Foreign Investment and Technology Transfer Act and Industrial Enterprises Act regulate and administrate the Foreign investment in Nepal. The two agency for implementation and administration of the Foreign Investment and Technology Transfer Act in Nepal is Department of Industry (“DOI”) as approving authority for foreign investments of under NPR 6 billion (~USD 53 million).
Investment Board of Nepal (“IBN”) as approving authority for foreign investments above NPR 6 billion (~USD 53 million).
Forms of Foreign Investment (FI)
Foreign Direct Investment can be made in any of the following forms:
Investment in shares of an industry;
Investment through the purchase of shares or asset;
Investment through the lease of airlines, ships, machinery and equipment;
Technology transfer i.e. licensing of foreign intellectual property, franchising, management, advisory and market services;
Investment in capital investment funds;
Investment in the secondary stock market;
Investment by the issue of securities in foreign stock markets; and
Re-investment of profits.
A few years back the Government of Nepal on Spetember 5, 2012 hiked the initial investment from NPR 1.6 million or USD 20,000 to NPR 5 million.
Areas allowed for Foreign Investment
Foreign direct investors can own to 100% shares/equity in any of the industries except the following industries:
Cottage industries (except industries using electricity more than 5 kW)
Personal service businesses (e.g. hair cutting, beauty slaon, tailoring, driving training, etc.)
Arms and ammunition industries
Gunpowder and explosives
Industries related to radio-active materials
Real estate business (excluding construction industries)
Film industries (national languages and other recognized languages of Nepal)
Bank notes and coins
A retail business (excluding international chain retail businesses with business in at least two countries)
Tobacco (excluding more than 90% exportable)
Internal courier service
Consultancy services (e.g. management, accounting, engineering, legal services); (Maximum of 51% FI is allowed)
Processing of food grains on rent
Local catering Services
Entry Conditions on Investment
FITTA 2019 allows foreigners to invest only in private limited companies and in public limited companies registered with the Company Register Office (CRO). They are not allowed to invest in proprietorship or partnership firms.
"Private Limited Company" means a company which by its articles:
Limits the number of its shareholders from 1 to 50, excluding persons who are in the employment of the company, and
Prohibits any invitation to the public to subscribe to its shares.
"Public Limited Company" means a company that:
Has a minimum number of 7 shareholders (there is no maximum limit), and
Offers shares and debentures to the public through a prospectus which complies with the requirements of the Companies Act 2006 and Securities Act 2007.
FDI Approval process of Nepal
The approval process of the FDI process is listed below
First, the application must be submitted, the submitted application with the required documents at the registration unit, it reaches to the director general who then agfter reviewing the documents sumbits it to the FDI director.
In the FDI section, the documents are carefully assessed by the staffs of the FDI.
Staffs forwad the application to the FDI approval committee.
Project reports are sent to the License Director and Technical director before the meeting.
The documents are studied by the member of the committee, the document is studied objectively and the concern is expressed if any.
Even if there are concerns expressed or other documents to be received, the applications are generally recommended for final approval with the condition that the concerns are addressed and the documents received.
Once these conditions are fulfilled, the application is sent to the Director General for final approval. It takes 5-10 days for FDI approval, from the application date.
FDI Approval Procedure
As soon as the foreign investment board approves the document, the FDI applying industry must apply for the registration of industry at DOI with in 35 days, if the investment is less than 5 million rupees, if the investment is higher than 5 million rupees, one must register at Investment Board within 35 days. Even if the investor miss the registration date and time then investor have to apply for the extension of the time frame.
Note: If the capital investment is more than NRs. 5 million, the Investment Board can directly deal with the investor, and the procedure will be followed accordingly.
Foreign Direct Investment Policy in Nepal:
The Foreign Investment and Technology Transfer Act 1992 has been replaced by the Foreign Investment and Technology Transfer Act 2019 (2075) (“FITTA”). A few months back it received the presidential approval on 27th March 2019.
The new FITTA’s section 15(2) states that the accent will be provided within a week after all the application and documentation process is submitted. However, there are certain loopholes in the section that has not been drafted clearing the path for the different argument to be done. Similarly, it is not clear whether the documents should be submitted or not to obtain the approvals.
Previously under the FITTA 1992, there was a provision of second approval for foreign investment from Nepal Rastra Bank- the central bank of Nepal through a different application procedure under the Foreign Exchange Act 1962. However, the new FITTA 2019’s section 16 (1) provides only notification or information to the central bank for obtaining the first approval from DOI, making the cumbersome process a cupcake. However, the sub-section (2) provides that the procedures set out by NRB must be covered. It is a wise choice for investors to apply for getting second approval from the central bank until the section is clearly stated.
To open the industry under the authority of the provinces must get the prior recommendation from the Ministry of Industries of such provinces to approve the foreign investment.
The FITTA also provides for “automatic approval” and “single point service center”. Automatic approval provision is not effective yet until further notifications from the government.
The legal framework that govern FDI in Nepal include Foreign Investment and Technology TransferAct (FITTA),2019,Foreign Exchange (Regulation) Act,1962, Investment Board Act, 2010 and Industrial Enterprises Act,2016, CompanyAct,2017, Investment Board Act,2011, Contract Act,2000, Arbitration Act,1999, Income Tax Act,2002, Labor Act,2017, and Privatization Act,1992. Likewise, DOI, Investment Board and central bank are the agencies for management and application of guidelines and principles related to FDI.
The FITTA 2019 describes foreign direct investment as (a) investment in share or equity; (b) reinvestment of the derived earnings from the share or equity; (c) asset made in the form of credit or loan facilities. The minimal investment requirement for foreign investment approval is Rs. 5 million per investor. Furthermore, the act also defines the technology transfer which is allowed even in the area where foreign investment is not permitted. Use of technological rights, specialization, formula, process, patent or technical know-how of foreign origin; use of any trademark of foreign ownership and acquiring any foreign technical consultancy, management and marketing service are the forms of technology transfer. However, there are some industries like cottage industries, security printing, arms and ammunition industries, among others, where foreign investments are not allowed.
General Regulatory Arrangement For FDI
At first, the foreign investors must be registered in the Inland Revenue Department(IRD)and comply with the tax system. If the company has a turnover of more than 5 million, they need to register for Value Added Tax (VAT). The foreign investors must fulfil the requirements set by the income tax, corporate tax, interest tax, profit tax, payroll tax, capital gain tax etc. However, there are some relaxations in tax for the industries in FDI have been offered in the Industrial Enterprises Act, 2016
.2.5.2 Foreign Exchange Arrangement
.The central bank of Nepal--NRB oversees the foreign exchange management in Nepal, and the foreign Exchange (Regulation) Act,1962 is the guiding regulation for it. Those foreign investors, who fulfil the criteria given by rules, can invest or take out (withdraw) investment. Likewise, Nepal has also adopted the recent exchange arrangement and exchange restriction of Article VIII of IMF.
.Foreign investors after registering at the office of Company Registrar and Tax Office should apply for the approval at NRB to bring in FDI to Nepal. In general, foreign investors must commit to keeping their investment in Nepal at least for a year. The company can also borrow from abroad at LIBOR plus a reasonable premium rate in case required amount and interest rate is unavailable domestically. Furthermore, Nepalese citizens can also borrow USD 0.5 million or INR. 50 million at zero interest rate from abroad at least for 5 years. 41.NRB provides the repatriation approval to the FDI on the basis of recommendation from the concerned regulatory authority. Foreign investors can repatriate the amount received from the sale of the share of foreign investment as a whole or any part thereof, amounts received as profit or dividend from foreign investment, amount received from the fees or royalties or supply in case of technology transfer, maximum 75 percent of the earning of foreign nationals working in foreign investment company.
2.5.3 Repatriate earning
FITTA 2019 has a provision that provides laxation to repatriate bonus, profits, dividends, earnings, proceeds of the sale of shares and furthermore proceeds of liquidation and amounts recovered from legal proceedings, which are given permission in FITTA 2019 but not clear in previous legislation.
However, the investor must show the strong proof that they have followed all the laws, agreements and obligations so that they can easily get permission for repatriation. This is a very difficult test in law and is bound to create more uncertainty and discourage foreign investment. In addition to this, applicable taxes should also be paid.
There is a need for approval from the responsible authority and the central bank of Nepal i.e Nepal Rastra Bank for each repatriation.
Top 10 Sector To Invest in Nepal
Nepal is the second richest country in terms of water resources and has the potential to generate a huge humongous amount of electricity i.e 84,000 MW. The rivers are perennial in Nepal and the hills are undulating and steep which makes easier to produce electricity. Despite the potential to generate a large amount of electricity, Nepal cannot cash the opportunity to be a key player in exporting electricity, however, the situation is reverse, Nepal imports some amount of electricity from neighbouring country India in dry season. Therefore, Nepal can be the best destinations for investment to produce electricity.
About 60% of Nepal’s population has access to electricity whereas 40 percent of people still live in darkness.
The demand for electricity surpasses the supply of electricity and the demand is increasing at the rate of 7-10 percent per year.
Nepal is a virgin land for development of infrastructure and industries which consumes electricity.
Many rivers to produce electricity have been identified and DPR of the projects of the rivers also have been done however, due to lack of potential investors the development cannot go at a stipulated rate.
Nepal is a land linked country. Due to undulating topography, transportation is arduous. Therefore, there is room to create more transportation facilities., road transport, cable car and water transport etc. are business opportunities to cash in future.
Still, in the 21st century, there are several gaps in the transportation sector of Nepal. The roads are in poor state filled with potholes. Therefore, there is an urgent need for developing better transportation service in Nepal.
Monorails and electric railways are the emerging modes of transportation at the incipient stage.
The country depends on the sole international airport for international connectivity and there is an urgent need of other few international airports outside Kathmandu.
Nepal is an agrarian country. Still, agriculture is the major source of livelihood for more than 65 percent of people. Moreover, 30 percent of GDP is contributed by agriculture. However, subsistence farming is what Nepalese farmers are attracted to. There is still a wide chance of commercial agriculture inside the country. Furthermore, there a big loopholes in the agriculture sector from production until it reaches the kitchen of people. The loopholes in post-harvest technology, marketing, agribusiness management must be meticulously resolved using the latest techniques. Similarly, other reasons for including agriculture in the top 10 list are as follows:
No matter how rich people get, people need food to eat and the population of Nepal is growing at a rapid rate.
Nepal has a high range of topographical, climatic and geographical variation which allows verdant products to grow in a small area.
There is no agriculture fertilizer company in the country, which certainly provides some room to open the fertilizer industry inside the country.
Fertile soils still remain unused due to lack of investment.
Labour wage is cheaper compared to neighbouring countries.
Nepal is the tourism hotspot in Asia and all over the world. A large number of tourist come each year to visit Nepal. However, there is still room to work on tourism sector diligently to uplift the tourism industry in future. Thousands of people are employed in the tourism industry. Some of the prudent reason to invest in the tourism sector of Nepal in future are:
The pristine mountains are present in Nepal, which are clearly visible from verdant hills. Eight out of the ten highest peaks are present in Nepal.
Hills and mountains of Nepal are suitable for adventurous games like rock climbing, hiking, trekking, and other adventurous sports.
Nepal is the biodiversity hotspot where many species of birds, mammals, and insects are found.
Nepal is the birthplace of Lord Buddha and the go-to destination to observe unique architecture and heritage.
Comparatively, there is a low number of star hotels outside Kathmandu.
The number of tourists visiting Nepal is growing at a faster pace.
Wilderness activities and the presence of unique flora and fauna is another reason why tourism is yet to flourish properly in Nepal.
Each day, new routes, new destinations, new trials and new adventure activities are opening up in remote locations of Nepal, creating a void, to be filled in by carrying out tourism-related activities to the locations.
Nepal consists of highly skilled guides and porters, who can be hired for a comparatively lower wage.
The warm and welcoming inhabitants of the country attract more and more tourists into the country every year. Tourism is hence of the 10 best sectors to invest in Nepal.
Infrastructure development is yet another best sector to invest in Nepal. The infrastructure state of Nepal is at a rudimentary stage of development. Infrastructure development is the most important component to excel in economic development and there are options for the infrastructure development in the country so that business can flourish. Though in the mega cities some infrastructure has been developed still that is not enough to cater to the business Nepal wants to develop and achieve the economic growth Nepal need to achieve.
Some of the reasons why infrastructure could be the sector to invest in Nepal:
Transportation of Nepal is feeble and call for the urgency to create proper transportation in Nepal.
Aftermath of 2015 earthquake caused destruction of buildings and there is a need for earthquake resistant high-rise buildings.
The work force is cheaper and easily available.
IT company are slowly grooming inside country thanks to the foreign direct investment inside the country by some of the large firms. However, considering the investment and the market there is still a big pothole to fill because a large number of IT firms are congregated inside the valley and small towns still have untrained manpower who can be trained and used in IT sector. The reasons why IT is considered one of the best 10 sectors to invest in Nepal are illustrated below:
Due to the cheaper wage, the works can be outsourced to Nepal.
The cost of operation is comparatively cheaper in Nepal compared to other countries.
The market is open and big potholes need to be fulfilled to make them saturated.
Only a few IT firms provide better and world class service inside Nepal.
Mines & Minerals
Nepal is a virgin land to explore the mines and minerals. Nepal is not only rich in natural resources like water and forest but also rich in minerals, forest, herbs and shurbs. It is said that Nepal is filled with minerals—both metallic and non-metallic minerals deposits as well as decorative materials like marbles and granite. Some of the reasons to consider mines and minerals business to be the best 10 sectors to invest in Nepal are illustrated below:
There is a huge number of mineral deposits all across its Himalayan vicinity.
There is no or very few or the countable number of mineral extracting businesses and less number of feasibility study has been done on the matter.
There are huge opportunities in this sector because this sector remains untouched like the pristine mountains.
The output will suffice the investment in future.
Nepal lacks world class financial institutes and services. Although there are few banks, which has an investment in foreign countries, however still there is a huge opportunity to invest in financial institutes. Not only in big banks, but also there are opportunities to invest in micero finance and financial institutes. Similarly, there are only few financial institutes that have reached every nooks and corner of the country.
Health & Education
However, the health and education sector are two different things. Nevertheless, they are the two primary things needed to human, it is very sad to say that still in Nepal, not every person has equal access to health and education. Health and education are the sectors that need a huge investment to make a better future of the country.
Telecommunication service provider
Although slowly the penetration of telecommunication is reaching every nooks and corner with only two key providers in the state. There is a kind of monopoly in the price set by the two companies, which is unfair to users. The cost of telecommunication is comparatively high than India and other neighbouring countries. Therefore there is a need for a few foreign direct investments in telecommunication sector as well.
Ecommerce websites are the emerging market to invest in Nepal. It is alluring to invest in the e-commerce website because there is still plenty of room to invest in the sector. The idea of e-commerce is new to Nepal and there are not sufficient foregin investment in Nepal. Recently, Kyamu—a leading e-commerce website had a foreign investment from Alibaba—the leading e-commerce website in the world.