Understanding The Key Issues On Foreign Investment Laws In Nepal

In an underdeveloped economy like Nepal, foreign investment has always played a vital role. However, reforms in policies started only a decade back. The tranches of reforms in Nepali investment regime can be traced back to 1980s and 1990s. Formerly, Nepal’s foreign investment regime was governed by Foreign Investment and Technology Transfer Act, 1992 (FITTA 1992) and provided foreign investment only in the form of equity, debt and technology transfer. During this period, the Government of Nepal also introduced one window policy for coordinated system between different approving agencies. Against this backdrop, Nepal saw some improvements with regard to its economy through increased inbound foreign investment. However, as the number of years passed, no significant changes were made to the then FITTA 1992 to accommodate the varying nature of the investment regimes worldwide. In the present context, foreign investment regime in Nepal is governed by the Foreign Investment and Technology Transfer Act 2019 (FITTA) and Foreign Investment and Technology Transfer Regulation 2021 (FITTR).

What Construes Foreign Investment

Expanding the scope of foreign investment, FITTA 2019 provides foreign investment as (i) share investment in foreign currency, (ii) re-investment of dividends, (iii) lease finance in aircraft, ship, machinery and equipment, construction apparatus or similar apparatus, (iv) investment in venture capital fund, (v) investment in listed securities through secondary securities market by a Nepali entity, (vi) investment made by acquiring shares or assets of a company incorporated in Nepal, (vii) investment received through banking channel after issue of securities in foreign capital market by an industry or a company incorporated in Nepal, (viii) investment through technology transfer, and (ix) investment maintained by establishing and expanding an industry in Nepal. The ambit of foreign investment has excluded foreign loan investment as foreign investment.

Foreign Investor

For the first time in history, Non-Resident Nepali has been regarded as foreign investor in FITTA which is explicitly contradictory with the investment rights provided to NRN under NRN Act 2008. In addition, FITTA covered foreign investor as the ultimate beneficiary of foreign entity investor or any incorporated foreign investor.

Permissible Sector

Foreign investment is only allowed in industrial activities and not in trading activities. Moreover, it is only permissible in sectors that are (i) classified as an industry under Industrial Enterprises Act 2020 of Nepal (Positive List) and (ii) sectors that are not included in the restricted sectors provided under Schedule of the FITTA (Negative List). So, even if a sector is not included in the Negative List, if it is not classified as an industry under the Positive List then foreign investment in such sector is not allowed. Recently, the government decided to allow foreign investment in agricultural sector. However, Supreme Court of Nepal has issued a stay order not to allow such foreign investment until the final verdict of the Court is heard.

Minimum Amount of Investment

The GoN has prescribed minimum investment of Rs 50 million by each foreign investor through Gazette Notification on May 29, 2019. The ceiling is not practical except in the case of capital-intensive projects.

Timeline for Foreign Investment Approval

The statutory timeline of foreign investment approval is seven days from the date of application however actual timeline for such approval is deviated considering the statutory timeline and might take 2-6 months for final completion. The automatic route introduced by FITTA has not been activated yet and the recent FITTR is complete silent in this regard.

Approval Requirement

Involvement of multiple government authorities is another problem faced by foreign investors in Nepal. Investment approval from Department of Industry (DoI) and Nepal Rastra Bank (NRB) is required if investment is up to Rs six billion and investment approval from Investment Board of Nepal and NRB is required if investment is more than Rs six billion. In addition, approval from the regulatory authority is required to be taken separately. For instance, for the purpose of hydropower project, approval from the Department of Electricity Development (DOED) and Electricity Regulation Commission (ERC) is required to be obtained.  Post federalism, the federal structure of the government authorities providing foreign investment has complicated the approval requirement further.

Foreign Loan Investment

FITTA has provided three key elements in relation to availing foreign loan, such as (a) loan has to be obtained from foreign financial institutions. This will mean, for example, shareholder loan will not be able to be provided as shareholder in all cases is unlikely to be a financial institution (b) foreign loan should be for (i) project loan or (ii) project financing. However, the terms “project loan” or “project financing” are not defined terminologies. It is unclear as to term loan granted (like corporate loan on the basis of balance-sheet) would fall within the scope of permissible loans, (c) Nepali borrowing entity will also have to have foreign investment i.e. should consist pre-existing equity investment by foreign investor. This will effectively exclude Nepali entrepreneurs from accessing foreign loan. In addition to that, FITTA regime of foreign investment totally discarded the loan entity with non-banking and financial institution such as foreign company and individuals which is again inconsistent with the NRB circular in relation to foreign loan which allowed all types of loan investment with prior approval from NRB.

Technology Transfer

Foreign investor can invest through technology transfer in any industry incorporated in Nepal. The terms of technology transfer are to be in accordance to an agreement related (a) patent, design, trademark, goodwill, technological specialisation, formula or process, (b) user’s license, know- how sharing or franchise, and (c) providing foreign technological consultancy, management and marketing services or other technical skill or knowledge has also constituted as technology transfer. Such agreement needs to be approved from the approving authority for foreign investment. The ambit of technology transfer inclusive of technological consultancy, management and marketing services or other technical skill or knowledge is debatable issue in FITTA.

Repatriation

Foreign investor can withdraw foreign investment from Nepal selling full or partial shares or industry of investment after clearing all outstanding taxes under prevailing laws of Nepal. Each time approval for foreign investment for repatriation shall be taken from the investment approval providing authority. The practice of providing blanket approval is very limited and reluctant. Repatriation of foreign investment made in different forms of investment is not allowed if the investment approving authority does not grant recommendation for investment repatriation and such investment is not recorded at the NRB.

Restriction on Contract Manufacturing

The prevailing legal regime has created restrictive legal framework for contract manufacturing of main products for industry with local as well as foreign investment, which was allowed before the enactment of FITTA. The intention of law is to allow outsourcing of part production or production of raw materials or ancillary products by way of contractual arrangement with other local industries.

Lease Financing

FITTA provides lease financing on (a) aircraft, (b) ship, (c) machinery (d) equipment, (e) construction apparatus or other similar type of apparatus. FITTR capped the lease financing minimum of Rs. five crores, however the law is not clear whether the total investment of lease financing should be Rs five crores or if the lease amount in total should be five crores. Further, the regulation has also failed to provide the lease period.

Branch Industry Registration

More often, foreign company has been established either as branch or contact office under Companies Act of Nepal. However, FITTA and FITTR provide the provision for establishment of branch industry. The concept of industry does not exist elsewhere like in Nepal, therefore the provision in relation to branch industry registration is not feasible option which has been incorporated under the existing foreign investment laws of Nepal.

Other issues

The Regulation imposes one more requirement for recording of Escrow Arrangement which would be additional compliance requirement for business houses which have involved transaction in such arrangement. The Regulation has mandated that investors shall inject 70 % of the investment amount before the commercial operation and the remaining 30% after commercial operation. However, the regulation has not defined what constitutes commercial operation. FITTR does not provide any provision in relation to non-tourist visa for the purpose of due diligence (for pre-investment study, research and investigation in potential investment sector) which is one of the key concerns of potential foreign investment substantiating the provision of FITTA.

Conclusion

FITTA and FITTR provide a number of legal reforms in comparison to FITTA 1992. Even after the enactment of FITTR, there is a lack of clarity in terms of different forms of foreign investment, ceiling of foreign investment, timeline of investment approval, dual approval requirement, activation of automatic route, branch establishment, business visa for authorised representatives.