Retracing the Evolution of Investment Companies for Foreign Direct Investment in Nepal

The Government of Nepal had first introduced the concept of "investment company", a new industry category open for foreign direct investment in Nepal, long before the incumbent Industrial Enterprise Act, 2076. In the previous industrial enterprise framework, "investment company" was classified under the service industry, as foreign investment was only allowed in sectors classified as "industry" by the Industrial Enterprises Act. Investment companies categorized as service-related industries were brought in to be treated like any other industries falling in that category. However, the introduction was far from addressing the fact that investment companies required special provisions to be regulated. The introduction had brought a rather inconsistent and unfavorable circumstance for other industries to be established in the same category, as the investment company was introduced without considering the following factors:

The Regulation for Foreign Investment

The initial introduction of investment companies in the positive list of the previous industrial enterprise framework had made the investment company open for foreign investment with few requirements, such as only complying with the minimum capital threshold. Complying with the minimum capital threshold, investment companies with foreign investment could even bring in the minimum capital and invest in diverse sectors through the same investment, unlike establishing other industries through foreign investment.

Say, an industry with foreign investment categorized as an infrastructural industry established to construct roads, bridges, and tunnels is not able to be involved in  providing health services, transport services, etc. However, with the previous arrangement, let's say for an investment company with foreign investment, it could easily bring the required minimum capital and invest in the service sector, information technology sector, infrastructural sector, or any other kind of industry by just registering itself as an industry. Now, given that there is no minimum capital requirement and without any arrangement to monitor or limit the sectors of investment by an investment company, was the provision fair for general investors? As this consideration wasn’t made in the initial arrangement for investment companies, especially with foreign investment, the introduction was deemed unfavorable for other foreign investors willing to establish any other industry in Nepal.

The Nature of an Investment Company

Investment companies, unlike other industries, require huge amounts of capital and have the potential to invest in businesses with diverse objectives. It is primarily a concept to have diverse portfolios of businesses, while the majority of the industries permitted for establishment had to be engaged in a specific business with limited objectives. Thus, with such a nature, it is to be considered whether or not it is reasonable to include investment companies in the categories of industries without any additional arrangements. Moreover, this new vehicle needed a specific set of arrangements for registration, monitoring, operation, etc. However, such provisions were not attached to the introduction. So, simply introducing the investment company without any additional provisions governing the operation of the investment company made the previous arrangement inadequate.

Systematic Arrangement of Investment Companies

The initial arrangement for investment companies did not perceive investment companies to be different from other kinds. No special provisions or regulations were attached to the introduction. Some of the basic provisions that could set a regulation for investment companies, like the minimum capital requirement, form of investment, prohibited actions, and regulating authority, had also not been brought forward. Hence, even a special vehicle like an investment company that needed a special arrangement came without one.

For instance, as per the previous arrangement, the investment company could easily register itself and invest in multiple sectors without any requirements. However, getting to invest without even requiring the need to specify the sectors of investment would have led to various implications and made the operation of the investment company unsystematic. Thus, the initial arrangement of the investment company, which came without any mechanism for establishment or operation, was a major miscue.

Implementation of the initial arrangement for investment companies would have led to various complications on the investment front in Nepal, as discussed above. Thus, as a recourse, the arrangement was removed from the new framework. In 2076 B.S., the government brought the prevailing Industrial Enterprise Act, 2076; however, adding to the void, the new Act hadn’t classified "investment company" in the list of industries.

However, realizing the importance of investment companies for the growth of investment in Nepal, the government of Nepal re-introduced the concept in 2077 B.S. by an official notification in the Nepal Gazette on September 19, 2077. And soon after the re-introduction, the systematic arrangement of investment companies was again introduced in 2078 B.S. by the official notification in the Nepal Gazette on September 25, 2078. This arrangement included minimum capital requirements, prohibitions, forms of investment to be made, sectors of investment, etc. But the arrangement was again repealed a year later, in 2079 B.S., and a new set of  arrangements was brought in for the registration of investment companies in Nepal with a few amendments by the official notification in the Nepal Gazette on February 18, 2079.

Is it not intriguing that the government went through such fluctuations over the introduction of a single concept like an "investment company"? Something must be very significant about introducing the concept of investment companies in Nepal for the government to go through all of these fluctuations, right? Yes! So, let's look right into the advantages of introducing an investment company in Nepal:

Firstly, growth in the establishment of investment companies can be a huge leap for the overall development of Nepal. The major pro is that investment companies can invest in diverse fields. A single investment company can invest in the health sector, infrastructure, information technology, etc., and any other permitted sector of investment. This predicts the overall growth of these sectors sooner or later. With investment companies, only mainstream sectors of investment will not be covered; other sectors that need investment and that have the potential to grow will come to light. Thus, for the country, making arrangements for the establishment of investment companies is a commendable step, and if implemented properly, it can do wonders.

More importantly, for an investment-seeking country like ours, it is crucial to look into the benefits we can offer as a country to investors who can bring in the investment by establishing investment companies in Nepal. A few of the benefits of establishing an investment company in light of prevalent provisions in Nepal have been discussed below:

Engage in Market Research for Effective Diversification of Investment Portfolios

As diversification of investment portfolios is a major characteristic of investment companies, they can engage in adequate market research to analyze the effective sectors of investment in Nepal and invest diversely. They can rely on this low-risk strategy and predict good returns. Further, as a country that has numerous underdeveloped sectors looking for investments, it is a good opportunity for institutional investors to perform their market research and invest where fruit can be borne.

Resolve for the Uncertainties Faced by Investors

Investment companies can be a safer option for investors looking to invest in diverse sectors in Nepal. They have the opportunity to conduct apt market research and delve into diverse sectors without much limitation. Let's say an investment company has invested in 5 sectors, and even if just 3 of the sectors gave them good returns, their investment can generate overall good returns for the company.

Mobilization of Funds

With the minimum cap of NRS 1 billion for the establishment of investment companies, investors can now make a lump-sum investment and invest in various sectors conveniently. Say, a foreign investor establishing an investment company in Nepal can bring a lump sum amount and mobilize the fund in diverse sectors.

Mobilization of Local Resources

Foreign investors can establish an investment company in Nepal by adequately mobilizing local resources. If an investment company is willing to invest in the information technology sector in Nepal as one of its sectors of investment, they can hire a local expert to do market research and ensure the possibilities of investing in the sector. Further, mobilizing local resources can be more significant when looking to invest in unconventional investment sectors.

Facilitation in the Establishment of Investment Companies for Foreign Investors

For foreign investors willing to establish an investment company in Nepal, they can easily receive visa facilities for themselves or their representative and stay in Nepal for a certain period in order to process the establishment of the investment company. Let's say a foreign investor is willing to bring their full investment to Nepal. The foreign investor or their representative and their families can get a business visa in Nepal for the total term of the investment, subject to renewal every one year.

Facilitation for Exit

In order to promote foreign investment, the government has introduced a shorter lock-in period for foreign investors. The previous regulation (prior to the 6th Amendment) provided a blanket lock-in period of 3 years for promoter or other classes of shares except the public shares issued pursuant to the initial public offering. The new amendment has provided a lock-in period of only 1 year for private equity, venture capital, hedge funds, and similar kinds of funds registered at the Securities Board of Nepal or funds registered abroad. This indicates a shorter period of exit for foreign investors.

Exemption from Blacklisting

Nepal Rastra Bank has recently made an arrangement to exempt private equity or venture capital companies in Nepal with 15% or more shareholding in any small or medium enterprise from blacklisting. And even if their investee companies (small and medium enterprises) have been blacklisted for loan defaults, the private equity or venture capital companies will be exempt from blacklisting.

As we learn about the advantages of establishing investment companies in Nepal, especially with foreign investment, it is clear that the government has taken commendable steps for its promotion. In a country like ours with political and economic instability that can have a sectoral impact, with the introduction of investment companies, investors can now utilize low-risk strategies and diversify their investment portfolios. And positively, the government has made provisions targeting institutional and large investors to securely invest in diverse sectors in Nepal. Moreover, as the investment environment becomes more systematic for investment companies, the establishment of investment companies with native and foreign investment has taken off. With the changes in the arrangements, popular business tycoons in Nepal have already made investment companies their new vehicle to invest in various sectors. And as the investment environment flourishes, we can be more optimistic about the growth of investment companies in Nepal.