Mon, April 15, 2024

Automatic route in foreign direct investment

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Foreign Direct Investment (FDI) in Nepal is driven by an approval-based regime, i.e., foreign investors willing to invest in Nepal should obtain FDI approval from the Department of Industry (DOI) or the Investment Board Nepal (IBN) depending on the size of the concerned investment. Prior to 2021, foreign investors had to additionally obtain FDI approval from Nepal Rastra Bank (NRB). After the enactment of the Foreign Investment and Foreign Loan Management Bylaws in 2021 (NRB Bylaws), foreign investors do not require FDI approval from NRB, except where investment is being done via share purchase. This has been in line with the government’s endeavour to create ease for incoming investments while maintaining anti-money laundering protectionist measures. In practice, it has been seen that obtaining FDI approval is not an easy task given that it involves multi-step verifications, even for small amounts of investments. The process of scrutiny and verification of the submitted documents is lengthy that can take at least two to three months before the approval can be granted. This can even extend to six months to a year. Such uncertainty does not facilitate an investment-friendly environment. In order to mitigate this issue and create ease for bringing FDI into Nepal, the government has recently sought to enforce automatic route in terms of the prevailing laws. Under the automatic route, foreign investors do not have to obtain FDI approval from regulatory authorities. They can directly invest in Nepal by bringing in required investment amount in convertible foreign currency through banking channel. Automatic route not only provides easy investment avenues for foreign investors but also allows the flow of capital in the market while strengthening foreign currency reserves. It helps local FDI companies to obtain timely funds from foreign investors and saves them from the risk of capital crunch, especially when companies are not comfortable with debt financing. It is unfortunate that many FDI applications are piled up before the approving authorities because of lengthy regulatory processes. This means that several investments are closed in paper. These investments could have been a source of income and employment generation in the country. Many Asian countries have adopted automatic route in their FDI regimes. For example, India applies both approval route and automatic route. Under the automatic route, no approval from the Government of India or the Reserve Bank of India is required as per the Indian Consolidated FDI Policy Circular, 2020. The Circular also specifies certain sectors where automatic route is not applicable such as banking, telecommunication, civil aviation, and pharmaceuticals. Similarly, Bangladesh does not require prior regulatory approval for FDI and only requires registration with Bangladesh Investment Development Authority. Automatic route is also prevalent for FDI in Sri Lanka, where foreign investors can directly invest through an Inward Investment Account opened in a commercial bank. However, FDI in certain sectors must be approved by the Board of Investment of Sri Lanka. Singapore also does not have any specific approval mechanism for FDI and hence, foreign investors can invest in Singapore like local investors. Aiming for a convenient entry of FDI in Nepal, Foreign Investment and Transfer of Technology Act, 2075 (2019) provided for an automatic route, with specific mechanisms to be further prescribed in the Foreign Investment and Transfer of Technology Regulations, 2077 (2021) (FITTR). Until the provisions on automatic route were prescribed in the FITTR, a legal development came in the form of NRB Bylaws which provided that approval for certain kinds of investments would not be required from the central bank. However, this was just a form of partial automatic route. The Ministry of Industry, Commerce and Supplies (MoICS) has now incorporated provisions on automatic route by amending the FITTR. FITTR envisages the applicability of automatic route in two types of FDIs – (a) incorporation of a foreign investment company with either 100% FDI or joint venture with local investors, or (b) reinvestment by the foreign investor in the same company (for example, investment in rights shares, bonus shares or additional capital injection). This means that FDI by way of share purchase, asset purchase, technology transfer, listed share purchase, and lease finance will go through approval route. Though foreign investors are still required to submit a list of documents for disclosure purposes, they now do not have to wait for FDI approval. Disclosures remain important as these are important tools for enforcing anti-money laundering laws. Submission of documents in the concerned web portal and receipt of such submission is as good as approval for a foreign investor to invest in Nepal. It must also be noted that the MoICS is yet to outline the limitation of automatic route. Such limitation could be capped in terms of (a) public private partnership projects, (b) investment exceeding a certain capital threshold, (c) sectors having a concerned line authority such as insurance companies, banks and financial institutions, telecommunication companies, etc. The provision of the automatic route in the FITTR will help foreign investors bring in investments in a timely fashion in adherence to their business plan, thereby reducing instances where investors have redirected investment to other countries in the region as opposed to coming to Nepal. This will also eliminate the procedural hassle foreign investors have to go through. Therefore, the inception of automatic route by the government is a welcomed and reformative approach taken by the Nepali government in relation to the Nepali FDI regime. READ ALSO:
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MARCH 2024

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