Law relating to capacity enhancement of industries

This undated image shows the premises of the Department of Industry in Tripura Marg, Kathmandu. Photo: DoI

Ordinarily, industries that are growing or wish to expand must address the issue of enhancement of their capacity to produce goods or render services. Generally, capacity is enhanced by increasing the effectiveness of existing equipment, contributing additional hours/shifts on existing unit, outsourcing, eliminating bottlenecks or acquiring new equipment, etc. For capacity enhancement, several regulatory steps are mandated by the Industrial Enterprises Act 2020 (2076) and its rules, the Industrial Enterprises Rules 2022 (2078). This article will endeavour to provide you with a simple understanding of the same.


Obtaining capacity enhancement approval

All types of industries must take prior approval of the concerned Industry Registration Body for capacity enhancement except for (i) micro-enterprise or cottage and small industry with fixed capital of up to Rs 10 million that do not require permission and (ii) non-industrial legal entities like banks, financial institutions, and insurance companies. If the capacity enhancement of a micro-enterprise or cottage and small industry is required, then such industry is to obtain environmental clearance.

It must be kept in mind that if production of an industry exceeds the projected production due to enhanced managerial capacity without altering installed machinery and equipment, then this will not be considered as capacity enhancement, and understandably approval will not be required for it.


Procedure for capacity enhancement approval

Any industry wishing to increase its capacity must apply for capacity enhancement approval from the industry registration body in the prescribed format along with necessary documents. Some of the important documents that are required are: Environmental Study Report, Industry Progress Report, Recommendation letter of Regulatory Body, and Industry Operation and Extension letter. Additionally, the industry registration body may conduct an on-site inspection of the industry and prepare a report on it. After examining the sufficiency of the required documents and carrying out on-site inspection, the approval for capacity increment gets issued. As per the Industrial Enterprises Act 2020 (2076), such approval must be granted within 90 days.

Upon receiving approval, other steps like equity payment or availing of loans for financing capacity increment, purchase and import of plants and machinery, leasing or acquiring land can be done in order to complete the capacity enhancement process.


Key details to pay attention for capacity enhancement

Ensuring Financial Viability: The industry registration body assesses whether the applicant is financially capable of implementing the capacity enhancement project. The financial statements of such industry must show that it has sufficient equity, earnings, or profit in its reserve to make payments for capacity enhancement. If the aforementioned is not in place, then that industry should consider (a) taking further equity investment, or (b) avail loan facility.

Updating Environmental Study Report: In general, the applicant industry must provide to the industry registration body the relevant Environmental Study Report (ESR), Initial Environmental Examination or Environmental Impact Assessment. If increment in capacity requires to update or modify the ESR, then the industry will have to procure recommendation and approval from regulatory authorities. This is a lengthy process that can be done simultaneously with the capacity enhancement procedure or even prior.

Updating Project Proposal: A Project Proposal also known as Project Report or Project Scheme is an important document that encompasses amongst others, the industry’s background, product/service description, current and target market, production process, equipment list, source of funding, costs and projected revenue. In case details like projected output and revenue, required machineries and human resources, amount of equity and loans are expected to get altered or added for conducting capacity enhancement, then such details must get amended in the Project Proposal. The industry registration body approves the Revised Project Proposal at the time of granting capacity enhancement approval.

The law does not provide a prescribed format for industry Project Proposal. Further, unless a Revised Project Proposal gets approved, an industry is prevented from doing activities that goes beyond what is covered in the Project Proposal. For instance, if ‘loan’ is not contained in the Project Proposal as ‘source of funding’ then that industry will not be allowed to procure a loan without amending the Project Proposal to include ‘loan’. The entire procedure of revising a Project Proposal is time-consuming and needs policy change to make the process shorter and simpler for the industry applicant to create ease of doing business.

Obtaining Company and Industry Update Letter: Industry registration body generally does not grant approval for capacity enhancement until the industry submits (i) latest fiscal year’s company update letter issued by the Office of the Company Registrar (applicable if the industry is a company) and (ii) Industry registration body’s letter stipulating that the industry has come into operation or has secured extension to commence operation. Obtaining these also takes a lot of time and may delay capacity enhancement process.

Misinterpretation of need for Capacity Enhancement Approval: There have been misinterpretations in the past by industry registration body in requirements for taking capacity enhancement approval. For instance, when certain industries increased their fixed capital without impacting their production output, such industries were suggested to make application for capacity enhancement. Similarly, when some industries increased their production output with existing machinery and equipment, they were also asked to take approval for capacity and capital increment, which was realistically unnecessary. Such misunderstandings persist in the industry registration body which needs to be changed.

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Nirvana Rawal

Nirvana Rawal is a legal practitioner and is an Associate at Pioneer Law Associates advising on foreign investment and corporate compliance.

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