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The New Draft FDI Policy of Nepal

  • 18 JUN 2013

The Government of Nepal has recently made public a draft version of the Foreign Direct Investment Policy 2070. The policy will only become law and have an impact on investors once the bill is drafted and is passed as an Act or an Ordinance. The major changes proposed are as follows:

> Foreign investors will only be allowed to invest more than USD 200,000, except in investment in IT in IT park, health and education related investments
> Foreign investors will only be allowed to invest in hydropower projects above 30 MW, and hotels above three star rating
> For mining, manufacturing, agricultural industries, minimum investment limit has been prescribed as USD 2,000,000
>Allow foreign portfolio institutional investors to invest in the secondary share and bond markets with a holding period of at least 3 months.
>Establish a separate Foreign Investment Department
>Tax breaks for reinvestment of profits
>Accelerated depreciation of 33% for priority industries
>Cash subsidy of 5% for value addition of more than 50%
>Allowing issuing bonds in foreign countries
>Freedom to resolve disputes under foreign law and foreign arbitration to be increased from 500 million Nepali Rupees to USD 10,000,000

Although allowing foreign institutional investors to invest in the stock market, allowing investment in agriculture is a positive development, minimum investment limits such as USD 200,000 in most industries and USD 2,000,000 in mining, manufacturing and agriculture, and 30 MW limit for hydropower projects are a negative development. The minimum investment limit is most likely to hurt young entrepreneurs in small manufacturing, service industries and other projects. Therefore, it is strongly suggested that all of these limits should be decreased.

The policy also fails to make special provisions for venture capital and private equity funds which are known to be active investors in emerging markets. Further, the provisions for institutional portfolio investors needs to be clarified on how the 3 month holing period is going to apply.