Attitude toward Foreign Direct Investment
The Government of Nepal (GON) officially welcomes foreign direct investment (FDI). In practice, however, American and other foreign companies say that corruption, bureaucracy, and a weak regulatory environment make investing in Nepal very difficult. While official laws are generally welcoming to foreign investors, the investment climate remains challenging. As an example, in January 2016, the Norwegian company Statkraft notified the Investment Board of Nepal (IBN) that it was discontinuing work on the 650 MW Tamakoshi hydropower project and withdrawing from discussions on a Project Development Agreement. The company cited the “absence of necessary policies and regulatory framework,” and “increased bureaucratic hurdles for foreign investments” as reasons for its withdrawal.
Other Investment Policy Reviews
In 2012, the World Trade Organization (WTO) conducted a trade policy review, available online at: https://www.wto.org/english/tratop_e/tpr_e/tp357_e.htm
Laws/Regulations on Foreign Direct Investment
The most significant foreign investment laws are the Foreign Investment and Technology Transfer Act of 1992 (since amended), the Foreign Investment and One Window Policy of 2015, the Foreign Exchange Regulation Act of 1962, the Immigration Rules of 1994, the Customs Act of 1997, the Industrial Enterprise Act of 1992, the Electricity Act of 1992, the Privatization Act of 1994, and the annual budget, which outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.
In February 2015, the GON issued the new Foreign Investment and One-Window Policy 2015, which replaced the Foreign Investment Policy of 1992. The new policy defines priority sectors for foreign investment, including hydropower, transportation infrastructure, agro-based and herbal processing industries, tourism, and mines and manufacturing industries. The Foreign Investment and One Window Policy also establishes currency repatriation guidelines, outlines visa regulations and arbitration guidelines, permits full foreign ownership in most sectors, and creates a “one window committee” for foreign investors.
The Foreign Investment and One Window Policy opened the retail sector to foreign investment for the first time, but with some conditions. Foreign multi-brand retail stores (i.e., Wal-Mart or Tesco) are now permitted, provided the investor has operations in more than two countries and invests more than USD 5 million in fixed capital. The policy also states that foreign investors will be treated the same as domestic investors, and industries run by foreign investors cannot be nationalized. The new policy also aimed at easing visa policies for investors, family members, and assisting foreign investors with land acquisition, industrial security, and repatriation of investment and profits.
The Foreign Investment and Technology Transfer Act (FITTA) of 1992, as amended, eliminated the minimum investment requirement and opened legal, management consulting, accounting, and engineering services to foreign investment with a 51-percent ownership limit. It also clarified rules relating to business and resident visas. In general, under the FITTA, all agreements related to foreign investment are governed by Nepali law and subject to arbitration in Kathmandu under the United Nations Commission for International Trade Law rules. However, foreign law can be applicable in cases where the foreign investment exceeds approximately USD 6 million and where the parties make this choice clear in their agreement. The GON is revising the FITTA, although it is unclear when the legislation will be approved by Parliament.
The Customs Act and the Industrial Enterprises Act, revised in 1997, established invoice-based customs valuations and eliminated many investment tax incentives, replacing them with a lower, uniform rate. The Electricity Act defines special terms and conditions for investment in hydropower development. The Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises to broaden participation of the private sector in the operation of such enterprises.
The Nepal Stock Exchange does not allow foreign investors to own or trade any publicly traded companies on the exchange. Stock trading is available only for citizens of Nepal.
The terms and conditions of intellectual property protection are defined by the 1965 Patent, Design, and Trademark Act and the 2002 Copyright Act. The latter covers electronic audio and visual materials and subjects violators to fines and imprisonment, as well as the confiscation of unauthorized materials. Violators must also pay compensation claimed by the copyright holder. However, the law does not meet the standards for trade-related intellectual property rights required by the World Trade Organization. The Competition Promotion and Market Protection Act (2007) controls anti-competitive practices, protects against monopolies, promotes fair competition, and regulates mergers and acquisitions. The Competition Promotion and Market Protection Act, also contains special provisions for controlling black markets and misleading advertisements.
There is no public evidence of direct executive interference in the court system that could affect foreign investors. However, in recent years there has been public and media criticism of the politicization of the judiciary, including appointments of judges to Appellate Courts and the Supreme Court allegedly based on political affiliation.
Business Registration
The Department of Industry (DOI) provides registration for both domestic and foreign businesses (www.doind.gov.np/en/). The DOI is also the regulator of industrial properties like patent, design, and trademarks. The DOI’s Industrial Promotion Board is responsible for approving small and medium-tier investments, while large-scale investments (more than USD 100 million) are approved by the Investment Board of Nepal (IBN). The DOI does not provide online registration. Applicants need to submit applications in writing and furnish hard copies of relevant documents for registration.
The IBN manages public-private partnerships (PPPs), cooperatives, and domestic and foreign private investment in the infrastructure sectors (www.ibn.gov.np). The IBN is mandated to grant approval for projects over NPR 10 billion (approximately USD 95 million). IBN does not provide an online registration facility. Applicants are required to submit applications in writing and furnish hard copies of relevant documents for approval.
All domestic and foreign companies are required to incorporate their business with the Ministry of Industry’s Office of Company Registrar (OCR). The OCR provides online registration facility (www.ocr.gov.np/index.php/en/).
The Inland Revenue Department (IRD) provides registration for all domestic and foreign businesses (www.ird.gov.np). Investors can register online for permanent account numbers and tax documents.
The Nepal Rastra Bank (NRB) – the central bank of Nepal – provides approval and registration for banks and financial institutions (www.nrb.org.np). NRB does not provide online registration. Applicants need to submit applications in writing and furnish hard copies of relevant documents for registration.
The Nepal Telecommunications Authority (NTA) is the telecommunications regulatory body of Nepal, which provides prior approval and registration for all telecommunication services (www.nta.gov.np/en). NTA does not provide online registration. Applicants need to submit applications in writing and furnish hard copies of relevant documents for registration.
The Insurance Board regulates the insurance business of Nepal. The Insurance Board does not provide online registration. Applicants need to submit applications in writing and furnish hard copies of relevant documents for registration.
Additional References
Industrial Promotion
The industrial sector accounts for about 15 percent of the country’s GDP. The economy remains dependent upon subsistence agriculture (34 percent of GDP) and remittances (equivalent to about 30 percent of GDP). A lack of industrial growth has contributed to underemployment and unemployment, which in turn has contributed to an outward migration of youth seeking employment outside of Nepal.
The GON aims to attract FDI primarily in the infrastructure sector, especially roads and hydropower projects. Nepal’s 2011 Industrial Policy, now under review, identifies strategies for promoting FDI. It calls for a greater focus on economic diplomacy from Nepali diplomatic missions abroad and seeks to leverage non-resident Nepalis as a source of FDI. It also aims to increase new product development in Nepal by giving customs breaks to investors who need to import raw materials or foreign-made goods.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish and own business enterprises and engage in various forms of remunerative activity. However, certain sectors are not open to foreign investment, including small-scale and “traditional” industries (such as handicrafts, wood carvings, and artwork), real estate, some types of primary agriculture and agribusiness, and weapons production. Depending upon the sectors foreign entities intend to operate in, approval and registration requirements may vary.
Other than the restricted sectors mentioned above, 100 percent foreign investment is permitted in most sectors. Some limits on foreign ownership are imposed for certain services sectors, such as banking and financial institutions where foreign investment is only permitted as a joint venture with a minimum of 20 percent to a maximum of 85 percent foreign ownership. Such joint ventures must be incorporated in Nepal in accordance with relevant Nepali laws. Branch operations of a foreign bank are only allowed in the wholesale banking sector, not in the retail banking sector. To operate a branch office of a foreign bank in Nepal, the minimum capital requirement is USD 20 million, and an additional USD 5 million is required for each new branch office. Restrictions on branch operations of foreign banks in the retail banking sector and requirements for mandatory domestic joint venture partner(s) have discouraged many international banks from entering Nepal’s banking sector.
Privatization Program
Economic reforms, deregulation, privatization of businesses and industries under government control, and liberalized policies toward FDI were initiated in the early 1990s. Sectors such as telecommunications, civil aviation, coal imports, print and electronic media, insurance, and hydropower generation were opened for private investment, both domestic and foreign.
The first privatization of a state-owned corporation was conducted in October 1992 through a cabinet decision (executive order). The Privatization Act was passed fourteen months later in January 1994. A total of 23 state-owned corporations have been privatized, liquidated, or dissolved. The process, however, has been static since 2003. While foreign companies can participate in the privatization of state-owned enterprises, the government has not restarted privatization efforts. As of 2016, Nepal has 37 state-owned enterprises.
Screening of FDI
There are two government entities responsible for foreign investment. The first is the Industrial Promotion Board (IPB), chaired by the Minister of Industry, which is charged with coordinating economic policies, establishing guidelines for investment, approving foreign investment proposals, and determining applicable investment incentives.
The second entity is the Investment Board of Nepal (IBN), which was created to serve as a “one window” facility for domestic and foreign investors pursuing projects worth more than USD 100 million, or large scale projects in priority sectors such as civil aviation, tourism, and hydropower. The Board, chaired by the Prime Minister, has the authority to formulate investment policies, prioritize and approve projects, facilitate the signing of agreements among different ministries, provide financial and nonfinancial facilities, procure land, monitor project progress, order government agencies to issue necessary project approvals, and bypass existing regulations in the name of investment promotion.
The IBN has focused on hydropower development, and it is responsible for projects larger than 500 MW. In 2014, the IBN signed power-development agreements with Indian investors for two 900 MW developments, the Upper Tamakoshi and Arun III projects. Negotiations are ongoing with Indian and Chinese investors on other large hydropower projects. In January 2016, Norwegian company Statkraft notified the IBN that it was discontinuing work on the 650 MW Tamakoshi hydropower project and withdrawing from discussions on a Project Development Agreement, citing the “absence of necessary policies and regulatory framework,” and “increased bureaucratic hurdles for foreign investments” as reasons for the company’s withdrawal.
Prior to the establishment of the Investment Board, the Department of Industry, under the Ministry of Industry, was designated as the “one window servicing agency” for all FDI. The Department of Industry still registers and classifies foreign investments and manages the income tax and duty drawbacks granted to some foreign investments. The Department of Industry remains the focal point for foreign investments of less than USD 100 million or investments outside of the priority sectors.
Under current administrative procedures, foreign investors are required to obtain licenses for manufacturing or service sector investments. Investments below USD 20 million are referred to the Department of Industry for action and are typically approved at the departmental level without the involvement of the IPB. For investments over USD 20 million, as many as six ministries review the business proposal prior to consideration by the IPB.
The Department of Electricity Development, under the Ministry of Energy, is responsible for licensing all investments in hydropower projects. However, decisions on project proposals that involve foreign investment are made by the Ministry of Energy itself. The Nepal Rastra Bank, the country’s central bank, is responsible for issuing licenses to operate commercial banks and financial institutions. The Insurance Board is responsible for issuing licenses to operate insurance companies. The Civil Aviation Authority of Nepal is responsible for granting operating licenses to domestic and foreign airline operators, and the Nepal Telecommunications Authority is responsible for issuing licenses for operating any type of telecommunications and information technology services.
Licensing of new investments is often time-consuming and requires legal counsel and patience. The IPB, for example, is mandated by law to make a licensing decision within 30 days of submission of an application, but this deadline is routinely missed.
Competition Promotion and Market Protection
The Competition Promotion and Market Protection Act (2007) controls anti-competitive practices, protects consumers against monopolies, promotes fair competition for the growth of trade and commerce, and includes provisions for the control of mergers and acquisitions that would create potential monopolies. The Competition Promotion and Market Protection Act also contains special provisions for controlling black markets and misleading advertisements.
The Competition Promotion and Market Protection Board, established as part of the act, is chaired by the Secretary of the Ministry of Commerce. The Board is mandated to take measures to enhance fair market competition by encouraging competition and preventing monopolies. The Board is comprised of members from the Ministry of Law and Justice, the Ministry of Finance, the Ministry of Commerce, two private sector representatives, four consumer rights representatives, and the Director General of the Department of Commerce. The act also calls for the designation of a government official to serve as the market protection officer at the district level to investigate cases relating to violations of the Competition Promotion and Market Protection Act.
The new Constitution of Nepal (2015), under article 51 “Policies of the State,” notes the need to protect the interest of consumers by maintaining fairness in trade, making the national economy competitive, ending practices such as black marketing and monopolies, and promoting competition in all business activity. The Black Marketing and Certain other Social Offenses and Punishment Act (1975) prohibits business practices such as black marketing, profiteering, hoarding and creation of artificial scarcity, fraudulent sale, and the adulteration and sale of drugs.
The Industrial Enterprises Act, 1992 (currently being revised) gives guidelines for economic policies to make the industrial sector competitive. The Foreign Investment and Technology Transfer Act (1992) states that industrialization of the country requires foreign investment and technology transfer to make the economy viable, dynamic, and competitive by mobilizing limited capital and other resources. The Consumer Protection Act (1997) protects the rights of the consumer and restricts unfair trade practices. Provisions in the Financial Administration Regulation (1999) prohibit unfair and anti-competitive practices in procurement of goods and services for the government.
Enforcement of such laws is irregular, which can create space for corrupt practices. Government procurements are often marred with charges of corruption and lack of transparency in the selection process. The constitutionally-mandated anti-corruption body, the Commission for Investigation Abuse of Authority (CIAA), monitors, enforces and prosecutes actions or decision by any government agency that violate or intend to violate laws (or constitute a misuse of power) that can be considered corrupt practice under the laws of Nepal. Private entities or individuals found engaging in such corrupt practices can be prosecuted by the CIAA.
