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Nepal Foreign Investment Policy 2015: What's hot and what's not?

  • 27 Mar 2015

The Council of Ministers of Nepal approved the new Foreign Investment Policy 2015 revoking the previous Foreign Investment Policy 1991 in the first week of March 2015. The provisions of the policy not covered by the current Foreign Investment and Technology Transfer Act (FITTA) 1992 will be implemented by the new foreign investment act. Generally, policies are not legally binding until they have been specifically enacted in the law as an act or regulation but they do have a significant impact on how laws are drafted.  

The earlier draft policy that was circulated by the Ministry of Industry was heavily criticized because it imposed sectorial capacity limits in foreign investment industries, for example allowing foreign investors to invest in projects with fixed capital of more than USD 200,000 and in case of hydropower projects, above 30MW only. These restrictions have been removed from the approved version.

The policy does not change the foreign investment regulatory regime in Nepal and in most aspects is consistent with the previous policy and regulatory regime. However, there are some new things to take note of, most of which are positive. However, overall, the policy could have achieved much more.

 

The Positive

There are a number of positive messages and reforms proposed by the policy. It acknowledges that attracting foreign investment into Nepal is not just a matter of a foreign investment policy, but the overall legal regime of doing business needs to be reformed to make the environment conducive to welcoming investments. The policy acknowledges that wider reforms including modifications in environmental and labor laws are required. Commitments are expressed to simplify procedures related to repatriation of profits.

Currently, Nepalese industrial and tax laws generally do not discriminate between foreign investors and local investors, and the same provision has been continued. It is important to maintain this approach as providing more facilities to foreign investment projects (except in purely PPP, infrastructure projects) may distort competition in the local market. Providing facilities or exemptions only to fully locally owned businesses will not send a good message to foreign investors.

After implementation, the policy will allow foreign investment in previously closed sectors: accountancy, law, engineering, all types of consulting, film industry, internal courier, and other professional services. We might also see the “Big Four” accountants and international engineering consultants opening their subsidiaries in Nepal. The policy has clarified that investment will be allowed in multi-brand retail with fixed capital of over USD 5 million from multinationals who already own and operate multi-brand retail in at least 3 other countries.

Previously, investment in the forms of equity and debt were recognized as foreign investment. Portfolio investments in secondary capital markets were not allowed. The policy provides that investment in listed securities will be opened for foreign institutional investors. This may open doors to foreign funding for listed local companies and will increase the depth of the capital markets in Nepal. 

The policy clarifies that debt and equity issued by Nepalese companies from international capital markets (eg. London, Hong Kong, Singapore) is foreign investment. This policy opens doors to Nepalese companies listing in the stock exchanges for mid-cap companies such as Alternative Investment Market (AIM) in London, which provides a flexible platform to raise more capital required by small but growing companies all around the world. This will provide more source of capital for Nepalese companies and help their growth.

 

The Negative

The Policy provides for default dispute resolution in foreign investment and technology transfer matters, which involve mediation by Department of Industry, followed by UNCITRAL Arbitration in Kathmandu governed by Nepalese law. Threshold to provide full freedom to resolve disputes has been increased from matters related to projects having fixed asset capital at least USD 5 million to projects where actual foreign investment in cash exceeds USD 10 million. This will disappoint many investors and does not fit into legal risk management policies of most multinationals. Therefore, there is a risk that big businesses will not invest in a joint venture basis, and innovative and mid-size local companies with growth potential might not get access to foreign capital or the right mentors and partners. Further, this restriction is against the spirit of Arbitration Act and New York Convention and several Supreme Court precedents that have enshrined paramount importance on freedom for commercial parties to determine dispute resolution methods.

Most multinationals, multilaterals, and venture capital funds prefer to resolve their disputes in a neutral location using a neutral applicable law, for example, Singapore International Arbitration Centre. Furthermore, English law remains popular for their certainty, consistency and faster proceedings, and ease of enforcement in many jurisdictions. Investors do not want to be engaged in dispute resolution under Nepalese law, both because of legal ambiguities and for being unenforceable in other jurisdictions. Further, for significant transactions, it is also easier for Nepalese parties to resolve dispute abroad because they can be easily enforced in the counterparties’ jurisdiction. Therefore, the government should immediately take steps to reverse this unnecessary and detrimental change.

 

Need for Reforms

The world has changed drastically in the last 25 years but the foreign investment policy has not incorporated any such changes in the new policy. The following could have been proposed by the new policy to attract more international capital into Nepal:

  • Integrated approval system – The regulatory regimes in Foreign Investment Act and Foreign Exchange Act govern foreign investment related matters. Separate foreign investment approvals of Department of Industry and Nepal Rastra Bank (NRB) are currently required for each matter relating to foreign investment and investors. Therefore, a separate “Foreign Investment Promotion Office” which should be an integrated unit of Ministry of Industry and Foreign Exchange Department of NRB could be established under the Promotion Board to provide a single door service to investors. This new office should provide a “one stop approval service” for all issues including investment approval, profit repatriation approval, visa recommendations, approvals for fees and loans, approvals for repatriation franchises fees and royalty and approvals for expansion. Staff with strong background in accountancy, business law and banking should be appointed to such roles.
  • More sectors – Foreign Investment Act is currently linked to Industrial Enterprises Act allowing foreign investment only in sectors that are listed as “industries” such as manufacturing, energy, tourism, mining and other listed services. However, foreign investors have also traditionally invested in non-industrial businesses such as banking and insurance by procuring specific permission from sectorial regulators such as NRB and Insurance Board. These inconsistencies should be harmonized. Foreign investment should be allowed in all companies not undertaking businesses listed in the prohibited list. Other sectors such as single brand retailers with larger investment, construction, operation and sale of commercial and residential buildings, and innovative information technology service providers should be opened.
  • Foreign loans – The policy has focused too much on equity investment. However, it should also be recognized that loans by foreign banks and development financial institutions are major source of investment required in all large-scale projects. Foreign loan investment should be allowed in all companies and not just in businesses listed as industries, including in sectors provided in the negative list. Approvals to create security interests for foreign lenders over both movable and immovable assets should also be provided by the foreign investment regulator. Consortium lending involving both foreign and local banks has already started in hydro projects and since this trend is likely to continue, the policy should expressly recognize this. Interest rate spread cap for foreign borrowing established by NRB should be increased to 8% from 5.5% (above One Year LIBOR) to attract more foreign capital in larger projects.
  • Hybrid instruments - Investment in convertible debt and hybrid equity has currently been allowed but legal provisions specifically need to be included to remove ambiguities.
  • Branch/liaison offices - Branch and liaison office opened by foreign companies pursuant to existing provisions in Companies Act should also be recognized as foreign investment and business visas should be provided to their officers based on their investment in Nepal.
  • Promotion board - The Industrial Promotion Board (different from Investment Board) being renamed “Foreign Investment Promotion Board” is a good sign, however, because of high-level nature of the Board, its role should be limited to policy making, planning and simplifying procedures to attract investment. The new office established to provide “one stop approval service” to foreign investors should approve all foreign investment applications.

 

Conclusion

The Foreign Investment Policy 2015 has provided a consistent policy confirming that the government of Nepal has renewed its commitment to attract foreign investment, treat local and foreign investors at par and open up new sectors for foreign investment. Allowing capital raising by Nepalese companies in capital markets worldwide, foreign investment in accountancy and consulting businesses, and enabling foreign investors to invest in Nepalese capital markets are major highlights. 

Much more can be done to reform the legal regime applicable to foreign investments. Many legal ambiguities need to be clarified and procedures need to be simplified. Establishing an integrated foreign investment office, harmonizing foreign investment act to include all companies, clarifying technical issues regarding foreign loans, hybrid instruments and recognizing branch and liaison offices established pursuant to Companies Act as foreign investment will be key reforms that should be undertaken to position Nepal as an attractive investment destination. 

AUTHOR: ANJAN NEUPANE