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On 26 February 2019, the government of Nepal tabled the Foreign Investment and Technology Transfer Bill 2019 (“Bill”) which will replace the Foreign Investment and Technology Transfer Act 1992. The Bill intends to reform the existing legal framework of foreign investment in Nepal to facilitate investments. This article provides an overview of the proposals, key changes that have been proposed and improvements that should be considered by the parliament.

Approving authority: The Department of Industry (“DOI”) is proposed to remain as the authority to approve, regulate and facilitate foreign investment. Further, overlapping authority is provided to Nepal Rastra Bank (“NRB”), Securities Board (“SEBON”) and Ministry of Industry (“Ministry”) for matters relating to loan, foreign listing of securities, investment funds, repatriation and appeals.

Approval limits: DOI will approve investments under NPR 5 billion, the threshold increased from the prevailing amount i.e. 2 billion, and Industry and Investment Promotion Board (“IIPB”) will approve investments over NPR 5 billion. PPPI Bill which is also tabled at the parliament provides that Investment Board of Nepal (“IBN”) will approve private investments above NPR 6 billion. Accordingly, it seems that there is an overlap between the two boards with IIPB’s nominal significance and narrow margin for approvals. IIPB could have been entirely removed and replaced by the IBN.  

Automatic approval: The bill mentions that foreign investment approvals may be granted through automatic route. However, this is subject to future decision of the government and will not be effective until provisions are made in the regulations.

Second Approval from NRB: Currently two investment approvals are required for investment in Nepal: first from either DOI, IIPB or IBN, and second from NRB. The bill proposes that second approval will not be required, but it is unclear. Section 16(1) of the Bill provides that only notification to NRB will be required to bring in foreign investment whereas sub-section (2) creates ambiguity by providing that “investors may bring investment after fulfilling procedures set out by NRB”. This ambiguity needs to be clarified.

Capital investment funds: It has been proposed that investment will be allowed in “capital investment funds” after approval from SEBON and DOI. Such funds will only be allowed to invest in “equity” and not debt instruments. Further approvals will be required each time for the funds to invest, which is paradoxical. Investors will also be allowed to purchase shares of listed companies in industrial companies, but will not be allowed to own share in banks and financial institutions, or trading companies. This provision will also not come into force immediately and only in a future date upon further decision of the government of Nepal. Secondary investment is not likely to interest investors as non-financial institutions constitute a very low percentage of all listed companies. The Bill also keeps open the possibility to impose further restrictions on investment funds through delegated legislation, increasing uncertainty for investors.

Issuance of securities in foreign exchanges: Nepalese companies will be allowed to issue securities (bonds, debentures and others) in foreign capital markets after approval from NRB and SEBON. It is unclear if issuance of shares will be allowed as the provision does not specifically refer to it. This has the potential to enable Nepalese companies to tap foreign capital markets.

Lease investment: Currently, leasing of plants, equipment, machineries and other assets from foreign companies is not considered as investment. There are uncertainties regarding custom clearance, repatriation of fees, and return of equipment leased (other than for aircraft leasing transactions). The Bill will clear these ambiguities on lease transactions.

Loans: Under the current law, all types of loan and loan facilities from foreign persons and financial institutions are allowed (subject to interest rate caps and other requirements). However, the Bill only allows companies with foreign equity investment to take loan and does not allow locally owned companies from doing so. It is unclear if this is a drafting mistake or government policy. Further, while approvals for foreign loans are currently provided by DOI and NRB, the Bill proposes that loans now will be approved by NRB following recommendation of Ministry. It would have been better if a single authority approved all types of investments. Further, multiple authorities will cause problems in transactions involving both equity and loan investments.

Repatriation: The Bill allows investors to repatriate dividends, profits, earnings, proceeds of sale of shares and also, proceeds of liquidation and amounts recovered from legal proceedings, which were not clear previously. However, unlike current law which grants repatriation as a right to foreign investors, investors now have to prove that they have “complied with laws, agreements and obligations”. This is bound to create more uncertainty and discourage foreign investment. Further, the Bill retains dual approval system from approving authority and NRB to obtain repatriation rights. In fact, some provisions go backwards imposing approvals on matters such as opening of foreign currency accounts, repatriation of royalties and service fees, which are allowed currently under automatic route by applying to banks directly.

Holding company ownership change notification: All transfers of ownership foreign companies (of their holding companies) that have investments in Nepal need to be notified and tax needs to be paid in Nepal. This type of provision was expected after the Ncell indirect transfer tax scandal. However, this will not be practical for large companies with multi-tier corporate structures and listed companies as their shareholding may change regularly and such change may not be related to Nepal. Provision needs to be made to exempt holding companies that also invest and do business in countries other than Nepal.

Work permits and business visas: Currently, depending on the amount of investment, institutional investors are provided with 5 business visas for their personnel and additional for their family. However, the Bill backtracks and restricts business visas to maximum of 2 persons and their family only. Further, procedure to recommend for work permit is not harmonized in accordance with the Labor Act 2017, which provides for 3 work permits for management personnel on fast track basis without having to announce vacancy or to prove similar employees were not available locally, whereas the Bill makes it conditional on evidencing that such persons are not available locally. The provision should at least be harmonized with the Labour Act.

Branch offices: The Bill provides provisions different from section 154 of the Company Act 2006 with regards to branch offices of foreign companies and is bound to create confusion, which is not necessary.

Negative list: Certain items in the negative list are not in accordance with Nepal’s WTO commitment. They are set out below:

SN  

Sector

Current Status

Proposal 

Remarks

1

Small and household industries

Restricted

Allowed

 

2

Personal service businesses such as barber shop, beauty parlors, tailoring, driving, and local catering

Restricted

Restricted

 

3

Weapons industry, Radioactive elements related industries, Atomic energy

Restricted

Restricted

 

4

Buying and selling of land and houses (except construction industry)

Restricted

Restricted

 

5

Movies, films of national language

Restricted

Restricted

 

6

Security printing and currency business

Restricted

Allowed

 

7

Retail business

Only allowed for companies operating in at least 3 countries subject to special approvals

Restricted

Against Nepal’s WTO commitment to allow 80% investment in electronics retail and wholesale, and to open other retail and wholesale sectors gradually

7

Remittance business

Restricted

Restricted

Against Nepal’s WTO commitment to allow investment in money transmission services

8

Beedi (Local/traditional cigarette)

Only allowed for companies exporting 90%

Allowed

 

9

Internal courier service

Restricted

Restricted

Against Nepal’s WTO commitments to allow 80% investment in courier

10

Chicken farming, Bee Farming, Fish Farming

Restricted

Only chicken farming is restricted

 

11

Legal, accounting, engineering, Consultancy

Only allowed for other consultancy maximum 51%

51% investment will be allowed

Against WTO commitments which allows 66% in architecture

12

Rural tourism and home stay

Restricted

Restricted

 

13

Travel agency, trekking and mountaineering

Allowed

Restricted

 

14

Media (newspapers, radio, TV, online news)

Allowed, but restricted to 25% by policy

Restricted

 

15

Educational consultancy, language teaching, music training, computer training

Allowed

Investment will be restricted below certain threshold amount

 

Overall, while efforts for reform seem to have been made in matters such as leasing and allowing Nepalese companies to issue securities abroad, a lot of it seem to be half-hearted. Important issues such as whether second NRB approval for investment will be required is unclear, and automatic route for investment and provisions relating to investment funds are subject to further enactments. It would also be desirable if single regulatory authority provides the investment approvals for all types of foreign investments.

Proposals such as notification of change in ownership of holding companies of foreign investors, restriction that foreign loan can only be availed by companies with foreign equity investment, and qualified repatriation rights are not likely to be welcomed by investors. Other proposals such as for branch office and working visas are not coherent with provisions of other laws.

There are also many drafting and conceptual flaws in the Bill that needs to be addressed to enable the Bill to be more investment friendly when it is finally enacted. It may be a big mistake to rush this bill before the Investment Summit at the end of March which the government plans. Proper stakeholder consultation needs to be undertaken before this is enacted.

Author: Anjan Neupane (Partner)

Please note that this guide is published for information only and should not be considered as legal advice. You are requested to seek legal advice for specific factual situations.