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Fri, April 12, 2024

Legal and Regulatory Constraints on Foreign Equity Investment in the Nepali Industrial Sector

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Foreign investment in Nepal must comply with the positive list and avoid the negative list as per the law. The Department of Industry (DoI) approves investments of up to Rs six billion, while the Investment Board Nepal (IBN) approves investments of above Rs six billion. The Nepali government has recently lowered the minimum investment threshold to Rs 20 million providing relief to investors interested in non-capital-intensive businesses. Also, a gazette notification has been issued to implement an automatic route to establish a new company (with 100% or joint foreign investment) or increment of capital of an existing company with foreign investment. Nepal Rastra Bank’s survey report shows that gross Foreign Direct Investment (FDI) inflow increased by 1.2% to Rs 19.9 billion in 2020/21, with foreign investment repatriation remaining at around 2% of gross FDI inflow. However, as per the Synopsis Report 2022 issued by the DoI, foreign investment in Nepal has been declining since 2019. Despite approval by the Department of Industry, FDI dropped from Rs 55,760.48 million in fiscal year 2074/75 to Rs 12,201 million as of mid-June fiscal year 2078/79. Despite the high approval, there is a significant gap between approved and actual net FDI inflow in Nepal. Concerned authorities have not proactively identified the reasons for the significant gap between foreign investment commitments and realisations. To create a favourable investment climate and improve ease of doing business, the legal and regulatory regime must be flexible and accommodating for investors. Following represents the primary impediments to foreign investment in Nepal’s legal and regulatory framework, NEGATIVE LIST The law limits foreign investment in certain Nepali industries such as poultry farming, fish farming, beekeeping, fruit and vegetable cultivation, oilseed production, pulse cultivation, and primary agricultural production, except for large-scale (75% of the total production) export-oriented industries. It also restricts investment in cottage and small industries, as well as travel agencies and guides involved in tourism, including homestays. It is time to revisit the negative list under the law and open up sectors with high potential for foreign investment to promote and increase foreign investment in Nepal. REGULATORY APPROVALS Timeline for foreign investment approval. The timeline for foreign investment approval granted by the regulating authorities, specifically the DoI/IBN, often exceeds the statutory period. According to the law, foreign investment approval should be provided within seven days, but in practice it takes anywhere from 6 to 12 weeks or more. Checklist of Documents. The law has provided a checklist of documents necessary for FDI approval. However, the provision regarding document request allows government officials to request additional documents beyond the checklist at any stage of processing. As a result, government authorities may request further documents for verification of the investment module several weeks after the initial submission. Among many, the requirement to submit Ultimate Beneficiary detail is a significant concern for foreign investors, particularly in cases involving commercially complex offshore entities or funds where such information may not readily be available due to privacy protections. Ineffective One-window System. The law envisaged the notion of a single window to ease regulatory approval and facilitate investors. However, in practice, the current ‘One Point Service Centre’ operates as a building with multiple regulating authorities under a single roof. Foreign investors must visit DoI/IBN and the Central Bank separately for investment approval, as well as the Office of the Company Registrar (OCR) for company registration and the DoI for industry registration. Additionally, investors must separately process tax and business registration and obtain regulatory licences or approvals from various government authorities physically. The process becomes even more cumbersome when seeking approvals from multiple authorities for minor changes in the project proposal including but not limited to increase capital, enhancement of capacity, and change in location of the plant. Restriction on Multiple Objectives. The current legal framework does not restrict to retain multiple objectives of a company, but the OCR prohibits retaining multiple objectives for a company with foreign investment. For example, a company manufacturing food cannot provide IT services. Pricing. Regulators block foreign investment above or below share valuation, despite a laissez faire policy. The regulatory approvals are based on valuation report, not commercial decisions. LACK OF DIGITALISATION Due to lack of digitalisation, physical copies of documents must be submitted, resulting in the need to submit the same set of documents to different regulatory authorities. Misplacing physical copies of transaction files can cause delays of months when restarting the approval process, such as for capital increment or updating company capacity. REPATRIATION The law allows for the repatriation of investment, profit, dividends, and share sale proceeds, but obtaining recommendations from DoI/IBN and approval from Nepal Rastra Bank is unpredictable in terms of timing. Regulatory approval is often provided months after corporate resolution for repatriation, discouraging foreign investors from choosing Nepal for further investment. OTHERS The ‘Change in Control’ tax is a major challenge for investors who prefer to enter a company for a short duration and make an exit after their goal has been completed. Frequent entry and exit of investors over a period of numerous years triggers payment of several taxes like the capital gains tax and change in control tax, which includes high costs and hampers the status of the balance sheet of a company. Obtaining a business visa for the authorised representative can be difficult and delayed. There is a lack of effective independent grievance handling mechanism to impartially hear investor queries without future obstacles. Intellectual property infringement is prevalent in Nepal, and registering intellectual property is a time-consuming process that can discourage investors. Simplification, rationalisation, and harmonisation of the multiple laws enacted by different line ministries, should be considered by the Government of Nepal. READ ALSO:
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MARCH 2024

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