issue a Convertible Note in Pakistan, Step-by-Step

The following timeline summarises the practical steps involved when a Pakistani startup proposes to issue a convertible note, whether to domestic or foreign investors. Founders should treat this as a compliance checklist and engage legal counsel at each stage.

Minimum Tranche and Investor Eligibility

Under the Right Offer Regulations 2022, the minimum investment per tranche for convertible debt securities is set with a view to protecting retail investors and ensuring institutional-grade participation. The MoLAW regulations provide that convertible debt should be offered only to eligible investors as defined therein, with structured minimum denomination requirements. Founders should verify the exact threshold (reported in market as Rs. 2,500,000) against the operative gazette notification before finalising subscription documentation.

Required Documents and Resolutions, Checklist

The table below lists every core document a founder needs when issuing a convertible note, together with its purpose and, where applicable, the relevant SECP or Companies Act form.

SBP Foreign Convertible Debt, Practical Procedure for Startups

For any Pakistani AI or technology startup raising convertible financing from non-resident investors, whether venture funds, angel syndicates or accelerator programmes abroad, the SBP foreign-exchange framework adds a mandatory compliance layer.

FE Circular Overview, Loan Classification and Approvals

The SBP treats a convertible note from a foreign investor as a foreign private loan. Under the applicable FE Circulars published on sbp.org.pk, the borrowing company must apply through its authorised dealer (commercial bank) for prior approval. The application typically includes the executed subscription agreement, board resolution, details of the foreign lender and the proposed conversion terms. SBP classifies the instrument according to its tenor and repayment terms. Industry observers expect processing to take several weeks, and founders are well advised to initiate the application concurrently with commercial negotiations rather than after signing.

FX, Repatriation and Central Bank Reporting

Once SBP approval is granted, the foreign investor remits funds in the approved foreign currency through the authorised dealer bank, which credits the Pakistani company’s account in local currency at the prevailing exchange rate. The company must maintain records of the inward remittance and report periodically to SBP on the status of the loan. Upon conversion, the company notifies SBP that the foreign loan has been extinguished and replaced by equity, effectively ending the repatriation obligation on the principal. If the note is repaid rather than converted, outward remittance of the principal (and any accrued interest, subject to withholding tax) requires a fresh SBP clearance through the authorised dealer.

These compliance steps are non-negotiable and failure to observe them can result in penalties under the Foreign Exchange Regulation Act, 1947.

Tax and Accounting Treatment (Finance Act and FBR Notes 2026)

The tax implications of convertible notes are often underestimated by founders. The Federal Board of Revenue and the Finance Act 2026 together determine the withholding tax obligations at issuance, during the life of the note and at the point of conversion or repayment.

Withholding Tax at Conversion and Repayment

Interest accrued on a convertible note is generally subject to withholding tax (WHT) under the Income Tax Ordinance, 2001 as updated by the Finance Act 2026. The company must deduct WHT at the applicable rate when crediting interest to the investor’s account, even if the interest is capitalised rather than paid in cash. Upon conversion, the key question is whether the conversion event itself triggers a taxable gain. Industry observers expect the FBR to treat conversion as a non-taxable exchange, effectively treating the debt and resulting equity as a single investment, but founders should obtain a written opinion from their tax adviser, particularly where the note includes a valuation cap that results in shares being issued below fair market value.

For foreign investors, treaty relief under Pakistan’s bilateral tax treaties may reduce or eliminate WHT on interest, provided proper documentation (tax residency certificate, beneficial-ownership declaration) is filed in advance.

Accounting Treatment for Startups, Debt vs Equity Classification

Under IFRS (applied by listed companies) and the applicable Pakistan accounting standards, a convertible note is typically classified as a compound financial instrument with both a liability and an equity component. At inception, the company recognises the fair value of the debt component as a liability and the residual amount as equity in the balance sheet. Interest is then accrued on the liability component using the effective interest method, resulting in a charge to the income statement that may exceed the coupon rate stated in the note. Upon conversion, the liability is derecognised and the equity component is transferred to share capital and share premium.

For early-stage startups following simplified accounting, the practical approach is to classify the entire note as a liability until the conversion trigger occurs, then reclassify to equity. Founders should document their accounting policy choice at inception and apply it consistently, disclosing the key terms and conversion mechanics in the notes to the financial statements.

Convertible Notes vs SAFE, Pakistan-Specific Comparison

Many founders ask whether a SAFE (Simple Agreement for Future Equity) might be a simpler alternative. The table below compares the two instruments specifically in the context of Pakistan’s regulatory environment, where the convertible note requirements Pakistan founders face differ materially from those in Silicon Valley.

The likely practical effect is that convertible notes will remain the dominant instrument for Pakistani startups, especially in rounds involving foreign investors who require SBP-compliant structures. SAFEs may suit small, all-domestic pre-seed rounds where speed outweighs regulatory certainty, but founders should be aware of enforcement risks.

Practical Risks and Mitigations for Founders and Investors

Issuing a convertible note in Pakistan creates specific risks that both sides of the table should address at term-sheet stage.

• Dilution and anti-dilution. Founders must model the fully diluted cap table assuming conversion at the valuation cap and at the discount. Broad-based weighted-average anti-dilution clauses are market standard and should be preferred over full-ratchet provisions to protect founder equity.
• Mandatory conversion triggers. Notes should specify clear qualifying-financing thresholds (e.g., a priced equity round of at least a stated dollar amount) that trigger automatic conversion. Ambiguous triggers create disputes at Series A.
• SECP compliance risk. Failure to file the return of allotment within the statutory window, or issuing shares without book-entry conversion as required by S.R.O. 328(I)/2026, can result in penalties and void allotments. Companies should work with their company secretary to calendar all deadlines at signing.
• SBP timing risk. SBP approval for foreign convertible debt is not instantaneous. Founders should build a buffer of several weeks into closing timelines and consider making SBP approval a condition precedent in the subscription agreement.
• Governance safeguards. Investors commonly request information rights, board-observer seats and protective provisions (veto over further debt). These should be documented in a side letter or shareholders’ agreement executed concurrently with the note.

Templates, Forms and Filings, Links to Regulator PDFs

The following official documents are essential references for any team preparing a convertible note issuance in Pakistan. Founders should download and review each before engaging counsel.

• Right Offer Regulations 2022 (full text): Ministry of Law & Justice, MoLAW PDF
• SECP press release (September 23, 2022): SECP announcement
• Companies Regulations 2024 (updated, incl. S.R.O. 328(I)/2026): SECP, Companies Regulations 2024
• CDC book-entry FAQs: CDC Pakistan, Frequently Asked Questions
• SBP FE Circulars (foreign exchange): State Bank of Pakistan
• FBR / Finance Act 2026 guidance: Federal Board of Revenue

Conclusion

The convertible note requirements in Pakistan span three regulatory bodies, SECP, SBP and FBR, and are evolving quickly. The 2022 Right Offer Regulations opened a formal pathway for convertible debt, the Companies Regulations 2024 (with S. R. O. 328(I)/2026) have tightened book-entry and filing obligations, and the Finance Act 2026 has refined the tax treatment of interest and conversion events. For AI and technology startups raising domestic or cross-border rounds, compliance is not optional: it determines whether shares are validly issued, whether foreign funds can legally enter the country, and whether tax exposures are managed.

Founders should use the checklists and tables in this guide as a starting framework, verify all thresholds against the operative gazette notifications linked above, and engage transactional counsel experienced in startup financing before executing any convertible instrument.

Sources

1. Ministry of Law & Justice, The Issuance of Convertible Debt Securities through Right Offer Regulations, 2022
2. SECP, Press Release: SECP Allows Listed Companies to Issue Convertible Debt through Right-Offer (September 23, 2022)
3. SECP, Companies Regulations, 2024 (updated up to 25.07.2025, reviewed 14.04.2026)
4. State Bank of Pakistan, FE Circulars and Foreign Exchange Guidance
5. Central Depository Company (CDC), Frequently Asked Questions on Book-Entry Shares
6. Federal Board of Revenue, Finance Act 2026 and Tax Guidance