PROMOTING PRIVATE

EQUITIES IN NEPAL
FEBRUARY 2016 SYNOPSIS REPORT

Researched by:

Kriti Capital & Investments Ltd

Ravibhawan, Soalteemode, Kathmandu
www.kriticapital.com.np
 PRIVATE
Nepal does not have any regulatory provision for the
formation of onshore-regulated institutional fund targeted
for investments in private companies. Private equity as an
organized institutional investment vehicle is not recognized

EQUITY
under the legal framework of Nepal. Investments are made by
resident or non-resident individuals/institutions of Nepalese
origin or foreign origin in private level. There is also no official
definition of Private Equity Industry in Nepal but for the

INVESTMENTS
purpose of the study, formal investments vehicle, recognized
and regulated by well-defined regulations, that participates in
risk capital formation in the form of equity investments or its
derivatives in any new/growing/or sick businesses for growth/

IN NEPAL
turn around. Private Equity market, depending upon the
choice of entrance in the business or ownership interest can
be venture capital investments, private equity investments or
Foreign Direct Investments (FDI).

In Nepal, offshore PE investment is also included under the

large bracket of FDI and is administered and regulated under
the Foreign Investment and Technology Transfer Act (FITTA),
1992 and Industrial Enterprise Act (IEA). The Department of
Industries (DOI) monitors these investments (both onshore and
offshore) of all kinds in all the sectors and is the sole agency for
administration and implementation of FITTA in Nepal. FITTA
defines Foreign Investment as an investment made by foreign
investors in any industry in the following forms :

• Investment in shares (equity);

• Reinvestment of the earnings derived from equity;
• Investment made in the form of loans or loan facilities; and
• Investment in kinds, e.g. machineries and equipment.

PROMOTING PRIVATE EQUITIES IN NEPAL 3

 1.1 GENESIS OF PRIVATE EQUITY IN NEPAL
Industrial development of Nepal can be sketched into two time frames: pre 1985 and post 1985. Prior to 1981, the
government practiced inward-looking strategies. Protectionist attitude towards domestic industries was common and the
role of government was very vigilant in all the aspects of the economy. Liberalization was initiated in 1987 when Nepal
entered into the World Bank and International Monetary Fund (IMF)initiated reform programs under SAF and SAP in order
to break the supply side bottlenecks and improve BOP deficits. Structural changes sought to modernize the economy
making it more investment friendly to the domestic as well as foreign investors.

The Industrial Policy of 1992 recognizes the need to
promote industrial investment to meet the needs of
domestic as well as foreign consumers through higher
level of industrial production, to generate employment
opportunities, and to bring improvements in the balance
of payments situation. In an attempt to encourage
investments, the policy framed two components as its
wings in the same year; Industrial Enterprises Act (IEA); the
Foreign Investment and Technology Transfer Act (FITTA),
and the One-Window Policy.
Active private participation became prominent in the
economy post enactment of IEA, 1992 as the government
began to withdraw from the economy. Replacement of FITA,
1981 by Foreign Investment and Technology Transfer Act
(FITTA), 1992 accelerated the role of foreign investments
in the Nepali economy. The important thrust of these acts
and policies were promotion of market-driven business
strategies and operations, and involvement of domestic
and foreign private enterprises. In last one decade, a
total of 2545 projects with foreign investments have been
recorded which amounts to project costs of US$ 2583.96
million with foreign investment worth US$ 1608.24 million.

1.2 PE TREND IN NEPAL

Over the past two decades, Nepal has seen rise in the level of both domestic and foreign investments in various sectors.
The growth rate of investments of foreign investment promises a positive future while push in domestic investments
can bring about radical changes in the economy.The figures below can display the performance of onshore and offshore
investments in Nepal.

Investment in Nepal Between 2061 to 2072 Number of Projects with Foreign Investments
2400 400 800
Domestic
Total Foreign Investments No. Of Project
Investment
Total Foreign Investments (in Billion)

Number of Projects with Foreign

Foreign
Investment
1800 300 600
Investments

1200 200 400

100 200
600

0 0
0
2060/61 2062/63 2064/65 2066/67 2068/69 2070/71
LARGE MEDIUM SMALL
2061/62 2063/64 2065/66 2067/68 2069/70 2071/72

SCALE Fiscal Year

*Till 01/08/2072 Source: Ministry of Industry, Industry Information System Source: Ministry of Industries, Data Bank

4
CURRENT INVESTMENT-RELATED
LEGAL SCENARIO IN NEPAL
2.1 ACTS
Several acts and regulations govern investments in Nepal. Some of the important ones that regulate investments are as
follows:
COMPANY ACT, 2063
Company Act of Parliament of Nepal regulates the
workings of companies, stating the legal limits within which
companies may do their business. This act consolidates
the law relating to companies in order to bring about
dynamism in the economic development of the country by
promoting investment in the industry, trade and business
sectors through economic liberalization and make the
incorporation, operation and administration of companies
easier, simpler and more transparent.
BANKING AND FINANCIAL INSTITUTION ACT (BAFIA)
This act was passed by the House of Representatives in
2063 (2006) to make financial activities timely in order
to promote the trust of the general public in the overall
banking and financial system of the country and protect
and promote the rights and interests of depositors, provide
quality and reliable banking and financial intermediary
services to the general public through healthy competition
among banks and financial institutions, minimize risks
relating to the banking and financial sector, boost and
consolidate the economy by liberalizing the banking and
financial sectors and introduce necessary legal provisions
relating to the establishment, operation, management and
regulation of banks and financial institutions.
SECURITIES ACT
The act was passed by the House of Representatives in
2006 which covers laws relating to securities by amending
and consolidating such laws in order to regulate and
manage activities of the securities markets and persons
involved in the business of dealing in securities by
regulating the issuance, purchase, sale and exchange of
securities for the purpose of protecting the interests of
investors in securities, by developing the capital market to
mobilize necessary capital for the economic development
of the country.
SECURITY REGISTRATION AND ISSUES REGULATIONS, 2008
In exercise of the power conferred by section 116 of the
Securities Related Act, 2007, the Securities Board of Nepal
has postulated certain rules and guidelines that regulate
the registration, issue, operation and exit of securities in
Nepalese financial market.
TAX ACT
Tax Act was passed by Constitution Assembly pursuant to
Sub-articles (1) of Article 83 of the Interim Constitution of
Nepal, 2063. This act dictates guidelines regarding some
charges, taxes, duties, excises and fees, continue or alter
the existing ones and also to amend the laws in force
relating to revenue administration.
FOREIGN TECHNOLOGY AND TECHNICAL TRANSFER ACT, 1992
This act was enacted by the parliament to expedite to
promote foreign investment and technology transfer for
making the economy viable, dynamic and competitive
through the maximum mobilization of limitedcapital,
human and natural resources.
Nepal opened up avenues for foreign investments after
the enactment of Foreign Investment Transfer Act, 1981;
however, the concept of investment flourished only after
the introduction of Industrial Enterprise Act in 1992.
PROMOTING PRIVATE EQUITIES IN NEPAL 5
 THE INDUSTRIAL ENTERPRISE ACT, 1992
The act was implemented to corroborate overall economic development of the country, it is expedient to make
arrangements for fostering industrial enterprises in a competitive manner through the increment in the productivity by
making the environment of industrial investment more congenial, straightforward and encouraging

2.2 GOVERNING BODIES

DEPARTMENT OF INDUSTRIES
Department of Industries is a department under the Ministry of Industry, which was incorporated to expedite and
implement policies, rules & regulations to enhance the economy of Nepal through industrialization. The objective of
the department is to facilitate the industrialists to establish industries in different parts of the country. Among various
functions of DoI, the following are the key functions-

• To formulate and implement rules, regulations • To issue license to prescribed industries and to
and policies regarding the medium & large scale register all the medium and large scale industries.
industries according to changing environment and • To approve the industrial project of foreign
implement them. investment and provide them consultancy service
• To perform promotional activities on industrial through providing data, information and replying
investment and disseminate knowledge and their queries.
information in that respect.

SEBON There are also two section under the Corporate Finance
Department namely, Public Issue Section and Collective
The GoN established Securities Board of Nepal (SEBON)in
Investment Scheme Section.
1993 as an apex regulator of Securities Markets in Nepal.
It has been regulating the market under the Securities Act,
2006. Strictly in the context of equity investments,
NEPAL RASTRA BANK (NRB)
NRB is the central bank of Nepal, which is responsible

• To grant permission to operate collective investment for regulating and monitoring the activities of banks

schemes and investment fund programs, and to and financial institutions in Nepal. NRB is also the sole

supervise and monitor them. institution responsible for repatriation.

• To register the securities of corporate bodies

established with the authority to make a public issue MINISTRY OF FINANCE (MOF)
of its securities.
Ministry of Finance is the central agency to drive the key
• To issue licenses to conduct the business of dealing
financial policies and acts of Nepal. MoF monitors SEBON,
in securities, subject to this Act, or the rules and the
NRB and other organizations. MoF is also the agency to
bye-rules framed under this Act, to companies or
design tax structures and any other policies that directly or
institutio ns desirous of conducting the business of
indirectly impact investments.
dealing in securities.

6
ISSUES RELATED TO
PE INVESTMENT IN NEPAL
3.1 ISSUES RELATED TO FOREIGN INVESTORS
Issues Present Situation
Entry
Automatic Approval Absence of Blanket Approval
Route Route or an Automatic
Approval Route for foreign
investments.
Protectionism by Restricts foreign capital and
increasing MCR expertise to reach the lower
strata of the economy.
Debt Financing Permitted in the positive
sectors with prior
permission from NRB; only
in the case of unavailability
of domestic debt; at an
interest rate no greater than
LIBOR +5.5%.
Valuation No standard method of
valuation in the financial
system.
Hybrid Instruments No legal restrictions on the
use of hybrid instruments;
however, lack of guidelines
related to the use of hybrid
instruments restrains
the use of such financial
instruments.
Tedious Approval Foreign PE funds are
Process required to seek permission
for every investment they
undertake.
Lock-In Period Lock-in Period for private
equity investors is 3 years
post IPO.
Repatriation Repatriation is legally free
and applies no income or
dividend caps; however, the
procedure is unclear and
time-consuming.
Suggestions
Automatic approval of FDI in
certain sectors (Reference:
India).
Lower MCR on FDIs.
Dilution of such clauses
Assignment of
internationally acceptable
valuation methodologies to
facilitate fair deal flow.
Introduction of Hybrid
Instruments in the market.
Provision to allow
investments in all the
permitted sectors without
prior approval but with
a clause of transparent
documentation.
Foreign Equity Investors
can be exempted from
this obligation so in order
to increase the number of
undertaken projects.
Free flow of repatriable
income with clear
bureaucratic guidelines.
Implications
Mitigating the uncertainty
of deal flow due to the
time lag and possibility of
change in the company's
performance.
Low MCR would help
SMEs to grow with foreign
capital and technical
expertise.
This would facilitate deal
flow and bring in huge
amount of investments
from abroad.
Brings about transparency
in the transactions.
Feasible for both investors
and investee to negotiate
deals.
Foreign Investors prefer
to use variety of hybrid
instruments that suit
their interests. This would
encourage inflow of FDI.
This would shorten the
time-lag and smoothen
investment procedures.
Private Equity investment
being closed-end investors
would be encouraged to
invest in Nepal.
Motivate investors to
undertake huge projects.
PROMOTING PRIVATE EQUITIES IN NEPAL 7
 3.1 ISSUES RELATED TO FOREIGN INVESTORS
Issues Present Situation
Structuring Parallel In the recent years, FDIs
Development and investments from NRN
are being prioritized over
domestic investments.
Tax Incentives Totalitarian Taxation System
(in terms of geography)
Sector-al Taxation System (in
terms of sectors)
No provision of tax holidays
to new industries (except
Hydroelectric Projects).
Companies are subject to
dividend tax on the profits
scraped for the purpose of
reinvestment in any other
company apart from their
existing companies.
Blacklisting Norms As per NRB's approach to
blacklisting, if an investee
company with 15% of its
stakes controlled by PE
investor, defaults from
any commercial loan, the
PE investor is subject to
blacklisting and is forced
to withdraw all the existing
investments.
3.2 ISSUES RELATED TO DOMESTIC INVESTORS
Issues Present Situation
Structuring Parallel In the recent years, FDIs
Development and investments from NRN
are being prioritized over
domestic investments.
Tax Incentives Totalitarian Taxation System
(in terms of geography)
Sector-al Taxation System (in
terms of sectors)
No provision of tax holidays
to new industries (except
Hydroelectric Projects).
Companies are subject to
dividend tax on the profits
scraped for the purpose of
reinvestment in any other
company apart from their
existing companies.
8
Suggestions
Provide financial as well as
motivational incentives to
the domestic investors.
Tax distribution should be
based on the geographical
realm.
Dividend tax should be
exempted if the fund
is directed towards
reinvestment of any form.
The norms should be
relaxed for the domestic
investors.
Suggestions
Provide financial as well as
motivational incentives to
the domestic investors.
Tax distribution should be
based on the geographical
realm.
Dividend tax should be
exempted if the fund
is directed towards
reinvestment of any form.
Implications
Domestic savings are
capable of pooling huge
investment-ready capital
that can be injected into
sustainable sectors.
Encourage domestic
investors to undertake
projects in rural areas and
help to attain balanced
growth.
Tax holidays for new
industries and firms
can be encouraging to
domestic entrepreneurs
and investors.
Investors would be
encouraged to invest
in risky yet profitable
ventures.
Seed investments and
Venture capitals would
be active in the domestic
economy.
Implications
Domestic savings are
capable of pooling huge
investment-ready capital
that can be injected into
sustainable sectors.
Encourage domestic
investors to undertake
projects in rural areas and
help to attain balanced
growth.
Tax holidays for new
industries and firms
can be encouraging to
domestic entrepreneurs
and investors.
 Issues Present Situation
Blacklisting Norms As per NRB's approach to
blacklisting, if an investee
company with 15% of its
stakes controlled by PE
investor, defaults from
any commercial loan, the
PE investor is subject to
blacklisting and is forced
to withdraw all the existing
investments.
3.3 ISSUES COMMON TO ALL INVESTORS
Issues Present Situation
STRUCTURING
Alternative Investment Alternative asset classes
Fund offer a wide range
of possibilities, from
commodities, futures
contracts to vintage cars.
However, Nepalese capital
market is yet to introduce
AIFs under its umbrella.
Lack of Clarity in Laws related to investment
Existing Laws and disinvestments lack
clarity. Few acts governing
investment procedures
contradict with each other.
ENTRY
Recognition of PE PE funds are not recognized
Funds as an independent financial
strategy. Equity investments
are governed either by FIP
or Companies Act.
Valuation No specified method of
valuation
Suggestions
The norms should be
relaxed for the domestic
investors.
Suggestions
Alternative investment class
should be added to the
existing traditional mixed-
asset portfolio.
All the acts, policies and
directives should be revised
to bring about clarity in
them.
Recognize PE funds as an
individual financial tool
capable of performing
specific financial
transactions.
Space for SPVs and
Investment Firms should
be built and so should the
regulation necessary to
guide them.
Guidelines to evaluate
different sectors with
unique approach should be
introduced.
Implications
Investors would be
encouraged to invest
in risky yet profitable
ventures.
Seed investments and
Venture capitals would
be active in the domestic
economy.
Implications
AIFs are of great
importance to portfolio
investors as they are
major determinant of
investment performance
and the most critical
decision in the investment
process.
This would bring
momentum in the
investments, minimize
operational costs and save
time.
Identifying PE fund would
organize investments
in Nepal under legal
decorum.
Terms of transaction
would be fair and both
parties would benefit
mutually.
PROMOTING PRIVATE EQUITIES IN NEPAL 9
 Issues Present Situation
Share Pricing Face value of shares is fixed
at Rs.100 par. Companies
can collect shares capital at
par value only.
Only after complying
conditions, company can
issue shares at premium but
limited upto net worth
Multi-sectoral There is a need to seek
Approval investment permission
form individual authorities.
This requires extensive
documentation and is often
time consuming.
OPERATIONS
Personal Guarantors Equity Investors are
required to be the personal
guarantor for ventures
undertaken.
Director's Liability and Director is liable several
Penalty Driven Filings penalties (sometimes
imprisonment) in the
event of bankruptcy, and
other intentional and
unintentional mishaps.
Various authorities demand
repetitive and sometimes
unnecessary filings. Failure
to comply by the deadlines
lead to penalties and fines.
Exit Policies Lock-in Period
Company should show
dividend distribution for
consecutive 3 years in order
to qualify for exit through
IPO at premium price.
IPO
A company can only float its
shares at market price post
3 years from the date of IPO.
The public issuance can
be made only if at least
promoters own fifty one
percent shareholding.
10
Suggestions
In pursuance to the
proposed amendment
draft of SEBON, premium
share price can be fixed up
to 2.5 times the net worth.
Conducive environment
would be when such limits
are not imposed and left
to the market to decide.
Speedy approval of the
amendment is essential.
Committee, which acts as a
single window approval for
all the sub-sectors.
Recognize the unique nature
of equity fund.
Legal acceptance of equity
as a financial asset by the
commercial banks.
Provision to relax some
clauses in the companies act
to protect the interest of PE
investors who chair the seat
of directors.
The lock-in period should be
relaxed, as the ultimate goal
of PE investors is to exit the
market by selling off their
stakes at higher value.
Public can be categorized
into financial literacy
and general. Thus the
shareholdings of promoters
can be brought down which
can be covered by the
shareholdings of financial
literate public.
Implications
Premium share pricing at
the value equivalent to
the company’s net worth
provides little propellant
to new investments.
Premium pricing greater
than net worth would
have a multiplier effect in
the economy.
Easy approval procedures
would accelerate
investments of all scales in
all sectors.
PE firms would be more
experimental and would
be able to undertake
many small to big risky
ventures.
Motivation to investors.
Free exits and entry is
essential a developed
private equity market.
Easy exits are an incentive
to equity investors.
3.4 ISSUES RELATED TO ENTREPRENEURS

Issues Present Situation Suggestions Implications

STRUCTURAL

Investors' Goals Short-term Investments
Domestic investors are more
inclined in making short-
term investments.
Risk Intake Capacity
Domestic Investors have
low risk intake capacity,
which is a drawback for PE
investments.
Insurance for private equity Promote entrepreneurship
undertakings and start-ups.
Introduction of AIF in the
economy to promote
venture and equity
investments.

Traditional Assets
Due to limited asset class
in the economy, investors
are secured investing in
traditional assets over new
ventures.
Investment Advisory There is no recognized Regulations to bring such Facilitate private equity
Firm investment advisory body to firms into existence deal flows. Protects the
negotiate and facilitate a fair interest of investees and
deal between investor/s and investors through win-win
entrepreneur/s. scenario.

ENTRY

Valuation Share Pricing Provision to have Market- Help negotiate a symbiotic

Clash between share pricing
guidelines by DoI and OCR.
Absence of Market
Mechanism to determine
the prices of shares
based Accounting system deal between investors
and entrepreneurs.
Valuation guidelines by
various departments

New Companies
There is no mechanism to
evaluate potential financial
worth of a new industry.

OPERATION

Sweat Equity There are no legal guidelines Guidelines monitoring and Protect the interest of
to regulate the issue of supervising the tax issues of entrepreneurs especially
sweat equity. sweat equity. in the service sector.

Double Taxation applicable

on entrepreneurs.

PROMOTING PRIVATE EQUITIES IN NEPAL 11

 Issues Present Situation
EXIT
Valuation IPO Shorten the time frame
Dividend distribution record
of minimum three out of five
years; a difficult condition
for start-ups.
Repatriation Repatriation though legal
has many operational
hurdles.
3.5 SUGGESTIONS OF THE EXPERTS
Issues Present Situation
STRUCTURING
Collective Investment Existence of provision for
Scheme using CIS under Security
Act of Nepal; however,
regulations governing VCFs
is absent.
Classification of Shares There is no system of rating
shares based on their
liability.
IPO Rating The current securities
regulations requires risk
ratings of IPOs, there is
no system to measure the
different instruments issued
by the private companies
based on their risk-return
credibility.
Limited Liability There is no concept of LLP
Partnership in Nepal.
Company Act Recognizes all companies as
the same type
12
Suggestions
Guidelines for repatriation
to stimulate process of
repatriation.
Suggestions
Introduction of Alternative
Investment Fund Regulation
Classification of shares on
the basis of their liability and
A provision to rate IPOs
based on their potential risk
and return.
Encode the concept of LLP in
the legal books of Nepalese
financial system.
Investment fund should be
excluded from the umbrella
of Companies
Implications
Allows new firms with
potential growth to
generate capital for
further expansion
Incentivizes foreign
investments resulting in
increased number and
amount of investments.
Implications
This like Mutual Fund
Regulation would facilitate
venture financing in a
structured manner.
Would facilitate investors
in making rational decision
based on their interests.
This would bring about
clarity in the investors,
providing an array of
rational options to choose
from.
This would prove to an
incentive to the investors
as liability
Investment Fund is all
together a different
form of company/trust
that requires special
recognition.
 Issues Present Situation
OPERATIONS
Company Act Section 9 of the Company
Act prohibits any private
company to have more than
50 shareholders.
Section 176 of the Act
restricts any company to
invest beyond 60% of its
paid up capital or 100% of
its free reserve; whichever
is higher. This clause is
not applicable to financial
institutions and some other
institutions.
BAFIA Section 47 restricts all the
domestic organizations
apart from banks and
financial institution to make
loan investments.
Banks are restricted from
making any Private Equity
Investments.
Blacklisting Norm Equity Investors are
subject to the risk of
being blacklisted if they
are members of BoD in a
defaulting company.
Forfeiting Share Forfeiting of shares is often
time consuming.
Reorganization No existing provision that
Process facilitates reorganization of
an underperforming firm.
Suggestions
Upon recognition,
Investment Fund can be
exempted from this clause.
Investment fund should be
exempted from the Clauses
of Section 176.
Investment Fund should
be clubbed with banks and
other financial institution,
which are exempted from
this clause.
Provision for the Banks
to invest in the PE up to a
prescribed limit.
This norm should be
restructured so that all
portfolio of companies
invested by PE form do
not get adversely and
unnecessarily affected due
to problem in one company.
Quick and easy process
resulting in forfeiture of
shares in case of default by
investor/s.
Liberal conditional banking
norms.
Implications
Investment funds are able
to generate more funds
if the ceiling of permitted
number of shareholders
is raised.
This would increase the
investible fund of any
investment company.
This would facilitate
investments through
combination of debt and
equity in companies that
have high-risk association
along with higher degree
of scalability.
This would allow domestic
enterprises to flourish
through additional
injection of funds in the
economy.
This provision allows
investors to undertake
several risky yet
potentially profitable
ventures.
This would curtail
operational lags of the
investee companies.
Facilitate the distressed
company to adopt
structural changes.
PROMOTING PRIVATE EQUITIES IN NEPAL 13
 3.6 ISSUES SPECIFIC TO OFF-SHORE PE
ENTRY:
ABSENCE OF SINGLE BLANKET NORMS
Absence of automatic and blanket approval route for for-
eign investments have confined free flow of foreign in-
vestments in Nepal. Automatic Investment Route enables
foreign investments to enter the economy without prior
permission. For every investment to be made, foreign in-
vestors are required to seek permission from at least two
counseling bodies: Investment Board or Industrial Promo-
tion Board/Department of Industries and Nepal Rastra
Bank (Central Bank of Nepal, NRB). These authorities have
their own list of procedures and documentation required
for the approval of the proposal. Offshore PE funds with
mandate to investment in multiple companies/projects,
such provision a major hurdle.
Limited Positive Sectors
Limited sectors are open to foreign investments with
sectoral caps in each. Adding to these limitations is the
guidelines from FITTA and IEA, which restrict foreign
investment only to the industries recognized as positive
sectors by the acts.
MINIMUM CAPITALIZATION REQUIREMENT
There is no written legal prescription for minimum volume
of investment required for the on-shore investments.
In the absence of such guidelines, it can be inferred that
domestic investments can be of any amount.
On the other hand, MCR to foreign investors for all the
sectors is USD 50,000. Newly proposed FIP draft proposes
MCR to be raised up to four times. This would stunt the
growth of foreign investments in SMEs and limit them to
large and concentrated sectors.
TREATMENT OF FOREIGN LOANS
An onshore investment is eligible to receive loans from
foreign financial institution only if:
14
• The company cannot avail loans from domestic banks
and financial institutions.The rate of interest on
foreign loan is
• lesser than the domestic rate of interest.
• The rules are even more rigid to avail loans from a
foreign investor. A company can avail loans from
foreign investor only if the company could not avail
loans from
• At least two domestic banks, and;
• At least one foreign financial institution.
NRB’s norms are rigid even in the case of repayment of
the foreign debt. A debtor is required to fulfill the following
criterion in order to undertake foreign loans. The debtor
doesn’t have any debt payable to local banks and financial
institutions, and is not blacklisted as a defaulter.
Promotion of offshore PE funds can be possible if these
norms are relaxed. Criterion pertaining to debt financing
from foreign investor is to be relaxed along with the
eligibility criterion of the debtor.
LIMITED INVESTMENT INSTRUMENTS
Currently, foreign equity investments can be made only by
the way of FDI. Offshore PE funds are restricted from using
any type of debt instruments.
Also hybrid instruments are not observed in the financial
market of Nepal; since most of the foreign investors prefer
to use of hybrid instruments like convertible debentures
and preference shares, investment inflow is stunted.
OPERATIONS:
ONE WINDOW POLICY
Single Window Policy was introduced as a part of
Industrial Enterprise Act, 1992 to eradicate bureaucratic
roadblocks for industrialists and expedite the process of
industrialization; however, this policy has only been able
to have a very limited impact.
Currently the function of One Window Policy is One Window Clearance System should be introduced,
managed by the DoI/BoI and is limited to providing which facilitates the investors to get all their documentation
necessary facilities and concessions to the industries, done from one office.
making recommendation for time-bound provision of
infrastructure for the industries and providing initial EXIT:
approval for foreign investments in Nepal.
Repetitive permission is to be sought from various
LOCK-IN PERIOD
departments upon each investment from the fund. This
One of the crucial demands of all the PE funds is sufficient
often turns out to be time-consuming leading to delay in
liquidity. The firm is open to such investments where the
investment procedures.
lock-in period is short and the exit is hassle-free.
One Window Policy is required to be more deterministic.

3.7 ISSUES SPECIFIC TO ON-SHORE PE

ENTRY:

IDENTIFICATION OF PE from FII, thus there is no law enunciating distinct set of

guidelines for FDI and FII entry and exists. The protocols
Domestic PE Investments has not been identified as of
for foreign investments are obscure right from their entry
now. Shareholder’s investment and debt investment are
to exit.
the only popular categories of domestic investments.
Policies should be framed in an effort to make them
PE Funds can grow only if laws and regulations cover PE
transparent, predictable and easily comprehensible.
investments as an independent investment tool.
As simple as distinguishing investments based on their
investment strategy and sectoral focus, the PE fund can
LIMITED INVESTMENT INSTRUMENTS
efficiently combine the different investment regimes to
In pursuance of Section 47 of the BAFIA, only licensed
make investments in Nepal.
banks and financial institutions can perform banking
transactions. This section regards lending as a banking
It is essential to have visionary and holistic policies for
transaction, which limits the scope of lending only to banks
cutting down red-tapism and improve investment climate
and registered financial institutions. Onshore PE funds and
and to give confidence to investors. Simplified clearance
investment firms are controlled from using any type of
procedures for offshore PE funds and lenient norms
debt investments.
for the existing investment firms can act as a catalyst to
increase both demand for and supply of PE funds.
POLICY FRAMEWORK Political stability and, rigid enforcement and
Policies related to equity investments lack clarity. The laws implementation of rules and guidelines can change the
covering foreign investments are not distinctive. Unlike paradigm of investment in Nepal.
India, there is no legal definition that differentiates FDI

PROMOTING PRIVATE EQUITIES IN NEPAL 15

 ENTRY:

VALUATION
Valuation methods are not defined in any of the regulations. Any company preparing for an exit is required to submit
its valuation to the NRB; however, there is no specific valuation method and guidelines to be followed. Ambiguity in the
choices of valuation method often results in exit delays. This is a serious issue for foreign investors as smooth and quick
repatriation procedure is a mandatory requisite.
There is a need to prescribe methods of valuation for investments, and repatriating disinvestment, dividends, and sales
proceeds.

OPERATIONS:

PENALTIES
During the operation phase, there are numerous filing Failure to comply with filing and reporting of prescribed
requirements. Companies registered in Nepal are documents within the designated time imposes penalties
required to file corporate documents before the Office and fines upon the companies and in some cases upon the
of the Company Registrar (OCR). Some of the documents nominee directors.
demanded by OCR appear to be irrelevant and unnecessary Director’s Liability
like annual filing of share-capital structures (even when In many cases, failure to file documents in the specified
there has been no change in capital structure for a period), time frame can result in fine imposed to the directors.
the requirement to inform regarding appointment of
auditor etc.

16
RECOMMENDATIONS
TO PROMOTE PE IN NEPAL
NEW REGULATION
A new regulation has the ability to change the magnanimity of PE investments in Nepal. In addition to it, a set of guidelines
can be introduced; a set of regulations amended to address pertinent problem that exist in the current situation and pave
way for smoother investment ventures at different stages. The following table recommends few strategies that can be
adopted if a regulating PE was to come in Nepal.

4.1 STRUCTURING INVESTMENT FUND WITH NEW REGULATION

INVESTMENT FUND

Issues Regulations Expected Impact

STRUCTURING

Regulation New Regulation under Chapter 6,CIS Formation of regulation to regulate

of Security Act financial activities involving VCFs
and PEFs.

ENTRY

Clarification of Fund Objectives, Registration at SEBON Monitor operations of fund

Targeted Investors, Proposed
Corpus, Investment Strategies,
Tenure of Fund, etc at the time of
investment
Individual Investment
Corpus Amount
Guidelines by SEBON Hedge against risk by assigning
minimum investment bar for
individual investors
Guidelines by SEBON Hedge against risk by assigning
minimum level of Corpus Amount to
be generated

Issue of Investment Defaults Penalty guidelines by SEBON Hedge against risk

EXIT

Lock-in Period As per the guidelines by SEBON Hedge against investors' risk
(generally 5 to 7 years) that is to be
followed strictly in all the cases of
normalcy.

Closure Guidelines by SEBON _

PROMOTING PRIVATE EQUITIES IN NEPAL 17

 4.2 STRUCTURING INVESTMENT FUND WITH AMENDMENTS IN EXITING LAWS
INVESTMENT FUND

Issues Regulations Expected Impact

STRUCTURING

Recognition of PE Fund Company Act Identifies the uniqueness of PE Fund

as in the international market
Introduction Pass-through Tax Tax Law Provision exempt PE fund from
System Double taxation
Parallel Development MoF, DoI, Holistic growth; sectorial and
geographical.

ENTRY

Minimum Investment Bar for Company Act Hedge against risk

individual investors
Minimum level of Corpus Amount to
be generated
Number of Shareholders
Personal Guarantor
Company Act Hedge against risk
Sub-section (1) of section 9, Facilitates pooling of huge fund
Company Act from small to big investors
Company Act Investments in risky yet scalable
businesses

OPERATIONS

Formation of SPVs Company Act Precision in investment related

decision-making
Blacklisting Sub Section 10 of Section 57, BAFIA Facilitates fund operation
Debt Investments Section 47, BAFIA Diversify investment strategies
Risk Supervision IPO Rating, SEBON Facilitates fair decision making for
investors based on their risk-return
expectations
Issue of Investment Defaults Penalty guidelines by SEBON

EXIT

Lock-in Period Company Act, Securities Regualtions Protects Investor interests

Investment undertakings by investment firm can be organized by the bringing about changes in the existing laws or
through new regulation all together.

18
4.3 ORGANIZING INVESTMENTS WITH NEW REGULATION
INVESTMENT UNDERTAKINGS

Issues Regulations Expected Impact

STRUCTURING

Identity New Regulation Recognition of Private Equity

Investment as a unique investment
strategy

ENTRY

Clarification of Investment Guidelines from SEBON Legal decorum for investments

Objectives, Proposed Investment
Corpus, Investment Strategies,
Tenure of Equity Investment, etc at
the time of investment
Investment level Guidelines by SEBON Hedge investment related risks
by putting a ceiling on investment
amount.

4.4 ORGANIZING INVESTMENTS WITH AMENDMENTS IN EXITING LAWS

INVESTMENT UNDERTAKINGS

Issues Regulations Expected Impact

STRUCTURING

Identity Company Act, BAFIA, SEBON Recognition of Private Equity

Investment as a unique investment
strategy
Tax- incentives Tax Law Compensation to liquidity risk/
Motivation to Investors

ENTRY

Investment Advisory Firms Guidelines by SEBON helps to cut a symbiotic deal

between the two parties
Clarification of Investment Registration at DoI
Objectives, Proposed Investment
Corpus, Investment Strategies,
Tenure of Equity Investment, etc at
the time of investment

PROMOTING PRIVATE EQUITIES IN NEPAL 19

 Issues Regulations Expected Impact
Notification to SEBON Approval of investments while
protecting the interest of investors.
Maximum volume of fund that Guidelines by SEBON Protection of Investor's Interest
can be invested in one equity
undertakings
Automatic Approval Mechanism Guidelines by DoI Mitigates time-lag

OPERATIONS

Forfeiture of Shares
Director's Penalties and Liabilities
Sweat Equity
Classification of Shares
Sub-Section (3) of Section 53, Smooth operation by protecting the
Company Act interests of investee companies
Section 81, 160,161,162, Company Protects investment manager
Act
Company Act Addresses the issues related to
sweat equity
Company Act Determine rights of investors

EXIT

Lock-in period Shareholders' lock-in Sub Regulation Faster exits

(1) of Regulation 10, SRI Regulations,
SEBON
Share Pricing Market Driven Share Pricing SEBON Fair deal flow
IPO Exit Promoter's Share Facilitate faster exit
Sub-Regulation (4) of Regulation 7,
SRI Regulations, SEBON

Divestment
Inclusion of provision to divest
through IPO

Dividend Record
Sub-Regulation (3) of Regulation 10,
SRI Regulations, SEBON
Valuation Market PriceMethod Company Act Easier deal flow
and SEBON Fair valuation of equities
Buy Back of Shares Section 61, Company Act Easier exit

20
REFERENCES
ACTS AND REGULATIONS:
Banks and Financial Institutions Act, Nepal 2063 (2006)
Foreign Investments and Technology Transfer Act, Nepal
(1992)
The Industrial Enterprises Act, Nepal (1992)
Nepal Rastra Bank Act, 2058 (2002)
Income Tax Act, Nepal 2058 (2002)
The Companies Act, Nepal (2006)
Foreign Exchange (Regulation) Act, Nepal 2019 (1962)
Foreign Investment and One-window Policy, Nepal (1992)
Foreign Investment Tax Rules, Nepal 2020 (1963)
Securities Registration and Issue Regulations, SEBON
(2003)
Merchant Bankers’ Regulations, SEBON (2008)
Foreign Investment Policy, Nepal (2071)
Securities and Exchange Board of India (Alternative Invest-
ment Funds) Regulations (2012)
Securities and Exchange Board of India (Venture Capital
Funds) Regulations (1996)
Securities and Exchange Board of India (Issue of Sweat Eq-
uity) Regulations (1996)
READINGS:
Regulatory Issues in Private Equity Investments in Nepal,
Dolma Development Fund, Kriti Capital and Investments
Ltd, Pioneer Law Associates
Private Equity in Developing World, Advocates for Interna-
tional Development, Aditi Kapoor, Reed Smith LLP, 2012
Scott W. Naidech, Chadbourne & Parke LLP (2011)Private
Equity Fund Formation, Practical Law Publishing Limited
and Practical Law Company
Legal Framework of Foreign Investment in Nepal, Ma-
hadevPaudel, Former Secretary, Ministry of Law and Jus-
tice, GoN
Nepal Budget 2072/73(2015-16) Tax Perspective, NBSM
Trade, Industry and Tax Policy Highlights, Nepal
What kind of signals are we sending to investors? A look at
Foreign Investment Policy and its implications to investors
(2014) Samriddhi, The Prosperity Foundation
A Review of Trade and Industrial Policy in Nepal, SWATEE
Private Equity Market Landscape, Nepal
Directives on Foreign Loan, Nepal Rastra Bank, 2003
Foreign Direct Investment in Nepal: Issues and Problems,
Dr. Suman Regmi
Investment Contours of Venture Capital Funds in India: An
Analysis, Dr. T. Satyanarayana Chary
Private Equity: Breaking Boarders (2014), Earnst and Young
The Preqin Private Equity Committed Capital Index (2015),
Preqin
Private Equity Investments, Grant & Smith LLP
Private equity Asia-Pacific: Rebounds, globalization, and
other tales, McKinsey & Company (2010)
A Handbook of Government Finance Statistics (2014), Ne-
pal Rastra Bank
2015, Preqin Global Private Equity & Venture Capital Re-
port, Preqin Private Equity Exits in China and India, Faculty
and Research Working Paper, Insead
Annual Report 2071, SEBON
Doing Business 2015: Going Beyond Efficiency, World Bank
WEBSITES:
http://www.sharesansar.com/
http://www.nepalstock.com.np/
http://www.doind.gov.np/
http://www.nrb.org.np/
http://www.lawcommission.gov.np/
http://www.investnepal.gov.np/
PROMOTING PRIVATE EQUITIES IN NEPAL 21
 NITIFOUNDATION FOUNDATIONNITI
WWW.NITIFOUNDATION.ORG
P.O.BOX: 8975 EPC 370, BALUWATAR, KATHMANDU, NEPAL