Protection of Business Entities and Foreign Investors: Need for Law on Compensation

The augmentation of domestic business practices as well as foreign investments in a state is only possible through a conducive legal system suitable and capable of fostering such an environment. In a country such as Nepal, if correctly promoted, business activities and foreign investments may be the driving factor for its growth. In order to do so, the government would need to develop laws in a similar line which would secure and protect the interests of such business entities and foreign investors. The World Investment Report 2017 shows that Foreign Direct Investment (FDI) inflow in Nepal increased from $52 million in 2015 to $106 million in 2016. This shows that Nepal has seen a booming increase in foreign investment in just a year. Questions and suspicions may arise however as to whether the government seeks to retain this number or whether we would see a decrease in such investment inflow in the coming years. One such measure that the government should pay dire attention to is compensation. Adequate compensation laws would provide a sense of security to investors which would inevitably bring an increase in investments in Nepal. The reason why China had an FDI inflow of $133,700 million in 2016 and similarly India had $44,486 million is because of the way the legal structure of the countries are made and how the FDI policies have been developed by their governments. Nepal does not have the same kind of laws and policies which would help it to increase its FDI inflows similar to that of its neighbouring states. The law of compensation or simply compensation, is indemnification or payment of damages or making amends. One particular explanation of compensation that should be paid attention to is, “it is a process of giving an equivalent or substitute of equal value; that which is necessary to restore an injured party to his former position.” The reason why this explanation is important is because the law of compensation is based on the principle of full compensation which states that compensation must be provided in such a way, so as to put the victim in the same position that he was in before he was damaged or injured; thus, for every action, there has to be an equal reaction.The Nepalese laws, however, fail to meet such basic requirement of this principle of full compensation. Although not specifically categorised as compensation law, the laws that do exist regarding the same, have not incorporated this principle.

Lack of laws and institutional malpractices are further accompanied by delayed dispute settlement procedures. Unlike in several developed countries, some cases in Nepal take years to be settled by courts.

Nepalese laws are still considered to be in the developing stage. The current laws have not been able to address every social enigma, laws regarding compensation being one of those. However, it is just not lawmakers that are to be blamed. Different institutional malpractices in FDI related institutions such as Department of Industries (DOI), Office of the Company Registrar (OCR) and Nepal Rastra Bank (NRB) are also at fault. Unnecessary delay, irregular compliance procedures and corruption are few of the types of malpractices that forbid the protection and promotion of investors. USA’s Federal Tort Claims Act makes the government liable for civil injuries caused by it. Nepal does not possess a standard law for this purpose, apart from the few laws such as the Compensation Relating to Torture Act, 2053 B.S. and the Directives on Citizen Charter including Compensation, 2069 B.S. As a result, uncontrolled and irrational government acts and decisions victimise people as well as business entities and investors. Lack of laws and institutional malpractices are further accompanied by delayed dispute settlement procedures. Unlike in several developed countries, some cases in Nepal take years to be settled by courts. These dispute settlement processes also do not assure the amount of compensation that would be received by the innocent party which may even lead to bankruptcy of business entities in rare cases. These kinds of lacunas in the Nepalese legal system refrain investors from making investments in Nepal. Investors would rather choose to invest in China or India which have better FDI policies and legal systems, further decreasing the chance of Nepal to develop within the coming years. Nepal has also signed Bilateral Investment Protection and Promotion Agreement (BIPPA) with various states; these include India, France, Germany, Britain, Mauritius, Qatar and Finland. These agreements require states to protect, encourage and create favourable conditions for investors of other countries to make investments in its territory and admit such investments in accordance with its policies, laws and regulations. However, absurd decisions of the government and lack of compensation for the same decrease the chance of foreign investments. Irrational decisions by Nepal Rastra Bank are also felt by investors to be unnecessary hurdles in the investment procedure. BIPPA also indicates that the government must provide compensation or other settlement to investments of other contracting parties in certain cases. Issues such as these beg us to wonder if the Nepalese laws are outdated. The law of compensation plays a huge role in foreign countries, however in Nepal, neither citizens and domestic business entities nor foreign investors are adequately compensated for injury suffered. Nepal should seek for reformation in the current laws and adopt new ones wherever necessary in light of compensation. Lawmakers should draft laws keeping in mind the current business environment of Nepal, its FDI policies, and the demands of foreign investors. While doing so, what is to be observed with utmost attention is whether these laws are made in integration with the principle of full compensation or not as doing so would not only benefit the people but also the state in the long run.

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Shikhar Pandit is a Managing Associate at Gandhi and Associates; and currently focused on the management of the corporate team. Shahrukh Rai is an Associate at Gandhi and Associates currently taking a leading role in developing the research department.