Unveiling Outward Investment: A Nepali Law Perspective

Nepal’s economy has traditionally been inward-focused, with its investment policies primarily designed to attract foreign direct investment (FDI). However, as the global economic landscape evolves, there is a growing interest among Nepali entrepreneurs and investors in exploring opportunities beyond the country’s borders. This shift in focus towards outward investment is both a natural progression for a developing economy and a complex legal challenge. This article delves into the current legal framework governing outward investment in Nepal, highlighting the opportunities, challenges and potential future developments in this area.

The Emergence of Outward Investment

Outward investment refers to domestic capital being invested in foreign countries. For Nepal, this is a relatively new phenomenon, driven by several factors including globalisation, the need for diversification, and the aspiration to tap into lucrative markets abroad. As Nepali businesses grow in size and ambition, the desire to invest in foreign markets becomes increasingly compelling. However, the legal infrastructure to support such endeavours is still in its nascent stage.

Legal Framework Governing Outward Investment

Nepal’s legal framework for outward investment consists of restrictive policies and evolving regulations. Key legislations include:

1. Act Restricting Investment Abroad 1964 (ARIA)

The ARIA limits outward investment by prohibiting investments in foreign securities, foreign firm, bank account, real states and other assets and any cash or kind investment unless specifically authorised by the Government of Nepal. The ARIA strictly prohibits outward investment unless otherwise allowed by the Government of Nepal. Till date, no such notification has been published allowing the outward foreign investment specifying its type, ceiling, period and other conditions. Violations of ARIA can result in fines or imprisonment or both.

2. Foreign Exchange (Regulation) Act 2019 (FERA)

The Foreign Exchange Regulation Act (FERA) establishes the legal framework for managing foreign exchange transactions in Nepal, including outward investments. The Act imposes stringent restrictions on transferring funds from Nepal to foreign countries. It mandates that businesses and individuals wishing to invest abroad or open bank accounts overseas must obtain prior approval from Nepal Rastra Bank (NRB). The NRB’s approval process is thorough, evaluating the economic viability of proposed investments and their potential impact on Nepal’s foreign exchange reserves.

However, FERA permits Nepali citizens residing abroad to invest using their income earned while overseas. Violations of this law, such as unauthorised foreign investments, can result in fines up to three times the amount of the investment. While this provision allows Non-Resident Nepalis and Nepali citizens to invest abroad with their foreign-earned income, it does not extend to investments made from Nepal.

3. Nepal Rastra Bank (NRB) Circulars and Notices

NRB has issued a notification imposing restrictions on various international financial activities. This includes the purchase of foreign land and buildings, investments in foreign securities, acquisition of assets abroad, deposits in foreign banks, capital transactions and making payments outside Nepal, all of which require prior NRB approval. Under the Unified Circular, Nepali citizens who earn foreign currency while abroad or engage in foreign currency investments must notify the NRB in writing within 35 days of their return to Nepal. Additionally, those with foreign bank accounts or ongoing investments abroad must also submit a notice to NRB within the same 35-day period.

4. Foreign Investment and Technology Transfer Act 2019 (FITTA)

The FITTA primarily governs inward foreign investment in Nepal’s industrial sector. It covers various forms of foreign investment, including equity, reinvestment of dividends from foreign currency, lease financing, venture capital, investments in listed shares, and technology transfer. FITTA provides a framework for approvals, a negative list of prohibited investments, and dispute resolution mechanisms. However, it lacks detailed provisions for outward foreign investment.

Recent amendments to FITTA introduce allowances for outward investment, specifically through technology transfer. The Act now permits Nepali companies to transfer technology to foreign entities and repatriate earnings to Nepal with prior NRB approval. It also allows the establishment of branches or contact offices abroad for such purposes. Despite these progressive changes, FITTA does not yet support outward equity investments or other forms of foreign investment. The absence of clear provisions and regulatory approvals for branches or contact offices abroad highlights ongoing implementation challenges, leaving many issues unresolved.

5. Budget as of Fiscal Year 2081/82

The Budget for Nepal 2081/82 focuses on infrastructure reform, improving the business environment, economic recovery, and financial and public administration reforms. It aims to increase revenue through better tax collection and enhance public services. The budget prioritises reforming industry and investment laws, ensuring policy stability, protecting investments, improving the country’s rating, and addressing bilateral investment and tax agreements. Additionally, it seeks to reform royalty caps and reinvestment rules for technology transfer and improve the overall ease of doing business in Nepal. However, the government remains focused on facilitating technology transfer rather than allowing outward investment from Nepal.

Challenges and Limitations

Nepali businesses face significant challenges under the current legal framework, which restricts their ability to seize international market opportunities and limits economic diversification. Industries that could benefit from expanding globally, such as manufacturing and IT, struggle to establish overseas operations due to regulatory barriers. Government policies often focus on preserving foreign currency reserves, neglecting the potential benefits of investment returns from abroad. This approach not only hampers revenue growth but also diminishes Nepal’s global competitive edge. Consequently, Nepali companies fall behind regional competitors, resulting in fewer job opportunities at home and missed chances for knowledge and skill transfer. The restrictions on outward investment also curtail Nepal’s ability to influence global markets and participate in international economic trends.

Way Forward

Nepal’s current legal framework for outward investment presents significant barriers, restricting Nepali businesses from exploring global opportunities and limiting economic diversification. Despite some legislative efforts, such as amendments to FITTA and the progressive budget for FY 2081/82, the overarching restrictions on outward foreign investment remain a challenge. To unlock the full potential of outward investment, Nepal must streamline regulatory processes, enhance foreign exchange access, and provide clear guidelines for investors. By addressing these issues, Nepal can better integrate into the global economy, boost economic growth, and create new opportunities for its businesses and citizens.