New Arrangements for Investment Company Registration for Foreign Investors in Nepal
Government of Nepal first introduced the concept of investment company, as a new vehicle for investing in Nepal a long way back. Shortly afterwards, the arrangement was repealed before it could bear any fruit. After a few years of void, in 2078 B.S., government introduced the arrangement of investment company in a rather systematic manner. But the arrangement was again repealed after a year in 2079 B.S and a new set of arrangement was brought for the registration of investment company in Nepal. Now, what is the arrangement? Why all of these fluctuations for an arrangement? Why was the arrangement brought in the first place? And what are the possible implications of this arrangement?
On Shrawan 25, 2078 Ministry of Industry, Commerce and Trade by an official notification in the Nepal Gazette had introduced an arrangement regarding the establishment of Investment Company. The initial arrangement was a new addition made to the list of industries that can be registered in Nepal, under No. 65 of Schedule 8 of the Industrial Enterprise Act, 2076 (2020). Along with the introduction, certain conditions for the registration were also prescribed in the notification.
Likewise, recently on Falgun 18 2079, Ministry of Industry, Commerce and Trade by an official notification in the Nepal Gazette repealed the previous arrangement and brought a new arrangement for the registration of investment company. With most of the provisions remaining same, few amendments have been brought with an evident intention to promote foreign investment of non-resident Nepalese investors.
Firstly, let us understand about investment company, its requirements for registration, limitations and governance through the previous and amended arrangement brought in Nepal for the same.
S.N | Subject | Previous Arrangement | Amended Arrangement |
| 1 | Minimum Capital Requirement | Investment company can be established or registered as industry with the minimum investment amount of NRs 1 billion | Same as before |
| 2 | Form of Investment | Investment company can only invest in the form of equity and investment in the form of loan, loan facilities, bond, debentures are prohibited | Following proviso is added to the previous provision: However, investment company with the joint investment of government and non- resident Nepalese can also invest in the bond and debenture of Infrastructural Projects |
| 3 | Currency of Investment | When registering an as industry the investment company should specify whether the investment is made through foreign currency or Nepalese currency | Same as before
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| 4 | Sector of Investment | Investment companies can only register as an industry by specifying the sectors of investment | Same as before |
Investment companies with foreign investment can only register as an industry by specifying the sectors of investment within Nepal | Same as before | ||
Investment companies can only invest in sectors of industry classified under the prevalent Industrial Enterprise Act and permitted by the Foreign Investment and Technology Transfer Act | Following proviso is added to the previous provision: However, investment company with the joint investment of government and non- resident Nepalese can invest in the sectors permitted by Foreign Investment and Technology Transfer Act, 2075 with a minimum investment of NRS 100 million per project | ||
| 5 | Prohibited Sector of Investment | Investment company is prohibited to invest in sectors of investment such as stock broker, market maker, real estate | Same as before |
| 6 | Foreign Investment Approval | Investment company with foreign investment must take separate foreign investment approval from the industry registering authority for each sector of investment | Following proviso is added to the previous provision: However, for the Investment company with the joint investment of government and non- resident Nepalese, foreign investment approval can be obtained by the company in the name of investor upon the submission of required details and documents. |
| 7 | Ultimate Beneficiary | When registering as an industry investment company with foreign investment should mandatorily attach details disclosing Company’s Ultimate Beneficiary | Same as before |
| 8 | Prohibited Activities | Investment company is prohibited to perform any function relating to bank and financial institution as per the relevant prevailing law | Same as before |
Investment company is prohibited to perform any function relating to Co-operatives established as per prevalent Co-operatives Act | Same as before | ||
Investment company is prohibited to invest through shell company and financially transact with shell banks | Same as before | ||
Investment company is prohibited to purchase shares or debentures listed in from the secondary market of Nepal Stock Exchange | Same as before | ||
Investment company is prohibited to avail loans or use bank guarantee of foreign banks to avail loans from local banks and financial institution | Same as before | ||
| 9 | Injecting foreign investment and Repatriation
| For the establishment of investment company approved foreign investment should be injected according to the procedure prescribed under prevalent Foreign Investment and Technology Transfer Act Investment company with foreign investment should inject and repatriate foreign investment according to the prevalent policy, guidelines and procedure issued by Nepal Rastra Bank | Following changes and proviso is added to the previous provision: Investment company with foreign investment should inject and repatriate foreign investment according to the prevalent Foreign Investment and Technology Transfer Act, Regulation and the prevalent policy, guidelines and procedure issued by Nepal Rastra Bank However, government of Nepal will prescribe separate procedure for the repatriation of investment of investment company with the joint investment of government and non- resident Nepalese |
| 10 | Monitoring | Investment company will be registered and monitored according to the prevalent Industrial Enterprise Act | Following addition is made to the previous provision: Investment companies will be monitored by Department of Industries |
Over the period of time, government brought new arrangements for investment companies with the objective to bring more clarity and systemization. However, departing from the former amendment, the most recent amendment is evidently brought with the objective to promote investment by non-resident Nepalese, even particularly investment on a joint venture with the government of Nepal. And it is obvious that these changes have their respective implications in the foreign investment realm of Nepal, impacting large and small investors in general.
Say, with the minimum cap of NRS 1 billion for the establishment of investment companies, investors can now bring a lump-sum investment and invest in various sectors conveniently. However, for small or single investors as well as native investors willing to invest in different sectors in Nepal, the minimum cap can be overwhelming. Similarly, foreign investors will be additionally applied with the cap of minimum NRS 20 million to bring the investment. And while share investment has only been the form of investment delegated as the investment method for investment companies in general, the option has been made rather flexible for the joint investment of government and non- resident Nepalese. Investment companies with the joint investment of government and non- resident Nepalese can also make investments in the debentures and bonds of infrastructural projects.
Similarly, with the flexible foreign investment approval arrangement, the investment company with the joint investment of the government and non- resident Nepalese will not be required to go through the bureaucratic hassle as other foreign investors to approve the foreign investment in every sector of investment. However, other investment companies with foreign investment are required to obtain separate foreign investment approval for each sector of investment. Also, departing from the former arrangement, a specified authority under the law will now register and monitor the activities of investment companies in Nepal.
In the same manner, repatriation of investment by investment companies with the joint investment of government and non- resident Nepalese will be implemented through a separate prescribed procedure which can make the process more convenient for them. Unlike, the investment companies in general, which will rely on the general existing framework and the new arrangement brought by Nepal Rastra Bank with the same old bureaucratic hassle.
Even though the amendment seems to be brought with the obvious objective to promote the investment by non-resident Nepalese, even particularly investment on a joint venture with the Government of Nepal, a few provisions in the amendment itself seem to be conflicting with the objective of bringing the arrangement. For instance, the foreign investment approval for the investment of non-resident Nepalese had been facilitated without requiring sector-wise approval. However, the minimum cap of NRs 100 million per project, only for investment involving that of non-resident Nepalese seems to be rather restrictive.
Likewise, the prohibition on investment companies doesn’t allow investment companies to invest in sectors of investment such as stock broker, market maker, real estate. The point of curiosity is, given the language of the new arrangement, now even the native investors establishing the investment company will not be able to invest in sectors such as stock broker, market maker, and real estate. Hence the question remains, as to how the provision should be interpreted.
So, with this understanding of the concept and prevailing arrangement of investment companies in Nepal along with the implications, stay tuned if you are curious to know about the reasons behind the introduction of the arrangement of investment companies in Nepal and the analysis of its possible implications.