Foreign Direct Investment in Nepal: critically analyse its conduciveness and assess the

situation with the enacted laws and experience of Multi-national company

Aashma Thapa Magar

Kathmandu University School of Management

Introduction:
Foreign Direct Investment (FDI) is defined as a “category of cross-border investment” in
which an investor from one country invests in another country wherein the investor has
significant control over the business it invests in (IMF,2009). It may involve a “transfer of
technical know-how, managerial and organisational skill”. FDI is considered as a source of
capital formation for developing countries. It strategically aims to gain an advantage in the
foreign market and to generate returns on the investment. It has been an interesting subject
for a long time and has been renewed in recent years for a number of reasons. One of them is
the rapid growth in global FDI inflows. Another reason is the expansion in foreign
ownership. A third reason is the possibility offered by FDI for channelling resources to
developing countries.

Nepal has been pursuing a liberal foreign investment policy and has been striving to create an
investment-friendly environment to attract FDIs into the country. Our Tax slabs are one of the
lowest and our position is fairly good in ease of doing business. The major profitable areas of
investment in Nepal include hydropower, industrial manufacturing, services, tourism,
construction, agriculture, minerals and energy. Nepal encourages foreign investment both as
joint venture operations with Nepalese investors or as 100% foreign-owned enterprises. The
few sectors that are not open to foreign investment are either reserved for national
entrepreneurs in order to promote small local enterprises and protect indigenous skills and
expertise or are restricted for national security reasons. No foreign investment is allowed in
cottage industries. However, no restriction is placed on transfer of technology in cottage
industries.

As an important source of financing for Nepal, Nepal has initiated institutional and legal
reforms in recent decades with the aim of promoting FDI to create an investment friendly
environment and complement the resource gap in capital formation. Some of related reforms
in gradual liberalisation of FDI inflows are Foreign Investment and Technology Transfer Act
(FITTA) 2019 A.D, Foreign Exchange Act, 2010, Investment Board Act, 2010, Arbitration
Act,1999, Company Act, 2017, Public-Private Partnership and Investment Act 2019, Nepal
Rastra Bank Foreign Investment and Foreign Loan Management bylaw, 2021A.D and
Industrial Enterprises Act 2076 B.S. Foreign Investment and Technology Act (FITTA) of
2019 regulates mainly for the Foreign Direct Investment. The Department of Industry, Nepal
Rastra Bank, and Investment Board Nepal are three agencies that implement the laws
regarding FDI. The apex body to address the proposal for FDI is the Investment Board, which
is chaired by the Prime Minister.

Investment Policy in Nepal

The Government of Nepal introduced a new Foreign Investment Policy, 2015, replacing the
policy of 1992 with an objective of making the economy more dynamic and competitive by
maintaining trade balance through export promotion and import management, and by
attracting foreign investment, technology, skills and knowledge in priority sectors. The new
policy incorporates the changing context of portfolio investment, non-resident Nepalese
investment, special economic zones, labour relation issues, and mobilisation of debt
instruments in domestic and foreign currencies. The foreign investment policy aims to
achieve sustainable economic growth and generate employment, enhance investment in
regional and national development, fill the gap of increasing investment demand, increase the
domestic production and productivity and create an investment friendly environment. In
contrast to the old policy, the new policy has clearly defined the term “foreign investment”
and “technology transfer”. It recognizes assignment, user’s licence, technical know-how
sharing and franchising as the medium for technology transfer. The policy has envisioned the
Investment Board, Ministry of Industry, Foreign Investment Promotion Board, Department of
Industry, and One Stop Service Center as the institutions involved in implementing foreign
investment policy in Nepal. The policy categorised the investors as a) foreign institutional
investors b) foreign individual investors and c) Non-Resident Nepalese (NRN). There are
provisions to facilitate FDI through the access to foreign exchange, facilities and exemptions,
access to credit, hiring foreign workers, acquisitions of land, and industrial security and
business promotion. It assures equal treatment to foreign investors, no nationalisation of the
investment, and withdrawal of their principal investment and its earnings. The provision of
mediator and dispute settlement has also been incorporated in this policy. The procedure of
FDI in Nepal varies depending on investment size and sectors. In general, the required
documents differ according to mode of foreign equity participation in the industries.

Key Acts/Laws Concerning FDI:

With the view to attract foreign as well as domestic investment to boost the economy,
laws/acts provide one window facilities to the investors. The necessary key provisions related
with FDI in acts/laws are briefly explained as below:

a. FITTA (Regulatory Framework) :

➔ FITTA was first introduced in 1992 and later revised in 2019.
➔ Investors need to bring 25 percent of the pledged investment within a year
from the date of registration, 70 percent by the start of operation, and the
remaining 30 percent within the next two years.
➔ Lease financing and investment in the secondary market through Venture
Capital Fund (VCF).
➔ Introduction of Single Point Service Center. Through this facility, the investors
can get various services from one place such as approval of foreign
investment, registration, visa related services, work permits, etc. This will ease
the tedious task of reaching out to multiple departments for clearance and
approval.
➔ Foreign loans can only be obtained from financial institutions and not from the
parent or a private enterprise. This would mean that a company won’t be able
to obtain a loan from its cash rich parent.
➔ Any eligible foreign investor can invest in any permitted industry established
in Nepal by acquiring the assets of the industry or shares not exceeding the
prescribed percentage.
➔ A foreign investor can make foreign investments in any industry established in
Nepal through the transfer of technology and know-how by entering into an
agreement with the Nepali industry. Royalty in excess of the amount as
specified in the agreement approved by the DOI/IBN within the threshold
specified in FITTA regulations cannot be repatriated.
➔ Any company with foreign investment can avail of loans from a foreign
institution under the ‘Project Loans’ or ‘Project Financing’ arrangement on the
recommendation of the Ministry of Industry, Commerce and Supplies and
approval of the Nepal Rastra Bank.
➔ Foreign investors can invest in equity shares in Nepal after obtaining approval
from the Securities Board Nepal (SEBON) by establishing a venture capital
fund.
➔ The foreign investor shall give information in writing, along with the
self-declaration to the effect that the amount of such investment has been
earned from any legitimate source, to the NRB. After giving such information,
the foreign investor may bring the amount of such investment into Nepal.
➔ A foreign investor or industry with foreign investment may open an account in
Nepali currency with any commercial bank, infrastructure development bank
or financial institution of Nepal and in foreign currency with any bank or
financial institution licensed to deal with convertible foreign currency in
accordance with the prevailing law and carry on transaction accordingly.
Provided, however, that approval of the Nepal Rastra Bank shall be obtained
to carry on transaction by opening an account in convertible foreign currency.
➔ A foreign investor may make foreign investment in any industry ( except those
industries mentioned in the schedule) and derive gains from such investment.
➔ Allows companies with foreign investment to borrow from foreign banks and
financial institutions if approval from NRB and recommendation from the
concerned ministry is received.
➔ Investors or their official representatives and their family members will get
residential visas if they make an investment of $1 million at one time.
b. Company act:
➔ No foreign company shall carry on any business or transaction in Nepal
without having a branch office of such company registered with the office.

c. Industrial Enterprise act:

➔ The Department of Industry would be undertaking registration of industries
based on Foreign Direct Investments.
➔ Permission may be granted to an industry in operation with foreign investment
to import goods produced by its principal company abroad for a certain period
on such terms and within such ceiling as prescribed, for development and
promotion of market for new goods.
➔ Contract manufacturing arrangements in case of production of auxiliary
products. Previously, FITTA was restricting production of main goods of the
industry through contract manufacturing.
➔ Areas/sectors where Foreign Investment is permitted and not permitted are
classified.

d. Public Private and Investment Act:

➔ Stipulates investments up to NPR 6 billion to be approved by the
Department of Industry, whereas investments above NPR 6 billion needs
to be approved by the Investment board of Nepal which is also
applicable to FDI.
➔ Foreign investment projects shall be treated equally as any domestic
industry in Nepal.
➔ To settle legal disputes between a native and a foreign investor: the
parties shall first try to resolve the dispute through mutual discussion or
negotiation. If unable to do so, the dispute can then be resolved through
negotiations by the IBN office. In case of failure to resolve the dispute
through negotiation through the IBN office, parties can refer to arbitration
proceedings as mentioned in the agreement. In the absence of arbitration
proceedings being mentioned in the agreement, the dispute shall be settled
under the arbitration laws of Nepal. Unless the disputing parties agree
otherwise, the settlement of any dispute arising from any foreign
investment shall be conducted through arbitration under prevailing
regulations and proceedings of the United Nations Commission on
International Trade Law (UNCITAL).
➔ IBN shall facilitate foreign investors with visas in coordination with the
Department of Industry.
➔ A non-tourist visa shall be provided for 6 months for foreign citizens to
study, research and survey any approved foreign investment. Similarly, the
foreign investor or one authorised representative and their family members
shall be provided business visas to stay as long as investments continue in
 Nepal. Foreign employees of the project acquiring labour permits shall also
be allowed to stay during their period of investment in Nepal.

e. NRB Foreign Investment and Loan Management Bylaws, 2078 B.S:

➔ Approval to avail exchange facility of foreign currency for repatriation of
foreign investment and earned money.
➔ Prior approval required for foreign loan.
➔ Recording of loan with NRB.
➔ Foreign Currency Conversion Facility for Repayment of Foreign Loans.

Current FDI Status in Nepal

In comparison of F/Y 2020/21, the number of approval for foreign investment inflow has
decreased from 112 to 56, and the number of approved FDI inflow has also decreased from
80 to 37. As per the data based on five months of 2022/23, capital transfer decreased 25.3
percent to Rs.3.47 billion and net foreign direct investment (FDI) remained Rs.604.9 million.
In the same period of the previous year, capital transfer and net FDI amounted to Rs.4.64
billion and Rs.7.07 billion respectively. In the review China has the highest FDI commitment
with proposed foreign capital of RS.216.62 billion contributing to generate 1,01,128 new
employment followed by India with proposed foreign capital of Rs.101.01 billion
contributing to generate 74,303 new employment. . There are 5,533 foreign investment
projects with proposed foreign capital of Rs. 419.26 billion with 2,92,120 new employment
licensed from DOI accounting the first day of registration to the end of Fiscal Year 2078/79.
It comprises 322 large, 603 medium and 4,608 small scale projects. Categorical analysis of
the industry registered shows the highest 1,820 projects in the service sector, followed by
1815 projects in the tourism sector. Moreover, the maximum amount of commitment is led by
energy based worth Rs. 130.4 billion from 91 projects followed by the service sector worth
Rs. 95.9 billion from 1,820 industries in the same period.

FDI and MNC:

There has always been the issue of conflict between the interest of foreign investors and the legal
issues of the government of Nepal which particularly exist in Nepal. CEO of Surya Nepal stated that
the foreign joint venture investors have been stating pointless financial statements, also concerned
authorities are not performing their responsibilities as per act and rules. For example: Companies
with foreign investments have been demanding that once they submit the relevant documents to the
Department of Industry, Office of the Company Registrar and Nepal Rastra Bank with the equity
structure approved by the Department of Industry, the concerned authorities should accept the
documents and approve the remittance of dividends.
Nepal is considered to have reasonable corporate tax rates in the South Asia region. However, There
are some issues in the tax system that limit Nepal’s Potential in receiving high FDI inflow. There is
the demand for a tax rebate on profits. The new Industrial Enterprises Act has a provision to
encourage such initiatives, the same is yet to be included in the tax law.
Problems in availability and acquisition of land for foreign investing companies in hydropower,
infrastructure and manufacturing have been facing multiple issues for significantly slowing down the
progress. Companies such as Hongshi-Shivam Cement have been facing and struggling to acquire the
land for the project. Due to unclear laws and rules, the problems are still unsolved.The brunt of
militant trade unions in the name of collective bargaining has disrupted foreign investors.
Colgate-Palmolive, Surya Nepal’s John Player and various garment plants with foreign investments were
forced to shut down their manufacturing operations in Nepal permanently in the past due to labour unrest.
Unilever Nepal is a recent example of this. The company over the last 10 years has seen forced to close its
factory units on multiple occasions. labour related issues are settled as per the provisions of the Labour
Act, 1992. The law has largely become obsolete in today’s global context of economic competitiveness
ultimately obstructing productivity in industrial and business sectors. Many see the existing law as
ambiguous as its interpretation varies from person to person. The law has reserved the rights of workers
but has failed to secure the interests of investors. There is the demand to the government to introduce a
progressive labour law in accordance with international standards which would protect not only the rights
of the worker but also the interests of the investor.
Meanwhile, the process of labour registration is also burdensome for foreign companies here. It is the lack
of a policy of reciprocity that has created difficulties for Nepal to welcome the best foreign talents from
whom the country can benefit in terms of knowledge sharing and bringing in new and effective ways of
corporate management and governance.
The rigid foreign exchange regime has led foreign investors to experience a number of obstacles in terms
of both investing in and repatriation of profits. Various FDI related laws have not been harmonised which
often creates confusion and exasperation. For example, the FITTA Act, 1992 permits repatriation of
investment in foreign currency. But provisions in the Foreign Exchange (Regulation) Act, 1962 create
difficulties. Investors who come to Nepal are required to show and convert their investments in Nepali
currency which is particularly risky due to the fluctuation in foreign exchange rates. There is no risk
sharing mechanism or swap market to address this specific problem. On top of this, cooperation among the
government agencies is weak which spells trouble for investors. The absence of capital account
convertibility (CAC) policy has created problems for FDI. India can be a good example regarding the
adoption of CAC.
Simultaneously, we also need to think about how to attract and retain the right investors. In effect
there should be a match between our needs and the investors’ goals.

At the moment, various government bodies such as the Department of Industries, Investment
Board of Nepal and Nepal Rastra Bank all act as entry points for different kinds of investments
and threshold limits with their own permission routes and mechanisms. This means that there are
several permutations and combinations to be mapped under different laws and regulations. For a
foreign investor keen to invest in Nepal, this process can be baffling, to say the least. The lack of
transparency in the process and timelines is therefore definitely something that needs to be
worked upon.

In conclusion, for FDI to be impactful, it needs to be intentional, planned and sustainable. We

need to see FDI’s contribution to our economy in terms of local employment, sustainability, long
term economic growth and needs of the Nepali people. Nepal should not be begging, but
choosing what FDI it needs to attract, retain and foster.
Recent reforms related with FDI:
The minimum foreign investment amount was cut to Rs.20 million from Rs.50 million.
Reducing the threshold will not increase foreign investment. What matters for foreign
investors is guarantee of political stability, tax policy and exit policy. Nepal is not receiving
foreign direct investment as expected due to policy instability, problems in tax administration,
land conflicts, industrial security and raw material issues.As global economies are suffering
from high inflation, increasing FDI will be difficult. The government opened the One Stop
Service Centre in May 2019 to make it easy for investors to receive services relating to
waivers, facilities and subsidies and essential infrastructure. But the implementation of the
policies has not been so consistent due to the unstable government, insiders say. Nepal lacks
strong and effective implementation of intellectual property laws due to which foreign
investors hesitate to make investments here.
The recent reform has made NRB open the door to foreign investment in digital payment
systems in PSPs( eSewa, khalti and IME pay) and PSOs(BAnks and non-banks) of up to 15
percent of the total capital. The minimum paid-up capital for a PSP operating instrument
other than payment cards has been raised from Rs 10 million to Rs 50 million. A PSP
operating payment cards and other instruments needs to have a paid-up capital of Rs 250
million, up from Rs 50 million.

The department of industry has tightened the business visa issuance system for foreign
investors for only three months at a time to prevent misuse of the faculty. Issues like,
applicants submitting fake documents to get business visas, fake details of the progress of
industry registration for another three month extension. This reform would help to narrow the
gap between proposed investment and actual investment.Eliminating fake investors will
provide a true picture of the investment coming into the country. According to the
department, the country received foreign direct investment (FDI) commitments totalling
Rs54.15 billion in the last fiscal year. But the actual foreign direct investment received during
that period, according to Nepal Rastra Bank, amounted to only Rs18.56 billion.

Conclusion:
For a developing nation like Nepal, the importance of FDI is immeasurable. The revised form
in acts and regulation, added a number of regulations and reforms are somehow adding up to
create the investment friendly environment for foreign investors in Nepal. The major problem
lies in the security for foreign investors, where they felt insecure in their investment; the
reason is improper implementation of acts and regulations due to political instability. The
immense efforts of the government seems like not working for them to get back their trust for
the secure investment environment. The new rules and acts for foreign investors have been
made to promote genuine investors, though the procedure seems lengthy. Hence, all these
issues and reforms are totally guided by the enacted laws and their effective regulations.
.mofa.gov.np

www.ibn.gov.np

Is FDI really the panacea we seek? - myRepublica - The New York Times Partner, Latest news of
Nepal in English, Latest News Articles (nagariknetwork.com)

www.nrb.org.np

https://kathmandupost.com/money/2022/10/14/minimum-foreign-investment-amount-slashed-to-rs20-
million

https://doind.gov.np/detail/138

https://www.rvo.nl/sites/default/files/2018/10/Nepal-Market-Study.pdf

https://www.newbusinessage.com/MagazineArticles/view/1785

FITTA, 2019

Industrial Enterprise Act,2076

Company act, 2064