Policies Towards Foreign Direct Investment

Bangladesh actively seeks foreign investment. Sectors with active investments from overseas include agribusiness, garment and textiles, leather and leather goods, light manufacturing, electronics, light engineering, energy and power, information and communications technology (ICT), plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure. It offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.

Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Four sectors, however, are reserved for government investment:

• Arms and ammunition and other defense equipment and machinery.
• Forest plantation and mechanized extraction within the bounds of reserved forests.
• Production of nuclear energy.
• Security printing (items such as currency, visa foils, and tax stamps).

The Bangladesh Investment Development Authority (BIDA) is the principal authority tasked with supervising and promoting private investment. The BIDA Act of 2016 approved the merger of the now-disbanded Board of Investment and the Privatization Committee. BIDA is directly supervised by the Prime Minister’s Office and the Executive Chairman of BIDA holds a rank equivalent to Senior Secretary, the highest rank within the civil service. BIDA performs the following functions:

• Provides pre-investment counseling services.
• Registers and approves private industrial projects.
• Issues approval of branch/liaison/representative offices.
• Issues work permits for foreign nationals.
• Issues approval of royalty remittances, technical know-how, and technical assistance fees.
• Facilitates import of capital machinery and raw materials.
• Issues approvals of foreign loans and supplier credits.

BIDA’s website has aggregated information regarding Bangladesh investment policies, incentives, and ease of doing business indicators:  http://bida.gov.bd/  

In addition to BIDA, there are three other Investment Promotion Agencies (IPAs) responsible for promoting investments in their respective jurisdictions.

• Bangladesh Export Processing Zone Authority (BEPZA) promotes investments in Export Processing Zones (EPZs). The first EPZ was established in the 1980s and there are currently eight EPZs in the country. Website: https://www.bepza.gov.bd/
• Bangladesh Economic Zones Authority (BEZA) plans to establish approximately 100 Economic Zones (EZs) throughout the country over the next several years. Site selections for 97 EZs have been completed as of February 2021, of which 11 private EZs are already licensed and operational while development of several other public and private sector EZs are underway. While EPZs accommodate exporting companies only, EZs are open for both export- and domestic-oriented companies. Website: https://www.beza.gov.bd/
• Bangladesh Hi-Tech Park Authority (BHTPA) is responsible for attracting and facilitating investments in the high-tech parks Bangladesh is establishing across the country. Website: http://bhtpa.gov.bd/

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Bangladesh allows private investment in power generation and natural gas exploration, but efforts to allow full foreign participation in petroleum marketing and gas distribution have stalled. Regulations in the area of telecommunication infrastructure currently include provisions for 60 percent foreign ownership (70 percent for tower sharing). In addition to the four sectors reserved for government investment, there are 17 controlled sectors that require prior clearance/ permission from the respective line ministries/authorities. These are:

• Fishing in the deep sea.
• Bank/financial institutions in the private sector.
• Insurance companies in the private sector.
• Generation, supply, and distribution of power in the private sector.
• Exploration, extraction, and supply of natural gas/oil.
• Exploration, extraction, and supply of coal.
• Exploration, extraction, and supply of other mineral resources.
• Large-scale infrastructure projects (e.g., elevated expressway, monorail, economic zone, inland container depot/container freight station).
• Crude oil refinery (recycling/refining of lube oil used as fuel).
• Medium and large industries using natural gas/condensate and other minerals as raw material.
• Telecommunications service (mobile/cellular and land phone).
• Satellite channels.
• Cargo/passenger aviation.
• Sea-bound ship transport.
• Seaports/deep seaports.
• VOIP/IP telephone.
• Industries using heavy minerals accumulated from sea beaches.

While discrimination against foreign investors is not widespread, the government frequently promotes local industries, and some discriminatory policies and regulations exist. For example, the government closely controls approvals for imported medicines that compete with domestically manufactured pharmaceutical products and it has required majority local ownership of new shipping and insurance companies, albeit with exemptions for existing foreign-owned firms. In practical terms, foreign investors frequently find it necessary to have a local partner even though this requirement may not be statutorily defined. In certain strategic sectors, the GOB has placed unofficial barriers on foreign companies’ ability to divest from the country.

BIDA is responsible for screening, reviewing, and approving investments in Bangladesh, except for investments in EPZs, EZs, and High-Tech Parks, which are supervised by BEPZA, BEZA, and BHTPA respectively. Both foreign and domestic companies are required to obtain approval from relevant ministries and agencies with regulatory oversight. In certain sectors (e.g., healthcare), foreign companies may be required to obtain a No Objection Certificate (NOC) from the relevant ministry or agency stating the specific investment will not hinder local manufacturers and is in line with the guidelines of the ministry concerned. Since Bangladesh actively seeks foreign investments, instances where one of the Investment Promotion Agencies (IPAs) declines investment proposals are rare.

Other Investment Policy Reviews

In 2013 Bangladesh completed an investment policy review (IPR) with the United Nations Conference on Trade and Development (UNCTAD):  https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=756  

A Trade Policy Review was done by the World Trade Organization in April 2019 and can be found at:  https://www.wto.org/english/tratop_e/tpr_e/tp485_e.htm  

Business Facilitation

In February 2018, the Bangladesh Parliament passed the “One Stop Service Bill 2018,” which aims to streamline business and investment registration processes. The four IPAs — BIDA, BEPZA, BEZA, and BHTPA — are mandated to provide one-stop services (OSS) to local and foreign investors under their respective jurisdictions. Expected streamlined services include company registration, taxpayer’s identification number (TIN) and value added tax (VAT) registration, work permit issuance, power and utilities connections, capital and profit repatriation, and environment clearance. In 2019 Bangladesh made reforms in three key areas: starting a business, getting electricity, and getting credit. These and other regulatory changes led to an improvement by eight ranks on the World Bank’s Doing Business score, moving up from 176 to 168 of the 190 countries rated. BIDA offers more than 40 services under its OSS as of March 2021 and has a plan to expand to 154 services covering 35 agencies. The GOB is also planning to integrate the services of all four investment promotion agencies under a single online platform. Progress on realizing a comprehensive OSS for businesses has been slowed by bureaucratic delays and a lack of interagency coordination.

Companies can register their businesses at the Office of the Registrar of Joint Stock Companies and Firms (RJSC):  www.roc.gov.bd  . However, the online business registration process, while improving, can at times be unclear and inconsistent. Additionally, BIDA facilitates company registration services as part of its OSS, which is available at:  https://bidaquickserv.org/ . BIDA also facilitates other services including office set-up approval, work permits for foreign employees, environmental clearance, outward remittance approval, and tax registration with National Board of Revenue. Other agencies with which a company must typically register are:

City Corporation – Trade License

National Board of Revenue – Tax & VAT Registration

Chief Inspector of Shops and Establishments – Employment of Workers Notification

It takes approximately 20 days to start a business in the country according to the World Bank. The company registration process at the RJSC generally takes one or two days to complete. The process for trade licensing, tax registration, and VAT registration requires seven days, one day, and one week respectively, as of February 2021.

Outward Investment

Outward foreign direct investment is generally restricted through the Foreign Exchange Regulation Act of 1947. As a result, the Bangladesh Bank plays a key role in limiting outbound investment. In September 2015, the government amended the Foreign Exchange Regulation Act of 1947 by adding a “conditional provision” that permits outbound investment for export-related enterprises. Private sector contacts note the few international investments approved by the Bangladesh Bank have been limited to large exporting companies with international experience.

Bangladesh has signed bilateral investment treaties with 29 countries, including Austria, the Belgium-Luxembourg Economic Union, Cambodia, China, Denmark, France, Germany, India, Indonesia, Iran, Italy, Japan, Democratic People’s Republic of Korea, Republic of Korea, Malaysia, the Netherlands, Pakistan, the Philippines, Poland, Romania, Singapore, Switzerland, Thailand, Turkey, the United Arab Emirates, the United Kingdom, the United States, Uzbekistan, and Vietnam.

The U.S.-Bangladesh Bilateral Investment Treaty was agreed to in 1986 and entered into force in 1989. The Foreign Investment Act includes a guarantee of national treatment, granting U.S. companies the equivalent of domestic status.

Bangladesh has successfully negotiated several regional trade and economic agreements, including the South Asian Free Trade Area (SAFTA), the Asia-Pacific Trade Agreement (APTA), and the Bay of Bengal Initiative for Multi-Sectoral, Technical and Economic Cooperation (BIMSTEC). Bangladesh signed its first bilateral Preferential Trade Agreement (PTA) with Bhutan in December 2020 while it is in discussions with several countries for PTAs and Free Trade Agreements (FTAs). A joint study on the prospects of a bilateral Comprehensive Economic Partnership Agreement (CEPA) between Bangladesh and India is underway. In addition, PTA negotiations with Nepal and Indonesia are in advanced stages.

Bangladesh has signed Avoidance of Double Taxation Treaties (DTT) with 36 countries: Bahrain, Belarus, Belgium, Burma, Canada, Czech Republic, China, Denmark, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Kuwait, Malaysia, Mauritius, Nepal, the Netherlands, Norway, Pakistan, the Philippines, Poland, Romania, Saudi Arabia, Singapore, Sri Lanka, Sweden, Switzerland, Thailand, Turkey, the United Arab Emirates, the United Kingdom, the United States, and Vietnam.

Bangladesh met all three criteria required to graduate from the United Nations’ (UN) list of Least Developed Countries (LDC) for the first time at the triennial review of the United Nations Committee for Development Policy (CDP) in March 2018. In February 2021, the CDP confirmed Bangladesh’s eligibility to graduate from LDC status. The country is scheduled to officially graduate from LDC status in 2026 instead of 2024 as earlier planned to allow it two additional years for smooth transition in view of the adverse impact of COVID-19 on the economy. Bangladesh will lose duty-free quota-free (DFQF) access to several major export markets after the graduation. However, the European Union’s Generalized System of Preferences Plus (GSP+) program may allow Bangladesh DFQF access for an additional three-year transition period following the country’s effective date of graduation. To be eligible for the EU’s GSP+ program, Bangladesh must ratify additional international conventions on human and labor rights, the environment, and governance, and show it has plans to amend and enforce its laws accordingly.

Transparency of the Regulatory System

Since 1989, the government has gradually moved to decrease regulatory obstruction of private business. Various chambers of commerce have called for privatization and for a greater voice for the private sector in government decisions, but at the same time many support protectionism and subsidies for their own industries. The result is policy and regulations which are often unclear, inconsistent, or little publicized. Registration and regulatory processes are frequently alleged by businesses to be used as rent-seeking opportunities. The major rule-making and regulatory authority exists at the national level under each Ministry with many final decisions being made at the top-most levels, including the Prime Minister’s Office (PMO). The PMO is actively engaged in directing policies, as well as foreign investment in government-controlled projects.

Bangladesh has made incremental progress in using information technology both to improve the transparency and efficiency of some government services and develop independent agencies to regulate the energy and telecommunication sectors. Some investors cited government laws, regulations, and lack of implementation as impediments to investment. The government has historically limited opportunities for the private sector to comment on proposed regulations. In 2009, Bangladesh adopted the Right to Information Act providing for multilevel stakeholder consultations through workshops or media outreach. Although the consultation process exists, it is still weak and in need of further improvement.

Ministries and regulatory agencies do not generally publish or solicit comments on draft proposed legislation or regulations. However, several government organizations, including the Bangladesh Bank (the central bank), Bangladesh Securities and Exchange Commission, BIDA, the Ministry of Commerce, and the Bangladesh Telecommunications Regulatory Commission have occasionally posted draft legislation and regulations online and solicited feedback from the business community. In some instances, parliamentary committees have also reached out to relevant stakeholders for input on draft legislation. The media continues to be the main information source for the public on many draft proposals. There is also no legal obligation to publish proposed regulations, consider alternatives to proposed regulation, or solicit comments from the general public.

The government printing office, The Bangladesh Government Press ( http://www.dpp.gov.bd/bgpress/ ), publishes the “Bangladesh Gazette” every Thursday and Extraordinary Gazettes as and when needed. The Gazette provides official notice of government actions, including issuance of government rules and regulations and the transfer and promotion of government employees. Laws can also be accessed at  http://bdlaws.minlaw.gov.bd/ .

Bangladesh passed the Financial Reporting Act of 2015 which created the Financial Reporting Council in 2016 aimed at establishing transparency and accountability in the accounting and auditing system. The country follows Bangladesh Accounting Standards and Bangladesh Financial Reporting Standards, which are largely derived from International Accounting Standards and International Financial Reporting Standards. However, the quality of reporting varies widely. Internationally known firms have begun establishing local offices in Bangladesh and their presence is positively influencing the accounting norms in the country. Some firms are capable of providing financial reports audited to international standards while others maintain unreliable (or multiple) sets of accounting records. Regulatory agencies do not conduct impact assessments for proposed regulations; consequently, regulations are often not reviewed on the basis of data-driven assessments. Not all national budget documents are prepared according to internationally accepted standards.

International Regulatory Considerations

The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) aims to integrate regional regulatory systems among Bangladesh, India, Burma, Sri Lanka, Thailand, Nepal, and Bhutan. However, efforts to advance regional cooperation measures have stalled in recent years and regulatory systems remain uncoordinated.

Local laws are based on the English common law system but most fall short of international standards. The country’s regulatory system remains weak and many of the laws and regulations are not enforced and standards are not maintained.

Bangladesh has been a member of the World Trade Organization (WTO) since 1995. WTO requires all signatories to the Agreement on Technical Barriers to Trade (TBT) to establish a National Inquiry Point and Notification Authority to gather and efficiently distribute trade-related regulatory, standards, and conformity assessment information to the WTO Member community. The Bangladesh Standards and Testing Institute (BSTI) has been working as the National Enquiry Point for the WTO-TBT Agreement since 2002. There is an internal committee on WTO affairs in BSTI and it participates in notifying WTO activities through the Ministry of Commerce and the Ministry of Industries.

General Contact for WTO-TBT National Enquiry Point:
Email: bsti_std@bangla.net; bsti_ad@bangla.net
Website: http://www.bsti.gov.bd/ 

Focal Point for TBT:

Mr. Md. Golam Baki,
Deputy Director (Certification Marks), BSTI;
Email: baki_cm@bsti.gov.bd,
Tel: +88-02-8870288,
Cell: +8801799828826, +8801712240702

Focal Point for other WTO related matters:

Mr. Md. Hafizur Rahman,
Director General, WTO Cell, Ministry of Commerce
Email: dg.wto@mincom.gov.bd,
Tel: +880-2-9545383,
Cell: +88 0171 1861056

Mr. Mohammad Mahbubur Rahman Patwary,
Director-1, WTO Cell, Ministry of Commerce
Email: director1.wto@mincom.gov.bd,
Tel: +880-2-9540580,
Cell: +88 0171 2148758

Legal System and Judicial Independence

Bangladesh is a common law-based jurisdiction. Many of the basic laws, such as the penal code, civil and criminal procedural codes, contract law, and company law are influenced by English common law. However, family laws, such as laws relating to marriage, dissolution of marriage, and inheritance are based on religious scripts and therefore differ among religious communities. The Bangladeshi legal system is based on a written constitution and the laws often take statutory forms that are enacted by the legislature and interpreted by the higher courts. Ordinarily, executive authorities and statutory corporations cannot make any law, but can make by-laws to the extent authorized by the legislature. Such subordinate legislation is known as rules or regulations and is also enforceable by the courts. However, as a common law system, the statutes are short and set out basic rights and responsibilities but are elaborated by the courts in the application and interpretation of those laws. The Bangladeshi judiciary acts through: (1) The Superior Judiciary, having appellate, revision, and original jurisdiction; and (2) The Sub-Ordinate Judiciary, having original jurisdiction.

Since 1971, Bangladesh has updated its legal system concerning company, banking, bankruptcy, and money loan court laws, and other commercial laws. An important impediment to investment in Bangladesh is its weak and slow legal system in which the enforceability of contracts is uncertain. The judicial system does not provide for interest to be charged in tort judgments, which means procedural delays carry no penalties. Bangladesh does not have a separate court or court division dedicated solely to commercial cases. The Joint District Judge court (a civil court) is responsible for enforcing contracts.

Some notable commercial laws include:

• The Contract Act, 1872 (Act No. IX of 1930).
• The Sale of Goods Act, 1930 (Act No. III of 1930).
• The Partnership Act, 1932 (Act No. IX of 1932).
• The Negotiable Instruments Act, 1881 (Act No. XXVI of 1881).
• The Bankruptcy Act, 1997 (Act No. X of 1997).
• The Arbitration Act, 2001 (Act No. I of 2001).

The judicial system of Bangladesh has never been completely independent from interference by the executive branch of the government. In a significant milestone, the government in 2007 separated the country’s judiciary from the executive but the executive retains strong influence over the judiciary through control of judicial appointments. Other pillars of the justice system, including the police, courts, and legal profession, are also closely aligned with the executive branch. In lower courts, corruption is widely perceived as a serious problem. Regulations or enforcement actions are appealable under the Appellate Division of the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign investment include: the Foreign Private Investment (Promotion and Protection) Act of 1980, the Bangladesh Export Processing Zones Authority Act of 1980, the Companies Act of 1994, the Telecommunications Act of 2001, and the Bangladesh Economic Zones Act of 2010.

Bangladesh industrial policy offers incentives for “green” (environmental) high-tech or “transformative” industries. It allows foreigners who invest $1 million or transfer $2 million to a recognized financial institution to apply for Bangladeshi citizenship. The GOB will provide financial and policy support for high-priority industries (those creating large-scale employment and earning substantial export revenue) and creative industries – architecture, arts and antiques, fashion design, film and video, interactive laser software, software, and computer and media programming. Specific importance is given to agriculture and food processing, RMG, ICT and software, pharmaceuticals, leather and leather products, and jute and jute goods.

In addition, Petrobangla, the state-owned oil and gas company, has modified its production sharing agreement contract for offshore gas exploration to include an option to export gas. In 2019, Parliament approved the Bangladesh Flag Vessels (Protection) Act 2019 with a provision to ensure Bangladeshi flagged vessels carry at least 50 percent of foreign cargo, up from 40 percent. In 2020, the Ministry of Commerce amended the digital commerce policy to allow fully foreign-owned e-commerce companies in Bangladesh and remove a previous joint venture requirement.

The One Stop Service (OSS) Act of 2018 mandated the four IPAs to provide OSS to local and foreign investors in their respective jurisdictions. The move aims to facilitate business services on behalf of multiple government agencies to improve ease of doing business. In 2020, BIDA issued time-bound rules to implement the Act of 2018. Although the IPAs have started to offer a few services under the OSS, corruption and excessive bureaucracy have held back the complete and effective roll out of the OSS. BIDA has a “one-stop” website that provides information on relevant laws, rules, procedures, and reporting requirements for investors at:  http://www.bida.gov.bd/ .

Aside from information on relevant business laws and licenses, the website includes information on Bangladesh’s investment climate, opportunities for businesses, potential sectors, and how to do business in Bangladesh. The website also has an eService Portal for Investors which provides services such as visa recommendations for foreign investors, approval/extension of work permits for expatriates, approval of foreign borrowing, and approval/renewal of branch/liaison and representative offices.

Competition and Anti-Trust Laws

Bangladesh formed an independent agency in 2011 called the “Bangladesh Competition Commission (BCC)” under the Ministry of Commerce. Parliament then passed the Competition Act in 2012. However, the BCC has not received sufficient resources to operate effectively.

In 2018, the Bangladesh Telecommunication Regulatory Commission (BTRC) finalized Significant Market Power (SMP) regulations to promote competition in the industry. In 2019, BTRC declared the country’s largest telecom operator, Grameenphone (GP), the first SMP based on its revenue share of more than 50 percent and customer shares of about 47 percent. Since the declaration, the BTRC has attempted to impose restrictions on GP’s operations, which GP has challenged in the judicial system.

Expropriation and Compensation

Since the Foreign Investment Act of 1980 banned nationalization or expropriation without adequate compensation, Bangladesh has not nationalized or expropriated property from foreign investors. In the years immediately following independence in 1971, widespread nationalization resulted in government ownership of more than 90 percent of fixed assets in the modern manufacturing sector, including the textile, jute and sugar industries and all banking and insurance interests, except those in foreign (but non-Pakistani) hands. However, the government has taken steps to privatize many of these industries since the late 1970s and the private sector has developed into a main driver of the country’s sustained economic growth.

Dispute Settlement

ICSID Convention and New York Convention

Bangladesh is a signatory to the International Convention for the Settlement of Disputes (ICSID) and acceded in May 1992 to the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards. Alternative dispute resolutions are possible under the Bangladesh Arbitration Act of 2001. The current legislation allows for enforcement of arbitral awards.

Investor-State Dispute Settlement

Bangladeshi law allows contracts to refer investor-state dispute settlement to third country fora for resolution. The U.S.-Bangladesh Bilateral Investment Treaty also stipulates that parties may, upon the initiative of either and as a part of their consultations and negotiations, agree to rely upon non-binding, third-party procedures, such as the fact-finding facility available under the rules of the “Additional Facility” of the International Centre for the Settlement of Investment Disputes. If the dispute cannot be resolved through consultation and negotiation, the dispute shall be submitted for settlement in accordance with the applicable dispute-settlement procedures upon which the parties have previously agreed. Bangladesh is also a party to the South Asia Association for Regional Cooperation (SAARC) Agreement for the Establishment of an Arbitration Council, signed in 2005, which aims to establish a permanent center for alternative dispute resolution in one of the SAARC member countries.

International Commercial Arbitration and Foreign Courts

The Bangladesh Arbitration Act of 2001 and amendments in 2004 reformed alternative dispute resolution procedures. The Act consolidated the law relating to both domestic and international commercial arbitration. It thus creates a single and unified legal regime for arbitration. Although the new Act is principally based on the UNCITRAL Model Law, it is a patchwork as some unique provisions are derived from the Indian Arbitration and Conciliation Act 1996 and some from the English Arbitration Act 1996.

In practice, arbitration results are unevenly enforced and the GOB has challenged ICSID rulings, especially those that involve rulings against the government. The timeframe for dispute resolution is unpredictable and has no set limit. It can be done as quickly as a few months, but often takes years depending on the type of dispute. Anecdotal information indicates average resolution time can be as high as 16 years. Local courts may be biased against foreign investors in resolving disputes.

Bangladesh is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and recognizes the enforcement of international arbitration awards. Domestic arbitration is under the authority of the district court bench and foreign arbitration is under the authority of the relevant high court bench.

The Bangladeshi judicial system has little ability to enforce its own awards. Senior members of the government have been effective in using their offices to resolve investment disputes on several occasions, but the government’s ability to resolve investment disputes at a lower level is mixed. Bangladesh does not publish the numbers of investment disputes involving U.S. or foreign investors. Anecdotal evidence indicates investment disputes occur with limited frequency, and the involved parties often resolve the disputes privately rather than seeking government intervention.

Implementing Alternative Dispute Resolution (ADR) procedures in Bangladesh is impeded by a lack of funding for courts to provide ADR services, limited cooperation by lawyers, and instances of ADR participants acting in bad faith. Slow adoption of ADR mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes in Bangladesh.

As in many countries, Bangladesh has adopted a “conflict of law” approach to determining whether a judgment from a foreign legal jurisdiction is enforceable in Bangladesh. This single criterion allows Bangladeshi courts broad discretion in choosing whether to enforce foreign judgments with significant effects on corporate and property disputes. Most enterprises in Bangladesh, and especially state-owned enterprises (SOEs), whose leadership is nominated by the ruling government party, maintain strong ties with the government. Thus, domestic courts strongly tend to favor SOEs and local companies in investment disputes.

Investors are also increasingly turning to the Bangladesh International Arbitration Center (BIAC) for dispute resolution. BIAC is an independent arbitration center established by prominent local business leaders in 2011 to improve commercial dispute resolution in Bangladesh to stimulate economic growth. The BIAC Board is headed by the President of the International Chamber of Commerce – Bangladesh and includes the presidents of other prominent chambers such as the Dhaka Chamber of Commerce and Industry and the Metropolitan Chamber of Commerce and Industry, among others. The Center operates under the Bangladesh Arbitration Act of 2001. According to BIAC, fast track cases are resolved in approximately six months while typical cases are resolved in one year. Major Bangladeshi trade and business associations such as the American Chamber of Commerce in Bangladesh can sometimes help resolve transaction disputes.

Bankruptcy Regulations

Many laws affecting investment in Bangladesh are outdated. Bankruptcy laws, which apply mainly to individual insolvency, are sometimes disregarded in business cases because of the numerous falsified assets and uncollectible cross-indebtedness supporting insolvent banks and companies. A Bankruptcy Act was passed by Parliament in 1997 but has been ineffective in addressing these issues. Some bankruptcy cases fall under the Money Loan Court Act which has more stringent and timely procedures.

Investment Incentives

Current regulations permit a tax holiday for designated “thrust” (strategic) sectors and infrastructure projects established between July 1, 2019 and June 30, 2024. The thrust sectors enjoy tax exemptions graduated from 90 percent to 20 percent over a period of five to ten years depending on the zone where the business is established. Industries set up in Export Processing Zones (EPZs) and Special Economic Zones (SEZs) are also eligible for tax holidays. Details of fiscal and non-fiscal incentives are available on the following websites:

BIDA: http://bida.gov.bd/?page_id=146 

BEPZA: https://www.bepza.gov.bd/investor_details/incentives-facilities 

BEZA: https://www.beza.gov.bd/investing-in-zones/incentive-package/ 

Thrust sectors eligible for tax exemptions include: certain pharmaceuticals, automobile manufacturing, contraceptives, rubber latex, chemicals or dyes, certain electronics, bicycles, fertilizer, biotechnology, commercial boilers, certain brickmaking technologies, compressors, computer hardware, home appliances, insecticides, pesticides, petro-chemicals, fruit and vegetable processing, textile machinery, tissue grafting, tire manufacturing industries, agricultural machineries, furniture, leather and leather goods, cell phones, plastic recycling, and toy manufacturing.

Eligible physical infrastructure projects are allowed tax exemptions graduated from 90 percent to 20 percent over a period of 10 years. Physical infrastructure projects eligible for exemptions include deep seaports, elevated expressways, road overpasses, toll roads and bridges, EPZs, gas pipelines, information technology parks, industrial waste and water treatment facilities, liquefied natural gas (LNG) terminals, electricity transmission, rapid transit projects, renewable energy projects, and ports.

Independent non-coal fired power plants (IPPs) commencing production after January 1, 2015 are granted a 100 percent tax exemption for five years, a 50 percent exemption for years six to eight, and a 25 percent exemption for years nine to 10. For new coal-fired IPPs commencing production before June 30, 2023 (provided operators contracted with the government before June 30, 2020), the tax exemption rate is 100 percent for the first 15 years of operations. For power projects, import duties are waived for imports of capital machinery and spare parts.

The valued-added tax (VAT) rate on exports is zero. For companies exporting only, duties are waived on imports of capital machinery and spare parts. For companies primarily exporting (80 percent of production and above), an import duty rate of 1 percent is charged for imports of capital machinery and spare parts identified and listed in notifications to relevant regulators. Import duties are also waived for EPZ industries and other export-oriented industries for imports of raw materials consumed in production.

The GOB provides special incentives to encourage non-resident Bangladeshis to invest in the country. Incentives include the ability to buy newly-issued shares and debentures in Bangladeshi companies. Further, non-resident Bangladeshis can maintain foreign currency deposits in Non-resident Foreign Currency Deposit (NFCD) accounts.

In the past several years, U.S. companies have experienced difficulties securing the investment incentives initially offered by Bangladesh. Several companies have reported instances of where infrastructure guarantees (ranging from electricity to gas connections) are not fully delivered or tax exemptions are delayed, either temporarily or indefinitely. These challenges are not specific to U.S. or foreign companies and reflect broader challenges in the business environment.

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the Bangladesh Export Processing Zones Authority Act of 1980, the government established the first EPZ in Chattogram in 1983. Additional EPZs now operate in Dhaka (Savar), Mongla, Ishwardi, Cumilla, Uttara, Karnaphuli (Chattogram), and Adamjee (Dhaka). Korean investors are also operating a separate and private EPZ in Chattogram.

Joint ventures, wholly foreign-owned investments, and wholly Bangladeshi-owned companies are all permitted to operate and enjoy equal treatment in the EPZs.

In 2010, Bangladesh enacted the Special Economic Zone Act allowing for the creation of privately owned SEZs to produce for export and domestic markets. The SEZs provide special fiscal and non-fiscal incentives to domestic and foreign investors in designated underdeveloped areas throughout Bangladesh.

Performance and Data Localization Requirements

Performance Requirements

BIDA has set the following restrictions on employing foreign nationals and obtaining work permits:

• Nationals of countries recognized by Bangladesh are eligible for employment consideration.
• Expatriate personnel will only be considered for employment in enterprises duly registered with the appropriate regulatory authority.
• Employment of foreign nationals is generally limited to positions for which qualified local workers are unavailable.
• Persons below 18 years of age are not eligible for employment.
• The Board of Directors of the employing company must issue a resolution for each offer or extension of employment.
• The percentage of foreign employees should not exceed 5 percent in industrial sectors and 20% in commercial sectors, including among senior management positions.
• Initial employment of any foreign national is for a term of two years, which may be extended based on merit.
• The Ministry of Home Affairs will issue necessary security clearance certificates.

In response to the high number of expatriate workers in the ready-made garment industry, BIDA has issued informal guidance encouraging industrial units to refrain from hiring additional foreign experts and workers. Overall, the government looks favorably on investments employing significant numbers of local workers and/or providing training and transfers of technical skills.

The GOB does not formally mandate that investors use domestic content in goods or technology. However, companies bidding on government procurement tenders are often informally encouraged to have a local partner and to produce or assemble a percentage of their products in country.

According to a legal overview by the Telenor Group, for reasons of national security or in times of emergency, several regulations and amendments, including the Bangladesh Telecommunication Regulatory Act, 2001 (the “BTRA”), Information and Communication Technology Act 2006 (the “ICT Act”), and the Telegraph Act 1885 (the “1885 Act”), grant law enforcement and intelligence agencies legal authority to lawfully seek disclosure of communications data and request censorship of communications. A Digital Security Act of 2016 (the “Digital Security Act”) was adopted by Parliament in 2018.

On the grounds of national security and maintaining public order, the government at times authorizes relevant authorities (intelligence agencies, national security agencies, investigation agencies, or any officer of any law enforcement agency) to suspend or prohibit the transmission of any data or any voice call and record or collect user information relating to any subscriber to a telecommunications service.

Under section 30 of the ICT Act, the government, through the ICT Controller who enforces the act, may access any computer system, any apparatus, data, or any other material connected with a computer system, for the purpose of searching for and obtaining information or data. The ICT Controller may, by order, direct any person in charge of, or otherwise concerned with the operation of a computer system, data apparatus, or material, to provide reasonable technical and other assistance as may be considered necessary. Under section 46 of the ICT Act, the ICT Controller can also direct any government agency to intercept any information transmitted through any computer resource and may also order any subscriber or any person in charge of computer resources to provide all necessary assistance to decrypt relevant information. The ICT Act also established a Cyber Tribunal to adjudicate cases. The BTRC enforces the BTRA, and the Ministry of Home Affairs grants approval for use of powers given under the Act. There is no direct reference in the BTRA to the storage of metadata. Under the broad powers granted to the BTRA, however, the government, on the grounds of national security and public order, may require telecommunications operators to keep records relating to the communications of a specific user. Telecommunications operators are also required to provide any metadata as evidence if ordered to do so by any civil court.

The Digital Security Act of 2018 created a Digital Security Agency empowered to monitor and supervise digital content. Also, under the Digital Security Act, for reasons of national security or maintenance of public order, the Director General (DG) of the DSA is authorized to block communications and to require that service providers facilitate the interception, monitoring, and decryption of a computer or other data source.

The Bangladesh Road Transport Authority’s (BRTA) Ride-sharing Service Guideline 2017 came into force on March 8, 2018. The regulations included requirements that ride-sharing companies keep data servers within Bangladesh.

Real Property

Although land, whether for purchase or lease, is often critical for investment and as security against loans, antiquated real property laws and poor record-keeping systems can complicate land and property transactions. Instruments take effect from the date of execution, not the date of registration, so a bona fide purchaser can often be uncertain of title. Land registration records have been historically prone to competing claims. Land disputes are common, and both U.S. companies and citizens have filed complaints about fraudulent land sales. For example, sellers fraudulently claiming ownership have transferred land to good faith purchasers while the actual owners were living outside of Bangladesh. In other instances, U.S.-Bangladeshi dual citizens have purchased land from legitimate owners only to have third parties make fraudulent claims of title to extort settlement compensation. A 2015 study by leading Bangladeshi think tank Policy Research Institute (PRI) revealed one in seven households in the country faced land disputes. Bangladesh ranks 184 among 190 countries for ease of registering property in the World Bank’s Doing Business 2020 Report.

While property owners can obtain mortgages, parties generally avoid registering mortgages, liens, and encumbrances due to the high cost of stamp duties (i.e., transaction taxes based on property value) and other charges. There are also concerns that non-registered mortgages are often unenforceable.

Article 42 of the Bangladesh Constitution guarantees a right to property for all citizens, but property rights are often not protected due to a weak judicial system. The Transfer of Property Act of 1882  and the Registration Act of 1908  are the two main laws regulating transfer of property in Bangladesh but these laws have no specific provisions covering foreign and/or non-resident investors. Currently, foreigners and non-residents can incorporate a company with the Registrar of Joint Stock Companies and Firms. The company would be considered a local entity and would be able to buy land in its name.

Intellectual Property Rights

The government has not invested heavily in intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and a significant portion of business software is pirated. A number of U.S. firms, including film studios, manufacturers of consumer goods, and software firms, have reported violations of their IPR. Investors note police are willing to investigate counterfeit goods producers when informed but are unlikely to initiate independent investigations.

In February 2021, the Cabinet gave its final approval to draft Bangladesh Patents Bill 2021 and in-principle approval to draft Bangladesh Industry-Designs Bill 2021 to replace the Patents and Designs Act 1911. The bills aim to make necessary updates to existing regulations and may improve iIPR in Bangladesh. However, the potential impact of the bills remains uncertain as they have yet to be made public for stakeholder scrutiny. The bills require approval by the Parliament before going into effect. Public awareness of IPR is growing, in part through the efforts of the Intellectual Property Rights Association of Bangladesh:  http://www.ipab.org.bd/ . Bangladesh is not currently listed in the U.S. Trade Representative’s Special 301 or Notorious Markets reports. Bangladesh is a member of the World Intellectual Property Organization (WIPO) and acceded to the Paris Convention on Intellectual Property in 1991.

Bangladesh has slowly made progress toward bringing its legislative framework into compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The government enacted a Copyright Law in 2000 (amended in 2005), a Trademarks Act in 2009, and a Geographical Indication of Goods (Registration and Protection) Act in 2013, in addition to the recent action on bills replacing the Patents and Designs Act.

A number of government agencies are empowered to take action against counterfeiting, including the National Board of Revenue (NBR), Customs, Mobile Courts, the Rapid Action Battalion (RAB), and the Bangladesh Police. The Department of National Consumer Rights Protection (DNCRP) is charged with tracking and reporting on counterfeit goods and the NBR/Customs tracks counterfeit goods seizures at ports of entry. Reports are not publicly available.

Resources for Intellectual Property Rights Holders:

John Cabeca
Intellectual Property Counselor for South Asia
U.S. Patent and Trademark Office
Foreign Commercial Service email: john.cabeca@trade.gov
email: john.cabeca@trade.gov website: https://www.uspto.gov/ip-policy/ip-attache-program
website: https://www.uspto.gov/ip-policy/ip-attache-program tel: +91-11-2347-2000
tel: +91-11-2347-2000

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Capital markets in Bangladesh are still developing, and the financial sector remains highly dependent on bank lending. Current regulatory infrastructure inhibits the development of a tradeable bond market.

Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), both of which are regulated by the Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance. As of February 2021, the DSE market capitalization stood at $54.8 billion, rising 35.8 percent year-over-year bolstered by increased liquidity and some sizeable initial public offerings.

Although the Bangladeshi government has a positive attitude toward foreign portfolio investors, participation in the exchanges remains low due to what is still limited liquidity for shares and the lack of publicly available and reliable company information. The DSE has attracted some foreign portfolio investors to the country’s capital market. However, the volume of foreign investment in Bangladesh remains a small fraction of total market capitalization. As a result, foreign portfolio investment has had limited influence on market trends and Bangladesh’s capital markets have been largely insulated from the volatility of international financial markets. Bangladeshi markets continue to rely primarily on domestic investors.

In 2019, BSEC undertook a number of initiatives to launch derivatives products, allow short selling, and invigorate the bond market. To this end, BSEC introduced three rules: Exchange Traded Derivatives Rules 2019, Short-Sale Rules 2019, and Investment Sukuk Rules 2019. Other recent, notable BSEC initiatives include forming a central clearing and settlement company – the Central Counterparty Bangladesh Limited (CCBL) – and promoting private equity and venture capital firms under the 2015 Alternative Investment Rules. In 2013, BSEC became a full signatory of the International Organization of Securities Commissions (IOSCO) Memorandum of Understanding.

BSEC has taken steps to improve regulatory oversight, including installing a modern surveillance system, the “Instant Market Watch,” providing real time connectivity with exchanges and depository institutions. As a result, the market abuse detection capabilities of BSEC have improved significantly. A mandatory Corporate Governance Code for listed companies was introduced in 2012 but the overall quality of corporate governance remains substandard. Demutualization of both the DSE and CSE was completed in 2013 to separate ownership of the exchanges from trading rights. A majority of the members of the Demutualization Board, including the Chairman, are independent directors. Apart from this, a separate tribunal has been established to resolve capital market-related criminal cases expeditiously. However, both domestic and foreign investor confidence remains low.

The Demutualization Act 2013 also directed DSE to pursue a strategic investor who would acquire a 25 percent stake in the bourse. Through a bidding process DSE selected a consortium of the Shenzhen and Shanghai stock exchanges in China as its strategic partner, with the consortium buying the 25 percent share of DSE for taka 9.47 billion ($112.7 million).

According to the International Monetary Fund (IMF), Bangladesh is an Article VIII member and maintains restrictions on the unapproved exchange, conversion, and/or transfer of proceeds of international transactions into non-resident taka-denominated accounts. Since 2015, authorities have relaxed restrictions by allowing some debits of balances in such accounts for outward remittances, but there is currently no established timetable for the complete removal of the restrictions.

Money and Banking System

The Bangladesh Bank (BB) acts as the central bank of Bangladesh. It was established on December 16, 1971 through the enactment of the Bangladesh Bank Order of1972. General supervision and strategic direction of the BB has been entrusted to a nine–member Board of Directors, which is headed by the BB Governor. A list of the bank’s departments and branches is on its website: https://www.bb.org.bd/aboutus/dept/depts.php .

According to the BB, four types of banks operate in the formal financial system: State Owned Commercial Banks (SOCBs), Specialized Banks, Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs). Some 61 “scheduled” banks in Bangladesh operate under the control and supervision of the central bank as per the Bangladesh Bank Order of 1972. The scheduled banks, include six SOCBs, three specialized government banks established for specific objectives such as agricultural or industrial development or expatriates’ welfare, 43 PCBs, and nine FCBs as of February 2021. The scheduled banks are licensed to operate under the Bank Company Act of 1991 (Amended 2013). There are also five non-scheduled banks in Bangladesh, including Nobel Prize recipient Grameen Bank, established for special and definite objectives and operating under legislation enacted to meet those objectives.

Currently, 34 non-bank financial institutions (FIs) are operating in Bangladesh. They are regulated under the Financial Institution Act, 1993 and controlled by the BB. Of these, two are fully government-owned, one is a subsidiary of a state-owned commercial bank, and the rest are private financial institutions. Major sources of funds for these financial institutions are term deposits (at least three months’ tenure), credit facilities from banks and other financial institutions, and call money, as well as bonds and securitization.

Unlike banks, FIs are prohibited from:

• Issuing checks, pay-orders, or demand drafts.
• Receiving demand deposits.
• Involvement in foreign exchange financing.

Microfinance institutions (MFIs) remain the dominant players in rural financial markets. According to the Bangladesh Microcredit Regulatory Authority, as of June 2019, there were 724 licensed micro-finance institutions operating a network of 18,977 branches with 32.3 million members. Additionally, Grameen Bank had nearly 9.3 million microfinance members at the end of 2019 of which 96.8 percent were women. A 2014 Institute of Microfinance survey study showed that approximately 40 percent of the adult population and 75 percent of households had access to financial services in Bangladesh.

The banking sector has had a mixed record of performance over the past several years. Industry experts have reported a rise in risky assets. Total domestic credit stood at 46.8 percent of gross domestic product at end of June 2020. The state-owned Sonali Bank is the largest bank in the country while Islami Bank Bangladesh and Standard Chartered Bangladesh are the largest local private and foreign banks respectively as of December 2020. The gross non-performing loan (NPL) ratio was 7.7 percent at the end of December 2020, down from 9.32 percent in December 2019. However, the decline in the NPLs was primarily caused by regulatory forbearance rather than actual reduction of stressed loans. Following the outbreak of COVID-19 in 2020, the central bank directed all banks not to classify any new loans as non-performing till December 2020. Industry contacts have predicted reported NPLs will demonstrate a sharp rise after the exemption expires unless the central bank grants additional forbearance in alternate forms. At 22.5 percent SCBs had the highest NPL ratio, followed by 15.9 percent of Specialized Banks, 5.9 percent of FCBs, and 5.6 percent of PCBs as of September 2020.

In 2017, the BB issued a circular warning citizens and financial institutions about the risks associated with cryptocurrencies. The circular noted that using cryptocurrencies may violate existing money laundering and terrorist financing regulations and cautioned users may incur financial losses. The BB issued similar warnings against cryptocurrencies in 2014.

Foreign investors may open temporary bank accounts called Non-Resident Taka Accounts (NRTA) in the proposed company name without prior approval from the BB in order to receive incoming capital remittances and encashment certificates. Once the proposed company is registered, it can open a new account to transfer capital from the NRTA account. Branch, representative, or liaison offices of foreign companies can open bank accounts to receive initial suspense payments from headquarters without opening NRTA accounts. In 2019, the BB relaxed regulations on the types of bank branches foreigners could use to open NRTAs, removing a previous requirement limiting use of NRTA’s solely to Authorized Dealers (ADs).

Foreign Exchange and Remittances

Foreign Exchange

Free repatriation of profits is allowed for registered companies and profits are generally fully convertible. However, companies report the procedures for repatriating foreign currency are lengthy and cumbersome. The Foreign Investment Act guarantees the right of repatriation for invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees for businesses. The central bank’s exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (in force since 1989) provide similar investment transfer guarantees. BIDA may need to approve repatriation of royalties and other fees.

Bangladesh maintains a de facto managed floating foreign exchange regime. Since 2013, Bangladesh has tried to manage its exchange rate vis-à-vis the U.S. dollar within a fairly narrow range. Until 2017, the Bangladesh currency – the taka – traded between 76 and 79 taka to the dollar. The taka has depreciated relative to the dollar since October 2017 reaching 84.95 taka per dollar as of March 2020, despite interventions from the Bangladesh Bank from time to time. The taka is approaching full convertibility for current account transactions, such as imports and travel, but not for financial and capital account transactions, such as investing, currency speculation, or e-commerce.

Remittance Policies

There are no set time limitations or waiting periods for remitting all types of investment returns. Remitting dividends, returns on investments, interest, and payments on private foreign debts do not usually require approval from the central bank and transfers are typically made within one to two weeks. Some central bank approval is required for repatriating lease payments, royalties and management fees, and this process can take between two and three weeks. If a company fails to submit all the proper documents for remitting, it may take up to 60 days. Foreign investors have reported difficulties transferring funds to overseas affiliates and making payments for certain technical fees without the government’s prior approval to do so. Additionally, some regulatory agencies have reportedly blocked the repatriation of profits due to sector-specific regulations. The U.S. Embassy also has received complaints from American citizens who were not able to transfer the proceeds of sales of their properties.

The central bank has recently made several small-scale reforms to ease the remittance process. In 2019, the BB simplified the profit repatriation process for foreign firms. Foreign companies and their branches, liaison, or representative offices no longer require prior approval from the central bank to remit funds to their parent offices outside Bangladesh. Banks, however, are required to submit applications for ex post facto approval within 30 days of profit remittance. In 2020, the Bangladesh Bank relaxed regulations for repatriating disinvestment proceeds, authorizing banks to remit up to 100 million taka (approximately $1.2 million) in equivalent foreign currency without the central bank’s prior approval. The central bank also eased profit repatriation and reinvestment by allowing banks to transfer foreign investors’ dividend income into their foreign currency bank accounts.

The Financial Action Task Force (FATF) notes Bangladesh has established the legal and regulatory framework to meet its Anti-Money Laundering/Counterterrorism Finance (AML/CTF) commitments. The Asia/Pacific Group on Money Laundering (APG), an independent and collaborative international organization based in Bangkok, evaluated Bangladesh’s AML/CTF regime in 2018 and found Bangladesh had made significant progress since the last Mutual Evaluation Report (MER) in 2009, but still faces significant money laundering and terrorism financing risks. The APG reports are available online:  http://www.fatf-gafi.org/countries/#Bangladesh  

Sovereign Wealth Funds

In 2015, the Bangladesh Finance Ministry announced it was exploring establishing a sovereign wealth fund in which to invest a portion of Bangladesh’s foreign currency reserves. In 2017, the Cabinet initially approved a $10 billion “Bangladesh Sovereign Wealth Fund,” (BSWF) to be created with funds from excess foreign exchange reserves but the plan was subsequently scrapped by the Finance Ministry.

Bangladesh’s 49 major non-financial SOEs, many of which are holding corporations owning or overseeing smaller state-owned entities, are spread among seven sectors – industrial; power, gas and water; transport and communication; trade; agriculture; construction; and services. The list of non-financial SOEs and relevant budget details are published in Bangla in the Ministry of Finance’s SOE Budget Summary 2020-21:  https://mof.gov.bd/site/view/budget_mof_sow/2020-21/SOE-Budget .

The SOE contribution to gross domestic product, value-added production, employment generation, and revenue earning is substantial. SOEs usually report to the relevant ministries, though the government has allowed some enhanced autonomy for certain SOEs, such as Biman Bangladesh Airlines. SOEs maintain control of rail transportation whereas private companies compete freely in air and road transportation. Bangladesh has restructured its corporate governance of SEOs as per the guidelines published by the Organization for Economic Cooperation and Development (OECD), but the country’s practices are not up to OECD standards. While SOEs are required to prepare annual reports and make financial disclosures, disclosure documents are often unavailable to the public. Each SOE has an independent Board of Directors composed of both government and private sector nominees who report to the relevant regulatory ministry. Most SOEs have strong ties with the government, and the ruling party nominates most SOE leaders. As the government controls most of the SOEs, domestic courts tend to favor the SOEs in investment disputes.

The government has taken recent steps to restructure several SOEs to improve competitiveness. This included conversion of Biman Bangladesh Airline, the national airline, into a public limited company to initiate a rebranding and a fleet renewal program involving purchase of 12 aircraft from Boeing. Five of six state-owned commercial banks – Sonali, Janata, Agrani, Rupali, and BASIC – were converted to public limited companies; only Rupali Bank is publicly listed. In July 2020, the government announced closure of 25 out of 26 state-owned jute mills under the Bangladesh Jute Mills Corporation amid mounting losses due to mismanagement and outdated technology.

The Bangladesh Petroleum Act of 1974 grants the government the authority to award natural resources contracts, and the Bangladesh Oil, Gas and Mineral Corporation Ordinance of 1984 gives Petrobangla, the state-owned oil and gas company, authority to assess and award natural resource contracts and licenses to both SOEs and private companies. Currently, oil and gas firms can pursue exploration and production ventures only through production-sharing agreements with Petrobangla.

Privatization Program

The Bangladeshi government has privatized 74 state-owned enterprises (SOEs) over the past 20 years, but SOEs still retain an important role in the economy, particularly in the financial and energy sectors. Of the 74 SOEs, 54 were privatized through outright sale and 20 through offloading of shares.

Since 2010, the government’s privatization drive has slowed. Previous privatization drives were plagued by allegations of corruption, undervaluation, political favoritism, and unfair competition. Nonetheless, the government has publicly stated its goal is to continue the privatization drive. SOEs can be privatized through a variety of methods, including:

• Sales through international tenders.
• Sales of government shares in the capital market.
• Transfers of some portion of the shares to the employees of the enterprises when shares are sold through the stock exchange.
• Sales of government shares to a private equity company (restructuring).
• Mixed sales methods.
• Management contracts.
• Leasing.
• Direct asset sales (liquidation).

In 2010, 22 SOEs were included in the Privatization Commission’s (now the BIDA) program for privatization. However, a 2010 study on privatized industries in Bangladesh conducted by the Privatization Commission found only 59 percent of the entities were in operation after being privatized and 20 percent were permanently closed – implying a lack of planning or business motivation of their private owners. In 2014, the government declared SOEs would not be handed over to private owners through direct sales. Offloading shares of SOEs in the stock market, however, can be a viable way to ensure greater accountability of the management of the SOEs and minimize the government’s exposure to commercial activities. The offloading of shares in an SOE, unless it involves more than 50 percent of its shares, does not divest the government of the control over the enterprise. Both domestic and foreign companies can participate in privatization programs. Additional information is available on the BIDA website at: http://bida.gov.bd/?page_id=4771

The business community is increasingly aware of and engaged in responsible business conduct (RBC) activities with multinational firms leading the way. While many firms in Bangladesh fall short on RBC activities and instead often focus on philanthropic giving, some of the leading local conglomerates have begun to incorporate increasingly rigorous environmental and safety standards in their workplaces. U.S. companies present in Bangladesh maintain diverse RBC activities. Consumers in Bangladesh are generally less aware of RBC, and consumers and shareholders exert little pressure on companies to engage in RBC activities.

While many international firms are aware of OECD guidelines and international best practices concerning RBC, many local firms have limited familiarity with international standards. There are currently two RBC NGOs active in Bangladesh:

• CSR Bangladesh: http://www.csrbangladesh.org/about.html 
• CSR Centre Bangladesh: http://www.csrcentre-bd.org 

Along with the Bangladesh Enterprise Institute, the CSR Centre is the joint focal point for the United Nations Global Compact (UNGC) and its corporate social responsibility principles in Bangladesh. The UN Global Compact is the world’s largest corporate citizenship and sustainability initiative. The Centre is a member of a regional RBC platform called the South Asian Network on Sustainability and Responsibility, with members including Bangladesh, Afghanistan, India, Nepal, and Pakistan.

While several NGOs have proposed National Corporate Social Responsibility Guidelines, the government has yet to adopt any such standards for RBC. As a result, the government encourages enterprises to follow generally accepted RBC principles but does not mandate any specific guidelines.

Bangladesh has natural resources, but it has not joined the Extractive Industries Transparency Initiative (EITI). The country does not adhere to the Voluntary Principles on Security and Human Rights.

Additional Resources

Department of State

Country Reports on Human Rights Practices ( https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report ( https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ( https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory ( https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf ).

Department of Labor

Findings on the Worst forms of Child Labor Report ( https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings  );

List of Goods Produced by Child Labor or Forced Labor ( https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods );

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World ( https://www.dol.gov/general/apps/ilab ) and;

Comply Chain ( https://www.dol.gov/ilab/complychain/ ).

Corruption remains a serious impediment to investment and economic growth in Bangladesh. While the government has established legislation to combat bribery, embezzlement, and other forms of corruption, enforcement is inconsistent. The Anti-Corruption Commission (ACC) is the main institutional anti-corruption watchdog. With amendments to the Money Prevention Act, the ACC is no longer the sole authority to probe money-laundering offenses. Although it still has primary authority for bribery and corruption, other agencies will now investigate related offenses, including:

• The Bangladesh Police (Criminal Investigation Department) – Most predicate offenses.
• The National Board of Revenue – VAT, taxation, and customs offenses.
• The Department of Narcotics Control – drug related offenses.

The current Awami League-led government has publicly underscored its commitment to fighting corruption and reaffirmed the need for a strong ACC, but opposition parties claim the ACC is used by the government to harass political opponents. Efforts to ease public procurement rules and a recent constitutional amendment diminishing the independence of the ACC may undermine institutional safeguards against corruption. Bangladesh is a party to the UN Anticorruption Convention but has not joined the OECD Convention on Combating Bribery of Public Officials. Corruption is common in public procurement, tax and customs collection, and among regulatory authorities. Corruption, including bribery, raises the costs and risks of doing business. By some estimates, off-the-record payments by firms may result in an annual reduction of two to three percent of GDP. Corruption has a corrosive impact on the broader business climate market and opportunities for U.S. companies in Bangladesh. It also deters investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

Resources to Report Corruption

Mr. Iqbal Mahmood
Chairman
Anti-Corruption Commission, Bangladesh
1, Segun Bagicha, Dhaka 1000
+88-02-8333350
chairman@acc.org.bd

Contact at “watchdog” organization:

Mr. Iftekharuzzaman
Executive Director
Transparency International Bangladesh (TIB)
MIDAS Centre (Level 4 & 5), House-5, Road-16 (New) 27 (Old),

Dhanmondi, Dhaka -1209
+880 2 912 4788 / 4789 / 4792
edtib@ti-bangladesh.org, info@ti-bangladesh.org, advocacy@ti-bangladesh.org

Prime Minister Hasina’s ruling Awami League party won 289 parliamentary seats out of 300 in a December 30, 2018 election marred by wide-spread vote-rigging, ballot-box stuffing and intimidation. Intimidation, harassment, and violence during the pre-election period made it difficult for many opposition candidates and their supporters to meet, hold rallies, and/or campaign freely. The clashes between rival political parties and general strikes that previously characterized the political environment in Bangladesh have become far less frequent in the wake of the Awami League’s increasing dominance and crackdown on dissent. Many civil society groups have expressed concern about the trend toward a one-party state and the marginalization of all political opposition groups.

Americans are advised to exercise increased caution due to crime and terrorism when traveling to Bangladesh. Travel in some areas have higher risks. For further information, see the  State Department’s travel website for the  Worldwide Caution,  Travel Advisories, and  Bangladesh Country Specific Information.

Bangladesh’s comparative advantage in cheap labor for manufacturing is partially offset by lower productivity due to poor skills development, inefficient management, pervasive corruption, and inadequate infrastructure. According to the 2016-2017 Labor Force Survey, 85 percent of the Bangladeshi labor force is employed in the informal economy. Bangladeshi workers have a strong reputation for hard work, entrepreneurial spirit, and a positive and optimistic attitude. With an average age of 26 years, the country boasts one of the largest and youngest labor forces in the world. However, training is not well aligned with labor demand. Bangladesh’s labor laws specify acceptable employment conditions, working hours, minimum wage levels, leave policies, health and sanitary conditions, and compensation for injured workers. Freedom of association and the right to join unions are guaranteed in the constitution. In practice, however, compliance and enforcement of labor laws are weak, and companies frequently discourage or prevent formation of worker-led labor unions, preferring pro- factory management unions. Export Processing Zones (EPZs) are a notable exception to the national labor law in that trade unions are not allowed there. The EPZ labor law instead allows worker welfare associations, to which 74 percent of workers belong, according to the government.

Since two back-to-back tragedies killed over 1,250 workers – the Tazreen Fashions fire in 2012 and the Rana Plaza collapse in 2013 – Bangladesh made significant progress in garment factory fire and structural safety remediation, thanks mostly to two Western brand-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), comprised of North American brands, and the Accord on Fire and Building Safety in Bangladesh (Accord), which was formed by European brands. Major accidents and workplace deaths in the garment sector dropped precipitously as a result—to zero in 2020. Monitoring and remediation of RMG factories exporting to non-Western countries was overseen by the government, with assistance from the International Labor Organization (ILO) under the National Initiative. By 2020, fewer than half the factories under the National Initiative had completed initial remediation of safety issues, and both the Alliance and Accord had closed their Bangladesh operations. North American brands continued to monitor manufacturers’ safety maintenance and training through a new organization, Nirapon. The Accord, under High Court order, handed over its staff and operations to the newly formed RMG Sustainability Council (RSC), overseen by a board consisting of manufacturers, brands, and worker representatives. The government is working to form an Industrial Safety Unit to oversee factory safety in National Initiative garment factories as well as all manufacturing

The U.S. government suspended Bangladesh’s access to the U.S. Generalized System of Preferences (GSP) over labor rights violations following a six-year formal review conducted by the U.S. Trade Representative. The decision, announced in 2013 in the months following the Rana Plaza collapse, was accompanied by a 16-point GSP Action Plan to help start Bangladesh’s path to reinstatement of the trade benefits. While some progress was made in the intervening years, several key issues have not been adequately addressed. Despite revisions intended to make Bangladesh more compliant with international labor standards, the Bangladesh Labor Act (BLA) and EPZ Labor Act (ELA) still restrict the freedom of association and formation of unions and maintain separate administrative systems for workers inside and outside of export processing zones.

Under the current BLA, legally registered unions are entitled to submit charters of demands and bargain collectively with employers, but this has rarely occurred in practice. The government counts nearly 1,000 registered trade unions, but labor leaders estimate there are fewer than 100 active trade unions in the country’s dominant sector, RMG, and only 30 to 40 are capable enough to negotiate with owners. The law provides criminal penalties for conducting unfair labor practices such as retaliation against union members for exercising their legal rights, but charges are rarely brought against employers and the labor courts have a large backlog of cases. Labor organizations reported most workers did not exercise their rights to form unions, attend meetings, or bargain collectively due to fear of reprisal. A crackdown on mostly peaceful wage protests between December 2018 and February 2019 reportedly led to termination or forced resignation of an estimated 7,000 to 11,000 garment workers – many of whom were blacklisted and remained unable to find new employment in the garment sector over a year later.

The labor law differentiates between layoffs and terminations; no severance is paid if a worker is fired for misconduct. In the case of downsizing or “retrenchment,” workers must be notified and paid 30 days’ wages for each year of service. The law requires factories and establishments to notify Bangladesh’s Department of Inspection for Factories and Establishments a week prior to temporarily laying off workers due to a shortage of work or material. Laid off workers are entitled to their full housing allowance. For the first 45 days, they are also entitled to half their basic wages, then 25 percent thereafter. Workers who were employed for less than one year are not eligible for compensation during a layoff. However, the press and trade unions report employers not only fail to pay workers their severance or benefits, but also their regular wages. In 2020 alone, workers and organizers staged 264 labor protests in the garment sector over back wages, factory layoffs, and demands to reopen closed factories. No unemployment insurance or other social safety net programs exist, although the government had begun discussing how to establish them with the help of development partners and brands. The government does not consistently and effectively enforce applicable labor laws. For example, the law establishes mechanisms for conciliation, arbitration, and dispute resolution by a labor court and workers in a collective bargaining union have the right to strike in the event of a failure to reach a settlement. In practice, few strikers followed the cumbersome and time-consuming legal requirements for settlements and strikes or walkouts often occur spontaneously. The government was partnering with the ILO to introduce a dispute settlement system within its Department of Labor.

The government does not consistently and effectively enforce applicable labor laws. For example, the law establishes mechanisms for conciliation, arbitration, and dispute resolution by a labor court and workers in a collective bargaining union have the right to strike in the event of a failure to reach a settlement. In practice, few strikers followed the cumbersome and time-consuming legal requirements for settlements and strikes or walkouts often occur spontaneously. The government was partnering with the ILO to introduce a dispute settlement system within its Department of Labor.

The BLA guarantees workers the right to conduct lawful strikes, but with many limitations. For example, the government may prohibit a strike deemed to pose a “serious hardship to the community” and may terminate any strike lasting more than 30 days. The BLA also prohibits strikes at factories in the first three years of commercial production, and at factories controlled by foreign investors.

The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garment sector in partnership with other international partners, civil society, businesses, and the Bangladeshi government. The United States works with other governments and the International Labor Organization (ILO) to discuss and assist with additional labor reforms needed to fully comply with international labor conventions. In early 2021, the government submitted a draft action plan to the EU and ILO describing how it planned to bring its laws and practices into compliance with international labor standards over time. The U.S. government will closely monitor development and implementation of the plan to ensure it sufficiently addresses long-standing recommendations.

The U.S. International Development Finance Corporation (DFC) is not currently authorized to operate in Bangladesh. Investors should check DFC’s website for updates:  https://www.dfc.gov/what-we-offer/eligibility/where-we-work  

DFC’s predecessor, the Overseas Private Investment Corporation (OPIC), and the Government of Bangladesh signed an updated bilateral agreement in 1998. More information on DFC services can be found at:  https://www.dfc.gov/  

Bangladesh is also a member of the Multilateral Investment Guarantee Agency (MIGA):  http://www.miga.org.  

The source of information described in Table 4 is the Coordinated Portfolio Investment Survey (CPIS) of the International Monetary Fund (IMF).  Website: https://data.imf.org/?sk=B981B4E3-4E58-467E-9B90-9DE0C3367363&sId=1481577785817.

Economic/Commercial Section
Embassy of the United States of America
Madani Avenue, Baridhara,
Dhaka — 1212
Tel: +880 2 5566-2000
Email: USTC-Dhaka@state.gov 

Policies toward Foreign Direct Investment

Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for most sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. FDI proposals in sensitive sectors, however, require the additional approval of the Home Ministry.

DPIIT, under the Ministry of Commerce and Industry, is India’s chief investment regulator and policy maker. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct–investment/foreign–direct–investment-policy.  DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with lead ministries and stakeholders. There however have been multiple incidents where relevant stakeholders reported being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” In the parliament’s 2021 budget session, the Indian government approved increasing the FDI caps in the insurance sector to 74 percent from 49 percent. However, the legislation retained the “Indian management and control” rider. In the August 2020 session of parliament, the government approved reforms that opened the agriculture sector to FDI, as well as allowed direct sales of products and contract farming, though implementation of these changes was temporarily suspended in the wake of widespread protests. In 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules that mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy .

Screening of FDI

All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment and applies in most sectors. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. The government route includes sectors deemed as strategic including defense, telecommunications, media, pharmaceuticals, and insurance. In August 2019, the government announced a new package of liberalization measures and brought a number of sectors including coal mining and contract manufacturing under the automatic route.

FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics are available at: http://dipp.nic.in/publications/fdi–statistics. 

Other Investment Policy Reviews

OECD’s Indian Economic Snapshot: http://www.oecd.org/economy/india-economic-snapshot/ 

WTO Trade Policy Review: https://www.wto.org/english/tratop_e/tpr_e/tp503_e.htm 

2015-2020 Government of India Foreign Trade Policy: http://dgft.gov.in/ForeignTradePolicy 

Business Facilitation

DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India  is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/ . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in the case of major projects, Prime Minister Modi started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As of January 2020, a total of 275 project proposals worth around $173 billion across ten states were cleared through PRAGATI. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. The government also launched an Inter-Ministerial Committee in late 2014, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports of stalled projects from business chambers and affected companies.

Outward Investment

The Ministry of Commerce’s India Brand Equity Foundation (IBEF) claimed in March 2020 that outbound investment from India had undergone a considerable change in recent years in terms of magnitude, geographical spread, and sectorial composition. Indian firms invest in foreign markets primarily through mergers and acquisition (M&A). According to a Care Ratings study, corporate India invested around $12.25 billion in overseas markets between April and December 2020. The investment was mostly into wholly owned subsidiaries of companies. In terms of country distribution, the dominant destinations were the Unites States ($2.36 billion), Singapore ($2.07 billion), Netherlands ($1.50 billion), British Virgin Islands ($1.37 billion), and Mauritius ($1.30 million).

India adopted a new model Bilateral Investment Treaty (BIT) in December 2015, following several adverse rulings in international arbitration proceedings. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors first to exhaust all local judicial and administrative remedies before entering international arbitration. The Indian government also served termination notices for existing BITs with 73 countries.

In September 2018, Belarus became the first country to execute a new BIT with India, based on the new model BIT, followed by the Taipei Cultural & Economic Centre (TECC) in December 2019, and Brazil in January 2020. India has also entered into a BIT negotiation with the Philippines and joint interpretative statements are under discussion with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius, and Oman.

Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).

The complete list of agreements can be found at: https://investmentpolicy.unctad.org/international-investment-agreements/countries/96/india 

Bilateral Taxation Treaties

India has a bilateral taxation treaty with the United States, available at: https://www.irs.gov/pub/irs–trty/india.pdf

https://www.irs.gov/pub/irs–trty/india.pdf

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry. For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control.” On most occasions the rules are framed after thorough discussions by government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts. However, in some instances the rules have been framed without following any consultative process.

In 2017, India began assessing a six percent “equalization levy,” or withholding tax, on foreign online advertising platforms with the ostensible goal of “equalizing the playing field” between resident service suppliers and non-resident service suppliers. However, its provisions did not provide credit for taxes paid in other countries for services supplied in India. In February 2020, the FY 2020-21 budget included an expansion of the “equalization levy,” adding a two percent tax to the equalization levy on foreign e-commerce and digital services provider companies. Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms. In February 2021, the FY 2021-22 budget included three amendments “clarifying” the 2020 equalization levy expansion that will significantly extend the scope and potential liability for U.S. digital and e-commerce firms. The changes to the levy announced in 2021 will be implemented retroactively from April 2020. The 2020 and 2021 changes were enacted without prior notification or an opportunity for public comment.

The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC’s economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1995, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations for Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian judiciary provides for an integrated system of courts to administer both central and state laws. The judicial system includes the Supreme Court as the highest national court, as well as a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy ( http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy ). DPIIT makes policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are notified by the Ministry of Finance as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA). These notifications take effect from the date of issuance of the Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant Notification under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 will prevail. The payment of inward remittance and reporting requirements are stipulated under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 issued by the Reserve Bank of India (RBI). The regulatory framework, over a period, thus, consists of FEMA and Rules/Regulations thereunder, Consolidated FDI Policy Circulars, Press Notes, Press Releases, and Clarifications.

The government has introduced a “Make in India” program. “Self-Reliant India” program, as well as investment policies designed to promote domestic manufacturing and attract foreign investment. “Digital India” aimed to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to become commercially viable businesses and grow. The “Smart Cities” project was launched to open new avenues for industrial technological investment opportunities in select urban areas.

Competition and Anti-Trust Laws

The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, reviews cases against cartelization and abuse of dominance as well as conducts capacity-building programs for bureaucrats and business officials. Currently, the Commission’s investigations wing is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.

Expropriation and Compensation

Tax experts confirm that India does not have domestic expropriation laws in place. Legislative authority does exist in the form of the retroactive taxation, a measure introduced in 2012 and that has been defended despite government assurances of not introducing new retroactive taxes. The Indian government has been divesting from state owned enterprises (SOEs) since 1991. In February 2021, the Finance Minister detailed an ambitious program to privatize roughly $24 billion in SOEs and public sector assets to both help finance the FY 2021-22 budget without increasing taxes and reducing the role of the government in the economy.

Dispute Settlement

India made resolving contract disputes and insolvency easier with the enactment and implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code put in place effective tools for creditors to successfully negotiate and increased their ability to receive payments. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also was reduced significantly from 4.3 years to 1.6 years. With these changes, India became the highest performer in South Asia in this category and exceeded the average for OECD high-income economies

India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with global standards. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.

Judgments of foreign courts have been enforced under multilateral conventions, including the Geneva Convention. India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying an arbitral award. Several cases are currently pending, the oldest of which dates to 1983, and the latest case is that of Amazon Vs. Future Retail, in which Amazon also received an interim award in its favour from the Singapore International Arbitration Centre. Future Retail refused to accept the findings and initiated litigation in Indian courts. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although it remains pending. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.

Investor-State Dispute Settlement

According to the United Nations Conference on Trade and Development, India has been a respondent state for 25 investment dispute settlement cases, of which 13 remain pending. Case details can be accessed at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/96/india .

Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or via ad hoc proceedings.

International Commercial Arbitration and Foreign Courts

Alternate Dispute Resolution (ADR)

Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.

Dispute Resolutions Pending

An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches, and judges; inordinate delays in filling judicial vacancies; and a very low rate of 14 judges per one million people.

Bankruptcy Regulations

The introduction and implementation of the IBC in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC created a uniform and comprehensive creditor-driven insolvency resolution process that encompasses all companies, partnerships, and individuals (other than financial firms). According to the World Bank Doing Business Report, after the implementation of the IBC, the time taken to for resolving insolvency was reduced significantly from 4.3 years to 1.6 years. The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions.

In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments targeted helping banks and financial institutions recover loans more effectively, encouraging the establishment of more asset reconstruction companies (ARCs), and revamping debt recovery tribunals. Union Finance Minister Nirmala Sitharaman, while presenting the FY 2021-22 budget, proposed setting up an ARC, or “bad bank”, to address perennial non-performing assets (NPAs) in the public banking sector.

The regulatory environment in terms of foreign investment has been eased to make it investor friendly. The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors, and simplifying other conditions of the FDI policy. The Indian government has issued guarantees to investments but only in cases of strategic industries.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. According to the Ministry of Commerce and Industry, as of October 2020, 426 SEZ’s have been approved and 262 SEZs were operational. SEZs are treated as foreign territory — businesses operating within SEZs are not subject to customs regulations nor have FDI equity caps. They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks. In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official. So far, three NIMZs have been accorded final approval and 13 have been accorded in-principal approval. In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been established as NIMZs. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in,   https://www.stpi.in/   http://www.fisme.org.in/export_schemes/DOCS/B–

1/EXPORT%20ORIENTED%20UNIT%20SCHEME.pdf and http://www.makeinindia.com/home. 

The GOI’s revised Foreign Trade Policy, which will be effective for five years starting April 1, 2021, is expected to include a new regionally focused District Export Hubs initiative in addition to existing SEZs and NIMZs

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India. State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:

1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.

2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.

3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:

a. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.

b. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.

c. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.

4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3,000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7,500), whichever is higher.

In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement. A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: http://meity.gov.in/esdm/pma. 

Research and Development

The Government of India allows for 100 percent FDI in research and development through the automatic route.

Data Storage & Localization

In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. RBI policy overwhelmingly and disproportionately has affected U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and anti-money-laundering/combatting the financing of terrorism (AML/CFT) protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Personal Data Protection Bill (PDPB) in December 2019 which has remained pending in Parliament. The PDPB would require “explicit consent” as a condition for the cross-border transfer of sensitive personal data, requiring users to fill out separate forms for each company that held their data. Additionally, Section 33 of the bill would require a copy of all “sensitive personal data” and “critical personal data” to be stored in India, potentially creating redundant local data storage. The localization of all “sensitive personal data” being processed in India could directly impact IT exports. In the current draft no clear criteria for the classification of “critical personal data” has been included. The PDPB also would grant wide authority for a newly created Data Protection Authority to define terms, develop regulations, or otherwise provide specifics on key aspects of the bill after it becomes a law. Reports on Non-Personal Data and the implementation of a New Information Technology Rule 2021 with Intermediary Guidelines and Digital Media Ethics Code added further uncertainty to how existing rules will interact with the PDPB and how non-personal data will be handled. 5.Protection of Property Rights

Real Property

In India, a registered sales deed does not confer title of land ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all the documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.

Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai, have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates — normally senior local government officials — notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.

In other urban areas, and in areas where illegal settlements have been established, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021.

Though land is a state government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list and so both the Indian Parliament and state legislatures can make laws on this subject. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, and continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70 percent approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

Businesses that intend to build facilities on land they own are also required to take the following steps: register the land, seek land use permission if the industry is located outside an industrially zoned area, obtain environmental site approval, seek authorization for electricity and financing, and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php 

The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx . Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.

Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.

Intellectual Property Rights

India remained on the Priority Watch List in the 2020 Special 301 Report due to concerns over weak intellectual property (IP) protection and enforcement.  The 2020 Review of Notorious Markets for Counterfeiting and Piracy includes physical and online marketplaces located in or connected to India.  The United States and India have continued to engage on a range of IP challenges facing U.S. companies in India with the intention of creating stronger IP protection and enforcement in India.

In the field of copyright, procedural hurdles, problematic policies, and effective enforcement remained concerns.  In February 2019, the Cinematograph (Amendment) Bill, which would criminalize illicit camcording of films, was tabled in Parliament and remains pending.  The expansive granting of licenses under Chapter VI of the Indian Copyright Act and overly broad exceptions for certain uses have raised concerns regarding the strength of copyright protection and complicated the market for music licensing.  In June 2020, the Copyright Board was merged with the Intellectual Property Appellate Board.  The lack of a functional copyright board had previously created uncertainty regarding how IP royalties were collected and distributed.

In 2019, the DPIIT proposed draft Copyright Amendment Rules that would broaden the scope of statutory licensing to encompass not only radio and television broadcasting but also online broadcasting, despite a high court ruling earlier in 2019 that held that statutory broadcast licensing does not include online broadcasts.  If implemented, the Amendment Rules would have severe implications for Internet content-related right holders.

In the area of patents, a number of factors negatively affect stakeholders’ perception of India’s overall IP regime, investment climate, and innovation goals.  The potential threat of compulsory licenses and patent revocations, and the narrow patentability criteria under the Indian Patent Act, burden companies across different sectors.  Patent applications continue to face expensive and time consuming pre- and post-grant oppositions and excessive reporting requirements.  In October 2020, India issued a revised “Statement of Working of Patents” (Form 27).  The United States is monitoring whether the revision addresses concerns previously raised by innovators over Form 27’s burdensome nature and required disclosure of sensitive business information.

While certain administrative decisions in past years have upheld patent rights, and specific tools and remedies do exist in India to support the rights of a patent holder, concerns remain over revocations and other challenges to patents, especially patents for agriculture biotechnology and pharmaceutical products. In particular, the United States continues to monitor India’s application of its compulsory licensing law. Moreover, the Indian Supreme Court’s 2013 decision that India’s Patent Law created a second tier of requirements for patenting certain technologies, such as pharmaceuticals, continues to be of concern as it may limit the patentability in India for an array of potentially beneficial innovations.

India currently lacks an effective system for protecting against unfair commercial use, as well as unauthorized disclosure, of undisclosed tests or other data generated to obtain marketing approval for pharmaceutical and agricultural products. The U.S. government and stakeholders have also raised concerns with respect to allegedly infringing pharmaceuticals being marketed without advance notice or opportunity for parties to resolve their IP disputes.

U.S. and Indian companies have expressed interest in eliminating gaps in India’s trade secrets regime, such as through the adoption of standalone trade secrets legislation. In 2016, India’s National Intellectual Property Rights Policy called for trade secrets to serve as an “important area of study for future policy development,” but India has not yet prioritized this work.

Developments Strengthening the Rights of IP Holders

In terms of progress in patent examination, India issued a revised Manual of Patent Office Practice and Procedure in November 2019 that requires patent examiners to look to the World Intellectual Property Organization’s Centralized Access to Search and Examination (CASE) system and Digital Access Service (DAS) to find prior art and other information filed by patent applicants in other jurisdictions.

Other developments over the past year strengthening the rights of IP holders include India’s continued efforts to reduce delays and backlogs of patent and trademark applications, the Cell for IPR Promotion and Management’s (CIPAM) promotion of IP awareness and commercialization throughout India, and ongoing efforts to improve IP enforcement, particularly at the state level. However, state-level IP enforcement remains uneven in India, with some states conducting enforcement activities and others falling short in this regard.

Capital Markets and Portfolio Investment

According to media reports, India climbed two notches in 2020 to take the eighth spot among the world’s top stock markets as equities crossed the $2.5 trillion market capitalization mark on December 28, 2020 for the first time. The previous high was in January 2018 when market capitalization reached $2.47 trillion. 2020 saw 15 initial public offer (IPO) issues raising over $3.8 billion (INR 266.11 billion), a 115.3 percent rise over $1.77 billion (INR 123.61 billion) raised in 2019 through 16 IPO issues.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies.  It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC).  SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange. SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines. Standard Chartered Bank, a British bank which was the first and only foreign entity to list in India in June 2010, delisted from the domestic exchanges in June 2020. Experts attribute the lack of interest in IDR to initial entry barriers, lack of clarity on conversion of the IDR holding into overseas shares, lack of tax clarity, and the regulator’s failure to popularize the product.

External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity; permitted and non-permitted end-uses; maximum all-in-cost ceiling as prescribed by the RBI; funds are used for outward FDI or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities. The rules are published by the RBI: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.

According to RBI data, external commercial borrowings (ECBs) by corporations reached $36.35 billion in 2020. This was the second highest inflow of offshore loans in a calendar year, following $50.51 billion raised in 2019. The monthly borrowing dropped to a multi-year low of $0.9 billion in April when the lockdown brought both economic and lending activities to a standstill. It then improved to $5.22 billion in September, driven by funds-raising by Reliance Industries. Non-banking financial companies (NBFC) also increased borrowing and corporations raised $1.6 billion through the issuance of rupee-denominated bonds.

The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non-Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market. FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds.

The RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs). In June 2020, the RBI allowed foreign branches of Indian banks and branches located in the IFSC to participate in the NDF. With the rupee trading volume in the offshore market higher than the onshore market, RBI felt the need to limit the impact of the NDF market and curb volatility in the movement of the rupee.

The International Financial Services Centre at Gujarat International Financial Tech-City (GIFT City) in Gujarat is being developed to compete with global financial hubs. The BSE was the first to start operations there, in January 2016. NSE domestic banks and foreign banks have started IFSC banking units in GIFT city. As part of its Budget 2020 proposal, the government proposed establishing an international bullion exchange at IFSC, which would lead to better price discovery of gold, create more jobs, and enhance India’s position in such markets.

Money and Banking System

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. However, the share of public banks has fallen sharply in the last five years (from 74.2 percent in 2015 to 59.8 percent in 2020), primarily driven by stressed balance sheets and non-performing loans. Also, several new licenses were granted to private financial entities (two new universal bank licenses and 10 small finance bank licenses) in the past few years. The government announced plans in 2021 to privatize two PSBs. This follows Indian authorities consolidating 10 public sector banks into four in 2019, which reduced the total number of public sector banks from 18 to 12. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18 percent of their net demand and time liabilities in government securities.

PSBs continue to face two significant hurdles: capital constraints and poor asset quality. As of September 2020, gross non-performing loans represented 7.5 percent of total loans in the banking system, with the public sector banks having a larger share at 9.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years has been driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. The COVID-19 crisis further exacerbated the stress, with NPAs likely to rise as the forbearance period ends. The government announced its intention to set up an asset reconstruction company to take over legacy stressed assets from bank balance sheets. With IBC in place, banks were making progress in non-performing asset recognition and resolution. However, the IBC Code was suspended following the onset of COVID-19 through March 2021 to help businesses cope with the economic disruptions caused by the pandemic.

To address asset quality challenges faced by public sector banks, the government injected $32 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CAR) improved to 13.5 percent in September 2020 from 12.9 in March 2020.

Women in the Financial Sector

Women’s lack of sufficient access to finance remained a major impediment to women’s entrepreneurship and participation in the workforce. According to experts, women are more likely than men to lack financial awareness, confidence to approach a financial institution, or possess adequate collateral, often leaving them vulnerable to poor terms of finance. Despite legal protections against discrimination, some banks reportedly remained unwelcoming towards women as customers. The International Finance Corporation (IFC) analysts described Indian women-led Micro, Small, and Medium Enterprises (MSME) as a large but untapped market that has a total finance requirement of $29 billion (72 percent for working capital). However, 70 percent of this demand remained unmet, creating a shortfall of $20 billion. The IFC argued that financial institutions should view this market as a compelling, profitable business segment, not corporate social responsibility or charitable activity.

The government-affiliated think tank NITI Aayog provides information on networking, mentorship, and financing to more than 18,000 members via its Women Entrepreneurship Platform (WEP). The WEP was launched in March 2018, following the 2017 Global Entrepreneurship Summit, that India hosted in partnership with the United States, focused on “Women First and Prosperity for All.” The GOI’s financial inclusion scheme Pradhan Mantri Jan Dhan Yojana (PMJDY) provides universal access to banking facilities with at least one basic banking account for every adult, financial literacy, access to credit, insurance, and pension. As of March 3, 2021, 233 million out of 420 million beneficiaries are women (55 percent.)  In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000 — 70 percent of the beneficiaries are women.

Foreign Exchange and Remittances

Foreign Exchange

The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The Indian Rupee or INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 ( https://www.rbi.org.in/Scripts/Fema.aspx ).

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account ( https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi ). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. Non-resident Indian investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification ( https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf ) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

In 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. In December 2020, NIIF officially closed the Master Fund with $2.34 billion in commitments from other Sovereign Wealth Funds and global pension funds. The NIIF Master Fund is focused on investing in core infrastructure sectors including transportation, energy, and urban infrastructure.

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises ( http://dpe.gov.in ) controls and formulates all the policies pertaining to SOEs and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken several steps to improve the performance of SOEs, also called Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. This was necessary as the government planned to disinvest its stake from these entities. All the CPSE’s are listed on stock exchanges as the government partially divested its equity from these entities.

According to the Public Enterprise Survey 2018-19, as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses.

Foreign investments are allowed in CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp. While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making SOEs, the government has not generally privatized its assets as they have led to job losses in the past, and therefore engendered political risks. Instead, the government adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.

In the FY 2021-22 budget, however, Finance Minister Nirmala Sitharaman unveiled a new Disinvestment/Strategic Disinvestment Policy detailing the government’s intent to privatize most state-owned companies in a phased manner. A few sectors were categorized as strategic sectors where the government plans to maintain a minimal presence. The budget established a disinvestment target of $24 billion for FY2021-22 after disinvestments planned for the prior fiscal year were not completed, many of which the government claimed were negatively impacted by the COVID-19 pandemic.

Foreign institutional investors can participate in the disinvestment programs. The earlier limits for foreign investors were 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. In the case of public sector banks, the limit is 20 percent of the paid-up capital. For many SOEs there is no bidding process as the shares of the entities being disinvested are sold in the open market. Certain SOEs, however, such as Air India are subject to a structure bidding process.

Among Indian companies there is a general awareness of standards for responsible business conduct. The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013 and is responsible for regulating the corporate sector in accordance with the law. The MCA is also responsible for protecting the interests of consumers by ensuring competitive markets.

The Companies Act of 2013 also established the framework for India’s corporate social responsibility (CSR) laws. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track CSR activities and provide recommendations in some cases for effective use of CSR funds. MCA released the National Guidelines on Responsible Business Conduct, 2018 (NGRBC) on March 13, 2019 to improve the 2011 National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The NGRBC aligned with the United Nations Guiding Principles on Business & Human Rights (UNGPs).

Per the Ministry of Corporate Affairs, corporations used all or most of their CSR money in 2020 to combat the COVID-19 pandemic, be it through contributions to the PM CARES Fund or other relief funds; distribution of food, masks, personal protective equipment (PPE) kits; or providing relief material to the needy. About $1 billion was spent during March-May 2020 that was classified as CSR. The tally of eligible companies that spent on CSR in FY 2019 and duly reported it rose to 1,276, compared with 1,246 the previous fiscal and their total CSR spend increased by around 14 percent year on year. Over two-thirds of these spent 2 percent or more of their net profits. (Note: The Companies Act, 2013 mandates that companies spend an average of 2 percent of their average net profit of the preceding three fiscal years. End Note).

India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.

India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.

Additional Resources

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India, with a score of 40, ranked 86 among 180 countries in Transparency International’s 2020 Corruption Perception Index.

Corruption is addressed by the following laws: The Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels and elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector based on allegations of revenue loss to the exchequer.

Other statutes approved by parliament to tackle corruption include:

The Benami Transactions (Prohibition) Amendment Act of 2016

The Real Estate (Regulation and Development) Act, 2016, enacted in 2017

The Whistleblower Protection Act, 2011 was passed in 2014 but has yet to be operationalized

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. However, the government has not established any monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act of 2011 may afford some protection once implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act, which created a national anti- corruption ombudsman and required states to create state-level ombudsmen within one year of the law’s passage. A national ombudsman was finally appointed in March 2019.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

The Indian chapter of Transparency International was closed in 2019.

Resources to Report Corruption at the Embassy

Matt Ingeneri

Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi +91 11 2419 8000 ingeneripm@state.gov

India is a multiparty, federal, parliamentary democracy with a bicameral legislature.  The president, elected by an electoral college composed of the state assemblies and parliament, is the head of state, and the prime minister is the head of government.  National parliamentary elections are held every five years.  Under the constitution, the country’s 28 states and eight union territories have a high degree of autonomy and have primary responsibility for law and order.  Electors chose President Ram Nath Kovind in 2017 to serve a five-year term.  Following the May 2019 national elections, Prime Minister Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) received a larger majority in the lower house of Parliament, or Lok Sabha, than it had won in the 2014 elections and returning Modi for a second term as prime minister.   Observers considered the parliamentary elections, which included more than 600 million voters, to be free and fair, although there were reports of isolated instances of violence.

The government’s first 100 days of its second term were marked by two controversial decisions.  The removal of special constitutional status from the state of Jammu and Kashmir (J&K) and the passage of the Citizenship Amendment Act (CAA).  Protests followed the enactment of the CAA but ended with the onset of COVID-19 in March 2020 and the imposition of a strict national lockdown.  The management of COVID-19 became the dominant issue in 2020 including the drop in economic activity and by December 2020, economic activity started to show signs of positive growth.  The BJP-led government has faced some criticism for its response to the recent surge in COVID-19 cases.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: https://travel.state.gov/content/passports/en/country/india.html for the latest information and travel resources.

Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port and dock, banking, and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.

In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages in 2019. During 2020, the parliament passed the Industrial Relations Code; the Occupational Safety, Health and Working Conditions Code; and the Code on Social Security. Along with the 2019 Code on Wages, the four codes harmonize and simplify India’s 29 existing labor laws with the aim of improving the business environment for both industry and workers. The changes expanded the potential use of contract labor, raised the threshold for small and medium sized enterprise exemptions from 100 to 300 employees, and expanded minimum wage and social security coverage to informal sector workers in agriculture and the growing gig economy, and gave employers greater hiring and firing flexibility. Details of the laws approved by parliament can be accessed at https://labour.gov.in/labour-law-reforms .

In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks. The amendment also made it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.

In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.

There are no reliable unemployment statistics for India due to the informal nature of most employment. During the COVID-19 pandemic experts claimed the unemployment rate spiraled as people in the informal sector lost their jobs. The Centre for Monitoring Indian Economy (CMIE) reported that the average unemployment in the April-June period of 2020 was around 24 percent. during a stringent national lockdown imposed in response to COVID-19. As the lockdown was eased, CMIE estimated the unemployment rate during the August-October period improved to around 7.9 percent.

The government has acknowledged a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. In response, the government established a Ministry of Skill Development and embarked on a national program to increase skilled labor.

The United States and India signed an Investment Incentive Agreement in 1997. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). The DFC is the U.S. Government’s development finance institution, launched in December 2019, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974 the DFC (under its predecessor agency, OPIC) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance.

As of March 2021, DFC’s current outstanding portfolio in India comprised more than $2.5 billion across 50 projects. These commitments were concentrated in renewable energy, financial services (including microfinance), and impact investments that include agribusiness and healthcare.

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions) 

Cumulative FDI April 2000 to December 2020      

(in USD million)

Source: Inward FDI DIPP, Ministry of Commerce and Industry

Outward investments from India (April – November 2020)

(in USD millions)

Matt Ingeneri
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000
IngeneriPM@state. gov 

Policies Towards Foreign Direct Investment

Maldives opened to foreign investment in the late 1980s and currently pursues an open policy for foreign investment, although the weak and, in some cases, arcane system of laws and regulations deter some investment.

Foreign investments in Maldives have primarily involved resort management, but also include telecommunications, accounting, banking, insurance, air transport, real estate, courier services, and some manufacturing.

The former administration began holding an annual investor forum in 2014 to showcase priority public and private sector investment projects, but the new government has not committed to hosting the annual forum.

Invest Maldives, an organization within the Ministry of Economic Development, is the government’s investment promotion arm.  Services provided by Invest Maldives include promoting Maldives as an investment destination, providing information to potential investors about the Maldives, guidance on investment approval and business registration, and facilitating the licensing of business.  As of March 2021, the Invest Maldives website was not functional.

Limits on Foreign Control and Right to Private Ownership and Establishment

Maldives allows foreign parties to register companies and partnerships but does not allow foreign parties to register cooperative societies or as a sole proprietor. Under a new Foreign Direct Investment policy established in February 2020, foreign investment is allowed in all major sectors of the economy apart from the following areas, which are restricted for locals only:

1. Forestry
2. Mining of sand
3. Other mining and quarrying
4. Manufacture of tobacco products
5. Manufacture of wood and of products of wood and cork except furniture
6. Manufacture of rubber and plastics products
7. Manufacture of handicrafts and souvenirs
8. Retail trade
9. Wholesale trade in sectors except construction materials
10. Land transport services and transport via pipelines
11. Postal and courier activities
12. Logistics activities (in transportation and storage)
13. Operating picnic islands
14. Food and beverage service activities (including café, restaurants, bakeries, and other eateries)
15. Programming and broadcasting activities
16. Legal activities (law firms etc.)
17. Photography and videography
18. Rental and leasing activities (including lease of heavy-duty machineries etc.)
19. Employment activities such as employment agencies and recruitment services
20. Travel agency, tour operator, reservation service and related activities
21. Services to building and landscape activities
22. Public administration and defense; compulsory social security
23. Clinics except physiotherapy clinics
24. Repair of computers and personal and household goods

The following sectors are open for foreign investment with a cap on equity ownership:

1. Manufacture of fish products (75 percent)
2. Manufacture of agricultural products (75 percent)
3. Printing and reproduction of recorded media (49 percent)
4. Manufacture of furniture (75 percent)
5. Repair and installation of machinery and equipment (75 percent)
6. Installation of equipment that forms an integral part of buildings or similar structures, such as installation of escalators and elevators (40 percent)
7. Construction of buildings (65 percent)
8. Civil engineering (65 percent)
9. Wholesale trade of construction materials (75 percent)
10. Franchising in international airports and approved locations (including products & services) (75 percent)
11. Sea transport services (including ownership of vessels) (49 percent)
12. Air transport services (including freight services) (75 percent)
13. Warehousing and support activities for transportation (75 percent)
14. Guest houses in approved locations (inclusive of all services) (49 percent)
15. Real estate activities (65 percent)
16. Accounting activities (75 percent)
17. Architecture and engineering activities; technical testing and analysis (75 percent)
18. Advertising (60 percent)
19. Other professional, scientific, and technical activities (75 percent)
20. Veterinary services (75 percent)
21. Security and investigation activities (75 percent)
22. Office administrative, office support and other business support activities (75 percent)
23. Universities and colleges (75 percent)
24. Private schools (75 percent)
25. Computer training institutions (75 percent)
26. Vocational and technical educational institutes (75 percent)
27. Sports and recreation education (75 percent)
28. Engineering schools (training and conduction of courses related to aircraft engineering) (75 percent)
29. Educational support activities (75 percent)
30. Residential care services (75 percent)
31. Social work activities without accommodation (75 percent)
32. Physiotherapy clinics (75 percent)
33. Creative, arts and entertainment activities (excluding live music bands and DJs) (75 percent)
34. Libraries, archives, museums, and other cultural activities (75 percent)
35. Sports activities and amusement and recreation activities (75 percent)
36. Water sports activities (49 percent)
37. Dive centers and dive schools (75 percent)

The following conditions are applied to foreign investments in the construction sector, as per the foreign contractor regulation:

• Construction companies valued below USD 5,000,000 are required to be at least 35 percent Maldivian owned.
• Construction companies valued above USD 5,000,000 may be 100 percent foreign owned.

There is little private ownership of land; most land is leased from the government, but Maldivians are permitted to hold title to land.  In August 2019, parliament repealed a July 2015 constitutional amendment that allowed foreigners to own land and islands in connection with major projects, provided they invested at least USD 1 billion and at least 70 percent of the land was reclaimed.  Currently, there are no property and real estate laws or mechanisms to allow foreign persons to hold title to land.

The Land Act allows foreigners to lease land on inhabited islands for up to a maximum of 50 years, but there is no formal process for registration of leasehold titles.  The Uninhabited Land Act allows foreigners to lease land on uninhabited islands for purposes other than tourism for a maximum of 21 years for investments amounting to less than USD 1 million and up to a maximum of 50 years for investments over USD 10 million.  A 2010 amendment to the Tourism Act allows investors to lease an island for 50 years in general.  A subsequent 2014 amendment allows the extension of resort leases up to 99 years for a payment of USD 5 million.  The changes aim to incentivize investors, make it easier to obtain financing from international institutions, and increase revenue for the government.  Leases can be renewed at the end of their terms, but the formula for assessing compensation value of a resort at the end of a lease has not been developed.  In 2016, Parliament approved additional amendments to the Tourism Act, whereby islands and lagoons can be leased for tourism development based on unsolicited proposals submitted to the Tourism Ministry (Law No: 13/2016).

The Ministry of Economic Development screens and reviews all foreign investment proposals.  The process includes standard due diligence efforts such as a local police screening of all investors, determining the financial standing of the proposed shareholders through a bank reference, and performing a background check on the investors involved.  According to the government, each case is reviewed based on its merits accounting for factors such as the number of existing investors in the sector and the potential for employment and technology transfer.  In practice, the investment review process is not as transparent as policy would indicate, with potential for corruption to influence the decision-making process.

The approval procedure for foreign investments is as follows:

1. Submit a completed Foreign Investment Application form to the Ministry of Economic Development, available at gov.mv.
2. Walk-in consultations are available for foreign investors who may wish to discuss their proposals prior to submitting an application.
3. Receive approval
4. The standard processing time is three working days; however, if relevant ministries must be consulted, the approval may take 10-14 days.
5. Register a business vehicle
6. Once approval is received, an investor must register as a company, partnership, or a company which has been incorporated in another jurisdiction.
7. Application forms for registering as a legal vehicle are available from the ministry’s website.
8. Sign the Foreign Investment Agreement with the Ministry of Economic Development.
9. This Agreement outlines the terms and conditions related to carrying out the specific business in Maldives. For tourism sector investments, a Foreign Investment Agreement is not required as the land lease signed with the Ministry of Tourism governs all matters relating to tourism businesses in Maldives.
10. Obtain licenses and permits.
11. Sectors which require operating licenses include fisheries and agriculture, banking and finance, health, tourism, transport, construction, and education.

Other Investment Policy Reviews

The most recent World Trade Organization trade policy review was conducted in March 2016: https://www.wto.org/english/tratop_e/tpr_e/tp432_e.htm . 

Business Facilitation

Maldives ranked 147 out of 190 on the World Bank’s Ease of Doing Business index in 2019, scoring especially low on getting electricity; registering property; trading across borders; protecting minority investors; getting credit; and resolving insolvency.  On average, it takes six steps and 12 days to start a business.

The Ministry of Economic Development manages the process for business incorporations, permits, licenses and registration of logos, trade markets, seals, and other processes.  The Ministry’s website details relevant policies and procedures: http://www.trade.gov.mv

The Ministry of Economic Development also maintains an online business portal at https://business.egov.mv/  to access the following services: Name Reservation; Business Name Registration; Sole Proprietorship registration submission; Company Registration Submission; SME Categorization; Issuance of Corporate Profile Sheet; Logo Registration; Seal Registration; Trade Mark Registration, Request for Certificate of Incumbency; Request for Letter of Good Standing; and a Request for re-issuance of registration certificate.  Foreign investment companies, including entities with any foreign shareholding, must receive foreign investment approval before they can register online.

As of March 2021, the government was drafting amendments to the Companies Act, Electronic Transactions Bill, and Mercantile Court Bill. A Bankruptcy Bill was submitted to Parliament in 2020 and is in the committee stage as of March 2021.  These bills could affect business facilitation. In June 2019, the government signed a USD 10 million project with the Asian Development Bank to develop a National Single Window project designed to establish a national single window system for international trade and reengineered trade processes, however the project is currently on hold due to contracting issues.

Outward Investment 

The government does not promote or incentivize outward investment but does not restrict domestic investors from investing abroad either.  According to UNCTAD’s 2019 World Investment Report, Maldives has not registered any outward investment since 2005.

The United States does not have a bilateral investment treaty with Maldives.  Maldives signed a trade and investment framework agreement (TIFA) with the United States and held its first meeting in October 2014.  The second meeting was held in June 2019. The Maldives and the United Arab Emirates signed an Agreement on the Promotion and Reciprocal Protection of Investments in October 2017.

India and Maldives signed a trade agreement in 1981, providing for export of essential commodities.  Maldives signed and entered into the South Asian Free Trade Area (SAFTA) in 2006 and signed but has not ratified the Trade Preferential System of the Organization of the Islamic Conference in 2014.

Maldives first signed an Agreement on Trade and Economic Cooperation with the People’s Republic of China (PRC) in 2004 and then signed its first bilateral free trade agreement with the PRC in December 2017.  However, the agreement is not yet in effect.  The Government of Maldives also completed negotiations on an FTA with Hong Kong in 2017, but an agreement has not been signed.

The United States has not signed a bilateral taxation treaty with Maldives.  Maldives signed a Double Tax Avoidance Treaty with the United Arab Emirates, which entered into force in January 2017.  In April 2016, Maldives and India signed an agreement to avoid double taxation of income derived from air transport and an agreement to share information on taxes, both of which are currently in force.  In 2005 Maldives signed a double taxation avoidance treaty which is a limited multilateral agreement between members of the South Asian Association for Regional Cooperation (SAARC) for avoidance of double taxation and mutual assistance in tax matters.

Transparency of the Regulatory System

Maldives’ Parliament (the People’s Majlis) formulates legislation, while ministries and agencies, primarily the Ministry of Economic Development, develop regulations pertaining to investment.  The Ministry of Tourism develops regulations relevant to the tourism sector.  Certain business sectors require sector-level operating licenses from other ministries/agencies, including fisheries and agriculture, banking and finance, health, tourism, transport, construction, and education.

The Maldives Monetary Authority (MMA) regulates the financial sector and issues banking licenses.  The Capital Market Development Authority develops regulations for the capital market and pension industry and licenses securities market intermediaries.  The current Parliament, sworn in in April 2019, regularly makes draft bills and regulations available for public comment.

Since its inauguration in November 2018, the Solih administration has taken steps to improve fiscal transparency.  For example, beginning in December 2018, the Ministry of Finance (MoF) began issuing weekly updates on fiscal operations on its public website.  A limited write-up on total annual debt obligations for 2021 and projected annual debt obligations for 2022 and 2023 were included in a “budget book” published on the MoF website, along with the 2021 proposed budget.  It includes the total amount of debt, disaggregated into the totals of domestic and foreign debt; however, it does not include details of contingent or state-owned enterprise (SOE) debt. All contingent debt numbers are published on the MoF website, which includes Central Government debt as well as all SOE guaranteed debt (which are usually external borrowings).

Detailed information on SOE debt with sovereign loan guarantees and the total debt amount of individual SOEs is included in the MoF’s Quarterly Report on SOEs, which is published on the MoF’s website each quarter.

The MMA, which functions as Maldives’ Central Bank, includes information on domestic debt obligations on a monthly basis on their website: http://mma.gov.mv/#/research/statisticalPublications/mstat/Monthly percent20Statistics. 

The MoF published a mid-year “Fiscal and Debt Strategy Report” on their website in July 2020.  This report included details of the position of the debt portfolio at the end of 2019 and the estimated position by the end of 2020 19: https://www.finance.gov.mv/fiscal-and-debt-strategy-report

The website of the Attorney General’s Office (AGO) (www.mvlaw.gov.mv) publishes the full text of all existing laws and regulations, but most of the documents are in the Dhivehi language.  The AGO is establishing an English language database of laws and court judgements.

International Regulatory Considerations

Maldives is a member of the South Asian Association for Regional Cooperation (SAARC) and is a signatory of the South Asian Free Trade Area (SAFTA).

Trade and investment related legislation and regulation are influenced by common law principles from the United Kingdom and other western jurisdictions.  The judiciary has cited foreign case law from jurisdictions from the United Kingdom, the United States, and Australia when interpreting local trade-related statues.

Maldives is a member of the World Trade Organization (WTO) and has submitted some of the notifications under Technical Barriers to Trade.  However, the Ministry of Economic Development reports that technical assistance is required for Maldives to fully comply with WTO obligations.

Legal System and Judicial Independence

The sources of law in Maldives are its constitution, Islamic Sharia law, regulations, presidential decrees, international law, and English common law, with the latter being most influential in commercial matters.  The Maldives has a Contract Law (Law No. 4/91) that codifies English common law practices on contracts.  The Civil Court is specialized to hear commercial cases.  The Employment Tribunal is mandated to hear claims of unfair labor practices.  A bill proposing the establishment of a Mercantile Court has been pending in Parliament since 2013.  The Judicial Services Commission is responsible for nominating, dismissing, and examining the conduct of all judges.  The Attorney General acts as legal advisor to the government and represents the government in all courts except on criminal proceedings, which are represented by the Prosecutor General.

A Supreme Court was established for the first time in 2008 under the new Maldives Constitution. The Supreme Court is the highest judicial authority in Maldives.  In addition to the Supreme Court, there are six courts: the High Court; Civil Court; Criminal Court; Family Court; Juvenile Court; and a Drug Court.  There are approximately 200 magistrate courts, one in each inhabited island.  The Supreme Court and the High Court serve as courts of appeal.  There are no jury trials. In February 2020, President Solih stated his intent to submit a bill introducing a circuit court system in the Maldives.

Historically, the judicial process has been slow and, often, arbitrary.  In August 2010, the Judicial Services Commission reappointed—and confirmed for life—191 of the 200 existing judges.  Many of these judges held only a certificate in Sharia law, not a law degree.  The Maldivian judiciary is a semi-independent institution but has been subjected frequently to executive influence, particularly the Supreme Court.  The United Nations Office of the High Commissioner for Human Rights in 2015 stated the judicial system is perceived as politicized, inadequate, and subject to external influence.  An estimated 25 percent of judges also have criminal records.  The media, human rights organizations, and civil society had repeatedly criticized the Judicial Services Commission for appointing judges deemed unqualified.

This history has led President Solih’s administration to make judicial reform is a top priority.  In 2019, the Judicial Service Commission was overhauled; it has since removed the former Supreme Court bench and initiated investigations into ethics standards complaints against several judges from the High Court, Criminal Court, Civil Court, Family Court, and several island magistrates courts.  In August 2019, Parliament amended the Judicial Service Commission Act to return control of the Department of Judicial Administration (DJA), which is responsible for the management of courts, to the judicial watchdog Judicial Service Commission. This amendment was intended to overcome longstanding issues of the former Supreme Court using its direct supervision of the DJA to punish judges exhibiting judicial independence by transferring them to a lower court or another island as retribution.

Laws and Regulations on Foreign Direct Investment

Foreign parties can invest in Maldives through the Foreign Investment Law or the Special Economic Zones (SEZ) Act.  Details are available on the Ministry of Economic Development’s Doing Business in the Maldives Guide and in the tax guide:

• https://www.maldivesembassy.or.th/media/attachments/2019/08/23/doing-business-maldives-trade-min.pdf 
• https://www.mira.gov.mv/forms/m829-tax-guide-for-foreigners-doing-business-in-the-Maldive.pdf 

A new Foreign Direct Investment policy announced in February 2020 consolidated existing practices and introduced new guidelines, including two new routes to get government approval for foreign direct investments and new caps on equity ownership for investments in certain sectors. The policy is available on http://trade.gov.mv/dms/669/1581480884.pdf 

Foreign investment in Maldives is governed by Law No. 25/79, covering agreements between the government and investors.  The Business Registration Act (18/2014) requires foreign businesses to register as a company or partnership.  The Companies Act (10/96) governs the registration and regulatory and operational requirements for public and private companies.  The Partnership Act of 2011 governs the formation and regulation of partnerships.  Foreign investments are currently approved for an initial period of five years, with the option to renew.

Maldives introduced income taxes through an Income Tax Act in December 2019.  Taxation under the act was set to commence on January 1, 2020 but remuneration was to come within the purview of income effective April 1, 2020.  The Business Profit Tax regime imposed under the Business Profit Tax Act and the Remittance Tax regime imposed under the Remittance Tax Act was repealed with the commencement of Income Tax. Under the Act, tax rates remain unchanged for banks at 25 percent on profits, while taxes of 15 percent on profits that exceed USD 32,425 (MVR 500,000) would be levied on corporations, partnerships, and other business entities.

Competition and Antitrust Laws

In 2019, Maldives drafted a Competition and Fair Business Practices Act to ensure a fair market and equitable opportunities for all small and medium enterprises.  President Solih ratified the bill on August 31, 2020, and it was due to enter into force in the first part of 2021, however it is still not in force as of March 31, 2020.  On entry into force, the Ministry of Economic Development will be the principal agency responsible for implementing the Act, including hearing, reviewing, and acting on competition-related complaints.  There had been no competition-related cases submitted to Ministry of Economic Development as of March 2021.

Expropriation and Compensation

According to the Law on Foreign Investment (No. 25/79), the government may, with or without notice, suspend an investment when an investor indulges in an act detrimental to the security of the country or where temporary closure is necessary for national security.  If, after due investigation, it cannot be concluded within 60 days of the temporary closure that the foreign investor had indulged in an activity detrimental to the security of Maldives, the government will pay compensation.  Capital belonging to an investment that is closed for these reasons may be taken out of the country in a mutually agreed upon manner.

In December 2012, the Maldivian government took over operation of the Malé International Airport from GMR Infrastructure Limited, an Indian company, after the Maldivian government repudiated the 2012 contract.  In 2016, the Maldivian government paid GMR USD 271 million in damages as ordered by a Singaporean Arbitration Tribunal.

Dispute Settlement

ICSID Convention and New York Convention

Maldives is not a Party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.  In September 2019, Maldives acceded to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, which came into force in Maldives in December 2019.

Investor-State Dispute Settlement

Maldives does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with the United States.  An Arbitration Act modeled on the United Nations Commission on International Trade Law (UNCITRAL) model law was passed in 2013 and provides for implementation of international arbitral awards.  However, the judgments of foreign courts cannot directly be enforced through the courts.  Judgments of foreign courts must be submitted to domestic courts, which then make a separate judgment.  In April 2019, President Solih established the Maldives International Arbitration Centre, a requirement under the 2013 Act.

In 2013, Maldives-based Sun Travels and Tours terminated a foreign corporation’s 20-year management agreement for a luxury resort.  The business took the case to the International Court of Arbitration in Singapore and was awarded USD 27 million in damages.  The Court dismissed a USD 16 million counterclaim by Sun Travel and Tours.  In 2015, the foreign corporation then filed the case in Maldives High Court to enforce the ruling of the arbitration center.  In 2016, Sun appealed the arbitration center’s decision in Maldives’ Civil Court, which ruled in Sun’s favor and ordered the foreign corporation to pay USD 16 million to Sun as compensation for violating the terms of their agreement to manage the resort. This ruling was overturned by the Maldivian High Court on July 7, 2020 and led to the Civil Court ordering freeze on bank accounts of Sun. There are no further updates on the cases as of March 2021.

International Commercial Arbitration and Foreign Courts

An Arbitration Act modeled on the United Nations Commission on International Trade Law (UNCITRAL) model law was passed in 2013 and provides for implementation of international arbitral awards.  However, the judgments of foreign courts cannot directly be enforced through the courts.  Judgments of foreign courts must be submitted as a fresh action and established as a judgment by the local courts that may then be enforced. In April 2019, President Solih established the Maldives International Arbitration Centre, a requirement under the 2013 Act. Dispute resolution for significant investments can take years, and it can be a challenge to collect payment for any damages from the government or from Maldivian companies.  The Maldivian judicial system is subject to significant political pressure.

Bankruptcy Regulations 

Maldives scores 33.3 out of 100 on resolving insolvency in the World Bank’s Ease of Doing Business Distance to Frontier index.  Maldives does not have a bankruptcy law, although corporate insolvencies are dealt with under the Companies Act.  Debtors and creditors may file for liquidation.  There is no priority assigned to creditors and there is very limited legal framework to protect creditors following commencement of insolvency.

Investment Incentives

Maldives introduced a Special Economic Zones Act (Law No.: 24/2014) in September 2014, with the goal of encouraging private investment in large-scale projects in priority areas, including: export processing activities; transportation and transshipment; universities, hospitals, and research facilities; information communication and technology parks; international financial services; oil and gas exploration; and initiatives that introduce new technologies.  SEZ investments in excess of USD 150 million qualify for special tax and regulatory incentives guaranteed under the SEZ law.  The list of priority sectors is reviewed by the President on a yearly basis.

Incentives under the SEZ law include:

1. Exemption from business profit tax
2. Exemption from goods and services tax

• Exemption from withholding tax

1. Flexible procedures in foreign employment
2. Exemption from taxes on sale and purchase of land
3. Option of acquiring freehold land by registered companies in Maldives with at least 50 percent local shareholding

The duration of these tax exemptions depends on the business area of the investment and the scale of the investment.

As of March 2021, no companies have invested in Maldives under the SEZ law.

Foreign Trade Zones/Free Ports/Trade Facilitation

As mentioned immediately above Maldives introduced a Special Economic Zones Act (Law No.: 24/2014) in September 2014. Please refer to the above section for details of investment incentives provided for under the Act.

Performance and Data Localization Requirements

In an attempt to boost local employment, the Law on Foreign Investments requires Maldivian nationals to be employed unless employment of foreigners is a necessity.  Qualifying employers are provided a quota, limiting the number of expatriates who can be employed.  Quota levels depend on the sector and size of the investment.  Employers obtain quotas from the Ministry of Economic Development before applying for employment approval.  SEZ investments receive some exceptions to these rules.  A report by the International Labor Organization (ILO) found that the quota system is cumbersome and difficult to implement and that inefficiencies and red tape create unnecessary administrative burdens while doing little to increase local employment.  In addition, the ILO reported when labor is not available because of quota requirements, employers often resort to the irregular labor market, providing incentives to the phenomena of visa trading.

Real Property

Secured interests in property, movable and real, are recognized and enforced under the 2002 Land Act, and the councils on each island maintain registries.  Rights in real estate are governed by the Land Act, the Uninhabited Islands Act (20/98) and the Tourism Act (2/99).  Foreign parties cannot own land but can lease land for periods no longer than 99 years for business activity under the remaining regimes.

Intellectual Property Rights

Although the government has an intellectual property unit within the Ministry of Economic Development, it is not active.  The government has not yet signed international agreements or conventions on intellectual property rights.  A Trademarks Bill is in the legislative agenda for 2021 and Ministry of Economic Development is in the drafting process of the bill which is planned to be submitted to Parliament during the second parliamentary session of 2021.

The World Intellectual Property Organization (WIPO) is providing assistance to the government on the drafting of bills regarding trademarks and geographical indicators.  For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en

Capital Markets and Portfolio Investment

Maldives Stock Exchange (MSE), first opened in 2002 as a small securities trading floor, was licensed as a private stock exchange in 2008.  The Securities Act of January 2006 created the Capital Market Development Authority (CMDA) to regulate the capital markets.  The MSE functions under the CMDA.  The only investment opportunities available to the public are shares in the Bank of Maldives, Islamic Bank of Maldives, five state-owned public companies, a foreign insurance company, a foreign telecommunications company, and a local shipping company.  The market capitalization of all listed companies listed was USD 857 million at the end of 2018.

Foreigners can invest in the capital market as both retail and institutional investors.  Capital market license holders from other jurisdictions can also seek licenses to carry out services in the Maldives capital market.  There are no restrictions on foreign investors obtaining credit from banks in Maldives nor are there restrictions on payments and transfers for current international transactions.

Money and Banking System 

The Maldives financial sector is dominated by the banking sector.  The banking sector consists of eight banks, of which three are locally incorporated, four are branches of foreign banks and one is a fully owned subsidiary of a foreign bank.  There are 52 branches of these banks throughout the country of which 33 are in the rural areas.  Additionally, at the end of 2017 there were 116 automatic teller machines (of which 51 were in rural areas) and 230 agent banking service providers.  Maldives has correspondent banking relationships with six banks.  Maldives has not announced intentions to allow the implementation of blockchain technologies (cryptocurrencies) in its banking system.  International money transfer services are offered by four remittance companies through global remittance networks.  Two telecommunications companies offer mobile payment services through mobile wallet accounts and this service does not require customers to hold bank accounts.

Non-bank financial institutions in the country consist of four insurance companies, a pension fund, and a finance leasing company, a specialized housing finance institution and money transfer businesses.  Maldives Real Time Gross Settlement System and Automated Clearing House system is housed in the MMA for interbank payments settlements for large value and small value batch processing transactions respectively.  There has been an increase in usage of electronic payments such as card payments and internet banking.  All financial institutions currently operate under the supervision of the MMA.

Foreign Exchange and Remittances

Foreign Exchange

Rules relating to the foreign exchange market are stipulated in the Monetary Regulation of the MMA.  Both residents and non-residents may freely trade and purchase currency in the foreign exchange market.  Residents do not need permission to maintain foreign currency accounts either at home or abroad and there is no distinction made between foreign national or non-resident accounts held with the banks operating in Maldives.  The exchange rate is maintained within a horizontal band, with the value of the Rufiyaa allowed to fluctuate against the U.S. dollar within a band of 20 percent on either side of a central parity of MVR12.85 per U.S. dollar.  In practice, however, the rufiyaa has been virtually fixed at the band’s weaker end of Rf 15.42 per dollar, according to the IMF.

Remittance Policies

Rules regarding foreign remittances are governed by the Regulation for Remittance Businesses under the Maldives Monetary Authority Act of 1981.  There are no restrictions on repatriation of profits or earnings from investments.  In 2016, the government imposed a three percent remittance tax on money transferred out of Maldives by foreigners employed in the Maldives.  However, Maldives Inland Revenue Authority (MIRA) repealed the remittance tax effective from January 1, 2020 to reduce “out-of-bank” money transactions that have become commonplace following implementation of the tax.

Sovereign Wealth Funds

In 2016, Maldives Finance Minister announced plans to establish a “Sovereign Development Fund (SDF)” that would support foreign currency obligations incurred to executive public sector development projects.  The government has not published any documents related to the SDF and does not have a published policy document regulating funding or a general approach to withdrawals with regard to SDF.  The MoF plans to issue a separate publication on SDF investments sometime within 2021.  This publication will include information on deposits into and withdrawals/investments from the SDF.  The MoF also reported it is in the process of drafting regulations detailing a general approach to deposits, withdrawals, and investments from the SDF.

Allocations to the SDF are included in the budget and published in the MoF’s weekly and monthly fiscal development reports published regularly on its website.  The Ministry reported two sources of funding for the SDF – revenue gathered through Airport Development Fees charged to all travelers entering and departing Maldives and ad hoc allocations made by the MoF at its discretion.  Expected ADF receipts are included in the Revenue Tables of the Budget.  Reports from the MoF show that the size of the SDF fund had amassed USD 206.5 million as of February 25, 2021.

The Maldives Privatization and Corporatization Board (PCB) monitors and evaluates all the majority and minority share holding companies of the government of Maldives.  PCB reported 32 SOEs in 2021, 22 of which are 100 percent state owned.  The government is a majority shareholder of Bank of Maldives, Maldives Transport and Contracting Company Plc, Malé Water and Sewerage Company Private Limited, State Trading Organization Plc, Addu International Airport Private Limited, and SME Development Finance Corporation Private Limited.  The government also holds minority shares in Maldives Tourism Development Corporation Plc, Dhivehi Raajjeyge Gulhun Plc (one of the two telecom providers), Housing Development Finance Corporation Plc, and Maldives Islamic Bank Plc. (https://www.finance.gov.mv/public-enterprises)

Maldivian SOEs do not strictly adhere to OECD Guidelines on Corporate Governance for SOEs.  When SOEs are involved in investment disputes, domestic courts tend to favor the government enterprise.  SOEs also follow different procurement regulations than government offices. As a result, SOEs have been a major contributor to fast rising Maldives’ public debt levels.

Privatization Program

A 2013 Privatization Act governs all privatization and corporatization efforts by the government.  The Privatization and Corporatization Board monitors and evaluates all the majority and minority share holding companies of the Government of Maldives https://www.finance.gov.mv/privatization-and-corporatization-board.  The Government of Maldives has announced plans for a privatization program in its 2021-23 budget, and the MoF is in the process of developing an action plan for the privatization strategy.  Further, an in-depth study will be undertaken for each SOE identified, and policy decisions to privatize will be based on these studies.

There is limited but growing awareness of responsible business conduct (RBC) or corporate social responsibility (CSR) among the business elite and tourism resort owners.  All new government leases for tourism resorts contain CSR requirements and individual resorts often implement their own RBC programs.  However, the government does not have a consistent policy or national action plan to promote responsible business conduct.

There are several workers’ organizations monitoring and advocating for RBC regarding workers’ rights, the most active of which is the Tourism Employees Association of the Maldives (TEAM).  Further, there are many NGOs advocating for RBC in environment-related issues.  Civil society organizations (CSOs) often work together to campaign for the introduction of new laws such as an Industrial Relations Law and an Occupational Health and Safety Law.  These CSOs can function without harassment from the government, though COVID-related restrictions during the pandemic made conducting their activities difficult.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings);
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

Maldives made significant progress in its efforts to increase its transparency, jumping from 130 out of 180 countries in the Transparency International Corruption Perception index in 2019 to 75^th, in 2020.  Its score increased from 29 out of 100 to 43 out of 100, surpassing that of regional competitors like Sri Lanka, India, and Pakistan. Still, corruption practices exist at all levels of society, threatening inclusive and sustainable economic growth.

The Solih administration has publicly pledged to tackle widespread corruption and judicial reform.  As part of President Solih’s first 100 business day agenda, he established a Presidential Commission on Corruption and Asset Recovery to investigate corruption cases originating between February 2012 and November 2018.  As of March 2021, the commission had not issued a report of its findings.  Additional measures towards increased transparency include requiring public financial disclosures for cabinet members, political appointees, and all members of parliament.

Maldives law provides criminal penalties for corruption by officials, but enforcement is weak.  The law on prevention and punishment of corruption (2000) defines bribery and improper pecuniary advantage and prescribes punishments.  The law also outlines procedures for the confiscation of property and funds obtained through the included offenses.  Penalties range from six months to 10 years banishment, or jail terms.  According to non-governmental organizations, a narrow definition of corruption in the law, and the lack of a provision to investigate and prosecute illicit enrichment, limited the Anti-Corruption Commission’s work.

Maldives acceded to the United Nations Convention against Corruption in March 2007, and under the 2008 Constitution, an independent Anti-Corruption Commission was established in December 2008.  The responsibilities of the Commission include inquiring into and investigating all allegations of corruption by government officials; recommending further inquiries and investigations by other investigatory bodies; and recommending prosecution of alleged offenses to the prosecutor general, where warranted.  The Commission does not have a mandate to investigate cases of corruption of government officials by the private sector.

The Maldives is a party to the UN Anticorruption Convention.  Maldives is not a party to the OECD Convention on Combatting Bribery.

A number of domestic human rights groups generally operated without government restriction, investigating and publishing their findings on human rights cases.  Government officials, however, often have not been cooperative or responsive to their views.  Upon assumption of office, President Solih’s administration pledged to submit a new NGO bill that would increase protections for non-government organizations. The bill completed parliamentary debate and is undergoing committee review as of March 2021.

Resources to Report Corruption

Anti-Corruption Commission of the Maldives
Address: Huravee Building, Male, Maldives, 20114
Telephone: (800)3300007 (Toll free number), (960) 331 0451, (960) 331 7410 (General Inquiries)
Email: info@acc.gov.mv; complaints@acc.gov.mv

Ms. Asiath Rilweena
Executive Director
Transparency Maldives
Address: MF Building, 7th Floor, Chaandhanee Magu, Male’, Republic of Maldives
Telephone: +960 330 4017
Email: office@transparencymaldives.org

Maldives is a multi-party constitutional democracy, but the transition from long term autocracy to democracy has been challenging.  Maldives gained its independence from Britain in 1965.  For the first 40 years of independence, Maldives was run by President Ibrahim Nasir and then President Maumoon Abdul Gayoom, who was elected to six successive terms by single-party referenda.  August 2003 demonstrations forced Gayoom to begin a democratic reform process, leading to the legalization of political parties in 2005, a new constitution in August 2008, and the first multiparty presidential elections later that year, through which Mohamed Nasheed was elected president.

In February 2012 Nasheed resigned under disputed circumstances. President Abdulla Yameen’s tenure, beginning in 2013, was marked by corruption, systemic limitations on the independence of parliament and the judiciary, and restrictions on freedom of speech, press, and association.  Yameen’s tenure was also characterized by increased reliance on PRC-financing for large scale infrastructure projects, which were decided largely under non-transparent circumstances and procedures.  External debt rose rapidly during Yameen’s tenure.

In September 2018, Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP) won the campaign for president running on a platform of economic and political reforms and transparency.  The MDP also won a super majority (65 out of 87) seats in parliamentary elections in April 2019, the first single-party majority since the advent of multi-party democracy.  President Solih has pledged to restore democratic institutions and the freedom of the press, re-establish the justice system, and protect fundamental rights.

There is a global threat from terrorism to U.S. citizens and interests.  Attacks could be indiscriminate, including in places visited by foreigners and “soft targets” such as restaurants, hotels, recreational events, resorts, beaches, maritime facilities, and aircraft.  Concerns have significantly increased about a small number of violent Maldivian extremists who advocate for attacks against secular Maldivians and are involved with transnational terrorist groups.  For more information, travelers may consult the State Department’s Country Reports on Terrorism.

U.S. citizens traveling to Maldives should be aware of violent attacks and threats made against local media, political parties, and civil society.  In the past there have been killings and violent attacks against secular bloggers and activists.  For more information, travelers may consult the State Department’s 2019 Human Rights Report link: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/maldives/

Maldives has a history of political protests. Some of these protests have involved use of anti-Western rhetoric. There are no reports of unrest or demonstrations on the resort islands or at the main Velana International Airport.  Travelers should not engage in political activity in Maldives. Visitors should exercise caution, particularly at night, and should steer clear of demonstrations and spontaneous gatherings.  Those who encounter demonstrations or large crowds should avoid confrontation, remain calm, and depart the area quickly.  While traveling in Maldives, travelers should refer to news sources, check the U.S. Embassy Colombo website for possible security updates, and remain aware of their surroundings at all times.

U.S. Embassy employees are not resident in Maldives.  This will constrain the Embassy’s ability to provide services to U.S. citizens in an emergency.  Many tourist resorts are several hours’ distance from Malé by boat, necessitating lengthy response times by authorities in case of medical or criminal emergencies.

Expatriate labor is allowed into Maldives to meet shortages.  Maldives Immigration reported approximately 200,000 registered expatriate workers in the country in 2019, mostly in tourism, construction, and personal services.  The government reported 63,000 unregistered expatriate migrant workers, but non-governmental sources estimate the number is even higher. During May 2020, President Solih announced that the government will be repatriating unregistered Bangladeshi nationals in the Maldives, following which the Ministry of Foreign Affairs, the Ministry of Economic Development and the Bangladeshi High Commission collaboratively began a repatriation exercise, with the assistance from the Bangladeshi government. Close to 15,000 unregistered migrant workers were repatriated under the program as of November 2020.

Notwithstanding the labor shortage, unemployment in Maldives is high, as many youths leaving lower secondary school have few in-country avenues to pursue higher secondary education.  Although resorts may offer employment opportunities, locals are less likely to take advantage of these jobs as resort employment practices require employees to live and work on the island for long stretches of time, away from family.  Religious and cultural reasons also discourage women from seeking employment on distant islands.

The Law on Foreign Investments requires Maldivian nationals to be employed unless employment of foreigners is necessary.  See section on “Performance and Data Localization” for more detail.

The 2008 the Employment Act and a subsequent amendment to the Employment Act recognize workers’ right to strike and establish trade unions; however, current law does not adequately govern the formation of trade unions, collective bargaining, and the right to association.  While the constitution provides for workers’ freedom of association, there is no law protecting it, which is required to allow unions to register and operate without interference and discrimination.  As a matter of practice, workers’ organizations are treated as civil society.

A regulation on strikes requires employees to negotiate with the employer first, and if this is unsuccessful, then the employees must file advance notice prior to a strike.  The Freedom of Peaceful Assembly Act effectively prohibits strikes by workers in the resort sector, the country’s largest money earner.  Employees in the following services are also prohibited from striking: hospitals and health centers, electricity companies, water providers, telecommunications providers, prison guards, and air traffic controllers.

Maldives became a member of the International Labor Organization in 2008 and has ratified the eight core ILO Conventions.  Maldives has not ratified the four priority governance ILO Conventions.  In 2019, the ILO called on the Government to take the necessary measures to eliminate child labor, including through adopting a national policy and a national action plan to combat child labor in the country.

Development Finance Corporation (DFC)/Overseas Private Investment Corporation (OPIC) began operations in Maldives in 2011, but no projects have been identified.  Maldives became the 165th member of the Multilateral Investment Guarantee Agency on May 20, 2005.

* Source for Host Country Data: Country Data: Maldives National Bureau of Statistics   

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Alan Brinker
Maldives Policy Coordinator
U.S. Embassy Colombo, Sri Lanka
Phone: +94-11-249-8500
Email: commercialcolombo@state.gov

Policies Toward Foreign Direct Investment

There is recognition within the GoN that foreign investment is necessary to boost economic growth to meet the GoN’s target of becoming a middle-income country by 2030. While the GoN’s stated attitude toward FDI is positive, this has yet to translate into meaningful practice.

The most significant foreign investment laws are the revised Foreign Investment and Technology Transfer Act (FITTA) of 2019, the Public-Private Partnership and Investment Act (PPIA) of 2019, the Foreign Exchange Regulation Act of 1962, the Immigration Rules of 1994, the Customs Act of 2007 (a revised act is under Parliamentary review), the Industrial Enterprise Act of 2016 (and its 2020 revision), the Special Economic Zone (SEZ) Act of 2016 (and its 2019 amendment), the Company Act (2006), the Electricity Act of 1992, the Privatization Act of 1994, and the Income Tax Act (2002). Also important is the annual budget, which outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.

The FITTA attempted to create a friendlier environment for foreign investors. It streamlined the process for inbound foreign investment by requiring approval of FDI within seven days of application. Similarly, the FITTA streamlined the profit repatriation approval process, mandating decisions within 15 days. The revised FITTA set up a Single Window Service Center, through which foreign investors can avail themselves of the full range of services provided by the various government entities involved in investment approvals, including the Ministry of Industry, Commerce, and Supplies (MOICS), the Labor and Immigration Departments, and the Central Bank. The FITTA included a provision requiring the government to set a minimum threshold for foreign investment and publish it in the Nepal Gazette. On May 23, 2019, citing that provision, the government raised the minimum foreign investment threshold ten-fold to NPR 50 million (USD415,000) from the existing NPR 5 million (USD41,500). The new FITTA commits to providing “national treatment” to all foreign investors and that foreign companies will not be nationalized. Under the FITTA, investments up to NPR 6 billion (USD52 million) come under the purview, including approval authority, of the MOICS Department of Industry (DOI), and anything above that amount falls under the authority of the Investment Board of Nepal (IBN).

Other relevant laws include the Industrial Enterprise Act, the SEZ Act, an updated Labor Act (2017), and a pending Intellectual Property Rights Act. The Industrial Enterprise Act is intended to promote industrial growth in the private sector, includes a “no work, no pay” provision, and allows companies to take certain steps – such as buying land and establishing a line of credit – while environmental assessments and other regulatory requirements are being carried out. In practice, U.S. and other foreign companies comment that corruption, bureaucracy, inefficient implementation of existing procedures and requirements, and a weak regulatory environment make investing in Nepal unattractive, and Nepal’s new legislation has not improved the investment climate sufficiently to change that assessment.

Another significant piece of legislation that could affect investment decisions in Nepal is the Customs Act (2007), which established invoice-based customs valuations and replaced many investment tax incentives with a lower, uniform rate.  In 2017, the Department of Customs started to use the Automated System for Customs Data (ASYCUDA) world software platform. In addition, the Electricity Act includes special terms and conditions for investment in hydropower development and the Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises.

There is no public evidence of direct executive interference in the court system that could affect foreign investors.  However, in recent years there has been public and media criticism of the politicization of the judiciary, including appointments of judges to Appellate Courts and the Supreme Court allegedly based on their political affiliations.

The IBN, a high-level government body chaired by the Prime Minister, was formed in 2011 to promote economic development in Nepal.  In addition to approving large-scale investment projects, the IBN is also the GoN body charged with assessing and managing public-private partnership (PPP) projects. It has the task of attracting large foreign investors to Nepal and was a key organizer of the last two Investment Summits in 2017 and 2019. It is the primary point of contact for large investors (above USD50 million), especially those engaged in public infrastructure projects.

The Nepal Business Forum ( http://www.nepalbusinessforum.org/ ) was formed in 2010 with the “aim of improving the business environment in Nepal through better interaction between the business community and government officials.” The NBF does not meet according to a regularized schedule, and the Embassy is not aware of any formal mechanisms or platforms to enable on-going dialogue, aside from the IBN, DOI, and the NBF.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises in Nepal and engage in various forms of remunerative activity.  The FITTA 2019 slightly increased the number of sectors open to foreign investment.  Outside of the restricted sectors listed below, foreign investment up to 100 percent ownership is permitted in most sectors. The GoN announced the opening of FDI in the primary agricultural sector for exports in January 2021. However, the matter is sub judice at the Supreme Court (as of March 2021), and so remains unimplemented.

During 2018 and 2019, the Market Monitoring Unit of the MOICS’s Department of Supply Management raided business establishments, seized records, closed business outlets, and brought charges against private businesses in various sectors, including retail, healthcare, and education, alleging that companies were charging prices that were too high.  Such raids are sporadic rather than a matter of sustained policy but contribute to creating an uncertain business environment.

The sectors excluded from foreign investment are listed in the annex of the FITTA 2019 and include:

1. Primary agricultural sectors including animal husbandry, fisheries, beekeeping, oil-processing (from seeds or legumes), milk-based product processing; (Note: The GoN is attempting to open this sector for FDI if 75 percent of the products are exported. However, the matter is under review at the Supreme Court.)
2. Small and cottage enterprises;
3. Personal business services (haircutting, tailoring, driving, etc.);
4. Arms and ammunition, bullets, gunpowder and explosives, nuclear, chemical and biological weapons, industries related to atomic energy and radioactive materials;
5. Real estate (excluding construction industries), retail business, domestic courier services, catering services, money exchange and remittance services;
6. Tourism-related services – trekking, mountaineering and travel agents, tourist guides, rural tourism including arranging homestays;
7. Mass media (print, radio, television, and online news), feature films in national languages;
8. Management, accounting, engineering, legal consultancy services, language, music, and computer training; and
9. Any consultancy services in which foreign investment is above 51 percent.

Investment proposals are screened by the DOI or the IBN to ensure compliance with the FITTA and other relevant laws.  Historically, the lack of clear, objective criteria and timeframes for decisions have resulted in complaints from prospective investors. While the GoN intended the FITTA to address these issues, the regulations enabling the implementation of the Act were only completed in January 2021, and thus how the law will work in practice remains to be seen.

The IBN website provides resources to prospective investors including the Nepal Investment Guide ( http://www.ibn.gov.np/ ). Similarly, the DOI maintains a website that should be helpful to investors ( http://www.investnepal.gov.np ).

U.S. investors are not disadvantaged or singled out relative to other foreign investors by any of the ownership or control mechanisms, sector restrictions, or investment screening mechanisms.  U.S. companies often note that they struggle to compete with firms from neighboring countries when it comes to cost, but this is not a factor resulting from any specific GoN policy.

Other Investment Policy Reviews

There have been no recent investment policy reviews of Nepal.  The last one by the United Nations Conference on Trade and Development (UNCTAD) was conducted in 2003. The World Trade Organization (WTO) conducted a trade policy review in 2019, available online at:   https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=((%20@Title=%20nepal)%20or%20(@CountryConcerned=%20nepal))%20and%20(%20(%20@Symbol=%20wt/tpr/g/*%20))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#  and https://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm#bycountry .  The International Finance Corporation (IFC) conducted a Country Private Sector Diagnostics, available at:   https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/creating+markets+in+nepal+country+private+sector+diagnostic .

Business Facilitation

In recent years, GoN officials have proclaimed Nepal “open for business” and explicitly welcomed foreign investment.  While the GoN likes to appear enthusiastic in its efforts to attract foreign investors, the reality has not yet matched the rhetoric.  Three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament but left little time for stakeholder consultations or transparency in the process. Both foreign and domestic private sector representatives often state that the GoN has not done enough to improve the business environment. While welcome provisions were included in the FITTA—for example, a streamlined approval process and single window service center—an assessment of the true effects of the reforms await full implementation.

After obtaining a letter of approval from DOI or IBN, Nepal’s Office of Company Registrar (OCR) maintains a website ( http://ocr.gov.np/index.php on which foreign companies can register.  OCR’s website also links to an information portal ( http://www.theiguides.org/public-docs/guides/nepal ), maintained by UNCTAD and the International Chamber of Commerce, with resources and information for potential investors interested in Nepal.  According to the portal, registering a company takes “between three days and a week with the law authorizing up to 15 days.” Independent think tanks, however, have noted the online system does not eliminate corruption, and bureaucrats frequently request additional documentation that must be submitted in person, rather than online. Users ranked the Nepal portion of the OCR business registration website a four out of ten, according to the UNCTAD supported Global Enterprise Registration website  www.GER.co .

Outward Investment

The Act Restricting Investment Abroad (ARIA) of 1964 prohibits outbound investment from Nepal.  Some enterprising Nepalis have found ways around the Act, but for most Nepali investors, outward investment is a practical impossibility. The GoN is currently in the process of revising the Foreign Exchange Regulation Act, which is expected to annul the ARIA, paving the way to limited capital account convertibility.

Nepal has Bilateral Investment Agreements in force with four countries:  France (1985), Germany (1988), the United Kingdom (1993), and Finland (2011).  In addition, Nepal has Bilateral Investment Agreement signed (but not in force) with Mauritius (signed 1999). Another one was signed with India in 2011 but was terminated in 2017.

Nepal has a free trade agreement with India, the Indo-Nepal Treaty of Trade, signed in 2002.  Nepal is a member of the South Asian Free Trade Area (SAFTA) along with Bangladesh, Bhutan, India, Pakistan, Sri Lanka, and the Maldives.

Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area, along with Bhutan, Myanmar, Sri Lanka, Bangladesh, India, and Thailand.

Nepal does not have a bilateral investment treaty or free trade agreement with the United States. Nepal has “Double Tax Avoidance” treaties with China, India, Mauritius, Sri Lanka, Pakistan, South Korea, Thailand, Austria, Norway, and Qatar.  The United States Embassy in Nepal (Post) is not aware of any recent or upcoming changes to the taxation regime. Nepal’s shift to a federalist structure, however, means that there will be new tax policies at the local and provincial levels.

A Malaysian company, Axiata (owner of NCell, the largest private telecom company in Nepal), is working through a dispute with the GoN regarding alleged tax evasion at the 2015 transfer of NCell’s ownership from previous owners, Telia Sonera. The implication of this settlement (which is still playing out in the courts) appears to be that Nepal’s Income Tax Act 2002 needs to be carefully studied by foreign investors when buying/selling companies in Nepal to understand their tax liabilities.

Transparency of the Regulatory System

The GoN has many laws, policies, and regulations that look good on paper, but are often not fully and consistently enforced.  Frequent government changes and staff rotations within the civil service result in officials who are often unclear on applicable laws and policies or interpret them differently than their predecessors.  Many foreign investors note that Nepal’s regulatory system is based largely on personal relationships with government officials, rather than systematic and routine processes.  Legal, regulatory, and accounting systems are not transparent and are not consistent with international norms. The World Bank gives Nepal a score of 1.75 (on a scale of one to five) on its “Global Indicators of Regulatory Governance” index https://rulemaking.worldbank.org/en/data/explorecountries/nepal , and notes that ministries in Nepal do not routinely create lists of “anticipated regulatory changes or proposals” and do not have the “legal obligation to publish the text of proposed regulations before their enactment.”

Historically, rule-making and regulatory authority resided almost exclusively with the central government in Kathmandu.  Nepal’s 2015 Constitution outlines a three-tiered federalist model. Following elections in 2017, seven provincial governments and 753 local government units were established.  Foreign businesses can expect to continue to interact with bureaucrats at the central government level in the near term, as national regulations remain the most relevant for foreign businesses. However, this could change over time as provincial governments become more established.

Traditionally, once acts are drafted and passed by Parliament, it has been incumbent upon the related government agencies and ministries to draft regulations to enforce the acts.  Regulations are passed by the cabinet and do not need parliamentary approval.  Nepal still lacks an established mechanism or system for the review of regulations based on scientific or data-driven assessments, or for conducting quantitative analyses for such purposes. The World Bank notes that the GoN is not required by law to solicit comments on proposed regulations, nor do ministries or regulatory agencies report on the results of the consultation on proposed regulations.  Post is not aware of any informal regulatory processes that are managed by nongovernmental organizations or private sector associations.

Legal, regulatory, and accounting systems are neither fully transparent nor consistent with international norms.  Though auditing is mandatory, professional accounting standards are low, and practitioners may be poorly trained. As a result, published financial reports can be unreliable, and investors often rely instead on businesses reputations unless companies voluntarily use international accounting standards.

Publicly listed companies in Nepal follow the 2013 Nepal Financial Reporting Standards (NFRSs), which were prepared on the basis of the International Financial Reporting Standards (IFRSs) 2012, developed by the IFRS Foundation and their standard-setting body, the International Accounting Standards Board.  Audited reports of publicly listed companies are usually made available.

Draft bills or regulations are sometimes made available for public comment, although there is no legal obligation to do so.  The government agency that drafts the bill is responsible for undertaking a public consultation process with key stakeholders by issuing federal notices for comments and recommendations, although it is unclear in practice how many government agencies actually do so.  Additionally, all parliamentarians are given copies of the draft bills to share with their constituencies.  This applies to all draft laws, regulations, and policies. Parliamentary rules, however, require that draft amendments to bills be proposed only within 72 hours of a bill’s introduction, giving minimal time for lawmakers, constituents, or stakeholders to submit considered feedback. In practice, post’s observation has been that there is no clear timeline for the process of creating and passing bills, including the time period provided for public or stakeholder consultation.

Generally, the government agency that drafted the bill, legislation, policy, or regulation posts the actual draft (in Nepali language) online.  Once approved, the Department of Printing, an office that is part of the Ministry of Communications and Information Technology, posts all acts online. Regulatory actions and summaries of these actions are available at the Office of the Auditor General and the Ministry of Finance.  Both of these government agencies post periodic reports on the regulatory actions taken against agencies violating laws, rules, and regulations.  Such summaries and reports are available online in Nepali.

Individual ministries are responsible for enforcement of regulations under their purview.  The enforcement process is legally reviewable, making the agencies publicly accountable.  There are several government entities, including the Parliamentary Accounts Committee, the Office of the Auditor General, and the Commission for the Investigation of Abuse of Authority (CIAA) that oversee the government’s administrative and regulatory processes. Post is not aware of any regulatory reform efforts.

Nepal’s budget and information on debt obligations are widely and easily accessible to the general public.  The annual budget is substantially complete and considered generally reliable. Nepal’s supreme audit institution reviews the government’s accounts, and its reports are publicly available.

International Regulatory Considerations

Nepal is one of eight members of the South Asian Association for Regional Cooperation (SAARC), an intergovernmental organization and geopolitical union of nations in South Asia including: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Under SAARC, Nepal is also a member of the South Asian Free Trade Area (SAFTA) which came into force on January 1, 2006 with the goal of creating a duty-free trade regime among SAARC member countries.  According to SAFTA rules, member countries were supposed to reduce formal tariff rates to zero by 2016.  However, tariff barriers remain in place for hundreds of “sensitive” goods produced by various SAARC member countries that do not qualify for duty-free status.

Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), an international organization of seven South Asian and Southeast Asian nations: Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal.

Bangladesh, Bhutan, India, and Nepal – known collectively as BBIN – are working together to develop a platform for sub-regional cooperation in such areas as water resources management, power connectivity, transportation, and infrastructure development.  The four BBIN nations agreed on a motor vehicle agreement (MVA – both cargo and passengers) in 2015. In early 2018, Bangladesh, India, and Nepal also agreed on operating procedures for the movement of passenger vehicles, and in early 2020, the same three countries met to draft a memorandum of understanding to implement the MVA, without obligation to Bhutan.

Nepal’s regulatory system generally relies on international norms and standards developed by the United Nations, World Bank, World Trade Organization (WTO), and other international organizations and regulatory agencies.

Nepal joined the WTO in March 2004.  According to its WTO accession commitments, the GoN agreed to provide notice of all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).  However, GoN officials are unable to confirm whether this procedure is followed consistently.

Nepal ratified the WTO’s Trade Facilitation Agreement (TFA) in January 2017.  As a least developed country (LDC), Nepal could benefit from additional technical assistance from WTO members through the TFA Facility.  A 2017 Asia Development Bank report noted, “Nepal has been making progress in undertaking trade facilitation reforms over the years, particularly those related to the customs.” The WTO’s December 2018 policy review ( https://www.wto.org/english/tratop_e/tpr_e/tp481_crc_e.htm ) noted Nepal’s efforts to diversify its narrow production and export base and encouraged Nepal to pursue further economic reform, including through its National Trade Integration Strategy ( https://www.oecd.org/aidfortrade/countryprofiles/dtis/Napal-DTIS-2016.pdf ) as well as address its supply side constraints, most notably high transit and transportation costs.  According to the TFA Facility’s website ( http://www.tfafacility.org ), Nepal has submitted provisions for all three categories, a key step for implementing TFA Category A, B, and C requisites.

Legal System and Judicial Independence

Nepal’s court system is based on common law and its legal system is generally categorized under civil and criminal offences and laws. Contract law is codified.  In theory, contracts are automatically enforced, and a breach of contract can be challenged in a court of law. In practice, enforcement of contracts is weak. Nepal’s contracts are guided by the Contract Act of 2000.  Nepal does not have a commercial code. All civil courts are authorized to hear commercial complaints. A ‘commercial bench’ has been established at the High Court, but judges who preside on this bench are the same judges dealing with civil and criminal cases as well.

The judicial system is independent of the executive branch.  Regulations or enforcement actions are appealable, and they are adjudicated in the national court system. In general, the judicial process is procedurally competent, fair, and reliable. In some isolated or high-profile cases, however, court judgments have come under criticism for alleged political interference favoring particular individuals and groups.  There remains widespread public perception that bribery and judicial conflicts of interest affect some judicial outcomes.

Laws and Regulations on Foreign Direct Investment

In March 2019, three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament ahead of the 2019 Investment Summit.  This left little time for effective stakeholder consultations and transparency. While welcome provisions were included in the FITTA (a promised single window service center and a streamlined approval process, for example), the regulations to implement the reforms were only completed in January 2021 and observers remain skeptical given the GoN’s record of making lofty announcements without delivering on them in practice. As drafted, even these pieces of reform legislation retain various institutional and procedural impediments to smooth businesses practices which will dissuade all but the most risk-tolerant investors.

Competition and Anti-Trust Laws

The Competition Promotion and Market Protection Board, comprised of GoN officials from various ministries and chaired by the Minister of Industry, Commerce, and Supplies, is responsible for reviewing competition-related concerns.  Post is not aware of any competition cases that have involved foreign investors. MOICS’ Department of Supplies Management has a mandate to crack down on cartels and protect consumers. In the previous two years, it has played a more active role in cracking down on businesses—ranging from retailers to healthcare facilities to private schools—for alleged price-gouging.  However, private sector representatives have said that this department is interfering with the free market and is being used by businesses with political connections to target competitors, rather than as a mechanism to protect consumers.

Nepal’s private sector is dominated by cartels and syndicates—often under the banner of business associations–which are often successful in limiting competition from new market entrants in multiple sectors.  In 2018, the GoN issued new permits for transportation companies, and the Minister of Physical Infrastructure and Transport called the cartels “a curse to the nation.” Subsequently, however, the GoN has taken few additional steps to crack down on cartels.

Expropriation and Compensation

The Industrial Enterprise Act of 2016 states that “no industry shall be nationalized.”  To date, there have been no cases of nationalization in Nepal, nor are there any official policies that suggest expropriation should be a concern for prospective investors.  However, companies can be sealed or confiscated if they do not pay taxes in accordance with Nepali law, and bank accounts can be frozen if authorities have suspicions of money laundering or other financial crimes.  Nepal does not have a history of expropriations. There have been no government actions or shifts in government policy that indicate expropriations will become more likely in the foreseeable future.

Dispute Settlement

ICSID Convention and New York Convention

Nepal is a member of both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Award.  Nepal’s Arbitration Act of 1999 allows the enforcement of foreign arbitral awards and limits the conditions under which those awards can be challenged. The GoN has updated its legislation on dispute settlement to bring its laws into line with the requirements of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Award.

Investor-State Dispute Settlement

As a signatory to the New York Convention and Nepal’s Arbitration Act of 1999, the GoN recognizes foreign arbitral awards as binding.  The Agreement between the Government of India and the Government of Nepal for the Promotion and Protection of Investments also discusses arbitration as a means to resolve investment disputes and notes that awards are binding.

Nepal does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States.  Investment disputes involving U.S. or other foreign investors have not been frequent.  In the past ten years, Post is aware of only two cases in which a U.S. investor claimed the GoN had not honored terms of a contract.  In a third case, a U.S. investor complained about monetary compensation given to a landowner. This case was eventually resolved in favor of the investor. Under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, local courts are obligated to recognize and enforce foreign arbitral awards issued against the government, but Post is not aware of any cases that have involved foreign arbitral awards. There are no known cases of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Other than arbitration, Post is not aware of any alternative dispute resolution mechanisms available in Nepal. In disputes involving a foreign investor, the concerned parties are encouraged to settle through mediation in the presence of the DOI.  If the dispute cannot be resolved through mediation, depending on the amount of the initial investment and the procedures specified in the contractual agreement, cases may be settled either in a Nepali court or in another legal jurisdiction. Commercial disputes under the jurisdiction of Nepali courts and laws often drag on for years.

Under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, local courts are obligated to recognize and enforce foreign arbitral awards, but Post is not aware of any cases that have involved foreign arbitral awards.

Domestic courts have a history of siding with state-owned enterprises (SOE) and other government entities in cases involving investment disputes. There have been cases in which local courts have refused to determine whether documents issued by an SOE were genuine.

Bankruptcy Regulations

There is no single specific act in Nepal that exclusively covers bankruptcy.  The 2006 Insolvency Act provides guidelines for insolvency proceedings in Nepal and specifies the conditions under which such proceedings can occur.  Additionally, the General Code of 1963 covers bankruptcy-related issues. Creditors, shareholders, or debenture holders can initiate insolvency proceedings against a company by filing a petition at the court.

If a company is solvent, its liquidation is covered by the Company Act of 2006.  If the company is insolvent and unable to pay its liabilities, or if its liabilities exceed its assets, then liquidation is covered by the Insolvency Act of 2006.  Under the Company Act, the order of claimant priority is as follows: 1) government revenue; 2) creditors; and 3) shareholders. Under the Insolvency Act, the government is equal to all other unsecured creditors.  Monetary judgments are made in local currency. Firms and entrepreneurs who have declared bankruptcy are blacklisted from receiving loans for 10 years.

Investment Incentives

The Nepal Laws Revision Act of 2000 eliminated most tax incentives, however, exports are still favored, as is investment in certain “priority” sectors, such as agriculture, tourism, and hydropower.  Incentives for these sectors usually take the form of reduced or subsidized interest rates on bank loans. There is no discrimination against foreign investors with respect to export/import policies or non-tariff barriers.  The GoN also offers tax incentives to encourage industries to locate outside the Kathmandu Valley. Newly formed provincial governments are likely to consider offering their own investment incentives in the future. Post is unaware of the GoN issuing guarantees for FDI projects, but it has been open to joint financing arrangements.

Foreign Trade Zones/Free Ports/Trade Facilitation

In August 2016, Nepal’s Parliament approved the Special Economic Zone (SEZ) Act, which provides numerous incentives for investors in SEZs, including exemptions on customs duties for raw materials, streamlined registration processes, guaranteed access to electricity, and prohibition of labor strikes.  A revision to the SEZ Act in 2019 provided more incentives, including reducing to 60 percent the requirement that industries within an SEZ export 75 percent of their production. The GoN maintains plans to have a network of up to 15 SEZs throughout the country and is currently developing the country’s first two special economic zones in Bhairahawa and Simara, which are partly operational. Both are located in southern Nepal near the border with India.

Performance and Data Localization Requirements

There are no mandates for local employment.  However, numerous foreign investors and foreign workers have complained that obtaining work visas is an extremely onerous process, requiring the approval of multiple GoN agencies and instances of demands for bribes when obtaining and renewing visas.  (For information on work visas, http://www.nepalimmigration.gov.np . A recommendation letter from the relevant ministry overseeing the investment has become a de facto requirement. The GoN limits the number of expatriate employees permitted to work at a company, expressing concern that foreign workers are “taking jobs” from Nepali citizens. Representatives of foreign companies have told Post that these attitudes and extremely inflexible immigration laws make it difficult to legally get a visa for short-term employees or consultants. There are no mandates for local employees in senior management and on boards of directors.

There are no government-imposed conditions on permission to invest, other than those already discussed above, such as the list of sectors from which foreign investment is restricted.  The GoN does not use “forced localization” policies designed to compel companies to relocate all or part of their global business operations within its borders.

Nepal also does not have any requirements for IT providers to turn over source code or provide access to encryption.  In late 2018, parliament passed the Privacy Act and implementing regulations are being drafted. While the new regulations may clarify restrictions and responsibilities of companies around personal data management, Nepal has not previously had any regulations that would impede companies from freely transmitting customer or other business-related data outside Nepal. Similarly, there are no laws related to storage of data for law enforcement or privacy purposes.

Post is unaware of any Nepali laws regarding performance requirement, defined by the United Nations Conference on Trade and Development as “stipulations, imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country.”

Real Property

The Secured Transactions Act (2006) applies to all transactions involving mortgages or liens where the effect is to secure an obligation with collateral, including pledge (when lender takes actual possession of goods), hypothecation (when possession remains with the borrower), hire-purchase, sale of accounts and secured sales contracts, and lease of goods.  The GoN has established the Secured Transactions Registry Office for registering notices under this Act. Pursuant to this Act, the GoN may also designate any office to perform the notice registration function. There are no debt markets in which securitization (use of a physical asset to back up a financial instrument) would be used. However, physical assets, particularly property and land, are often used to secure personal and small business loans.

Nepal is ranked 97th in the World Bank’s 2020 Doing Business Report for registering property.  The report notes that registering property requires four procedures that typically take six days to complete. There are no exclusive regulations for land lease or acquisition by foreign and/or non-resident investors.  The FITTA and related laws governing foreign investment clearly state that investors can own property, but the title rests with the business/company rather than the foreign investor in an individual capacity.

The GoN does not maintain official statistics on untitled land.  The Ministry for Agriculture, Land Management and Cooperatives (previously known as the Ministry of Land Reform and Management) has been working for decades to identify property titles and registration.  Political instability, poor record-keeping, and resistance from stakeholders, however, has made this a difficult task. Most arable land has a title, although titles have sometimes been acquired in a fraudulent manner.

For legally purchased property, ownership does not revert to other owners.  But, if that property remains unoccupied or unused for an extended period, there is the possibility that squatters may occupy and claim the land.  Although such occupation is not legally enforceable, there are hundreds of cases of unsettled or unlawful occupation of property languishing in Nepal’s court system, most dating back to the 1996-2006 Maoist insurgency.

In 2007, Nepal ratified the International Labour Organization’s (ILO) Indigenous and Tribal Peoples Convention (1989), which guarantees the rights of indigenous peoples.  Post is not aware of any legal case in Nepal citing this convention.

Intellectual Property Rights

There is currently no single exclusive legislation in Nepal for the protection of intellectual property rights (IPR), and protections remain weak with little enforcement. In 2017, the GoN finalized an IPR Policy and stated its intention to use it as the foundation for new IPR legislation. Nepal signed the 1994 World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). However, patent registration under the Patent, Design, and Trademark Act does not provide automatic protection to foreign trademarks and designs. Similarly, Nepal does not automatically recognize patents awarded by other nations. Trademarks must be registered in Nepal to receive protection. Once registered, trademarks are protected for a period of seven years. The Copyright Act of 2002 covers most modern forms of authorship and provides periods of protection consistent with international practice. Nepal became a member of the World Intellectual Property Organization (WIPO) in 1997 but has not yet signed the WIPO Copyright Treaty or the WIPO Performances and Phonograms Treaty.

Nepal is not included in the U.S. Trade Representative’s (USTR) Special 301 Report or Notorious Markets List. However, enforcement of existing IPR violations is sporadic at best. Law enforcement officials do not have adequate training on IPR issues and offenders can often pay a small bribe to avoid prosecution. Some of Nepal’s IPR laws are several decades old and penalties are too low to have deterrent effect. Awareness of IPR issues is low in the private sector and the legal system. As a result, Nepal faces serious challenges in preventing the sale of counterfeit goods. The primary marketplaces in Nepal are flooded with counterfeit products, including electronic equipment, clothing, digital media, and pharmaceutical products. Nepal does not track seizures of counterfeit goods and does not have a strong track record of prosecuting IPR violations.

Improving Nepal’s IPR policies has been a top priority for the U.S. Embassy, and the United States Patent and Trademark Office (USPTO) has conducted nearly a dozen training courses for Nepali officials over the past several years on various aspects of IPR policy. Nepal’s Cabinet approved a new IPR Policy in March 2017 that has served as the foundation for new IPR legislation. Representatives from USPTO have reviewed the draft IPR bill, most recently in 2019, and provided the GoN recommendations on how the policy could be strengthened. This IPR Bill is currently awaiting clearance by the Ministry of Finance and will then be presented to the cabinet and parliament for ratification. It is expected that this new IP Act will be enacted some time in 2021. As Nepal works to update its IPR legislation, USPTO and the U.S. Embassy continue to advocate for stronger IPR protection.

Resources for Intellectual Property Rights Holders:

John Cabeca
Intellectual Property Counselor for South Asia
U.S. Patent and Trademark Office
Foreign Commercial Service email: john.cabeca@trade.gov 
email: john.cabeca@trade.gov
website: https://www.uspto.gov/ip-policy/ip-attache-program 
tel: +91-11-2347-2000

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at: www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

The Nepal Stock Exchange (NEPSE) is the only stock exchange in Nepal. The majority of NEPSE’s 255 listed companies are hydropower companies and banks, with the NEPSE listings for banks driven primarily by a regulatory requirement rather than commercial considerations. There are few opportunities for foreign portfolio investment in Nepal.  Foreign investors are not allowed to invest in the Nepal Stock Exchange nor permitted to trade in the shares of publicly listed Nepali companies; only Nepali citizens and Non-Resident Nepalis (NRNs) are allowed to invest in NEPSE and trade stock. The FITTA, however, allows for the creation of a “venture capital fund” to enable foreign institutional investors to take equity stakes in Nepali companies.

The Securities Board of Nepal (SEBON) regulates NEPSE, but the Board does little to encourage and facilitate portfolio investment. While both NEPSE and SEBON have been enhancing their capabilities in recent years, Post’s view is that the NEPSE is far from becoming a mature stock exchange and likely does not have sufficient liquidity to allow for the entry and exit of sizeable positions. Some experts have raised concerns about the Ministry of Finance’s degree of influence over both SEBON and NEPSE and have cited lack of independence from government influence as an impediment to the development of Nepal’s capital market. (See: https://milkeninstitute.org/reports/framing-issues-modernizing-public-equity-market-nepal .)

Nepal moved to full convertibility (no foreign exchange restrictions for transactions in the current account)  when it accepted Article VIII obligations of IMF’s Articles of Agreement in May 1994. In line with this, the GoN and NRB refrain from imposing restrictions on payments and transfers for current international transactions.

Credit is generally allocated on market terms, although special credit arrangements exist for farmers and rural producers through the Agricultural Development Bank of Nepal.  Foreign-owned companies can obtain loans on the local market. The private sector has access to a variety of credit and investment instruments. These include public stock and direct loans from finance companies and joint venture commercial banks. Foreign investors can access equity financing locally, but in order to do so, the investor must be incorporated in Nepal under the Companies Act of 2006 and listed on the stock exchange. The banking sector has grappled with shortages of loanable funds in the last couple of years resulting in high interest rates on loans. One of the major reasons for this is slow and inefficient government spending leading to lack of liquidity in the system. With the return of relative political stability in 2018, it was hoped this problem would be reduced but it has continued.

Money and Banking System

The NRB has promoted mergers in the financial sector and published merger bylaws in 2011 to help consolidate and better regulate the banking sector.  As of January 2021, there were 27 commercial banks, 19 development banks, and 21 finance companies registered with the NRB. This total does not include micro-finance institutions, savings and credit cooperatives, non-government organizations (NGOs), and other institutions, which provide many of the functions of banks and financial institutions.  There are no legal provisions to defend against hostile takeovers, but there have been no reports of hostile takeovers in the banking system.

Nepal’s poor infrastructure and challenging terrain has meant that many parts of the country do not have access to financial services.  A 2015 study by the UN Capital Development Fund (UNCDF) reported that 61 percent of Nepalis had access to formal financial services (40 percent to formal banking). Following local elections in 2017, the GoN established 753 local government units and promised that each unit would be served by at least one bank.  As of January 2020, 8 local units were still without a bank. Most of the local units without banks are in remote locations with few suitable buildings and a lack of proper security and internet connectivity.

(UNCDF) reported that 61 percent of Nepalis had access to formal financial services (40 percent to formal banking). Following local elections in 2017, the GoN established 753 local government units and promised that each unit would be served by at least one bank.  As of January 2020, 8 local units were still without a bank. Most of the local units without banks are in remote locations with few suitable buildings and a lack of proper security and internet connectivity.

Nepal’s banking sector is relatively healthy, though fragmented, and NRB bank supervision, while improving, remains weak, allegedly due to political influence according to several private sector representatives.  The GoN hopes to strengthen the banking system by reducing the number of smaller banks and it has actively encouraged consolidation of commercial banks; there are currently 27 commercial banks, down from 78 in 2012. Most banks locate their branches in and around Kathmandu and in the large cities of southern Nepal.  Some banks are owned by prominent business houses, which could create conflicts of interest. There are also a large number of cooperative banks that are governed not by the NRB but by the Ministry of Agricultural, Land Management, and Cooperatives. These cooperatives compete with banks for customers.

In January 2017, Parliament approved the Bank and Financial Institutions (BAFI) Act.  First introduced in 2013, BAFI is designed to strengthen corporate governance by setting term limits for Chief Executive Officers and board members at banks and financial institutions.  The legislation also aims to reduce potential conflicts of interest by prohibiting business owners from serving on the board of any bank from which their business has taken loans.

In 2018, NRB was criticized for not taking action to relieve a liquidity crunch and the Nepal Banker’s Association came to a gentlemen’s agreement to limit deposit rates.  The NRB did not protest this action, leading to some criticism that it was not fulfilling its role as a regulator against what many perceived as cartel behavior.

The NRB regulates the national banking system and also functions as the government’s central bank. As a regulator, NRB controls foreign exchange; supervises, monitors, and governs operations of banking and non-banking financial institutions; determines interest rates for commercial loans and deposits; and determines exchange rates for foreign currencies.  As the government’s bank, NRB manages all government income and expenditure accounts, issues Nepali bills and treasury notes, makes loans to the government, and determines monetary policy.

Existing banking laws do not allow retail branch operations by foreign banks, which compels foreign banks to set up a local bank if choosing to operate in Nepal.  For example, Standard Chartered formed Standard Chartered Nepal. All commercial banks have correspondent banking arrangements with foreign commercial banks, which they use for transfers and payments.  Standard Chartered is the only correspondent bank with a physical presence in Nepal and handles foreign transactions for the NRB. Nepal will be undergoing a review by the Financial Action Task Force (FATF) in 2021 to assess its anti-money laundering regime. Although unlikely, Nepal risks losing its correspondent banking relationships or increased FATF monitoring if it fails this assessment.  Foreigners who are legal residents of Nepal with proper work permits and business visas are allowed to open bank accounts.

Foreign Exchange and Remittances

Foreign Exchange

The FITTA allows foreign investors to repatriate all profits and dividends, all money raised through the sale of shares, all payments of principal and interest on any foreign loans, and any amounts invested in transferring foreign technology. Doing so, however, requires multiple approvals and extended procedures which have historically resulted in such transactions taking months to complete. Foreign nationals working in local industries are also allowed to repatriate 75 percent of their income. Opening bank accounts and obtaining permission for remittance of foreign exchange are available based on the recommendation of the DOI, which usually has provided approval of the original investment.

In practice, repatriation is difficult, time consuming, and not guaranteed.  The relevant GoN department and the NRB, which regulates foreign exchange, must both approve the repatriation of funds. In most cases, approval must also be obtained from the DOI. In the case of the telecommunications sector, the Nepal Telecommunications Authority must also approve the repatriation. In joint venture cases, the NRB and the Ministry of Finance must grant approval. Repatriation of funds is expected to become easier after the single window service center, as provided for by the FITTA, comes fully into operation.

In the past, several foreign companies reported that the GoN insisted on contracts denominated in Nepal’s currency, the Nepali rupee (NPR), and not major world currencies, such as the U.S. dollar. This seems to be changing, at least in the energy sector, where the GoN has adopted a policy that permits the Nepal Electricity Authority to sign Power Purchase Agreements (PPAs) denominated in U.S. dollars (or other hard foreign currency).  There are some limits on so-called “forex” or hard currency PPAs, including, for example, the stipulations that only costs or borrowing in foreign currency are covered and that payments may only be made for 10 years or the term of the loan, whichever is less. Provisions for repatriation are governed by NRB procedures, as is conversion of foreign investors’ funds into other currencies. Nepal’s currency has been pegged to the Indian rupee (INR) since 1994 at a rate of 1.6 NPR to 1 INR. As such, the NPR fluctuates relative to world currencies in line with the INR. According to the April 2020 IMF Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Nepal ( https://www.imf.org/en/Countries/NPL ), the peg to the INR reduces exchange rate uncertainty for trade and investment with India, its major trading partner, but the appreciation of the Nepali rupee against the Indian rupee has also resulted in the overvaluation of the Nepali rupee and could affect Nepal’s competitiveness.

Remittance Policies

The FITTA legislation promises to make it easier to remit investment earnings, but it will depend on how effectively the single window, as well as associated approvals and procedures, functions in practice. In the interim, foreign investors will continue to use the old process of applying to the NRB to repatriate funds from the sale of shares. For repatriation of funds connected with dividends, principal and interest on foreign loans, technology transfer fees, or expatriate salaries, the foreign investor applies first to the DOI and then to the NRB. At the DOI stage of obtaining remittance approval, foreign investors must submit remittance requests to a commercial bank. Final remittance approval is granted by the NRB Department of Foreign Exchange, a process that is reported by foreign investors to be opaque and time-consuming. After administrative approvals, a lengthy clearance process between the NRB and the commercial bank further slows the foreign exchange transfer. The experience of U.S. and other foreign investors so far indicates serious discrepancies between the government’s stated policies in the FITTA and implementation in practice.

Sovereign Wealth Funds

Nepal has no sovereign wealth funds.

There are 36 state-owned enterprises (SOEs) in Nepal, including Nepal Airlines Corporation, Nepal Oil Corporation, and the Nepal Electricity Authority. Since 1993, Nepal has initiated numerous market policy and regulatory reforms in an effort to open eligible government-controlled sectors to domestic and foreign private investment. These efforts have had mixed results. The majority of private investment has been made in manufacturing and tourism—sectors where there is little government involvement and existing state-owned enterprises are not competitive. Many state-owned sectors are not open for foreign investment. Information on the annual performance of Nepal’s SOEs’ can be found on this website. https://mof.gov.np/uploads/document/file/Annual%20Status%20Review%20of%20Public%20Enterprises%202019_20200213054242.pdf .

Corporate governance of SOEs remains a challenge and executive positions have reportedly been filled by people connected to politically appointed government ministers. Board seats are generally allocated to senior government officials and the SOEs are often required to consult with government officials before making any major business decisions. A 2011 executive order mandates a competitive and merit-based selection process but has encountered resistance within some ministries. Third-party market analysts consider most Nepali SOEs to be poorly managed and characterized by excessive government control and political interference. According to local economic analysts, SOEs are sometimes given preference for government tenders, although official policy states that SOEs and private companies are to compete under the same terms and conditions.

Private enterprises do not have the same access to finance as SOEs. Private enterprises mostly rely on commercial banks and financial institutions for business and project financing. SOEs, however, also have access to financing from state-owned banks, development banks, and other state-owned investment vehicles. Similar concessions or facilities are not granted to private enterprises. SOEs receive non-market-based advantages, given their proximity to government officials, although these advantages can be hard to quantify. Some SOEs, such as the Nepal Electricity Authority or the Nepal Oil Corporation have monopolies that prevent foreign competitors from entering those market sectors.

The World Bank in Nepal assesses corporate governance benchmarks (both law and practice) against the OECD Principles of Corporate Governance, focusing on companies listed on the stock market. Awareness of the importance of corporate governance is growing. The NRB has introduced higher corporate governance standards for banks and other financial institutions. Under the OECD Principles of Corporate Governance, the World Bank recommended in 2011 that the GoN strengthen capital market institutions and overhaul the OCR. Although some reforms were initiated, many were never finalized and no reforms have been instituted at the OCR.

Privatization Program

The Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises to broaden participation of the private sector in the operation of such enterprises. The Privatization Act of 1994 generally does not discriminate between national and foreign investors, however, in cases where proposals from two or more investors are identical, the government gives priority to Nepali investors.

Economic reforms, deregulation, privatization of businesses and industries under government control, and liberalized policies toward FDI were initiated in the early 1990s. During this time, sectors such as telecommunications, civil aviation, coal imports, print and electronic media, insurance, and hydropower generation were opened for private investment, both domestic and foreign. The first privatization of a state-owned corporation was conducted in October 1992 through a Cabinet decision (executive order). Since then, a total of 23 state-owned corporations have been privatized, liquidated, or dissolved, though the process has been static since 2008.

The last company to be (partially) privatized was Nepal Telecom in 2008 (although the GoN still is the majority shareholder). Since then, no SOEs have been privatized. In the past, privatization was initiated with a public bidding process that was transparent and non-discriminatory. Procedural delays, resistance from trade unions, and a lack of will within the GoN, however, have created obstacles to the privatization process. The Corporate Coordination and Privatization Division of the Ministry of Finance is responsible for management of the privatization program. Foreign investors can participate in privatization programs of state-owned enterprises.

Awareness of the general international expectations of responsible business conduct (RBC) remains very low in Nepal. Government rules, policies, and standards related to RBC are mostly limited to environmental issues. Social and governance issues are poorly promoted and enforced by the government.

Government laws, policies, and rules concerning RBC, including environmental and social standards, are in place. However, the government agencies and officials responsible for enforcing them have been criticized for failing to fulfill their responsibilities. The GoN has not drafted a national action plan for RBC and does not factor RBC policies into procurement decisions. Workers’ organizations and unions are the most vocal entities promoting or monitoring RBC. Other than the Department of Labor, which works with workers’ organizations and unions, government agencies do not actively encourage foreign and domestic enterprises to follow generally accepted RBC principles. The ILO is working to promote RBC in the agricultural sector, focusing on the tea, ginger, cardamom, and dairy industries.

The GoN’s efforts to develop and enforce laws for environmental protection, consumer protection, labor rights, and human rights have been sporadic and lacking in efficacy. Ministries and concerned departments occasionally initiate special campaigns to enforce laws and regulations protecting these rights, but this is not standard practice. Government agencies often do not enforce these laws, and the minor penalties imposed provide minimal deterrent effect. Post is not aware of any cases of private sector projects’ effects on human rights.

Various government agencies monitor business entities’ compliance with different standards and codes. For example, OCR looks after governance issues, the Inland Revenue Department monitors accounting, and the Department of Labor monitors executive compensation standards. There are no independent NGOs or investment funds focusing on promoting or monitoring RBC, although organizations like Goodweave help promote child labor-free products.

The GoN does not encourage adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are virtually no extractive industries in Nepal, other than sand mining in riverbeds and the country does not participate in the Extractive Industries Transparency Initiative.

Additional Resources

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

Some report that corruption is rampant in Nepal. In the words of a World Bank official, corruption in Nepal is “endemic, institutionalized, and driven from the top.” Corruption takes many forms but is pervasive in the awarding of licenses, government procurement, and revenue management. The primary law used to combat corruption in Nepal is the Prevention of Corruption Act 2002. This law prohibits corruption, bribery, money laundering, abuse of office, and payments to facilitate services, both in the public and private sector. According to a report by GAN Integrity, a company that works with businesses to mitigate corporate risk, “implementation and enforcement [of the Prevention of Corruption Act] is inadequate, leaving the levels of corruption in the country unchallenged.” The report goes on to note that Nepal’s judicial system is “subject to pervasive corruption and executive influence,” that “corruption is rife among low-level [police] officers,” and that “Nepali tax officials are prone to corruption, and some seek positions in the sector specifically for personal enrichment.” The full report is available at: https://www.ganintegrity.com/portal/country-profiles/nepal .

The CIAA is Nepal’s constitutional body for corruption control.  The 2015 constitution empowers the CIAA to conduct “investigations of any abuse of authority committed through corruption by any person holding public office.” In practice, CIAA arrests and investigations tend to focus on lower-level government bureaucrats. According to the 2020 Corruption Perception Index released by Transparency International (TI), Nepal ranked 117th among 180 countries, placing it in the range of “highly corrupt” countries.  In January 2018, local media reported that the CIAA is drafting a bill to replace the Prevention of Corruption Act, with the goal of making the new law compatible with the UN Convention against Corruption that Nepal signed in 2011. Nepal is not a member of the OEDC Anti-Bribery Convention.

While anti-corruption laws extend to family members of officials and to political parties, there are no laws or regulations that are specifically designed to counter conflict-of-interest in awarding contracts or government procurement. GoN officials are aware that there should be no conflict of interest when contracts are awarded, but how this is implemented is left to the discretion of the concerned government agency.

The GoN does not require companies to establish codes of conduct. Post is not aware of private companies that use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials, however, this does not mean that there are no companies that use such programs. American consulting firm Frost and Sullivan ( www.frost.com ) maintains an office in Kathmandu and investigates local investment partners for a fee. NGOs involved in investigating corruption do not receive special protections.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Commission for the Investigation of Abuse of Authority
CIAA Headquarter, P.O. Box No. 9996
Tangal, Kathmandu, Nepal
Phone:  +9771-4440151, 4429688, 4432708

International nongovernmental organization:

Mr. Bharat Bahadur Thapa
President, Transparency International Nepal
P.O. Box 11486, Chakhkhu Bakhkhu Marga, New Baneshwor, Kathmandu
+977 1 4475112, 4475262
Email:  trans@tinepal.org 

Local nongovernmental organization:

Prof. Dr. Srikrishna Shrestha
President, Pro Public
P.O. Box: 14307, Gautambuddha Marg, Annamnagar
Phone:  +977-01-4268681, 4265023; Fax: +977-01-4268022
Email:   mailto:propublic@wlink.com.np 

In 2017, Nepal successfully held local, provincial, and national elections to fully implement its 2015 constitution. The Madhesi population in Nepal’s southern Terai belt, together with other traditionally marginalized ethnic and caste groups, believes the constitution is insufficiently inclusive and that its grievances are not being addressed. Post-election, however, this feeling of disenfranchisement may be somewhat assuaged due to the fact that Madhesi parties achieved a majority in the Province 2 provincial assembly elections. The Nepal Communist Party (NCP)—formed by the merger of the Communist Party of Nepal (Unified Marxist Leninist (UML)) and the Communist Party of Nepal (Maoist Center)—swept the 2017 elections to form a two-thirds majority government in 2018. However, internal wrangling within the NCP broke into the open and dominated much of 2020, resulting in Prime Minister KP Sharma Oli dissolving the parliament in December 2020. Although the parliament was reinstated by the Supreme Court on February 23, 2021, a March 7 Supreme Court ruling broke up the NCP into its original constituents, the Communist Party of Nepal (CPN)-United Marxist Leninist (CPN-UML) and CPN-Maoist Center (CPN-MC) parties. It is unclear when or if a new coalition government will be formed among the various parties represented in the (reconvened) Parliament – or whether early elections will be called if the Oli government fails to win a confidence vote. Political negotiations, wrangling, and horse-trading are ongoing, with governance and lawmaking taking a back seat. In the meantime Oli continues as PM.

Criminal violence, sometimes conducted under the guise of political activism, remains a problem. Bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide. However, in the last several years, few bandhs have been successfully carried out in Kathmandu. Americans and other Westerners are generally not targets of violence.

U.S. citizens who travel to or reside in Nepal are urged to register with the Consular Section of the Embassy by accessing the Department of State’s travel registration site at  https://step.state.gov/step,. The Consular Section provides updated information on travel and security on the embassy website, http://np.usembassy.gov., and can be reached through the Embassy switchboard at (977) (1) 423-4500, by fax at (977) (1) 400-7281, by email at  consktm@state.gov .

U.S. citizens also should consult the Department of State’s Consular Information Sheet for Nepal and Worldwide Caution Public Announcement on the Department of State’s home page at http://travel.state.gov, by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, by a regular toll line at 1-202-501-4444. These numbers are available from 8:00 a.m. to 8:00 p.m. Eastern Time, Monday through Friday (except U.S. federal holidays).

Over the last ten years, there have been frequent calls for strikes, particularly in the Terai. Occasionally, protesters have vandalized or damaged factories and other businesses. On February 22, 2019, a small improvised explosive device (IED) was placed overnight outside the entrance of NCell, Nepal’s second largest mobile carrier. One person died and two others were injured. The Indian-run Arun 3 hydro-power plant has been targeted by IEDs on three occasions and in early-2018 the U.S. Embassy issued a security notice about credible threats of violence targeting the private Chandragiri Hills Cable Car attraction. Such incidents remain infrequent, but unpredictable. Demonstrations have on occasion turned violent, although these activities generally are not directed at U.S. citizens or businesses. Biplav, a splinter Maoist group that threatened or attempted to extort NGOs, businesses, and educational institutions across Nepal over the past two years, is in negotiations with the KP Oli government to give up violence and enter peaceful politics.

Nepal’s labor force is characterized by an acute lack of skilled workers and an abundance of political party-affiliated unions. Only a small proportion (14%) of Nepal’s working age population has a secondary or above secondary education. In Nepal, there is little demand for skilled workers, and prior to the COVID pandemic, thousands of skilled and unskilled Nepalis departed each year to work in foreign countries, primarily Qatar, the United Arab Emirates, Saudi Arabia, Kuwait, South Korea, Japan, and Malaysia. Thousands more also sought employment in India, which shares an open border with Nepal. Nepal’s unemployment rate of 11% and high rates of underemployment have provided push factors, but the gap between overseas migrant workers’ and domestic wage rates has made it difficult for Nepal’s agricultural and construction sectors to find enough workers, and many companies import laborers willing to work for lower wages from India.

According to the Central Bureau of Statistics, the country’s literacy rate is 65.9 percent, with the literacy rate for men at 75.1 percent and 57.4 percent for women. Vocational and technical training are poorly developed, and the national system of higher education is overwhelmed by high enrollment and inadequate resources. Many secondary school and college graduates are unable to find jobs commensurate with their education levels. Hiring non-Nepali workers is not, with the exception of India, a viable option as the employment of foreigners is restricted and requires the approval of the Department of Labor. The Act and Labor Regulations of 2018 limit the number of foreign employees a firm can employ and the length of time foreign employees can remain in Nepal to three years for those with non-specialized skills and five years for those with technical expertise. These terms are renewable, but only after the employee has departed Nepal for at least one-year, further undermining firm’s ability to retain needed staff based on business needs.

Under Nepali law, it has historically been difficult to dismiss employees. Labor laws differentiate between layoffs and firing. In some cases, Nepal’s labor laws have forced companies to retain employees, even after a business has closed. Workers at state-owned enterprises often receive generous severance packages if they are laid off. Unemployment insurance does not exist. Many private enterprises hire workers on a contract basis for jobs that are not temporary in nature as a way to avoid cumbersome labor laws. In some commercial banks and other businesses, security guards, drivers, and administrative staff jobs are filled by contract workers. The Industrial Enterprise Act of 2016 and the Labor Act of 2017 both include a “no work, no pay” provision, and the later clarifies processes for hiring and firing employees. In practice, it remains difficult to fire workers in Nepal and the Labor Act encourages the hiring of Nepali citizens wherever possible. Some labor union representatives said the new Labor Act 2017 is generally worker friendly. It is unclear how effectively this law is being enforced. The new act details requirements for time off, payment, and termination of employees. It also has some provisions to end discrimination in the workplace. According to the act, the employer is prohibited from discriminating against any employee based on religion, color, sex, caste and ethnicity, origin, language or belief or any other related basis. The Labor Act also confirms that employees shall have the right to form a trade union.

By law, labor unions in Nepal are independent of the government and employer. In practice, however, all labor unions are affiliated with political parties, and have significant influence within the government. The constitution provides for the freedom to establish and join unions and associations. It permits restrictions on unions only in cases of subversion, sedition, or similar circumstances. Labor laws permit strikes, except by employees in essential services such as water supply, electricity, and telecommunications. Sixty percent of a union’s membership must vote in favor of a strike for it to be legal, though this law is often ignored. Laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affects the nation’s economic interests; in practice, this is rarely done. Labor unions have staged frequent strikes, often unrelated to working conditions, although they have become less frequent and less effective in recent years. Political parties will frequently call for national strikes that are observed only in particular regions or that only last for a few hours. In the past year, Post is not aware of any strike that lasted long enough to pose an investment risk. The SEZ Act approved in August 2016 prohibits workers from striking in any SEZ. There are two SEZs that are partially operational, but the GoN hopes to eventually have as many as 15. However, private sector interest in SEZs has been lukewarm.

Total union participation is estimated at about one million, or about 10 percent of the total workforce. The three largest trade unions are affiliated with political parties. The Maoist-affiliated All Nepal Trade Union Federation (ANTUF) is the most active and its organizing tactics have led to violent clashes with other trade unions in the past. The ANTUF and its splinter group, the ANTUF-R, are aggressive in their defense of members and frequently engage in disputes with management. Labor union agitation is often conducted in violation of valid contracts and existing laws, and unions are rarely held accountable for their actions.

Collective bargaining is only applied in establishing workers’ salaries. Trade unions, employers, and government representatives actively engage in this practice. Nepal’s Labor Act, updated in 2017, includes two types of labor dispute resolution mechanisms, one for individual disputes and one for collective disputes for businesses with 10 or more employees. If a dispute cannot be resolved by the employee and management, the case is forwarded for mediation. If mediation is unsuccessful, it is settled through arbitration. For individual disputes, the employee is required to submit an application to the business regarding their claim. The company’s management should then discuss the claim with the employee in order to settle it within 15 days. If a claim made by the employee cannot be settled between the employee and the company, the issue may be forwarded to the Department of Labor where discussions shall be held in the presence of Department of Labor officials. If the employee is not satisfied with the decision made by the Department of Labor, they can appeal to the Labor Court.

The Labor Act is applicable only to companies, private firms, partnerships, cooperatives, associations, or other organizations in operation or established, incorporated, registered, or formed under prevailing laws of Nepal regardless of their objective to earn profit or not. The Labor Act does not apply to the following entities: Civil Service, Nepal Army, Nepal Police, Armed Police Force, entities incorporated under other prevailing laws or situated in Special Economic Zones to the extent separate provisions are provided, and working journalists, unless specifically provided in the contract.

Nepal’s enforcement of regulations to monitor labor abuses and health and safety standards is weak. Operations in small towns and rural areas are rarely monitored. International labor rights are recognized within domestic law. No new labor-related laws have been enacted in the past year.

The GoN does not fully meet the minimum standards for the elimination of trafficking in persons, though it is making significant efforts to do so. The definition of human trafficking under Nepal’s Human Trafficking and Transportation (Control) Act (HTTCA) does not match the definition of human trafficking under international law. In June 2020, Nepal formally acceded to the Palermo Protocol. Children in Nepal are engaged in child labor, including in the production of bricks, carpets, and embellished textiles, although the GoN claims to be serious about ending child labor. The Labor Inspectorate’s budget, the number of labor inspectors, and relevant resources and training are all insufficient for effective enforcement of Nepal’s labor laws, including those related to child labor. The most recent Human Rights Report can be found at:  https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/. The Department of Labor’s 2018 Findings on the Worst Forms of Child Labor is available at:  https://www.dol.gov/agencies/ilab/resources/reports/child-labor/nepal 

Nepal has a modest level of trade with the United States, with USD180 million in bilateral trade in 2020 (down from USD214 million the previous year). In late 2016, the Nepal Trade Preferences Program – which grants duty free access to certain products made in Nepal – went into effect. Nepal exported approximately USD2.4 million worth of goods in 2020 under this program (down from USD3.1 million the previous year). To remain eligible for this program, Nepal must meet certain labor standards.

Nepalis are prohibited from investing abroad as per the Act Restricting Investment Abroad (ARIA), 1964. Post has heard this Law might be abrogated soon, but as of April 2021, no outward investment is permitted from Nepal.

Table 4: Sources of Portfolio Investment
Data not available.

Molly Rivera-Olds
Economic/Commercial Officer
U.S. Embassy Kathmandu+977 1 423 4192
Email: rivera-oldsm@state.gov

Abhishek Basnyat
Economic Specialist
U.S. Embassy Kathmandu
+977 1 423 4469
Email:   basnyatap@state.gov 

Policies Towards Foreign Direct Investment

Pakistan seeks inward investment in order to boost economic growth, particularly in the energy, agribusiness, information and communications technology, and industrial sectors.  Since 1997, Pakistan has established and maintained a largely open investment regime.  Pakistan introduced an Investment Policy in 2013 that further liberalized investment policies in most sectors to attract foreign investment and signed an economic co-operation agreement with China, the China-Pakistan Economic Corridor (CPEC), in April 2015.  CPEC Phase I, which concluded in late 2019, focused primarily on infrastructure and energy production.  CPEC Phase II, which is ongoing, is pivoting away from infrastructure development to mainly focus on promoting Pakistan’s industrial growth by establishing special economic zones throughout the country.  The PRC has also pledged to provide $1 billion in socio-economic initiatives focused on agriculture, health, education, poverty alleviation, and vocational training by 2024.  However, progress on Phase II is significantly delayed due to the COVID pandemic, fiscal constraints, and regulatory issues including the government’s inability so far to pass legislation formalizing the CPEC Authority (a centralized federal body charged with CPEC implementation across the country).  Some opportunities are only open to approved Chinese companies, and CPEC has ensured those projects and their investors receive the authorities’ attention.

To support its Investment Policy, Pakistan also has implemented sectoral policies designed to provide additional incentives to investors in those specific sectors.  The Automotive Policy 2016, Strategic Trade Policy Framework (STPF) 2015-18, Export Enhancement Package 2019, Alternative and Renewable Energy Policy 2019, Merchant Marine Shipping Policy 2019 with 2020 updates, the Electric Vehicle Policy 2020-2025, and the Textile Policy 2021 (still awaiting final approval) are a few examples of sector-specific incentive schemes.  Sector-specific incentives typically include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.  A new STPF 2020-25 and the Textile Policy 2021 have been approved by the Prime Minister but are still awaiting final Cabinet approvals.

In the absence of the new STPF 2020-2025, incentives introduced through STPF 2015-18 remain in place.  Nonetheless, foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and establish clear and consistent policies for upholding contractual obligations and settlement of tax disputes.

The Foreign Private Investment Promotion and Protection Act (FPIPPA), 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan.  The FPIPPA stipulates that foreign investments will not be subject to higher income taxes than similar investments made by Pakistani citizens.  All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety.  Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.  There are no restrictions or mechanisms that specifically exclude U.S. investors.

Pakistan’s investment promotion agency is the Board of Investment (BOI).  BOI is responsible for attracting investment, facilitating local and foreign investor implementation of projects, and enhancing Pakistan’s international competitiveness.  BOI assists companies and investors who seek to invest in Pakistan and facilitates the implementation and operation of their projects.  BOI is not a one-stop shop for investors, however.

Pakistan prioritizes investment retention through “business dialogues” (virtual or in-person engagements) with existing and potential investors.  BOI plays the leading role in initiating and managing such dialogues.  However, Pakistan does not have an Ombudsman’s office focusing on investment retention.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners, except Indian and Israeli citizens/businesses, can establish, own, operate, and dispose of interests in most types of businesses in Pakistan, except those involved in arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.  There are no restrictions or mechanisms that specifically exclude U.S. investors.  There are no laws or regulations authorizing domestic private entities to adopt articles of incorporation discriminating against foreign investment.

Pakistan does not place any limits on foreign ownership or control.  The 2013 Investment Policy eliminated minimum initial capital requirements across sectors so that there is no minimum investment requirement or upper limit on the allowed share of foreign equity, with the exception of investments in the airline, banking, agriculture, and media sectors.  Foreign investors in the services sector may retain 100 percent equity, subject to obtaining permission, a “no objection certificate,” and license from the concerned agency, as well as fulfilling the requirements of the respective sectoral policy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agriculture sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  Small-scale mining valued at less than PKR 300 million (roughly $1.9 million) is restricted to Pakistani investors.

Foreign banks may establish locally incorporated subsidiaries and branches, provided they have $5 billion in paid-up capital or belong to one of the regional organizations or associations to which Pakistan is a member (e.g., Economic Cooperation Organization (ECO) or the South Asian Association for Regional Cooperation (SAARC).  Absent these requirements, foreign banks are limited to a 49-percent maximum equity stake in locally incorporated subsidiaries.

There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a $100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years.  Royalties and technical payments are subject to remittance restrictions listed in Chapter 14, Section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm).

Pakistan maintains investment screening mechanisms for inbound foreign investment.  The BOI is the lead organization for such screening.  Pakistan blocks foreign investments where the screening process determines the investment could negatively affect Pakistan’s national security.

Other Investment Policy Reviews

Pakistan has not undergone any third-party investment policy reviews over the past three years.

Business Facilitation

The government utilizes the World Bank’s “Doing Business” criteria to guide its efforts to improve Pakistan’s business climate.  The government has simplified pre-registration and registration facilities and automated land records to simplify property registration, eased requirements for obtaining construction permits and utilities, introduced online/electronic tax payments, and facilitated cross-border trade by expanding electronic submissions and processing of trade documents.  Starting a business in Pakistan normally involves five procedures and takes at least 16.5 days – as compared to an average of 7.1 procedures and 14.5 days for the group of countries comprising the World Bank’s South Asia cohort.  Pakistan ranked 72 out of 190 countries in the Doing Business 2020 report’s “Starting a Business” category.  Pakistan ranked 28 out of 190 for protecting minority investors.  (Note: the 2020 Doing Business Report is the last available report.  End Note.)

The Securities and Exchange Commission of Pakistan (SECP) manages company registration, which is available to both foreign and domestic companies.  Companies first provide a company name and pay the requisite registration fee to the SECP.  They then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter.  Both foreign and domestic companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes.  Industrial or commercial establishments with five or more employees must register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes.  Depending on the location, registration with provincial governments may also be required.  The SECP website (www.secp.gov.pk) offers a Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously.  The OSS can be used by foreign investors.

Outward Investment

Pakistan does not promote nor incentivize outward investment.  Pakistan does not explicitly restrict domestic investors from investing abroad.  However, cumbersome and time consuming approval processes, involving multiple entities such as the SBP, SECP, and the Ministries of Finance, Economic Affairs, and Foreign Affairs, generally discourage outward investors.  Despite the cumbersome processes, larger Pakistani corporations have made investments in the United States in recent years.

Pakistan has signed Bilateral Investment Treaties (BITs) with 49 countries, although only 27 have entered into force.  U.S.-Pakistan BIT negotiations began in 2004 and the text closed in 2012; however, the agreement has not been signed.  The government has declared its intention to pull out of BITs currently in force.

Pakistan has a Trade and Investment Framework Agreement (TIFA) in place with the United States.  Pakistan has free or preferential trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia.  It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA).  A revised  China-Pakistan Free Trade Agreement entered into force January 1, 2020.  Pakistan is negotiating free trade agreements with Turkey and Thailand.

A U.S.-Pakistan bilateral tax treaty was signed in 1959.  Pakistan has double taxation agreements with 63 other countries.  A multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011 and provides additional provisions for the administration of taxes.  In 2018, Pakistan updated its tax treaty with Switzerland.

Pakistan relies heavily on multinational corporations for a significant portion of its tax collections (up to one-third of revenue collected by the FBR, according to reports by the Overseas Investors Chamber of Commerce and Industry.)  Foreign investors in Pakistan regularly report that both federal and provincial tax regulations are difficult to navigate, and tax assessments are non-transparent.  Since 2013, the government has requested advance tax payments from companies, complicating businesses’ operations as the government intentionally delays tax refunds.  The World Bank’s Doing Business 2020 report notes that companies pay 34 different taxes, compared to an average of 26.8 in other South Asian countries.  On average, according to the 2020 Doing Business report, businesses spend over 283 hours per year calculating these payments.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks.  Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package.

Transparency of the Regulatory System

Pakistan generally lacks transparency and effective policies and laws that foster market-based competition in a non-discriminatory manner.  The Competition Commission of Pakistan has a mandate to ensure market-based competition.  In spite of this, however, the “rules of the game” in Pakistan are opaque and variable, and sometimes applied to benefit domestic businesses.

All businesses in Pakistan are required to adhere to certain regulatory processes managed by the chambers of commerce and industry.  Rules, for example on the requirement for importers or exporters to register with a chamber, are equally applicable to domestic and foreign firms.  To date, Post is not aware of any incidents where such rules have been used to discriminate against foreign investors in general or U.S. investors specifically.

The Pakistani government is responsible for establishing and implementing legal rules and regulations, but sub-national governments have a role as well depending on the sector.  Prior to implementation, non-government actors and private sector associations can provide feedback to the government on regulations and policies, but governmental authorities are not bound to follow their input.  Regulatory authorities are required to conduct in-house post-implementation reviews of regulations in consultation with relevant stakeholders.  However, these assessments are not made publicly available.  Since the 2010 introduction of the 18th amendment to Pakistan’s constitution, which delegated significant authorities to provincial governments, foreign companies must comply with provincial, and sometimes local, laws in addition to federal law.  Foreign businesses complain about the inconsistencies in the application of laws and policies from different regulatory authorities.  There are no rules or regulations in place that discriminate specifically against U.S. firms or investors, however.

The SECP is the main regulatory body for foreign companies operating in Pakistan, but it is not the sole regulator.  Company financial transactions are regulated by the State Bank of Pakistan (SBP), labor by Social Welfare or the Employee Old-Age Benefits Institution (EOBI), and specialized functions in the energy sector are administered by bodies such as the National Electric Power Regulatory Authority (NEPRA), the Oil and Gas Regulatory Authority (OGRA), and Alternate Energy Development Board (AEDB).  Each body has independent management but all must submit draft regulatory or policy changes through the Ministry of Law and Justice before any proposed rules or regulations may be submitted to parliament or, in some cases, the executive branch.

The SECP is authorized to establish accounting standards for companies in Pakistan, however, execution and implementation of those standards is poor.  Pakistan has adopted most, though not all, International Financial Reporting Standards.  Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.

Most draft legislation is made available for public comment but there is no centralized body to collect public responses.  The relevant authorities, usually the ministry under which a law may fall, gathers public comments, if it deems it necessary; otherwise legislation is directly submitted by the government to the legislative branch.  For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback obtained from local chambers and associations – such as the American Business Council (ABC) and Overseas Investors Chamber of Commerce and Industry (OICCI) – rather than publishing regulations online for public review.

There is no centralized online location where key regulatory actions are published.  Different regulators publish their regulations and implementing actions on their respective websites.  However, in most cases, regulatory implementing actions are not published online.

Businesses impacted by non-compliance with government regulations may seek relief from the judiciary, Ombudsman’s offices, and the Parliamentary Public Account Committee.  These forums are designed to ensure the government follows required administrative processes.

Pakistan did not announce any enforcement reforms during the last year.  Pakistan is in the process of fully implementing IPR Customs rules to improve IPR enforcement.  However, delayed legislative amendments in IP laws restricts full and effective implementation of such rules.

If fully implemented, IPR Customs rules will improve IPR enforcement and will boost foreign innovators’ confidence in introducing their innovations in Pakistan.

Enforcement processes are legally reviewable – initially by specialized IP Tribunals, but also through the High and Supreme Courts of Pakistan.

The government publishes limited debt obligations in the budget document in two broad categories: capital receipts and public debt, which are published in the “Explanatory Memorandum on Federal Receipts.”  These documents are available at http://www.finance.gov.pk, http://www.fbr.gov.pk, and http://www.sbp.org.pk/edocata.  The government does not publicly disclose the terms of bilateral debt obligations.

International Regulatory Considerations

Pakistan is a member of the South Asian Association for Regional Cooperation (SAARC), the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).  However, there is no regional cooperation between Pakistan and other member nations on regulatory development or implementation.

Pakistan’s judicial system incorporates British standards.  As such, most of Pakistan’s regulatory systems use British norms to meet international standards.

Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states, except India and Israel.  In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA).  Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement.  Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade, albeit at times with significant delays.

Legal System and Judicial Independence

Most international norms and standards incorporated in Pakistan’s regulatory system, including commercial matters, are influenced by British law.  Laws governing domestic or personal matters are strongly influenced by Islamic Sharia law.  Regulations and enforcement actions may be appealed through the court system.  The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government.  Decisions by the courts of the superior judiciary (the Supreme Court, the Federal Sharia Court, and five High Courts (Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court) have national standing.  The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, tax law, environmental law, consumer protection, insurance, and cases of corruption.  Pakistan’s judiciary is influenced by the government and other stakeholders.  The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness.  It currently faces a significant backlog of unresolved cases.

Pakistan’s Contract Act of 1872 is the main law that regulates contracts with Pakistan.  British legal decisions, under some circumstances, are also been cited in court rulings.  While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.

Theoretically, Pakistan’s judicial system operates independently of the executive branch.  However, the reality is different, as the military wields significant influence over the judicial branch.  As a result, there are doubts concerning the competence, fairness, and reliability of Pakistan’s judicial system.  However, fear of contempt of court proceedings inhibit businesses and the public generally from reporting on perceived weaknesses of the judicial process.

Regulations and enforcement actions are appealable.  Specialized tribunals and departmental adjudication authorities are the primary forum for such appeals.  Decisions made by a tribunal or adjudication authority may be appealed to a high court and then to the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in most sectors of the economy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed.  In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.

A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP.  While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations.  If the chief executive is not a Pakistani national, she or he is required to obtain a multiple-entry work visa.  Corporations operating in Pakistan are statutorily required to retain full-time audit services and legal representation.  Corporations must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change.  To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC).  The certificate of incorporation includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.

No new law, regulation, or judicial decision was announced or went into effect during the last year which would be significant to foreign investors.

There is no “single window” website for investment in Pakistan which provides direct access to all relevant laws, rules and reporting requirements for investors.

Competition and Antitrust Laws

Established in 2007, the Competition Commission of Pakistan (CCP) is designed to ensure private and public sector organizations are not involved in any anti-competitive or monopolistic practices.  Complaints regarding anti-competitive practices can be lodged with CCP, which conducts the investigation and is legally empowered to impose penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan.  The CCP appellate tribunal is required to issue decisions on any anti-competitive practice within six months from the date in which it becomes aware of the practice.

The CCP is currently investigating a cement sector cartel.  While the CCP has found that cement manufacturers in Pakistan established a cartel and kept prices at an artificially high level raising excess revenues worth $250 million, a review is not yet final.  The CCP also conducted a recent inquiry into sugar prices and submitted a report to the prime minister’s office.  That report has not yet been made public and no action has been taken on the report’s findings.  The CCP generally adheres to transparent norms and procedures.

Expropriation and Compensation

Two Acts, the Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests.  Pakistan does not have a strong history of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID).  Pakistan ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2011 under its “Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act.”

Investor-State Dispute Settlement

Pakistan has Bilateral Investment Treaties (BIT) with 32 countries.  The BITs include binding international arbitration of investment disputes.  Since foreign investors generally distrust Pakistan’s domestic courts to enforce commercial contracts, they often include clauses requiring binding international arbitration of investment disputes in contracts with the Government of Pakistan.

Pakistan does not have a BIT or FTA with the United States.

A U.S. industrial services company has an ongoing issue regarding the re-possession of its property – three gas compressors – which remain at Pakistan’s Bhikhi power grid station and have an estimated worth of $2 million.  The company entered into a three-year lease agreement with Pakistan Power Resources (PPR) LLC whereby the three compressors were installed at the Bhikki Rental Power Plant on November 1, 2007.  PPR had entered into a contract with Pakistan’s Water and Power Development Authority (WAPDA) to supply 136MW of electricity under a Government of Pakistan rental power project scheme.  The compressors, with WAPDA identified as the importing entity, were brought in under a “temporary import” scheme of Pakistan’s Federal Bureau of Revenue (FBR), which allowed for lower assessed import duties on the compressors with the understanding that the compressors would be re-exported within a pre-defined time period.  To date, WAPDA has not released the compressors due to outstanding penalties/duties assessed by the FBR for the company’s alleged failure to comply with “temporary import” rules.  The FBR has not granted a requested waiver from the parties, continuing to bar their export.

A California-based information technology company responded to the Capital Development Authority (CDA)’s Expression of Interest for the construction, development, and management of an information technology university in Islamabad in 2008.  According to the Expression of Interest, the CDA would provide the land on a 99-year lease to the highest bidder, on agreed yearly payments.  The company was selected, entered into a lease agreement for approximately 200,000 square yards, and made regular payments to CDA.  Upon taking possession of the land, the company determined that the land area was less than the area agreed in the lease contract.  CDA was unsuccessful in clearing access to the leased land due to unlawful encroachment by local dwellers.  Since 2015, the company has attempted to have CDA either clear the land or reimburse the company its lease payments with interest.

A large U.S. insurance company has sought U.S. support to repatriate approximately $4 million (approximate value based on the dollar-rupee exchange rate) from the sale of its shares in its former Pakistani operations.  The company purchased the Pakistani operations in 2010, which included business entities in the U.S. and Pakistan, and sold its Pakistani interest (worth 81 percent of the Pakistani business) in two tranches in 2014 and 2015.  The company has requested the State Bank of Pakistan (SBP) and Ministry of Finance permit the repatriation of the proceeds.  In the past, the Finance Ministry has held that proceeds from the sale of its Pakistani interests could not be repatriated because they were earned prior to the liberalization of the foreign exchange regime in 1997.

Local courts do not recognize and enforce foreign arbitral awards issued against the government.  Any award involving domestic enforcement component needs an additional affirmative ruling from a local court.

There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Arbitration and special judicial tribunals do exist as alternative dispute resolution (ADR) mechanisms for settling disputes between two private parties.  Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve.  To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration.

Pakistan’s judicial system also allows for specialized tribunals as a means of alternative dispute resolution.  Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes.  However, foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms.  Protracted arbitration cases are a major concern.  Pakistani courts have not upheld some international arbitration awards.

Pakistan’s local courts do not recognize and enforce foreign arbitral awards.  Any such award, involving local enforcement, requires direction from a local court.  The Reko Diq mining dispute is an example where an international arbitral award against Pakistan was not enforced by local Pakistani courts and remains unresolved.

Generally, domestic courts favor SOEs for their investment disputes against foreign entities on the basis of “public interest.”  However, there has not been a relevant case in the past ten years.  In the 2006 Pakistan Steel Case, the Supreme Court struck down the contract between the Privatization Commission of Pakistan and the foreign investor who won the bid.  The Supreme Court decided the bidder should have furnished a guarantee that it would  make future investments to raise production capacity.  Despite the fact that this was not a condition specified in the bid documents, the Supreme Court invalidated the contract.  Since then, the government has not been able to find a serious investor/buyer for Pakistan Steel.

Bankruptcy Regulations

Pakistan does not have a single, comprehensive bankruptcy law.  Foreclosures are governed under the Companies Act 2017 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions.  Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.  On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 42.8 percent.  Pakistan was ranked 58 of 190 for ease of “resolving insolvency” rankings in the World Bank’s Doing Business 2020 report.

The Companies Act 2017 regulates mergers and acquisitions.  Mergers are allowed between international companies, as well as between international and local companies.  In 2012, the government enacted legislation for friendly and hostile takeovers.  The law requires companies to disclose any concentration of share ownership over 25 percent.

Pakistan has no dedicated credit monitoring authority.  However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.

Investment Incentives

The government’s investment policy provides both domestic and foreign investors the same incentives, concessions, and facilities for industrial development.  Though some incentives are included in the federal budget, the government relies on Statutory Regulatory Orders (SROs) – ad hoc arrangements implemented through executive order – for industry specific taxes or incentives.  The government does not offer research and development incentives.  Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.  Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.

In general, the government does not issue guarantees or jointly finance foreign direct investment projects.  The government made an exception for CPEC-related projects and provided sovereign guarantees for the investment and returns, along with joint financing for specific projects.

To encourage use of electrical vehicles (EV), the Government of Pakistan incentivized imports of EVs via the Electric Vehicles Policy 2020-2025 as completely built up (CBU)/finished vehicles and EV specific parts in complete knock down (CKD)/unassembled vehicles.  Incentives include rebates on customs duties, regulatory duties, exemptions from sales tax, and lower tariff rates.  (Note: sector contacts state that implementation of the EV policy is delayed as the government has yet to finalize the draft finance bill to introduce the duty exemptions.  Full implementation is expected in 3Q 2021.  End Note.)

Foreign Trade Zones/Free Ports/Trade Facilitation

To boost exports, the government established fiscal and institutional incentives for export-oriented industries who located operations in Export Processing Zones (EPZ), the first of which was established in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Diq, and Duddar. However, today, only Karachi, Risalpur, Sialkot, and Saindak EPZs remain operational.  These zones offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window,” which facilitates import and export authorizations.

The 2012 Special Economic Zones (SEZ) Act, amended in 2016, allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  According to the Pakistan’s 2013 Investment Policy, any manufacturer that introduces technologies that are unavailable in Pakistan can receive the same incentives available to companies operating in Pakistan’s SEZs.

Pakistan has a total of 23 designated SEZs.  All investors in SEZs are offered a number of incentives, including a ten-year tax holiday, one-time waiver of import duties on plant materials and machinery, and streamlined utilities connections.  Despite these benefits to both foreign and domestic firms, Pakistan’s SEZs have struggled to attract investment due their lack of basic infrastructure.  Khyber Pakhtunkhwa’s Peshawar Economic Zone Office opened in 2020 an Industrial Facilitation Center to provide potential investors with a one-stop shop for existing and new foreign investors.  Pakistan also intends to establish nine SEZs under CPEC.  Most CPEC SEZs remain in nascent stages of development and currently lack basic infrastructure.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOUs) – a stand-alone industrial entity exporting 100 percent of its production.  EOU incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles.  EOUs are allowed to operate anywhere in the country.  Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign businesspeople often struggle to obtain business visas for travel to Pakistan.  When visas are issued, they are typically only single-entry visas with short-duration validity.  Technical and managerial personnel working in sectors that are open to foreign investment are typically not required to obtain separate work permits.  While Pakistan announced in 2019 its visa and no objection certification (NOC) policies would be changed to attract foreign tourists and businesspeople, the new visa policies do not apply to U.S. passport holders.  In February 2021, Pakistan shifted to a 100-percent e-visa policy to facilitate business (and tourism) travel.  Pakistan also started a 30-day single entry “Business Visa in Your Inbox” Electronic Travel Authorization that allows visa on arrival.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information.  Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors.  Likewise, there are no specific performance requirements for foreign entities operating in the country.  Similarly, there are no special performance requirements on the basis of origin of the investment.  However, onerous requirements exist for foreign citizen board members of Pakistani companies, including additional documents required by the SECP as well as vetting by the Ministry of Interior.  Such requirements discourage foreign nationals from becoming board members of Pakistani companies.

There are currently no requirements for foreign IT providers to turn over source code or provide access to encryption.  However, the Government of Pakistan has plans to introduce regulations requiring this.

Currently Pakistan does not restrict data transfer outside of the economy or country’s territory except when involving the banking industry.  State Bank of Pakistan (SBP) requires financial institutions to have local data storage and any transfer of data outside of Pakistan requires formal approval from SBP.

Currently, Pakistan is in the process of approving a “personal data protection” bill and in 2020 approved the “Removal and Blocking of Unlawful Content Rules.”   Each requires data localization and requires platforms with more than 500,000 Pakistani users to register with the Pakistan Telecommunication Authority (PTA) and establish a physical office in Pakistan within nine months of the implementation of the rules.  Within three months of the local office’s establishment, a person must be appointed for coordination, and a data server system must be set up within 18 months.  The rules are also slated to be applied to internet service providers.  All companies and providers are instructed to restrict content contrary to the “security, prestige, and defense of the country.”

The government agencies involved are: the State Bank of Pakistan, the Ministry of Information Technology and Telecommunications, and the Pakistan Telecommunication Authority.

Real Property

Although Pakistan’s legal system includes the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of real property.  There is no data with respect to the percentage of land with clear title and land title issues are common.  With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding the leasing of land or acquisition by foreign or non-resident investors exists.  Corporate farming by foreign-controlled companies is permitted if the subsidiaries are incorporated in Pakistan.  There are no limits on the size of corporate farmland holdings, and foreign companies can lease farmland for up to 50 years, with renewal options.

The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain without sufficient compensation for both foreign and domestic investors.  The 1976 Foreign Private Investment Promotion and Protection Act guarantees the remittance of profits earned through the sale or appreciation in value of property.

Though protections for legal purchasers of land are provided, even if unoccupied, land titles remains a challenge.  Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments who have dedicated significant resources to digitizing land records.  In the newly merged tribal districts of Khyber Pakhtunkhwa, land rights are held collectively by the tribes, not privately by individuals and there are functionally no ownership records.  However, the provincial government is currently undertaking a long-term land registration process in the newly merged districts for tribally owned land.

In urban centers, undocumented possession of unoccupied land, squatting, is a continuing issue.  However, if it can be proven that the land was acquired legally, government agencies are supportive of the legal owner taking possession of their property.

Intellectual Property Rights

The Government of Pakistan has identified protecting intellectual property (IP) rights  as a reform priority and has taken concrete steps over the last two decades to strengthen its IP regime.  In 2005, Pakistan created the Intellectual Property Office (IPO) to consolidate government control over trademarks, patents, and copyrights.  IPO’s mission also includes coordinating and monitoring the enforcement and protection of IPR through law enforcement agencies.  Enforcement agencies include the local police, the Federal Investigation Agency (FIA), customs officials at the FBR, the CCP, the SECP, the Drug Regulatory Authority of Pakistan (DRAP), and the Print and Electronic Media Regulatory Authority (PEMRA).

Although the creation of IPO consolidated policy-making, confusion surrounding enforcement agencies’ roles still constrains performance on IP enforcement, leaving IP rights holders struggling to elicit action to address IP infringement.  Although IPO established ten enforcement coordination committees to improve IP enforcement, and has signed an MOU with the FBR, CCP, Collective Management Office, Pakistan Agricultural Research Council, and SECP to share information, the agency labors to coordinate disparate bodies under current laws.  Weak penalties and the agencies’ redundancies allow counterfeiters to evade punishment, while companies struggle to identify the correct forum in which to file a complaint.

The Intellectual Property Office as an institution has historically suffered from leadership turnover, limited resources, and a lack of government attention.  Since 2016, the Government of Pakistan has taken steps to improve the IPO’s effectiveness, starting with bringing IPO under the administrative responsibility of the Ministry of Commerce.  The IPO Act 2012 stipulates a three-year term, 14-person policy board with at least five seats dedicated to the private sector.  Section 8(2) of the IPO Act also stipulates, “the board shall meet not less than two times in a calendar year.”  2020 was a challenging year due to complications from the COVID-19 pandemic and resultant lockdowns.  As a result, no policy board meeting was held during the year.  IPO is severely under-resourced in human capital, currently working at only 52 percent of its approved staffing.  New hiring rules await final approval from the Ministry of Law.  IPO aims to start recruiting new staff once these rules are approved by the Ministry of Law.

The Intellectual Property Office is also charged with increasing public awareness of IP rights through collaboration with the private sector.  COVID-19 slowed IPO’s momentum in this area with only 20 webinars and virtual interactions concluded during 2020 (down from more than 100 in 2019) – a significant portion of which focused on Pakistan’s new Geographical Indication (GI) Law.  Academics and private attorneys have noted that the creation of the IPO has improved public awareness, albeit slowly.  While difficult to quantify, contacts have also observed increased local demand for IPR protections, including from small businesses and startups.  Private and public sector contacts highlight that the educational system is a “missing link” in IPR awareness and enforcement.  Pakistani educational institutions, including law schools, have rarely included IPR issues in their curricula and do not have a culture of commercializing innovations.  However, the International Islamic University now includes an IP rights-specific course in its curriculum and Lahore University of Management Sciences has content-specific courses as part of its MBA program.  IPO officials have expressed interest in collaborating with Pakistani universities to increase IPR awareness.  IPO is working with the Higher Education Commission to offer IPR curricula at other universities but has achieved limited traction.  In collaboration with the World Intellectual Property Organization (WIPO), Technology Innovation Support Centers have been established at 47 different universities in Pakistan.

In 2016, Pakistan established three specialized IP tribunals: in Karachi covering Sindh and Balochistan, in Lahore covering Punjab, and in Islamabad covering Islamabad and Khyber Pakhtunkhwa.  IPO had initiated a plan to create additional tribunals in 2019, however, the proposal is still awaiting approval from the Ministry of Law.  These tribunals have not been a priority in terms of assigning judges.  They have experienced high turnover, and the assigned judges do not receive any specialized technical training in IP law.

Pakistan’s IPR legal framework remains inadequate, consisting of 40-year-old subordinate IP laws on copyright, patents, and trademarks alongside the 2012 IPO Act.  The IPO Act provides the overall legal basis for IP licensing and enforcement while subordinate laws apply to specific IP fields, but inconsistencies in the laws make IP enforcement difficult.  Since 2000, Pakistan has made piecemeal updates to IPR laws in an incomplete bid to bring consistency to IPR treatment within the legal system.  With the help of Mission Pakistan, CLDP, and the U.S. Patent and Trademark Office (USPTO), IPO is updating Pakistan’s IPR laws to minimize inconsistencies and improve enforcement, but progress has been slow.

In February 2021, Pakistan acceded to the Madrid Protocol on Trademarks.

The U.S. Mission in Pakistan, with the support of USTR, the Department of Commerce, and USPTO, has engaged with the Government of Pakistan over several years seeking resolution of long-standing software licensing and IP infringements committed by offices within the Government of Pakistan which undermine Pakistan’s credibility with respect to IP enforcement.  In early 2021, several U.S. agencies, including the Commercial Law Development Program, United States Patent and Trademark Office, USAID, and the U.S. Food & Drug Administration, launched a six-month, 16-part capacity building series with Pakistani IP enforcement and relevant officials focused on curbing the flow of counterfeit pharmaceuticals within and through Pakistan.  The program provides instruction on forensic tools, pharmaceutical supply chain integrity, cyber intelligence, and the identification of transnational criminal organizations exploiting trade routes.  The program seeks to address intellectual property rights enforcement issues while protecting public health and safety.

Pakistan is currently on the Special 301 report Watch List.

Pakistan does not track and report on its seizures of counterfeit goods.

Resources for Intellectual Property Rights Holders:

John Cabeca
Intellectual Property Counselor for South Asia
U.S. Patent and Trademark Office
Foreign Commercial Service
email: john.cabeca@trade.gov
website: https://www.uspto.gov/ip-policy/ip-attache-program
tel: +91-11-2347-2000

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSX) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSX is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.  Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSX and can repatriate profits, dividends, or disinvestment proceeds.  The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.  In 2017, the government modified the capital gains tax and imposed a 15 percent tax on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months. The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.

The SBP and SECP provide regulatory oversight of financial and capital markets for domestic and foreign investors.  Interest rates depend on the reverse repo rate (also called the policy rate).

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits.  Banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of a bank’s equity.  Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves.  For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital.  While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending.  Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in the early stages of development.

Money and Banking System

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP (2021), only 24 percent of the adult population uses formal banking channels to conduct financial transactions while 25 percent are informally served by the banking sector; women are financially excluded at higher rates than men.  The remaining 51 percent of the adult population do not utilize formal financial services.

Pakistan’s financial sector has been described by international banks and lenders as performing well in recent years.  According to the latest review of the banking sector conducted by SBP in July 2020, improving asset quality, stable liquidity, robust solvency, and slow pick-up in private sector advances were noted.  The asset base of the banking sector expanded by 7.8 percent during 2020 due to a surge in banks’ investments, which increased by 22.8 percent (or PKR 2 trillion).  The five largest banks, one of which is state-owned, control 50.4 percent of all banking sector assets.

SBP conducted the 6th wave of the Systemic Risk Survey in August-2020.  The survey results indicated respondents perceived key risks for the financial system to be mostly exogenous and global in nature.  Importantly, the policy measures rolled out by SBP to mitigate the effects of COVID-19 have been very well received by the stakeholders.

The risk profile of the banking sector remained satisfactory and moderation in profitability and asset quality improved as non-performing loans as a percentage of total loans (infection ratio) was recorded at 9.7 percent at the end of FY 2020 (June 30, 2020).  In 2020, total assets of the banking industry were estimated at $151.9 billion and net non-performing bank loans totaled approximately $1 billion– 1.9 percent of net total loans.

The penetration of foreign banks in Pakistan is low, making a small contribution to the local banking industry and the overall economy.  According to a study conducted by the World Bank Group in 2018, (the latest data available) the share of foreign bank assets to GDP stood at 3.5 percent while private credit by deposit to GDP stood at 15.4 percent.  Foreign banks operating in Pakistan include Citibank, Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the Bank of China.  International banks are primarily involved in two types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations.  SBP requires foreign banks to hold at minimum $300 million in capital reserves at their Pakistani flagship location, and maintain at least an 8 percent capital adequacy ratio.  In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

• 1 to 5 branches: $28 million in assigned capital;
• 6 to 50 branches: $56 million in assigned capital;
• Over 50 branches: $94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan.  There are no other restrictions to prevent foreigners from opening and operating a bank account.

Foreign Exchange and Remittances

Foreign Exchange

As a prior action of its July 2019 IMF program, Pakistan agreed to adopt a flexible market-determined exchange rate.  The SBP regulates the exchange rate and monitors foreign exchange transactions in the open market, with interventions limited to safeguarding financial stability and preventing disorderly market conditions.  However, other government entities can influence SBP decisions through their membership on the SBP’s board; the finance secretary and the Board of Investment chair currently sit on the board.

Banks are required to report and justify outflows of foreign currency.  Travelers leaving or entering Pakistan are allowed to physically carry a maximum of $10,000 in cash.  While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules.  Although no formal policy bars profit repatriation, U.S. companies have faced delays in profit repatriation due to unclear policies and coordination between the SBP, the Ministry of Finance and other government entities.  Mission Pakistan has provided advocacy for U.S. companies which have struggled to repatriate their profits.  Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.

There is no clear policy on convertibility of funds associated with investment in other global currencies.  The SBP opts for an ad-hoc approach on a case-by-case basis.

Remittance Policies

The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.  Remittance of full capital, profits, and dividends over $5 million are permitted while dividends are tax-exempt.  No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law.  However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee.  Similarly, banks are required to account for outflows of foreign currency.  Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.

In September 2020, Prime Minister Imran Khan launched the Roshan Digital Account (RDA) project aimed at providing digital banking facilities to overseas Pakistanis.  Customers can use  both PKR and USD for transactions and the accounts receive special tax treatment.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law.  Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

Pakistan has 197 state-owned enterprises (SOEs) in the power, oil and gas, banking and finance, insurance, and transportation sectors.  They provide stable employment and other benefits for more than 420,000 workers, but a number require annual government subsidies to cover their losses.

Three of the country’s largest SOEs include:  Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).  According to the IMF, the total debt of SOEs now amounts to 2.3 percent of GDP – just over $7 billion in 2019.  Note: IMF and WB data for 2020 regarding SOEs is not yet available, however, according to SBP provisional data from December 2020, the total debt of Pakistani SOEs is $14.62 billion.  End Note.  The IMF required audits of PIA and PSM by December 2019 as part of Pakistan’s IMF Extended Fund Facility.  PR is the only provider of rail services in Pakistan and the largest public sector employer with approximately 90,000 employees.  PR has received commitments for $8.2 billion in CPEC loans and grants to modernize its rail lines.  PR relies on monthly government subsidies of approximately $2.8 million to cover its ongoing obligations.  In 2019, government payments to PR totaled approximately $248 million.  The government provided a $37.5 million bailout package to PR in 2020.  In 2019, the Government of Pakistan extended bailout packages worth $89 million to PIA.  Established to avoid importing foreign steel, PSM has accumulated losses of approximately $3.77 billion per annum.  The government has provided $562 million to PSM in bailout packages since 2008.  The company loses $5 million a week, and has not produced steel since June 2015, when the national gas company shut off supplies to PSM facilities due to its greater than $340 million in outstanding unpaid utility bills.

SOEs competing in the domestic market receive non-market based advantages from the host government.  Two examples include PIA and PSM, which operate at a loss but continue to receive financial bailout packages from the government.  Post is not aware of any negative impact to U.S firms in this regard.

The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013.  Adherence to the OECD guidelines is not known.

Privatization Program 

Terms to purchase public shares of SOEs and financial institutions are the same for both foreign and local investors.  The government on March 7, 2019 announced plans to carry out a privatization program but postponed plans because of significant political resistance.  Even though the government is still publicly committed to privatizing its national airline (PIA), the process has been stalled since early 2016 when three labor union members were killed during a violent protest in response to the government’s decision to convert PIA into a limited company, a decision which would have allowed shares to be transferred to a non-government entity and pave the way for privatization.  A bill passed by the legislature requires that the government retain 51% equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors.

The Privatization Commission claims the privatization process to be transparent, easy to understand, and non-discriminatory.  The privatization process is a 17-step process available on the Commission’s website under this link http://privatisation.gov.pk/?page_id=88.

The following links provide details of the Government of Pakistan’s privatized transactions over the past 18 years, since 1991:  http://privatisation.gov.pk/?page_id=125

There is no unified set of standards defining responsible business conduct (RBC) in Pakistan.  Though large companies, especially multi-national corporations, have an awareness of RBC standards, broader awareness is lacking.  The Pakistani government has not established standards or strategic documents specifically defining RBC standards and goals.  The Ministry of Human Rights published its most recent “Action Plan for Human Rights” in May 2017.  Although it does not specifically address RBC or business and human rights, one of its six thematic areas of focus is implementation of international and UN treaties.  Pakistan is signatory to nearly all International Labor Organization (ILO) conventions.

International organization, civil society, and labor union contacts all note that there is a lack of adequate implementation and enforcement of labor laws.  Some NGOs, worker organizations, and business associations are working to promote RBC, but not on a wide scale.

According to NGOs, international organizations, and civil society contacts, children continued to work in conditions of forced and bonded labor.  In rural areas, forced child labor appeared to occur most frequently in the agriculture and brick making industries.  Pakistan does not have domestic measures which require supply chain due diligence for companies sourcing minerals originating from conflict-affected areas.  In 2021, DOL started a pilot project to support tracing in supply chains for cotton in Punjab.  It does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.

Additional Resources

Department of State

Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings );

List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;

Comply Chain (https://www.dol.gov/ilab/complychain/).

Pakistan ranked 124 out of 180 countries on Transparency International’s 2020 Corruption Perceptions Index.  The organization noted corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotions, and relatively low salaries.

Bribes are classified as criminal acts under the Pakistani legal code and are punishable by law, but are widely believed to be given across all levels of government.  Although higher courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, political, and military figures.  Political involvement in judicial appointments increases the government’s influence over the court system.

The National Accountability Bureau (NAB), Pakistan’s anti-corruption organization, suffers from insufficient funding and professionalism, and is viewed by Pakistan’s opposition as politically biased.  Fear of NAB prosecution has also deterred agency action on legitimate regulatory issues affecting the business sector.

Resources to Report Corruption

Justice (R) Javed Iqbal
Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
+92-51-111-622-622
chairman@nab.gov.pk

Ms. Yasmin Lari
Chair
Transparency International
5-C, 2nd Floor, Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
+92-21-35390408-9
ti.pakistan@gmail.com

Despite improvements to the security situation in recent years, the presence of foreign and domestic terrorist groups within Pakistan continues to pose some threat to U.S. interests and citizens.  Terrorist groups commit occasional attacks in Pakistan, though the number of such attacks has declined steadily over the last decade.  Terrorists have in the past targeted transportation hubs, markets, shopping malls, military installations, airports, universities, tourist locations, schools, hospitals, places of worship, and government facilities.  Many multinational companies operating in Pakistan employ private security and risk management firms to mitigate the significant threats to their business operations.  Baloch militant groups continue to target the Pakistani military as well as Chinese and CPEC installations in Balochistan, where Gwadar port is being developed under CPEC.  There are greater security resources and infrastructure in the major cities, particularly Islamabad, and security forces in these areas may be more readily able to respond to an emergency compared to other areas of the country.

The BOI, in collaboration with Provincial Investment Promotion Agencies, can coordinate airport-to-airport security and secure lodging for foreign investors.  To inquire about this service, investors can contact the BOI for additional information – https://www.invest.gov.pk/

Abductions/kidnappings of foreigners for ransom remains a concern.

While security challenges exist in Pakistan, the country has not grown increasingly politicized or insecure in the past year.

Pakistan has a complex system of labor laws.  According to the 18th Amendment to the Constitution, jurisdiction over labor matters is managed by the provinces.  Each province is in the process of developing its own labor law regime, and the provinces are at different stages of labor law development.

In the Islamabad Capital Territory and provinces of Punjab, Khyber Pakhtunkhwa, and Balochistan, the minimum wage for unskilled workers is PKR 17,500 (c.$110) per month.  In Sindh, it is PKR 17,000 (c. $105) per month.  However, the minimum recommended living wage by the Pakistan Institute of Labor Education and Research (PILER) is PKR 31,000 (c. $200) whereas ILO has recommended a reference wage of at least PKR 25,000 (c. $165) per month.  Legal protections for laborers are uneven across provinces, and implementation of labor laws is weak nationwide.  Lahore inspectorates have inadequate resources, which lead to inadequate frequency and quality of labor inspections.  Some labor courts are reportedly corrupt and biased in favor of employers.  In July 2020, the Pakistani government amended the Employment of Children Act 1991 to include child domestic labor as hazardous work.  The decision applies to the Islamabad Capital Territory; provinces are able to adopt the measure via a provincial assembly resolution.  On January 23, 2019 the Punjab Provincial Assembly passed the Punjab Domestic Workers Act 2019.  The law prohibits the employment of children under age 15 as domestic workers, and stipulates that children between 15 and 18 may only perform part-time, non-hazardous household work.  The law also mandates a series of protections and benefits, including limits to the number of hours worked weekly, and paid sick and holiday leave.  On January 25, 2017 the Sindh Provincial Assembly passed the Sindh Prohibition of Employment of Children Act, 2017.  In August 2019, the Balochistan Assembly adopted a resolution to eradicate child labor in coal mines.

The Senate passed the Domestic Workers (Employment Rights) Act in March 2016 (http://www.senate.gov.pk/uploads/documents/1390294147_766.pdf), but the bill has not progressed in the National Assembly.  An amendment to the federal Employment of Children Act, 1991, which would raise the minimum age of employment to sixteen, has been pending in the National Assembly since January 2016.

According to Pakistan’s most recent labor force survey (conducted 2017-2018), the civilian workforce consists of approximately 65.5 million workers.  Women are far under-represented in the formal labor force.  The survey estimated overall labor participation at approximately 45 percent, with male participation at 68 percent and females at 20 percent.  The largest percentage of the labor force works in the agricultural sector (38.5 percent), followed by the services (37.84 percent), and industry/manufacturing (16 percent) sectors.  Although the official unemployment rate hovered at roughly 6 percent pre-COVID-19, the figure is likely significantly higher.  Additionally, there are as-yet no reliable unemployment statistics since the COVID-19 outbreak.  In 2018, the UN Population Fund estimated that 29 percent of Pakistan’s population was between the ages of 10 and 24 and according to 2017-18 labor force survey estimates unemployment for 15 to 24 year old was 10.5 percent.

Pakistan is a labor exporter, particularly to Gulf Cooperation Council (GCC) countries.  According to Pakistan’s Bureau of Emigration and Overseas Employment’s 2019 “Export of Manpower Analysis,” (the latest report available) the bureau had registered more than 11 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries.  Pakistanis working overseas have sent more than $20 billion in remittances each year since 2015.  Remittances of more than $2 billion per month have continued from mid-2020 through February 2021 despite the negative impacts of COVID-19 that has resulted in many overseas Pakistanis returning to Pakistan over the last year.

Pakistani government sector contacts say their workforce is insufficiently skilled.  Federal and provincial government initiatives such as the National Vocational and Technical Training Commission and the Punjab government’s Technical Education and Vocational Training Authority aim to increase the employability of the Pakistani workforce.  However, the ILO’s 2016-2020 Pakistan Decent Work Country Program notes that, “Neither a comprehensive national policy nor coherent provincial policies for skills and entrepreneurship development are being applied.”  The ILO report notes that “a small fraction of vulnerable workers are covered by social security in one form or another, while access to comprehensive social protection systems is also limited.”  The ILO’s 2016 Decent Work Country Profile states that in 2015, only 9.4 percent of the economically active population – excluding public sector employees – were contributing to formal social security systems such as old age, survivors’, and disability pensions.

Freedom of association is guaranteed under Article 17 of Pakistan’s Constitution.  However, the ILO indicates that the Pakistani state and employers have used “disabling legislation and repressive tactics” to make union formation and collective bargaining “extremely difficult.” A report compiled by ILO in 2018 noted there were a total of 7,906 registered trade unions with a total membership of 1,414,160.  However, this may underreport the actual figure because it pertains to the number of members declared at the time of union registration.  As membership grows over time, provincial labor departments and the National Industrial Relations Commission (NIRC) do not regularly update their records.  According to worker representative organizations, the estimated unionized workforce is approximately two million, which would represent roughly three percent of the total workforce in Pakistan. Provincial labor departments are responsible for managing trade union and industrial labor disputes.  Each province has its own industrial relations legislation, and each has labor courts to adjudicate disputes.  Recent strikes have been spearheaded by public sector workers, such as teachers and public health workers.

The ILO’s 2016-2020 Pakistan Decent Work Country Program states that “exploitative labor practices in the form of child and bonded labor remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labor, worst forms of child labor, or forced labor.”  The report also identifies weak compliance with, and enforcement of, labor laws and regulations as contributing to poor working conditions – including unhealthy and unsafe workplaces –and the erosion of worker rights.

Pakistan is a beneficiary of the U.S. Generalized System of Preferences (GSP) program, (Note: As of April 2021, the GSP program has lapsed pending review.  End Note), as well as the EU’s GSP+ program, both of which require labor standards to be upheld.

The Development Finance Corporation is active in Pakistan with a current portfolio in excess of $400 million as of June 2020, including investments in, insurance for, or financing of microfinance, wind energy, and healthcare projects, among others, with more in the pipeline.  An Investment Incentive Agreement was signed between the United States and Pakistan in 1997.

https://www.dfc.gov/sites/default/files/2019-08/bl_pakistan_islamic_republic_of_11-18-1997.pdf

https://www.state.gov/pakistan-12903-investment-incentive-agreement/

Michael D. Boven
Economic Officer – Trade and Investment
Embassy Islamabad
+92 51 201 4000
BovenMD@state.gov

Policies Towards Foreign Direct Investment

Sri Lanka is a constitutional multiparty socialist republic.  In 1978, Sri Lanka began moving away from socialist, protectionist policies and opening up to foreign investment, although changes in government are often accompanied by swings in economic policy.  While the incumbent government largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI, the government also made interventionist policies to arrest the ongoing economic fallout from COVID-19.  This in turn has altered the field of foreign direct investment towards manufacturing intended to the domestic market.

The BOI (www.investsrilanka.com), an autonomous statutory agency, is the primary government authority responsible for investment, particularly foreign investment, with BOI aiming to provide “one-stop” services for foreign investors.  BOI’s Single Window Investment Facilitation Taskforce (SWIFT) helps facilitate the investment approvals process and works with other agencies in order to expedite the process.  BOI can grant project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.

Importers to Sri Lanka face high barriers.  According to a World Bank study, Sri Lanka’s import regime is one of the most complex and protectionist in the world.  U.S. stakeholders have raised concerns the government does not adequately consult with the private sector prior to implementing new taxes or regulations – citing the severe import restrictions imposed as a reaction to COVID-19 as an example.  These restrictions, quickly imposed without consulting the private sector, further complicated Sri Lanka’s import regime.   Similarly, stakeholders have raised concerns that the government does not allow adequate time to implement new regulations.  Additionally, the Sri Lankan government has banned the importation of several “non-essential” items since April 2020 in an attempt to curtail foreign exchange outflow as the Sri Lankan rupee (LKR) depreciated around five percent year-to-date in 2021 and is expected to come under further pressure.

Sri Lanka is a challenging place to do business, with high transaction costs aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices.  Investors noted concerns over the potential for contract repudiation, cronyism, and de facto or de jure expropriation.  Public sector corruption is a significant challenge for U.S. firms operating in Sri Lanka and a constraint on foreign investment.  While the country generally has adequate laws and regulations to combat corruption, enforcement is weak, inconsistent, and selective.  U.S. stakeholders and potential investors expressed particular concern about corruption in large infrastructure projects and in government procurement.  The government pledged to address these issues, but the COVID-19 response remains its primary concern.  Historically, the main political parties do not pursue corruption cases against each other after gaining or losing political positions.

While Sri Lanka is a challenging place for businesses to operate, investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other lower middle-income markets.  However, scalability is a problem due to the lack of skilled labor, a relatively small talent pool and constraints on land ownership and use.  Investors note that employee retention is generally good in Sri Lanka, but numerous public holidays, a reluctance of employees to work at night, a lack of labor mobility, and difficulty recruiting women decrease efficiency and increase start-up times.  A leading international consulting firm claims the primary issue affecting investment is lack of policy consistency.

Limits on Foreign Control and Private Ownership

Foreign ownership is allowed in most sectors, although foreigners are prohibited from owning land with a few limited exceptions.  Foreigners can invest in company shares, debt securities, government securities, and unit trusts.  Many investors point to land acquisition as the biggest challenge for starting a new business.  Generally, Sri Lanka prohibits the sale of public and private land to foreigners and to enterprises with foreign equity exceeding 50 percent.  However, on July 30, 2018, Sri Lanka amended the Land (Restriction of Alienation) Act of 2014 to allow foreign companies listed on the Colombo Stock Exchange (CSE) to acquire land.  Foreign companies not listed on the CSE—but engaged in banking, financial, insurance, maritime, aviation, advanced technology, or infrastructure development projects identified and approved as strategic development projects—may also be exempted from restrictions imposed by the Land Act of 2014 on a case-by-case basis.

The government owns approximately 80 percent of the land in Sri Lanka, including the land housing most tea, rubber, and coconut plantations, which are leased out, typically on 50-year terms.  Private land ownership is limited to fifty acres per person.  Although state land for industrial use is usually allotted on a 50-year lease, the government may approve 99-year leases on a case-by-case basis depending on the project.  Many land title records were lost or destroyed during the civil war, and significant disputes remain over land ownership, particularly in the North and East.  The government has started a program to return property taken by the government during the war to residents in the North and East.

The government allows up to 100 percent foreign investment in any commercial, trading, or industrial activity except for the following heavily regulated sectors: banking, air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents.  However, select strategic sectors, such as railway freight transportation and electricity transmission and distribution, are closed to any foreign capital participation. Foreign investment is also not permitted in the following businesses: pawn brokering; retail trade with a capital investment of less than $5 million; and coastal fishing.

Foreign investments in the following areas are restricted to 40 percent ownership:  a) production for export of goods subject to international quotas; b) growing and primary processing of tea, rubber, and coconut, c) cocoa, rice, sugar, and spices; d) mining and primary processing of non-renewable national resources, e) timber based industries using local timber, f) deep-sea fishing, g) mass communications, h) education, i) freight forwarding, j) travel services, k) businesses providing shipping services.

In areas where foreign investments are permitted, Sri Lanka treats foreign investors the same as domestic investors.  However, corruption reportedly may make it difficult for U.S. firms to compete against foreign bidders not subject to the U.S. Foreign Corrupt Practices Act when competing for public tenders.

Business Facilitation

The Department of Registrar of Companies (www.drc.gov.lk) is responsible for business registration.  Online registration (http://eroc.drc.gov.lk/) was recently introduced and registration averages four to five days.  In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number (TIN) for payment of taxes and with the Department of Labor for social security payments.

Outward Investment

The government supports outward investment, and the Export Development Board offers subsidies for companies seeking to establish overseas operations, including branch offices related to exports.  New outward investment regulations came into effect November 20, 2017.  Sri Lankan companies, partnerships, and individuals are permitted to invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the new Foreign Exchange Regulations.  Sri Lankan companies are also permitted to establish overseas companies.  Investments over the specified limit require the Central Bank Monetary Board’s approval.  All investments must be made through outward investment accounts (OIA).  All income from investments overseas must be routed through the same OIA within three months of payment.  (Note:  In the wake of the COVID-19 pandemic, the Sri Lankan government introduced a series of measures attempting to ease pressure on the Sri Lankan rupee.  These measures included a temporary suspension on OIA transactions and additional foreign exchange controls.)

Sri Lanka has signed investment protection agreements with 26 countries, including the United States (which came into force in May 1993).  Pursuant to the Constitution, investment protection agreements enjoy the force of law and legislative, executive, or administrative actions cannot contravene them.

• Sri Lanka has signed free trade agreements (FTAs) with India, Pakistan, and Singapore, and is negotiating an FTA with China.
• The FTAs with India and Pakistan only cover trade in goods. They provide for duty-free entry and duty preferences for manufactured and agricultural goods. A domestic value addition of 35 percent is required to qualify for concessions granted pursuant to the FTAs.
• The Singapore-Sri Lanka FTA came into force on May 1, 2018, and covers: investment, goods, services, trade facilitation, government procurement, telecommunications, e-commerce, and dispute settlement.  Sri Lanka eliminated customs duties on 50 percent of tariff lines, which will progressively increase to 80 percent over 14 years.  Sri Lanka will not reduce or eliminate duties on the remaining 20 percent of tariff lines.
• Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).

Sri Lanka signed a bilateral taxation treaty with the United States in 1985, which was amended in 2002.  Information about the treaty can be found at: http://www.irs.gov/Businesses/International-Businesses/Sri-Lanka—Tax-Treaty-Documents

The United States-Sri Lanka Trade and Investment Framework Agreement (TIFA) is the primary forum for bilateral trade and investment discussions, including the protection of worker rights.

Sri Lanka has signed bilateral agreements with an additional 43 countries.

Sri Lanka passed an Inland Revenue Act in 2017.  The law, which came into force on April 1, 2018, provides a tax framework to provide increased certainty to investors and taxpayers; modernize rules related to cross-border transactions to address tax avoidance; broaden the tax base; and expand income tax sources.  A three-tier corporate tax structure was also introduced with a 40 percent rate for businesses in the liquor, tobacco, and betting and gaming industries.  The law also introduced capital gains tax and fines and/or imprisonment for tax evasion and personal liability for company directors.

Transparency of the Regulatory System

Many foreign and domestic investors view the regulatory system as unpredictable with outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion.  BOI is responsible for informing potential investors about laws and regulations affecting operations in Sri Lanka, including new regulations and policies that are frequently developed to protect specific sectors or stakeholders.  Effective enforcement mechanisms are sometimes lacking, and investors cite coordination problems between BOI and relevant line agencies.  Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during the tender process.

Corporate financial reporting requirements in Sri Lanka are covered in a number of laws, and the Institute of Chartered Accountants of Sri Lanka (ICASL) is responsible for setting and updating accounting standards to comply with current accounting and audit standards adopted by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB).  Sri Lanka follows International Financial Reporting Standards (IFRS) for financial reporting purposes set by the IASB.  Sri Lankan accounting standards are applicable for all banks, companies listed on the stock exchange, and all other large and medium-sized companies in Sri Lanka.  Accounts must be audited by professionally qualified auditors holding ICASL membership.  ICASL also has published accounting standards for small companies.  The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards.

Overall legislative authority lies with Parliament.  Line ministries draft bills and, together with regulatory authorities, are responsible for crafting draft regulations, which may require approval from the National Economic Council, the Cabinet, and/or Parliament.  Bills are published in the government gazette http://documents.gov.lk/en/home.php at least seven days before being placed on the Order Paper of the Parliament (the first occasion the public is officially informed of proposed laws) with drafts being treated as confidential prior to this.  Any member of the public can challenge a bill in the Supreme Court if they do so within one week of its placement on the Order Paper of the Parliament.  If the Supreme Court orders amendments to a bill, such amendments must be incorporated before the bill can be debated and passed.  Regulations are made by administrative agencies and are published in a government gazette, similar to a U.S. Federal Notice.  In addition to regulations, some rules are made through internal circulars, which may be difficult to locate.

The Central Bank and the Finance Ministry published information on Central Government debt including contingent liabilities and government finance. Central Bank publishes information on debt of major SOE’s.  Debt obligations are available online in the Central Bank Annual Report; Fiscal Management Report of the Finance Ministry; Annual Report of the Ministry of Finance.  Information on contingent liabilities is available in the Annual Report of the Ministry of Finance.  Since 2018, the Central Bank published guaranteed debt and central government debt annually.

International Regulatory Considerations

Sri Lanka is a member of the World Trade Organization (WTO) and has made WTO notifications on customs valuation, agriculture, import licensing, sanitary and phytosanitary measures, the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights.  Sri Lanka ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and a National Trade Facilitation Committee was tasked with undertaking reforms needed to operationalize the TFA.  The WTO conducted a review of the TFA in June 2019 in which Sri Lankan officials noted challenges related to accessing technical assistance and capacity building support for implementation of TFA recommendations.

Legal System and Judicial Independence

Sri Lanka’s legal system reflects diverse cultural influences.  Criminal law is fundamentally British-based while civil law is Roman-Dutch.  Laws on marriage, divorce, inheritance, and other issues can also vary based on religious affiliation.  Sri Lankan commercial law is almost entirely statutory, reflecting British colonial law, although amendments have largely kept pace with subsequent legal changes in the United Kingdom.  Several important legislative enactments regulate commercial issues: the BOI Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act.

Sri Lanka’s court system consists of the Supreme Court, the Court of Appeal, provincial High Courts, and the Courts of First Instance (district courts with general civil jurisdiction) and Magistrate Courts (with criminal jurisdiction).  Provincial High Courts have original, appellate, and reversionary criminal jurisdiction.  The Court of Appeal is an intermediate appellate court with a limited right of appeal to the Supreme Court.  The Supreme Court exercises final appellate jurisdiction for all criminal and civil cases.  Citizens may apply directly to the Supreme Court for protection if they believe any government or administrative action has violated their fundamental human rights.

Laws and Regulations on Foreign Direct Investment

The principal law governing foreign investment is Law No. 4 (known as the BOI Act), created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012.  The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions.  Under Section 17 of the Act, the BOI is empowered to approve companies satisfying minimum investment criteria with such companies eligible for duty-free import concessions.  The BOI acts as the “one-stop-shop” to facilitate all the requirements of the foreign investors to Sri Lanka.  Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws and applies to investments that do not satisfy eligibility incentive criteria.  From April 1, 2017, Inland Revenue Act No. 24 of 2017 created an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments.  Commercial Hub Regulation No 1 of 2013 applies to transshipment trade, offshore businesses, and logistic services.  The Strategic Development Project Act of 2008 (SDPA) provides tax incentives for large projects that the Cabinet identifies as “strategic development projects.”

https://investsrilanka.com/

Competition and Anti-Trust Laws

Sri Lanka does not have a specific competition law.  Instead, the BOI or respective regulatory authorities may review transactions for competition-related concerns.  In March of 2017, Parliament approved the “Anti-Dumping and Countervailing” and “Safeguard Measures” Acts.  These laws provide a framework against unfair trade practices and import surges and allow government trade agencies to initiate investigations relating to unfair business practices to impose additional and/or countervailing duties.

Expropriation and Compensation

Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment, with the last expropriation dispute resolved in 1998.  The land acquisition law (Land Acquisition Act of 1950) empowers the government to take private land for public purposes with compensation based on a government valuation.  Still, there have been reported cases of the military taking over businesses in the North and East part of the country, by claiming they were on government land, with little or no compensation.

Dispute Settlement

ICSID Convention and New York Convention

Sri Lanka is a member state to the International Centre for the Settlement of Investment Disputes (ICSID convention) and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.

Investor-State Dispute Settlement

Sri Lanka signed a Bilateral Investment Treaty (BIT) with the United States in 1991.  Over the past ten years, according to the United Nations, two investment disputes in Sri Lanka have involved foreign investors: 1) a dispute between a major European bank and the national Ceylon Petroleum Corporation regarding an oil hedging agreement, concluded with the proceeding being decided in favor of the foreign bank; and 2) an arbitration involving British and local investors (with the Attorney General as respondent) regarding a tourism development project that concluded in 2020 with the ICSID tribunal dismissing the $20 million claim for failure to prove the claim.

International Commercial Arbitration and Foreign Courts

Sri Lanka ranks very poorly on contract enforcement (164 out of 190) on the World Bank’s Doing Business Indicators.  As a result, many investors prefer arbitration over litigation.  Sri Lanka has a community mediation system, which primarily handles non-commercial mediations and commercial disputes where the amount in controversy is less than $3,333.00.  There is no-mediation system for commercial disputes over that threshold amount.  The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com) and the Sri Lanka National Arbitration Centre (www.slnarbcentre.com) also help settle private commercial disputes through arbitration.

Bankruptcy Regulations

The Companies Act and the Insolvency Ordinance provide for dissolution of insolvent companies, but there is no mechanism to facilitate the reorganization of financially troubled companies.  Other laws make it difficult to keep a struggling company solvent.  The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems.  In the absence of comprehensive bankruptcy laws, extra-judicial powers granted by law to financial institutions protect the rights of creditors.  A creditor may petition the court to dissolve the company if the company cannot make payments on debts in excess of LKR 50,000 ($320.00).  Lenders are also empowered to foreclose on collateral without court intervention.  However, loans below LKR 5 million ($32,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan.

Sri Lanka ranked 94 out of 190 countries in the resolving insolvency index in the World Bank’s Doing Business Report 2020.  Resolving insolvency takes, on average, 1.7 years at a cost equivalent to 10 percent of the estate’s value.

Investment Incentives

The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in certain sectors and increased capital allowances (depreciation) on capital investments.

Corporate Taxation

As per the 2021 budget revisions the standard rate of corporate tax is 14 percent for: a) small and medium companies (with an annual income of less than LKR 500 million or $3.2 million); b) companies exporting goods and services; and c) companies engaged in education services; promotion of tourism; d) companies engaged in construction and e) companies engaged in healthcare services. Companies engaged in information technology services and agricultural business are exempt from taxes.  A 40 percent corporate tax rate applies to companies engaged in gaming, liquor, and tobacco related businesses. An 18 percent tax on manufacturing and 24 percent tax on Trading, banking, finance, insurance, and similar businesses.

For further information on investment incentives and other investment-related issues, potential investors should contact BOI directly (www.investsrilanka.com or info@Board of Investment.lk.) and refer the Inland Revenue Act 24 of 2017 http://www.ird.gov.lk/en/sitepages/default.aspx

Foreign Trade Zones/Free Ports/Trade Facilitation

Sri Lanka has 15 free trade zones, also called “export processing zones,” which are administered by the BOI.  Foreign investors have the same investment opportunities as local entities in these zones.  Export-oriented companies located within and outside the zones are eligible to import project-related material and inputs free of customs import duties although such imports may be subject to other taxes.

In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transportation time and cost.  However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, environmental pollution, and a scarcity of labor.  The BOI and the government now encourage export-oriented factories to locate in industrial zones farther from Colombo, although Sri Lanka’s limited road network create other challenges for outlying zones.

In 2019, the China Harbor Engineering Company (CHEC) completed the reclamation of 269 hectares of land adjacent to Colombo’s port and historic downtown to form the Colombo Port City Special Economic Zone (SEZ), which government officials describe as a future “international commercial and financial hub.”  CHEC invested $1.4 billion in the land reclamation and basic infrastructure of the Port City, in return for which it will have control, via lease, of 116 of the 178 total hectares of marketable land on the site, the balance of which the government will control.  Parliament approved on May 20, 2021 legislation to govern the SEZ and establish a commission to act as promoter, manager, regulator, and “single window investment facilitator” to attract foreign direct investment to the project.  The legislation also includes tax exemptions and other incentives for potential investors.  The legislation was amended prior to approval by a simple majority in Parliament following a Supreme Court ruling on multiple legal challenges to the bill’s constitutionality, though concerns remain about the potential risk of illicit financial flows.

Performance and Data Localization Requirements

Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor.  Technical and managerial personnel are in short supply, and this shortage is likely to continue in the near future.  Foreign laborers do not experience significant problems in obtaining work or residence permits.  Sri Lanka has seen a rise in foreign laborers, mainly in construction sites, with some reportedly working without proper work visas.  Foreign investors who remit at least $250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program: (http://www.immigration.gov.lk/web/index.php?option=com_content&view=article&id=154&Itemid=200&lang=en).  Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries, including the United States.  Tourist and business visas are granted for one month with possible extensions.

Sri Lanka has no specific requirements for foreign information technology providers to turn over source code or provide access to surveillance.  Provisions relating to interception of communications for cybercrime issues are subject to court supervision under the Computer Crimes Act (CCA) of 2007.  Sri Lanka became a party to the Budapest Cybercrime Convention in 2015, and safeguards based on the convention are in force.  Although there is no comprehensive legislative protection of electronic data, the CCA has a provision to protect data and information.  The government is currently formulating data protection legislation.  There is no ban on the sale of electronic data for marketing purposes.

Real Property

Secured interests in real property in Sri Lanka are generally recognized and enforced, but many investors claim protection can be flimsy.  A reliable registration system exists for recording private property including land, buildings, and mortgages, although problems reportedly exist due to fraud and forged documents.  In the World Bank’s 2020 “Doing Business Index,” Sri Lanka ranked 138 out of 190 countries for registering a property.  Property registration required, on average, completion of eight procedures lasting 39 days.  Sri Lanka prohibits the sale of land to foreign nationals and to enterprises with foreign equity exceeding 50 percent.

Intellectual Property Rights

While IPR enforcement is improving, counterfeit goods, particularly imports, are still widely available, and music and software piracy are reportedly widespread.  Foreign and U.S. companies in the recording, software, movie, clothing, and consumer product industries claim that inadequate IPR protection and enforcement weaken their businesses in Sri Lanka.

Sri Lanka has a comprehensive IPR law, and several offenders have been charged or convicted.  The government points to the new information technology (IT) policy that requires government agencies to use licensed or open-source software as proof of IPR improvements (although the government has yet to put systems in place to monitor compliance with the policy) and some sectors – including apparel, software, tobacco, and electronics have reported success in combating trademark counterfeiting through the courts.  Still, judicial redress remains time-consuming and challenging.  Better coordination among enforcement authorities and government institutions – such as the National Intellectual Property Office (NIPO), Sri Lanka Customs, and Sri Lanka Police as well as more trained staff and resources – is needed to strengthen Sri Lanka’s IPR regime.  Although infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties, Sri Lanka does not track and report on seizures of counterfeit goods.

Sri Lanka is a party to major intellectual property agreements.  Sri Lanka adopted an intellectual property law in 2003 intended to meet U.S.-Sri Lanka bilateral IPR agreements and trade-related aspects of intellectual property rights (TRIPS) obligations.  The law governs copyrights and related rights; industrial designs; patents, trademarks, and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets).  All trademarks, designs, industrial designs, and patents must be registered with the Director General of Intellectual Property.  No legal provisions exist for registration of copyrights and trade secrets.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Contact at U.S. Embassy Colombo:

John Cabela, U.S. Intellectual Property Attaché for South Asia, American Center
+91 11 2347 2000
Email: john.cabeca@trade.gov

Local lawyers list: https://lk.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys-2/

Country/Economy Resources:

• American Chamber of Commerce in Sri Lanka: www.amcham.lk
• National Intellectual Property Office of Sri Lanka: www.nipo.gov.lk

Capital Markets and Portfolio Investment

The Securities and Exchange Commission (SEC) governs the CSE, unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories.  Foreign portfolio investment is encouraged.  Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors.  Investors may open an Inward Investment Account (IIA) with any commercial bank in Sri Lanka to bring in investments.  As of August 30, 2020, 289 companies representing 20 business sectors are listed on the CSE.  As stock market liquidity is limited, investors need to manage exit strategies carefully.

In accordance with its IMF Article VIII obligations, the government and the Central Bank of Sri Lanka (CBSL) generally refrain from restrictions on current international transfers.  When the government experiences balance of payments difficulties, it tends to impose controls on foreign exchange transactions.  Due to pressures on the balance of payments caused by the COVID-19 economic crisis, Sri Lanka took several measures to restrict imports and limit outward capital transactions.

The state consumes over 50 percent of the country’s domestic financial resources and has a virtual monopoly on the management and use of long-term savings.  This inhibits the free flow of financial resources to product and factor markets.  High budget deficits have caused interest rates to rise and resulted in higher inflation.  On a year-to-year basis, inflation was approximately 5.1 percent in March of 2021, and the average prime lending rate was 9.91 percent.  Retained profits finance a significant portion of private investment in Sri Lanka with commercial banks as the principal source of bank finance and bank loans as the most widely used credit instrument for the private sector.  Large companies also raise funds through corporate debentures.  Credit ratings are mandatory for all deposit-taking institutions and all varieties of debt instruments.  Local companies can borrow from foreign sources.  FDI finances about 6 percent of overall investment.  Foreign investors can access credit on the local market and are free to raise foreign currency loans.

Money and Banking System

Sri Lanka has a diversified banking system.  There are 25 commercial banks:  13 local and 12 foreign.  In addition, there are seven specialized local banks.  Citibank N.A. is the only U.S. bank operating in Sri Lanka.  Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government.  Banking has expanded to rural areas, and by end of 2020 there were over 3,619 commercial bank branches and over 6,176 Automated Teller Machines throughout the country.  Both resident and non-resident foreign nationals can open foreign currency banking accounts.  However, non-resident foreign nationals are not eligible to open Sri Lankan Rupee accounts.

CBSL is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance.  Credit ratings are mandatory for all banks.  CBSL introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standards substantially increased impairment provisions on loans.  The migration to the Basel III capital standards began in July of 2017 on a staggered basis, with full implementation was kicking in on January 1, 2019 and some banks having had to boost capital to meet full implementation of Basel III requirements.  In addition, banks must increase capital to meet CBSL’s new minimum capital requirements deadline, which is set for December 31, 2022. A staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed.

Total assets of the banking industry stood at LKR 14,666 billion ($75.2 billion) as of December 31, 2020.  The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 33 percent of all banking assets.  The Bank of Ceylon currently holds a non-performing loan (NPL) ratio of 4.98 percent (up from 4.79 percent in 2019).  The People’s Bank currently holds a NPL ratio of 3.85 percent (up from 3.68 percent in 2019).  Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state.  The six-month debt moratorium issued by the CBSL for distressed borrowers will expired in March 2021, the impact of this is yet to be reflected on the banking sector NPL

In October 2019, Sri Lanka was removed from the Financial Action Task Force (FATF) gray list after making significant changes to its Anti-Money Laundering/Countering the Finance of Terrorism (AML/CFT) laws.  CBSL is exploring the adoption of blockchain technologies in its financial transactions and appointed two committees to investigate the possible adoption of blockchain and cryptocurrencies.

Sri Lanka has a rapidly growing alternative financial services industry that includes finance companies, leasing companies, and microfinance institutes.  In response, CBSL has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions.  Credit ratings are mandatory for finance companies as of October 1, 2018.   The government also directed banks to register with the U.S. Internal Revenue Service (IRS) to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA).  Almost all commercial banks have registered with the IRS.

Foreign Exchange and Remittances

Foreign Exchange

Sri Lanka generally has investor-friendly conversion and transfer policies.  Companies say they can repatriate funds relatively easily.  In accordance with its Article VIII obligations as a member of the IMF, Sri Lanka liberalized exchange controls on current account transactions in 1994 and, in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions.  A new Foreign Exchange Act, No. 12 of 2017, came into operation on November 20, 2017 and further liberalized capital account transactions to simplify current account transactions.  Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments but there are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by CBSL.

Remittance Policies

No barriers exist, legal or otherwise, to remittance of corporate profits and dividends for foreign enterprises since 2017 when Sri Lanka relaxed investment remittance policies with the new Foreign Exchange Act.  Remittances are done through IIAs.  There are no waiting periods for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties, and management fees provided there is sufficient evidence to prove the originally invested funds were remitted into the country through legal channels.  Exporters must repatriate export proceeds within 120 days.

Sovereign Wealth Funds

Sri Lanka does not have a sovereign wealth fund.  The government manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in government securities), stock market investments, and corporate debenture investments.

SOEs are active in transport (buses and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance.  Following the end of the civil war in 2009, Sri Lankan armed forces began operating domestic air services, tourist resorts, and farms crowding out some private investment.  In total, there are over 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important, and 345 have been identified as non-commercial.

Privatization Program

The government currently have not adopted a strategy of privatizing SOEs.  Several attempts to sell the government’s stake in the heavily indebted national carrier, Sri Lankan Airlines, were not successful.  The government is also seeking to improve the efficiency of SOEs through private sector management practices.  SOE labor unions and opposition political parties often oppose privatization and are particularly averse to foreign ownership.  Privatization through the sale of shares in the stock market is likely to be less problematic.

The concept of Corporate Social Responsibility (CSR) is more widely recognized among Sri Lankan companies than Responsible Business Conduct (RBC).  Leading companies in Sri Lanka actively promote CSR, and some SMEs have also started to promote CSR.  CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR.  The Ceylon Chamber of Commerce actively promotes CSR among its membership.  The SEC, together with the Institute of Chartered Accountants of Sri Lanka, published a Code of Best Practices on Corporate Governance in order to establish good corporate governance practices in Sri Lankan capital markets.  Separate government agencies are tasked with protecting individuals from adverse business impacts in relation to labor rights, consumer protection, and environmental protections, although the effectiveness of these agencies is questioned by some.  The government has not launched an initiative to promote RBC principles, such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights.  The government also does not participate in the Extractive Industries Transparency Initiative (EITI) although Sri Lanka has mineral resources including graphite, mineral sands, and gemstones.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings);
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is often weak and inconsistent.  U.S. firms identify corruption as a major constraint on foreign investment, but generally not a major threat to operating in Sri Lanka once contracts have been established.  The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts.  Projects geared toward exports face fewer problems.  A Right to Information Act came into effect in February of 2017 which increased government transparency.

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations, but it is widely considered ineffective and has reportedly made little progress pursuing cases of national significance.  The law states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and fine.  Bribery laws extend to family members of public officials, but political parties are not covered.  A bribe by a local company to a foreign official is also not covered by the Bribery Act and the government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials.  Thus far, the Bribery Commission has focused on minor cases such as bribes taken by traffic police, wildlife officers, and school principals.  These cases reportedly follow a pattern of targeting low-level offenses with prosecutions years after the offense followed by the imposition of sentences not always proportionate to the conduct (i.e., sometimes overly strict, other times overly lenient).

Government procurement regulations contain provisions on conflicts-of-interest in awarding contracts or government procurement.  While financial crime investigators have developed a number of cases involving the misappropriation of government funds, these cases have often not moved forward due to lack of political will, political interference, and lack of investigative capacity.  Sri Lanka signed and ratified the UN Convention against Corruption in March of 2004 and the UN Convention against Transnational Organized Crime in 2006.  Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
T+94 112 596360 / 2595039 M+94 767011954
Email: ciaboc@eureka.lk or dgbribery@gmail.com

Contact at “watchdog” organization:

Transparency International, Sri Lanka
5/1 Elibank Road Colombo 5
Phone: 94-11- 4369783
Email: tisl@tisrilanka.org

The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE.  During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were intentionally directed against U.S. citizens.  On April 21, 2019, terrorist attacks targeted several churches and hotels throughout Colombo and in the eastern city of Batticaloa, killing more than 250 people, including over 40 foreigners including five Americans.  In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets.

Demonstrations occasionally take place in response to world events or local developments and are not uncommon near Western embassies.  However, they tend to be well-contained with support from the Sri Lankan police.

Business-related Violence

Business related violence is not common and has little impact on the investment environment.

Both local and international businesses have cited labor shortages as a major problem in Sri Lanka.  In 2019, 8.5 million Sri Lankans were employed:  47 percent in services, 27 percent in industry and 25 percent in agriculture.  Approximately 60 percent of the employed are in the informal sector.  The government sector also employs over 1.4 million people.

Sri Lanka’s labor laws afford many employee protections.  Many investors consider this legal framework somewhat rigid, making it difficult for companies to reduce their workforce even when market conditions warrant doing so.  The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages averaged over 54 salary weeks, one of the highest in the world.  There is no unemployment insurance or social safety net for laid off workers.

Labor is available at relatively low cost, though higher than in other South Asian countries.  Sri Lanka’s labor force is largely literate (particularly in local languages), although weak in certain technical skills and English.  The average worker has eight years of schooling, and two-thirds of the labor force is male.  The government has initiated educational reforms to better prepare students for the labor market, including revamping technical and vocational education and training.  While the number of students pursuing computer, accounting, business skills, and English language training programs is increasing, the demand for these skills still outpaces supply with many top graduates seeking employment outside of the country.

Youth are increasingly uninterested in labor-intensive manual jobs, and the construction, plantation, apparel, and other manufacturing industries report a severe shortage of workers.  The garment industry reports up to a 40 percent staff turnover rate.  Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere.

A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs.  Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency.  Investors often struggle to find employees with the requisite skills, a situation particularly noticeable as the tourism industry opens new hotels.

Many service sector companies rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products and retention is reasonably good in the information technology sector.  Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.

Migrant Workers Abroad

There were an estimated 1.8 million Sri Lankan workers abroad in 2009/10, the last year the government published the figure.  Remittances from migrant workers, averaged about $7.1 billion in 2020, making up Sri Lanka’s largest source of foreign exchange. Most of this labor force is unskilled (i.e., housemaids and factory laborers) and located primarily in the Middle East.  Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad.  Approximately 6,000 Sri Lankans work in Bangladeshi garment factories.

Foreign Workers in Sri Lanka

Sri Lanka has seen a gradual rise in foreign workers.  Most foreign workers are from India, Bangladesh, and the PRC, many reportedly without proper work visas or other documentation.

Trade Unions

Approximately 9.5 percent of the workforce is unionized, and union membership is declining.  There are more than 2,000 registered trade unions (many of which have 50 or fewer members), and several federations.  About 18 percent of labor in the industry and service sector is unionized.  Most of the major trade unions are affiliated with political parties, creating a highly politicized labor environment.  This is not the case for private companies, which typically only have one union or workers’ council to represent employees.  There are also some independent unions.  All workers, other than police, armed forces, prison service, and those in essential services, have the right to strike.  The President can designate any industry an essential service. Workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court.

Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses typically do not belong to unions.  The tea industry, however, is highly unionized, and public sector employees are unionized at high rates.  Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist within the EPZs.  The International Labor Organization’s (ILO) Freedom of Association Committee observed that Sri Lankan trade unions and worker councils can co-exist but advises that there should not be any discrimination against those employees choosing to join a union.  The right of worker councils to engage in collective bargaining has been recognized by the ILO.

Collective bargaining exists but is not universal.  The Employers’ Federation of Ceylon, the main employers’ association in Sri Lanka, assists member companies in negotiating with unions and signing collective bargaining agreements.  While about a quarter of the 660 members of the Employers’ Federation of Ceylon are unionized, approximately 90 of these companies (including a number of foreign-owned firms) are bound by collective agreements.  Several other companies have signed memorandums of understanding with trade unions.  However, there are only a few collective bargaining agreements signed with companies located in EPZs.

All forms of forced and compulsory labor are prohibited.  In March of 2016, the government introduced a national minimum wage set at LKR 10,000 ($54) per month or LKR 400 ($2.16) per day.   Forty-four “wage boards” established by the Ministry of Labor set minimum wages and working conditions by sector and industry in consultation with unions and employers.  The minimum wages established by these sector-specific wage boards tend to be higher than the minimum wage.

Sri Lankan law does not require equal pay for equal work for women.  The law prohibits most full-time workers from regularly working more than 45 hours per week without receiving overtime (premium pay).  In addition, the law stipulates a rest period of one hour per day.  Regulations limit the maximum overtime hours to 15 per week.  The law provides for paid annual holidays, sick leave, and maternity leave.  Occupational health and safety regulations do not fully meet international standards.

Child labor is prohibited and virtually nonexistent in the organized sectors, although child labor occurs in informal sectors.  The minimum legal age for employment is set at 16 years of age.  The minimum age for employment in hazardous work is 18 years of age.

Sri Lanka is a member of the ILO and has ratified 31 international labor conventions, including all eight of the ILO’s core labor conventions.  The ILO and the Employers’ Federation of Ceylon are working to improve awareness of core labor standards and the ILO also promotes its “Decent Work Agenda” program in Sri Lanka.

Sri Lanka and the Overseas Private Investment Corporation (OPIC) signed an agreement in 1966 and subsequently renewed in 1993.  This agreement provides investment insurance guarantees for U.S. investors.  The Development Finance Corporation (DFC) succeeded OPIC in 2019 and is now party to the agreement.  Sri Lanka is a founding member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, which offers insurance against non-commercial risks.

Several countries provide bilateral project loans to the government, which assist firms from their countries to win projects.  China has provided extensive loans, enabling Chinese companies to engage in numerous projects in Sri Lanka ranging from road and port construction to railway equipment supply.

* Source for Host Country Data: Central Bank of Sri Lanka

According to CBSL, the United States is the 13th largest foreign investor in Sri Lanka in terms of stock of foreign direct investment (FDI). The United States stock of FDI in 2020 was $274 million.  FDI inflows from the United States were $13 million in 2020.  United States FDI in Sri Lanka has remained steady over the past five years.

Table 4: Sources of Portfolio Investment
Data not available.

Jacob Dietrich
Economic Officer
U.S. Embassy Colombo, Sri Lanka
Phone: +94-11-249-8500
Email: commercialcolombo@state.gov