Policies Towards Foreign Direct Investment

Bangladesh actively seeks foreign investment, particularly in the 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 sectors. 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; and
• Security printing.

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; and
• 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, three other Investment Promotion Agencies (IPAs) – the Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh Economic Zones Authority (BEZA), and Bangladesh Hi-Tech Park Authority (BHTPA) — promote domestic and foreign investment. 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. BEZA plans to establish approximately 100 Economic Zones (EZs) throughout the country over the next several years, of which 11 are currently fully or partially operational. Site selections for 77 additional EZs have been completed as of March 2020. While EPZs accommodate exporting companies only, EZs are open for both export- and domestic-oriented companies. Additionally, Bangladesh is setting up several Hi-Tech Parks across the country under the supervision of the Bangladesh Hi-Tech Park Authority.

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:

a) Fishing in the deep sea

b) Bank/financial institutions in the private sector

c) Insurance companies in the private sector

d) Generation, supply, and distribution of power in the private sector

e) Exploration, extraction, and supply of natural gas/oil

f) Exploration, extraction, and supply of coal

g) Exploration, extraction, and supply of other mineral resources

h) Large-scale infrastructure projects (e.g. flyover, elevated expressway, monorail, economic zone, inland container depot/container freight station)

i) Crude oil refinery (recycling/refining of lube oil used as fuel)

j) Medium and large industries using natural gas/condensate and other minerals as raw material

k) Telecommunications service (mobile/cellular and land phone)

l) Satellite channels

m) Cargo/passenger aviation

n) Sea-bound ship transport

o) Seaports/deep seaports

p) VOIP/IP telephone

q) 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, following a prime ministerial directive. 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 clearance certificates 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 of eight ranks on the World Bank’s Doing Business score. BIDA offers 18 services under its online OSS as of April 2020, and has a plan to expand to 154 services covering 35 agencies. The Bangladesh government 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 can 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, 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 now 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.

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 1947 Act by adding a “conditional provision” that permits outbound investment for export-related enterprises. Private sector contacts note that the few international investments approved by the Bangladesh Bank have been limited to large exporting companies with international experience.

Transparency of the Regulatory System

Since 1989, the government has gradually moved to decrease regulatory obstruction of private business. The chambers of commerce have called for a greater voice for the private sector in government decisions and for privatization, but at the same time many support protectionism and subsidies for their own industries. The result is that policy and regulations in Bangladesh are often not clear, consistent, or publicized. Registration and regulatory processes are alleged to be frequently 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 controlling policies, as well as foreign investment in government-controlled projects.

Bangladesh has achieved incremental progress in using information technology to improve the transparency and efficiency of some government services and to 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 that provides 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 (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 weekly “Bangladesh Gazette” every Thursday and Extraordinary Gazettes from time to time. The gazette provides official notice of government actions, including the 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 (FRC) in 2016 in an aim to establish transparency and accountability in the accounting and auditing system. The country follows Bangladesh Accounting Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS), which are largely derived from International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). However, the quality of reporting varies widely in Bangladesh. Internationally known and recognized firms have begun establishing local offices in Bangladesh and the presence of these firms 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 reports. Regulatory agencies also do not conduct impact assessments of proposed regulations; hence, 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 law is 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 January 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 notification to 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 Points for TBT:

Mr. Md. Golam Baki,
Deputy Director (Certification Marks), BSTI;
Email: baki_cm@bsti.gov.bd,
Tel: +88-02-9131582,
Cell: 01799828826

Mr. Mohammad Arafat Hossain Sarker,
Assistant Director (Certification Marks), BSTI;
Email: arafat_cm@bsti.gov.bd,
Tel: +88-02-9131582,
Cell: +8801715023589

Focal Point for other WTO related matters:

Mr. Md. Hafizur Rahman,
Director-1, WTO Cell, Ministry of Commerce
Email: director1.wto@mincom.gov.bd,
Tel: +880-2-9552105,
Cell: +88 0171 1861056

Mr. Mohammad Mahbubur Rahman Patwary,
Director-3, WTO Cell, Ministry of Commerce
Email: director3.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 of Bangladesh, 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, being a common law system, the statutes are short and set out basic rights and responsibilities but are elaborated by the courts in their application and interpretation of those laws. The Judiciary of Bangladesh acts through (1) The Superior Judiciary, having appellate, revision, and original jurisdiction and (2) The Sub-Ordinate Judiciary, having original jurisdiction.

Since 1971, Bangladesh’s legal system has been updated in the areas of company, banking, bankruptcy, and money loan court laws and other commercial laws. An important impediment to investment in Bangladesh is a 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 delays in proceedings carry no penalties. Bangladesh does not have a separate court or division of a court dedicated solely to hearing 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 the interference of 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.

Bangladesh scored 3.33 in the World Bank’s 2017 Judicial Independence Index out of a 1-7 band score with 7 being the best. That was up from 2016 when it scored 2.38. In the Rule of Law Index 2020 published by the independent, non-profit World Justice Project (WJP), Bangladesh ranked 115 among 128 countries and jurisdictions, dropping two positions from 2019.

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, the Industrial Policy Act of 2005, the Industrial Policy Act of 2010, and the Bangladesh Economic Zones Act of 2010. The Industrial Policy Act of 2016 was approved by the Cabinet Committee on Industrial Purchase on February 24, 2016 and replaces the Industrial Policy of 2010.

The National Industrial Policy of 2016 offers incentives for “green” (environmental) high-tech or “transformative” industries. Foreigners who invest $1 million or transfer $2 million to a recognized financial institution can apply for Bangladeshi citizenship. The Government of Bangladesh will provide financial and policy support for high-priority industries (those that create large-scale employment and earn substantial export revenue) and creative (architecture, arts and antiques, fashion design, film and video, interactive laser software, software, and computer and media programming) industries. Specific importance will be given to agriculture and food processing, ready-made garments (RMG), information and communication technology (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 November 2019, Parliament approved the Bangladesh Flag Vessels (Protection) Act 2019 with a provision to ensure Bangladeshi flag vessels to carry at least 50 percent of foreign cargo, up from 40 percent.

The One Stop Service 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. Although the IPAs have started to offer a few services under the OSS, corruption and excessive bureaucracy have hindered the complete roll out of the OSS. BIDA has a “one-stop” website that provides relevant laws, rules, procedure, 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

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

In November 2018, the Bangladesh Telecommunication Regulatory Commission (BTRC) finalized Significant Market Power (SMP) regulations to promote competition in the industry. In February 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, the GOB 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 it 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 (“Facility”) of the International Centre for the Settlement of Investment Disputes (“Centre”).” If the dispute cannot be resolved through consultation and negotiation, then 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 November 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, enforcement of arbitration results is applied unevenly and the GOB has challenged ICSID rulings, especially those that involve rulings against the GOB. 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 ability of the Bangladeshi judicial system to enforce its own awards is weak. Senior members of the government have been effective in using their offices to resolve investment disputes on several occasions, but the GOB’s ability to resolve investment disputes at a lower level is mixed. The GOB 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.

The practice of alternative dispute resolution (ADR) in Bangladesh has many challenges, including lack of funding for courts to provide ADR services, lack of lawyer cooperation, and lack of good 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 “conflicts of law” approach to determining whether a judgment from a foreign legal jurisdiction is enforceable in Bangladesh. This single criterion allows Bangladesh courts broad discretion in choosing whether to enforce foreign judgments with significant effects on matrimonial, adoption, 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 April 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 (ICCB) and includes the presidents of other prominent chambers such as the Dhaka Chamber of Commerce and Industry (DCCI) and the Metropolitan Chamber of Commerce and Industry (MCCI), 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 (AmCham) can sometimes help resolve transaction disputes.

Bankruptcy Regulations

Many laws affecting investment in Bangladesh are old and 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 graduated tax exemption 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 subject to tax exemption 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 graduated tax exemption from 90 percent to 20 percent over a period of 10 years.

Physical infrastructure projects eligible for exemptions include: deep sea ports, elevated expressways, road overpasses, toll road 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 (COD) after January 1, 2015 are granted a 100 percent tax exemption for 5 years, a 50 percent exemption for years 6-8, and a 25 percent exemption for years 9-10. For coal-fired IPPs contracting with the GOB before June 30, 2020 and COD before June 30, 2023, 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 that only export, import duties are waived for imports of capital machinery and spare parts. For companies that primarily export (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.

Special incentives are provided to encourage non-resident Bangladeshis to invest in the country. Incentives include the ability to buy newly-issued shares and debentures in Bangladeshi companies. A quota of 10 percent of primary shares has been fixed for non-resident Bangladeshis. Furthermore, 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 the GOB. Several companies have reported instances of infrastructure guarantees (ranging from electricity to gas connections) not being fully delivered or tax exemptions being 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 an 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.

Investments that are wholly foreign-owned, joint ventures, and wholly Bangladeshi-owned companies are all permitted to operate and enjoy equal treatment in the EPZs. Approximately one dozen U.S. firms – mostly textile producers – are currently operating in Bangladesh EPZs.

In 2010, Bangladesh enacted the Special Economic Zone Act that allows for the creation of privately owned SEZs that can 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 restrictions for the employment of foreign nationals and the issuance of work permits as follows:

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% 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; and

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 semi-skilled foreign experts and workers. Overall, the government looks favorably on investments that employ significant numbers of local workers and/or provide 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 draft Digital Security Act of 2016 (the “Digital Security Act”) was adopted by Parliament in October 2018.

On the grounds of national security and maintaining public order, the GOB can authorize relevant government 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 GOB, through the ICT Controller, 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 any such 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 order any subscriber or any person in charge of computer resources to provide all necessary assistance to decrypt relevant information.

There is no direct reference in the BTRA to the storage of metadata. Under the broad powers granted to the BTRA, however, the GOB, 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 ICT Controller enforces the ICT Act and the Bangladesh Telecommunication Regulatory Commission (BTRC) enforces the BTRA. The Ministry of Home Affairs grants approval for use of powers given under the BTRA. The ICT Act also established a Cyber Tribunal to adjudicate cases. 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 new 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 never be certain 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 study by a leading Bangladeshi think tank Policy Research Institute (PRI) revealed in 2015 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.

Property owners can obtain mortgages but 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 that regulate transfer of property in Bangladesh but these laws do not have any 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 GOB has limited resources to devote to intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and industry estimates that 90 percent 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.

The GOB has limited resources to devote to intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and industry estimates that 90 percent 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.

The Software Alliance, also known as BSA, is a trade group established by Microsoft Corporation in 1988. It opened a Bangladesh office in early 2014 as a platform to improve IPR protection in Bangladesh. Public awareness of IPR is growing, thanks in part to 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 July 2000 (amended in 2005), a Trademarks Act in 2009, and a Geographical Indication of Goods (Registration and Protection) Act in 2013. The Department of Patents, Designs and Trademarks (DPDT) drafted a new Patent Act in 2014 prepared in compliance with the requirements of the TRIPS Agreement. The draft act remains under Ministry of Industries review, and has not made measurable progress during the past year.

A number of government agencies are empowered to take action against counterfeiting, including the NBR/Customs, Mobile Courts, the Rapid Action Battalion (RAB), and local 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.

Capital Markets and Portfolio Investment

Capital markets in Bangladesh are still developing and the financial sector remains highly dependent on bank lending. Current government policy inhibits the creation of reliable benchmarks for long-term bonds and prevents the development of a tradable bond market.

Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). The Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance, regulates both. As of March 25, 2020, the DSE market capitalization stood at $36.7 billion, a 24.6 percent drop year-on-year caused by an acute shortage of liquidity and reduced investor confidence.

Although the Bangladeshi government has a positive attitude towards foreign portfolio investors, participation remains low due to limited liquidity 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 activate the bond market. To this end, BSEC introduced three rules in May 2019: 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 named Central Counterparty Bangladesh Limited (CCBL) and promoting private equity and venture capital firms under the 2015 Alternative Investment Rules. In December 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,” that provides 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 August 2012 but the overall quality of corporate governance remains substandard. Demutualization of both the DSE and CSE was completed in November 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. DSE opened bids for a strategic partner in February 2018 and, in September 2018, the Chinese consortium of the Shenzhen and Shanghai stock exchanges became DSE’s strategic partner after buying a 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 BB has been entrusted to a nine–member Board of Directors, which is headed by the BB Governor. BB has 45 departments and 10 branch offices.

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 60 “scheduled” banks in Bangladesh operate under the full control and supervision of the central bank as per the Bangladesh Bank Order of 1972. The scheduled banks including six SOCBs, three specialized government banks established for specific objectives such as agricultural or industrial development or expatriates’ welfare, 42 PCBs, and nine FCBs as of March 2019. 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 that is 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 an SOCB, 15 are private domestic initiatives, and 15 are joint venture initiatives. Major sources of funds for these financial institutions are term deposits (at least three months’ tenure), credit facilities from banks and other financial institutions, call money, as well as bonds and securitization.

The major differences between banks and FIs are:

FIs cannot issue checks, pay-orders, or demand drafts;

FIs cannot receive demand deposits; and

FIs cannot be involved 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 2018, there were 705 licensed micro-finance institutions operating a network of 18,196 branches with 31.2 million members. Additionally, Grameen Bank had 830,000 million microfinance members as of June 2018. 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 shrinking liquidity and a rise in risky assets. Total domestic credit stood at 45.22 percent of gross domestic product at end of June 2019. With total assets of $15.4 billion, the state-owned Sonali Bank is the largest bank in the country while Islami Bank Bangladesh ($11.7 billion) and Standard Chartered Bangladesh ($4.5 billion) are the largest local private and foreign banks respectively as of December 2018, the latest data available. The gross non-performing loan (NPL) ratio was 9.3 percent at the end of December 2019 but was as high as 12.0 percent in the previous quarter. At 23.9 percent SCBs had the highest NPL ratio, followed by 15.1 percent of Specialized Banks, 5.8 percent of PCBs, and 5.7 percent of FCBs as of December 2019. Following the outbreak of COVID-19, the central bank directed all banks in March 2020 not to classify any new clients as non-performing until June 30. However, industry contacts predict NPLs will increase sharply after the exemption expires.

On December 26, 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 that 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 an NRTA account. In May 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 legally 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 of 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 taka traded between 76 and 78.8 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 Bangladesh currency, 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 require approval from the central bank and transfers are typically made within one to two weeks. For repatriating lease payments, royalties and management fees, some central bank approval is required, 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.

In September 2019, 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. However, banks need to submit applications for ex post facto approval within 30 days of profit remittance.

The Financial Action Task Force (FATF) notes that 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, conducted its mutual evaluation of Bangladesh’s AML/CTF regime in September 2018 and found that 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 

http://www.fatf-gafi.org/countries/#Bangladesh 

Sovereign Wealth Funds

The Bangladesh Finance Ministry first announced in 2015 that it was exploring the possibility of establishing a sovereign wealth fund to invest a portion of Bangladesh’s foreign currency reserves. In February 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.

Bangladesh’s 49 non-financial SOEs 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 201-20: http://www.mof.gov.bd/site/page/5eed2680-c68c-4782-9070-13e129548aac/SOE-Budget 

The current government has taken steps to restructure several SOEs to improve their competitiveness. The GOB converted Biman Bangladesh Airline, the national airline, into a public limited company that initiated a rebranding and fleet renewal program, including the purchase of twelve aircraft from Boeing, all of which have been delivered. Five of six state-owned commercial banks (SCBs) – Sonali, Janata, Agrani, Rupali, and BASIC – were converted to public limited companies, of which only Rupali is publicly listed.

The contribution of SOEs to gross domestic product, value-added production, employment generation, and revenue earning is substantial. SOEs usually report to the ministries, though the government has allowed some enhanced autonomy for certain SOEs, such as Biman Bangladesh Airline. SOEs maintain control of rail transportation whereas private companies compete freely in air and road transportation. The corporate governance structure of SOEs in Bangladesh has been restructured 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.  There are no guidelines regarding ownership of SOEs, and 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. The boards 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 Bangladesh Petroleum Act of 1974 grants authority for the government 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; and direct asset sales (liquidation). In 2010, 22 SOEs were included in the Privatization Commission’s (now the BIDA) program for privatization. However, a study on privatized industries in Bangladesh conducted by the Privatization Commission in 2010 found that only 59 percent of the entities were in operation after being privatized and 20 percent of them were permanently closed down – 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 by direct selling. Offloading shares of SOEs in the stock market 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 (BEI), the CSR Centre is the joint focal point for the United Nations Global Compact (UNGC) and its 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 (SANSAR). Currently, SANSAR has five member countries including Afghanistan, Bangladesh, India, Nepal, and Pakistan.

While several NGOs have proposed National Corporate Social Responsibility Guidelines, the GOB has yet to adopt any national standards for RBC. As a result, the GOB 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.

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.
• NBR – 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 anticorruption efforts and reaffirmed the need for a strong ACC, but opposition parties claim that the ACC is used by the government to harass political opponents. Efforts to ease public procurement rules and a recent constitutional amendment that reduced 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. Harassment, intimidation 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 of the country and crackdown on dissent. Many civil society groups have expressed concern about the apparent 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. Some areas have increased risk. 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 2010 Labor Force Survey, 87 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 in Bangladesh 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 has labor laws that specify 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, compliance and enforcement of labor laws are inconsistent, and companies frequently discourage or prevent the formation of worker-led labor unions, preferring pro-government unions. Export Processing Zones (EPZs) are a notable exception to the national labor law in that they do not allow trade unions, but do allow worker welfare associations, to which 74 percent of workers belong, according to GOB.

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 factory fire and structural safety remediation, thanks mostly to two brand-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), comprised of U.S. and Canadian brands, and the Accord on Fire and Building Safety in Bangladesh (Accord), which was formed by European brands. Monitoring and remediation of RMG factories outside the purview of the Alliance and the Accord were handled by the GOB, with assistance from the ILO, under the National Initiative. The Alliance and Accord were scheduled to close in 2018 and hand over all monitoring to Bangladesh. The Alliance successfully concluded its factory monitoring and remediation operations at the end of 2018, as scheduled, but U.S. brands established a local organization, Nirapon, to continue monitoring remediated factories to ensure there is no backsliding.

As of March 2020, only 32 percent of factories under the National Initiative have completed remediation. After several court cases attempted to force the Accord out of Bangladesh in 2018 before its factories completed remediation, it signed an MOU with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) in May 2019 to hand over its operations to a new entity, the RMG Sustainability Council (RSC) on June 1, 2020. In addition to BGMEA, the RSC would have representation from Accord brands and trade union federations. BGMEA and the GOB envision all RMG factories will eventually come under one monitoring platform, but have not yet agreed on how to coordinate inspections through an Industrial Safety Unit.

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 USTR. 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 has been made in the intervening years, several key issues have not been adequately addressed. Despite revisions in 2018 intended to make Bangladesh more compliant with international labor standards, the 2019 Bangladesh Labor Act (BLA) and 2019 Export Processing Zone (EPZ) Labor Act (ELA, which replaces the EPZ Workers Welfare Association and Industrial Relation Act) still restrict the freedom of association and formation of unions, and maintain two administrative systems for workers inside and outside of zones. The GOB reported it will issue implementation rules for both laws in 2020, and further amend them starting in July 2021.

The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garment (RMG) sector in partnership with other international partners, civil society, businesses, and the GOB. The United States is also working with the EU, Canada, and the International Labor Organization (ILO) to continuously improve working conditions in the RMG sector via the Sustainability Compact, a coordination platform launched in 2013 to promote continuous improvements under three pillars: 1) respect for labor rights; 2) structural integrity of buildings and occupational safety and health; and 3) responsible business conduct.

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. Labor leaders estimate there are no more than 80 or 90 trade unions in the country, and only 30 to 40 are able to negotiate with owners. The law provides criminal penalties for 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 the termination or forced resignation of some 11,000 workers—many of whom were blacklisted and remained unable to find new employment a year later.

Labor laws differentiate 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 (DIFE) 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 entitled to half their basic wages, then 25 percent after that. Workers who were employed for less than one year are not eligible for any compensation in a lay off. In reality, trade unions and protesting workers report employers not only fail to pay workers their severance or benefits, but also their regular wages. No unemployment insurance or other social safety net programs exist.

The GOB does not consistently and effectively enforce applicable labor law. 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 strikes followed the cumbersome and time-consuming legal requirements for settlements, and strikes or walkouts often occur spontaneously. The GOB was partnering with the ILO to introduce a dispute settlement system with 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 owned by foreign investors or built with foreign investment funds. 12. U.S International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The U.S. International Development Finance Corporation (DFC) is not currently authorized for operation 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 May 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 

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 the vast majority of sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. (Note: in January 2019, the government of India changed the name of DIPP to Department for Promotion of Industry and Internal Trade (DPIIT). End Note). FDI proposals in sensitive sectors will, however, require the additional approval of the Home Ministry.

The DPIIT, under the Ministry of Commerce and Industry, is the nodal investment promotion agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. 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 ministries and stakeholders, but some relevant stakeholders report 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 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.” Similarly, in 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules which 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 .

In 2017, the government implemented moderate reforms aimed at easing investments in sectors including single-brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. 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. 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. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple additional sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the Automatic Route. The new rules also eased restrictions on investment in single-brand retail.

Screening of FDI

Since the abolition of the Foreign Investment Promotion Board in 2017, appropriate ministries have screened FDI. 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 available at: http://dipp.nic.in/publications/fdi-statistics. 

Other Investment Policy Reviews

2019 OECD Economic Survey of India: http://www.oecd.org/economy/india-economic-snapshot/ 

2015 WTO Trade Policy Review: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-  DP.aspx?language=E&CatalogueIdList=131827,6391,16935,35446,11982&CurrentCatal  ogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&H  asSpanishRecord=True 

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 the 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, deep dive 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 case of major projects, Prime Minister Modi has started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. Per the Prime Minister’s Office as of November 2019 a total of 265 project proposals worth around $169 billion related to 17 sectors were cleared through PRAGATI. Prime Minister Modi personally monitors the process, to ensure compliance in meeting PRAGATI project deadlines. In December 2014, the Modi government also approved the formation of an Inter-Ministerial Committee, 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 from business chambers and affected companies of stalled projects.

Outward Investment

According to the Reserve Bank of India (RBI), India’s central bank, the total overseas direct investment (ODI) outflow from India till December 2019 was $18.86 billion. According to the U.S. Bureau of Economic Analysis, Indian direct investment into the U.S. was $9.9 billion in 2017. RBI contends that the growth in magnitude and spread (in terms of geography, nature and types of business activities) of ODI from India reflects the increasing appetite and capacity of Indian investors.

India made public a new model Bilateral Investment Treaty (BIT) in December 2015. This followed a string of rulings against Indian firms in international arbitration. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors to first exhaust all local judicial and administrative remedies before entering into international arbitration. The Indian government also announced its intention to abrogate all BITs negotiated on the earlier model BIT. The government has served termination notices to roughly 58 countries, including EU countries and Australia. 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).

In September 2018, Belarus became the first country to execute a new BIT with India. The Belarus – India BIT is predominantly based on the new Model BIT. In December 2018, Taipei Cultural & Economic Centre (TECC) in India signed a BIT with India Taipei Association (ITA) in Taipei. The TECC is the representative office of the government in Taipei in India and is responsible for promoting bilateral relations between Taiwan and India. By December 2019, two BITs/ JIS have been concluded but not yet signed with Brazil and Cambodia. Several BITs and joint interpretative statements are under discussion such as with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius and Oman. The complete list of agreements can be found at: https://dea.gov.in/bipa. 

Bilateral Taxation Treaties

India has a bilateral taxation treaty with the United States, available at: 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 for higher FDI in the insurance sector came with a new requirement for “Indian management and control.” On most occasions the rules are framed after thorough discussions by the competent 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.

In December 2018, India unveiled new “Guidelines” on foreign-owned e-commerce operations that imposed restrictions disproportionately affecting over $20 billion in combined investments by U.S. companies. As of February 1, 2019, these platforms may not offer exclusive discounts; sell products from companies in which they own a stake; or have any vendor who sources more than 25 percent of their retail stock from a single source. The Guidelines were issued without prior notification or opportunity to provide public comments. While Indian officials argue this was a mere “clarification” of existing policy, the new Guidelines constituted a major regulatory change that severely affected U.S. investors’ operations and business models. The refusal of Indian authorities to extend the deadline for implementation beyond just over one month, further exacerbated the undue and unnecessary disruption to U.S. investors.

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 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 1994, 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 per 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 Judicial Structure provides for an integrated system of courts to administer both central and state laws. The legal system has a pyramidal structure, with the Supreme Court at the apex, and 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 provide 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.

Laws and Regulations on Foreign Direct Investment

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 Press Notes/Press Releases, which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications are effective on the date of the issued press release, unless otherwise specified. The judiciary does not influence FDI policy measures.

The government has introduced a “Make in India” program as well as investment policies designed to promote manufacturing and attract foreign investment. “Digital India” aims 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 commercialize and grow. The “Smart Cities” project intends to open up new avenues for industrial technological investment opportunities in select urban areas. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

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, is now taking cases against mergers, cartels, and abuse of dominance, as well as conducting capacity-building programs for bureaucrats and business officials. Mergers meeting certain thresholds must be notified to the CCI for its review. Upon receipt of a complaint, or upon its own enquiry, if the CCI is of the opinion that there exists a prima facie case, it must direct its investigative arm (the Director General) to investigate. Currently the Director General 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

The government has taken steps to provide greater clarity in regulation. In 2016, the government successfully carried out the largest spectrum auction in the country’s history. India also has transfer pricing rules that apply to related party transactions. The government implemented the Goods and Services Tax (GST) in July 2017, which reduced the complexity of tax codes and eliminated multiple taxation policies. It also enacted the Insolvency and Bankruptcy Code in 2016, which offers uniform, comprehensive insolvency legislation for all companies, partnerships and individuals (other than financial firms).

Though land is a State Government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list, thus both the Indian Parliament and State Legislatures can make laws on this subject. Legislation approved by the Central Government is used as guidance by the State Governments. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, but 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% approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Dispute Settlement

India made resolving contract disputes and insolvency easier with the establishment of a modern bankruptcy regime with the enactment in 2016 and subsequent 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 has 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 has put in place effective tools for creditors to successfully negotiate and effectuated greater chances for creditors to realize their dues. 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 came down significantly from 4.3 years to 1.6 years. (https://www.ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf 

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 most of the world. Judgments of foreign courts are enforceable under multilateral conventions, including the Geneva Convention. 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.

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 any arbitral award. Seven cases are currently pending, the oldest of which dates to 1983. 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 no progress has been made in establishing the office. 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 11 remain pending (http://investmentpolicyhub.unctad.org/ISDS/CountryCases/96?partyRole=2 ).

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 through the use of 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 commonly 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 only 14 judges per one million people. Almost 25 percent of judicial vacancies can be attributed to procedural delays.

Bankruptcy Regulations

According to the World Bank, it used to take an average of 4.3 years to recover funds from an insolvent company in India, compared to 2.6 years in Pakistan, 1.7 years in China and 1.8 years in OECD countries. The introduction and implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC focused on creditor-driven insolvency resolution, and offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms).

The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions. The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. Supplementary legislation would create a new institutional framework, consisting of a regulator, insolvency professionals, information utilities, and adjudicatory mechanisms that would facilitate formal and time-bound insolvency resolution process and liquidation.

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 were geared at improving the effectiveness of debt recovery laws and helping address the problem of rising bad loans for domestic and multilateral banks. It will also help banks and financial institutions recover loans more effectively, encourage the establishment of more asset reconstruction companies (ARCs) and revamp debt recovery tribunals.

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 does issue guarantees to investments but only in case 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).  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-principle approval.  In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been 12 established as NIMZs.  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.  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. 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. 

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:
   1. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
   2. 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.
   3. 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 ($3000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7500), 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 the 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.  The RBI policy overwhelmingly and disproportionately affects 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 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 Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India.  The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that is considered “critical” can only be stored in India.  The Bill is based on the conclusions of a ten-person Committee of Experts, established by MeitY in July 2017.

Real Property

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 built up, 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

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. 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.

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 

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.

To establish a business, various government approvals and clearances are required, including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts. 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.

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.

In India, a registered sales deed does not confer title 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 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.

Intellectual Property Rights

In 2018, India became a signatory to the WIPO Centralized Access to Search and Examination (CASE) and Digital Access Service (DAS) agreements.  The CASE system enables patent offices to securely share and search examination documentation related to patent applications, and DAS provides details of the types of applications managed by individual digital libraries together with any operational procedures and technical requirements.  However, the provision of Indian law prescribing criminal penalties for failure to furnish information pertaining to applications for a patent for the “same or substantially the same invention” filed in any country outside India remains in place.

Prime Minister Modi’s courtship of multinationals to invest and “Make in India” has not yet addressed longstanding hesitations over India’s lack of effective intellectual property rights (IPR) enforcement.  Despite the release of the National IPR Policy and the establishment of India’s first intellectual property (IP) crime unit in Telangana in 2016, India’s IP regime continues to fall short of global best practices and standards.  U.S. engagement has not yet translated into the progress and/or actions on IPR that were anticipated under the previous U.S. administration.  Some “Notorious Markets” across the country continue to operate, while many smaller stores sell or deal with pirated content across the country. U.S. and Indian Government officials continued to engage on IPR issues.  U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S.  Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications.  India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.

U.S. and Indian Government officials continued to engage on IPR issues.  U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S.  Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications.  India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.

Although India’s copyright laws were amended in 2012, the amendments have not been fully implemented. Without an active copyright board in place to determine royalty rates for authors, weak enforcement of copyright regulations, and the widespread issue of pirated copyrighted materials are all contributing factors to why copyright law requires more emphasis on implementation.

The Delhi High Court diluted the publishing industry’s and authors’ rights and expanded the definition of fair use judgment, by allowing photocopiers to copy an entire book for educational purposes without seeking prior permission of the copyright holder.  The movie industry identified new illegal cam cording hubs of operation in Indore and Noida, and the Telangana police cracked down on two syndicates that used under-age children to illegally record movies.  After years of advocacy by industry groups, especially the Indian office of the Motion Picture Association (MPA), the GOI released a draft Cinematography Bill for comment in December 2018, which contained anti-cam cording legislation.  Industry groups welcomed this move, which included criminal and financial penalties for offenders.  The bill is now awaiting Parliamentary approval.  However, the penalties for infringement and IP theft are significantly weakened from those suggested in the initial draft legislation in 2013.

The music industry remains concerned about a Section 31D memorandum that the Department of Industry and Policy Promotion (DIPP), now DPIIT,-issued announced in September 2016 to announce that all online transmissions fall under the statutory licensing provisions of section 31D of the Copyright Act.  The memo places internet service providers on par with radio broadcasters, allowing them to provide music on their websites by paying the same royalties to copyright societies, two percent of ad revenues.  The industry argues that most of the websites have little to no ad revenue, and some may be hosted on servers outside India, which makes collection of royalties challenging.  However, in February 2017, India issued a notice to all event organizers that they would have to pay music royalties to artists when played at an event. On a more positive note, in April 2019, the Bombay High Court issued its decision in Tips Industries LTD v. Wynk Music LTD (Airtel) that statutory licensing under section 31D of the Copyright Act does not cover Internet transmissions (streaming), but rather is limited to traditional television and radio broadcasts.  The Court also stated that Section 31D was an exception to copyright and must be distinctly interpreted.   It is not clear if this judgement will move the Government of India to withdraw DPIIT’s 2016 memo. However, in 2019, the DPIIT proposed amendments to the Copyright Rules that would, in contravention to the plain statutory text, broaden the scope of the statutory licensing exception to encompass not only radio and television broadcasting, but also Internet broadcasting.

2018 was a year of great difficulty in the agriculture and biotechnology space, which has been reeling from the aftermath of a coordinated attack in 2016 and 2017 on the Monsanto Corporation’s India operations (reported in our 2016 and 2017 Special 301 submissions).  In 2017, the Protection of Plant Varieties and Farmers Rights Act (PPVFRA) removed the long-standing requirement for breeders to produce a “No-Objection-Certificate” from the patentee of a particular genetically modified (GM) trait.  The move was nearly unprecedented and removed a key preemptive tool for breeders to diligently ensure stakeholders are consulted and patentee’s innovations are not being infringed upon or used without permission.

In April 2018, the Delhi High Court judgment struck down a patent held by Monsanto in a summary judgment.  In a series of decisions on this matter, most recently in August, 2019, the Supreme Court overturned Delhi High Court Divisional Bench judgement of April 2018 and reinstated the March 2017 Single Judge decision, pointing to the Divisional Bench failing to have confined itself to the examination of the validity of the order of injunction granted by the Single Judge 2017 decision.   Issues remain complex and unsettled.  The GM Licensing Guidelines remain in draft form but could have significant and wide-ranging implications for Monsanto and many other IP holders.  Moreover, follow-on decisions and administrative legal actions could set important Indian legal precedents for stopping a patent, the role of the PVPFRA and its relationship to biological innovation, the application of administrative regulations regarding price and term of a patent, and the interplay between the Patents Act, PVPFRA, and the Biodiversity Act.  It is worth noting that in December 2015, Monsanto terminated more than 40 of its license agreements with Indian companies for nonpayment of licensing fees.  The Indian licensees subsequently challenged Monsanto’s patents in court on several grounds, including challenging the validity of the patent and efficacy of the technology.

The Government of India’s refusal to repudiate Ministry of Agriculture and Farmers Welfare’s GM licensing guidelines has already resulted in withdrawal of next-generation innovative biotechnology from the Indian marketplace and has given pause to many other companies who seek to protect their innovative products.  Other biotech-led industries are also following this development and are greatly concerned, as the action reaches beyond compulsory licensing under the Patents Act.

Indian law still does not provide any statutory protection for trade secrets. After a workshop conducted in October 2016, DIPP agreed to provide guidance to start-ups on trade secrets.  The Designs Act allows for the registration of industrial designs and affords a 15-year term of protection.

Other long-standing concerns remain. Since 2012, outstanding concerns that have not been addressed either in the IP Policy or by Government of India include; Section 3(d) of India’s Patent Act, which creates confusing criteria on “enhanced efficacy” for the patentability of pharmaceutical products;  draft biotechnology licensing regulations from the Ministry of Agriculture which are mandatory, overly prescriptive, and  severely limit the value of IPR; remaining lack of clarity on the conditions under which compulsory licensing may be allowed; lack of a copyright board; lack of a trade secrets law; lack of data exclusivity legislation; lack of an early dispute resolution mechanism for patents ; lack of a legislative framework facilitating public-private partnership in government-funded research  (along the lines of  Bayh-Dole in the United States); weak IP enforcement; and overall unwillingness to make IPR a priority within the Indian government.  All these measures across various sectors create uncertainty at best, and at worst perceptions of a hostile business environment.

In addition, the Patent Act requires patentees to regularly report on a commercial scale “the working” of their patents.  This is implemented by filing a required annual form called Form 27 on patent working.  The current requirement to file Form 27 is not only onerous and costly for patentees and ill-suited to the reality of patented technology, it also hinders any incentives to invent and advance innovation.

Standard Essential Patents (SEPs) and fair, reasonable, and non-discriminatory (FRAND) licensing criteria and systems are another concerning area.  Discussions on FRAND licensing terms restarted in 2019 but did not include stakeholders.  Several cases are pending before the Delhi High Court surrounding the issue of royalty payments for standard essential patents.  While initial indications from Delhi High Court proceedings are encouraging, a 2016 GOI discussion paper on SEPs raised concerns related to active government involvement in setting standards and determining FRAND royalties.  Some decisions from the Competition Commission of India (CCI) have been inconsistent with the Delhi High Court, creating confusion related to the development of SEP policy and practices in India.

Another area of concern is the global blocking order against “Intermediaries”.  A Delhi High Court judge issued an interim injunction directing Google, Facebook, YouTube, Twitter, and other “intermediaries” to remove – on a global basis – content uploaded to their platforms allegedly defaming the guru Baba Ramdev.  The judgment moved beyond traditional “geo-blocking,” in which take down orders are limited to specific geographic regions.  Facebook has challenged the judgment before a Division Bench.

In 2019, we observed that public notice and comment procedures on policy – including on IPR related issues – were often not followed.  Stakeholders were not properly notified of meetings with agencies to discuss concerns, including for changes to critical issues like price controls on medical devices or changes to key policies.  Moreover, Mission India remains concerned that when stakeholder input is solicited, it is often disregarded and/or ignored during the final determination of a policy.

India actively engages at multilateral negotiations, including the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council.  As a result, in April 2017, the MOHFW issued a notification that amended the manufacturing license form (Form 44), taking out any requirement to notify the regulator if the drug, for which manufacturing approval was being sought, is under patent or not.  The GOI cited their view that Form 44 provisions were outside the scope of their WTO TRIPS agreement commitments as justification for the change.  Industry contracts point to the clear benefit this change has delivered to the Indian generic pharmaceutical industry, which now has an even easier path to manufacture patented drugs for years, while IP holders are forced to discover the violation and challenge the infringement in separate courts.  These negotiations will have an impact on innovation, trade, and investment in IP-intensive products and services.

Developments Strengthening the Rights of IP Holders

Clarification of Patentability Criteria: the Delhi High Court added clarity on the matter of the patentability criterion under Section 3(k) of the India Patents Act, ruling in Ferid Allani vs UOI & Ors that there is no absolute bar on the patentability of computer programs.  Additionally, ‘technical effect’ or ‘technical contribution’ must be taken into consideration during examination when determining the patent eligibility of a computer program.

Bombay High Court Clarifies 31(D) of the Copyright Act: Ruling on “Tips Industries vs. Wynk Music,” the Bombay High Court stated that the extension of the Copyright Act, 2016’s Section 31(D) to the internet is flawed logic and unsound in law.  The court also noted that Section 31(D) is an exception to copyright and must be strictly interpreted.  It is to be seen if this judgement helps Government of India in withdrawing of DPIIT memo of 2016.

Delhi High Court Confronts Online Piracy: The Delhi High Court decided that approved site take down requests will apply to those sites with addresses specifically listed in the request as well as similar sites that operate under different addresses.  This “dynamic injunction” is meant to eliminate the need for complainants to approach courts with new requests should a banned site reappear under a new address.

The Delhi High Court in July 2019 took steps to address the “gridlock” of the Intellectual Property Appellate Board (IPAB).  IPAB was established in 2003 to adjudicate appeals over patents, trademarks, copyrights, and other decisions, but lacked the necessary number of technical members to form a quorum and make judgements, resulting in a significant backlog.  To clear the backlog of cases, the court decided that until the appointments were filled, the chairman and available technical members could issue decisions despite lacking a quorum.  If no technical members were available, the IPAB chairman could consult a scientific advisor from the panel of scientific advisors appointed under Section 115 of the 1970 Patents Act.  Additionally, in October 2019, the court permitted the current IPAB chairman to serve past his term – which ended in September 2019, reinstating him until a replacement takes over.

Capital Markets and Portfolio Investment

Total market capitalization of the Indian equity market stood around $2.2 trillion as of December 31, 2019. The benchmark Standard and Poor’s (S&P) BSE (erstwhile Bombay Stock Exchange) Sensex recorded gains of about 14 percent in 2019. Nonetheless, Indian equity markets were tumultuous throughout 2019. The BSE Sensex generally gained from the beginning of the year until July 5, when Finance Minister Nirmala Sitharaman introduced a tax increase on foreign portfolio investment in her post-election Union Budget for the remainder for FY 2020.  The Sensex declined, erasing all previous gains for the year as the new tax led to a rapid exodus of foreign portfolio investors from the market.  The market continued to fluctuate even after the tax increase was repealed on August 23 until September 20, when the Finance Minister made a surprise announcement to slash corporate tax rates.  After that, the Sensex surged and hit a record high of 41,854 on December 20. However, even as the benchmark Sensex hit record highs, the midcap and small cap indices disappointed investors with a year of negative returns.  The Sensex’s advance was driven by a handful of stocks; two in particular Reliance Industries Ltd. and ICICI Bank Ltd. accounted for about half the gain.   Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

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 foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.

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 foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.  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: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.

Total external commercial borrowings through both the approval and automatic route increased 61.45 percent year-on-year to $50.15 billion as of December 2019, according to the Reserve Bank of India’s data.

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. In October 2019, 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).  This was based on the recommendations of the task force on offshore rupee markets to examine and recommend appropriate policy measures to ensure the stability of the external value of the Rupee (https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=937).    The International Financial Services Centre at Gujarat International Financial Tec-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.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

The International Financial Services Centre at Gujarat International Financial Tec-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.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

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. 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 18.25 percent of their net demand and time liabilities in government securities. The RBI plans to reduce this by 25 basis points every quarter until the investment requirement reaches 18 percent of their net demand and time liabilities.

PSBs currently face two significant hurdles: capital constraints and poor asset quality. As of September 2019, gross non-performing loans represented 9.3 percent of total loans in the banking system, with the public sector banks having an even larger share at 12.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years is driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. With the new bankruptcy law (IBC) in place, banks are making progress in non-performing asset recognition and resolution. As of December 2019, the resolution processes have been approved in 190 cases Lengthy legal challenges have posed the greatest obstacle, as time spent on litigation was not counted against the 270 day deadline.

In July 2019, Parliament amended the IBC to require final resolution within 330 days including litigation time. To address asset quality challenges faced by public sector banks, the government injected $30 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 (CRAR) improved to 13.5 percent in September 2019 from 12.2 in March 2019. In 2019, the Indian authorities also announced a consolidation plan entailing a merger of 10 public sector banks into 4, thereby reducing the total number of public sector banks from 18 to 12.

Women in the Financial Sector

Women in India receive a smaller portion of financial support relative to men, especially in rural and semi-urban areas. 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. The Acting Finance Minister Piyush Goyal while delivering the 2019 budget speech mentioned that 70 percent of the beneficiaries of MUDRA initiative are women. Under the MUDRA initiative, 155.6 million loans have been disbursed amounting to $103 billion. Following the Global Entrepreneurship Summit (GES) 2017, government agency the National Institute for Transforming India (NITI Aayog), launched a Women’s Entrepreneurship Platform, https://wep.gov.in/, a single window information hub which provides information on a range of issues including access to finance, marketing, existing government programs, incubators, public and private initiatives, and mentoring. About 5,000 members are currently registered and using the services of the portal said a NITI Aayog officer who has an oversight of the project.

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 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 USD $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. NRI 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

The FY 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. So far, the Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority, Australian Super, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance have committed investments into the NIIF Master Fund, alongside Government of India. NIIF Master Fund now has $2.1 billion in commitments with a focus on 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 a number of steps to improve the performance of SOEs, also called the Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. Reforms carried out in the 1990s focused on liberalization and deregulation of most sectors and disinvestment of government shares. These and other steps to strengthen CPSE boards and enhance transparency evolved into a more comprehensive governance approach, culminating in the Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007 and their mandatory implementation beginning in 2010. Governance reforms gained prominence for several reasons: the important role that CPSEs continue to play in the Indian economy; increased pressure on CPSEs to improve their competitiveness as a result of exposure to competition and hard budget constraints; and new listings of CPSEs on capital markets.

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. The government tried to unsuccessfully privatize the state-run loss- incurring airline Air India.

Foreign investments are allowed in the 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 state-owned enterprises (SOEs), the government has not generally privatized its assets as they have led to job losses in the past, and therefore engender political risks. Instead, the government has 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 recent years, however the government has begun to look to disinvestment proceeds as a major source of revenue to finance its fiscal deficit. For the first time in seven years, the government met its disinvestment target in fiscal year 2017-18, generating $15.38 billion against a target of $11.15 billion. For FY 2020, the government increased the disinvestment target of $12.3 billion but managed to generate only $2.5 billion till December 2019 The Government of India’s plan to sell state-owned carrier Air India could not happen in FY 2020. The Indian Government constituted inter-ministerial panel recommended 100 percent stake sale in Air India to make it more lucrative as against a 76 percent stake sale last year. Government did say that they have received some good bids, but the process might go to a back burner because of the COVID19 pandemic and its resulting impact on the economy.

Foreign institutional investors can participate in these disinvestment programs subject to these limits: 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. The limit is 20 percent of the paid-up capital in the case of public sector banks. There is no bidding process. The shares of the SOEs being disinvested are sold in the open market. Detailed policy procedures relating to disinvestment in India can be accessed at: https://dipam.gov.in/disinvestment-policy 

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 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 (an improvement over the existing National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business, 2011), as a means to nudge businesses to contribute towards wider development goals while seeking to maximize their profits. The NGRBC is dovetailed with the United Nations Guiding Principles on Business & Human Rights (UNGPs).

A CRISIL study reported that cumulative spending on CSR since it was mandated is more than $ 7 billion (Rs.50,000 crores) including $ 4.85 billion (Rs. 34,000 crores) by listed companies and nearly $ 2.7 billion (Rs.19,000 crores) by unlisted ones. The study further noted that overall, 1,913 companies met the government’s eligibility criteria but 667 of them could not spend for various reasons. About 153 companies spent 3 percent or more as against the mandated 2 percent of profits. In terms of spending, energy companies were front runners to spend $ 322 million (Rs. 2,253 crore) or 23 percent of the overall spending followed by manufacturing, financial services and information technology services. The preferred spending heads were education, skill development, healthcare, and sanitation and preferred areas being National Capital region, Karnataka and Maharashtra. The study however noted that there could be shrink both in terms of number of companies and their total spend after the Companies (Amendment) Act 2017 where the eligibility criteria is now based on financials of the “immediately preceding financial year” rather than the earlier stipulation of “any three preceding “immediately preceding financial year” rather than the earlier stipulation of “any three preceding financial years.”

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.

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India showed marginal improvement and scored 41 out of 100 in Transparency International’s 2018 Corruption Perception Index, with a ranking of 78 out of the 180 countries surveyed (as compared to a score of 40 out of 100 and ranked 81 in 2017).

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. The amendments also 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 on the basis of allegations of revenue loss to the exchequer.

In November 2016, the Modi government ordered that INR 1000 and 500 notes, comprising approximately 86 percent of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism. An August 2018 RBI report stated 99 percent of demonetized cash was deposited in legitimate bank accounts, leading analysts to question if the exercise enabled criminals to launder money into the banking system. Digital transactions increased due to demonetization, as mobile banking inclusion jumped from 40 percent to 60 percent of the populace. India is investigating 1.8 million bank accounts and 200 individuals associated with unusual deposits during demonetization, and banks’ suspicious transaction reports quadrupled to 473,000 in 2016. On August 7, SEBI directed stock exchanges to restrict trading and audit 162 suspected shell companies on the basis of large cash deposits during demonetization.

The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benami property is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act. In May 2017, the Real Estate (Regulation and Development) Act, 2016 came into effect. The Act will regulate India’s real estate sector, which is notorious for its corruption and lack of transparency.

In November 2016, India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.

In February 2014, the government enacted the Whistleblower Act, intended to protect anti- corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.

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. As yet, the government has established no 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, 2011, may afford some protection once it has been fully implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti- corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. Till December 2018, the government had not appointed an ombudsman. (Note: An 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.

Resources to Report Corruption

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

Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar,
New Delhi – 110024 +91 11 2646 0826
info@transparencyindia.org

Prime Minister Modi’s BJP-led National Democratic Alliance government won a decisive mandate in the May 2019 elections, winning a larger majority in the Lok Sabha (lower house of Parliament) than in 2014. The new government’s first 100 days of its second term were marked by the removal of special constitutional status from the state of Jammu and Kashmir (J&K) The government’s decision to remove J&K autonomy was preceded by a heavy paramilitary build-up in the State, arrests of local opposition leaders, and cutting of mobile phone and Internet services. Internet connections have since been largely opened, but with continued severe limitations on data download speeds to the extent that everyday activities of Kashmiris often take hours or need to be completed outside the region.

A number of areas of India suffered from terrorist attacks by separatists, including Jammu and Kashmir and some states in India’s northeast.

In December 2019, the government passed the Citizenship Amendment Act (CAA), which promises fast-tracked citizenship to applicants from six minority religious groups from Afghanistan, Bangladesh, and Pakistan, but does not offer a similar privilege to Muslims from these countries. The new law sparked widespread protests that sometimes-included violence by demonstrators, government supporters, and security services.

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 & 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.

India’s labor regulations are very stringent and complex, and over time have limited the growth of the formal manufacturing sector. In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages legislation in 2019. This Code combines four previously existing statutes- The Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act, and the Equal Renumeration Act- into one code to simplify compliance procedures for employers. Minimum industrial wages vary by state, ranging from about $2.20 per day for unskilled laborers to over $9.30 per day for skilled production workers.  Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act of 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people, although some states including Haryana, Madhya Pradesh, Rajasthan, and Maharashtra have increased the threshold to 300 people. RBI approval is also required for foreign banks to close branches.  Permission is generally difficult to obtain, which has resulted in the increasing use of contract workers (i.e. non- permanent employees) to circumvent the law.  Private firms successfully downsize through voluntary retirement schemes.

Since the current government assumed office in 2014, much of the movement on labor laws has taken place at the state level, particularly in Rajasthan, where the government has passed major amendments to allow for quicker hiring, firing, laying off, and shutting down of businesses. The Ministry of Labor and Employment launched a web portal in 2014 to assist companies in filing a single online report on compliance with 16 labor-related laws. The government has also drafted a Code on Industrial Relations that is currently being reviewed by a parliamentary committee. India’s major labor unions have opposed labor reforms, arguing that they compromise workers’ safety and job security.

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 makes 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. A 2019 report from India’s National Statistics Commission claimed that the official unemployment rate in India rose to 6.1 percent in 2018, a 45-year high. In contrast, the unemployment rate was only 2.2 percent the last time when the commission conducted this survey in 2012. The government acknowledges a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. The current government has established a Ministry of Skill Development and has embarked on a national program to increase skilled labor.

The United States and India signed an Investment Incentive Agreement in 1987. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). DFC is the U.S. Government’s development finance institution, launched in January 1, 2020, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974, 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 2020, DFC’s current outstanding portfolio in India comprises more than $1.7 billion, across 50 projects. These commitments are concentrated in utilities, financial services (including microfinance), and impact investments that include agribusiness and healthcare. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

*The Indian government source for GDP is: https://www.indiabudget.gov.in/economicsurvey/doc/Statistical-Appendix-in-English.pdf  The Indian government source for FDI statistics is: http://dipp.nic.in/publications/fdi-statistics  and the figure is the cumulative FDI from April 2000 to December 2017. The DIPP figures include equity inflows, reinvested earnings and “other capital,” and are not directly comparable with the BEA data. Outward FDI data has been sourced from: http://ficci.in/study-  page.asp?spid=20933&deskid=54531  

Note: Outward Direct Investment – According to India Brand Equity Foundation (IBEF) of the Department of Commerce, Ministry of Commerce and Industry, the outward FDI from India in equity, loan and guaranteed issue stood at US$ 12.59 billion in FY2018-19.
Source: Inward FDI DIPP, Ministry of Commerce and Industry
Outward Investments (July 2018-December 2018) RBI

Matt Ingeneri
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi +91 11 2419 8000
+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 investments, 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 June 2020, 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 that 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:

• Submit a completed Foreign Investment Application form to the Ministry of Economic Development, available at trade.gov.mv  .
  • Walk-in consultations are available for foreign investors who may wish to discuss their proposals prior to submitting an application.
• Receive approval
  • The standard processing time is three working days; however, if relevant ministries must be consulted, the approval may take 10-14 days.
• Register a business vehicle
  • Once approval is received, an investor must register as a company, partnership, or a company which has been incorporated in another jurisdiction.
    • Application forms for registering as a legal vehicle are available from the ministry’s website.
  • Sign the Foreign Investment Agreement with the Ministry of Economic Development.
    • 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.
  • Obtain licenses and permits.
    • 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, 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 April 2020, the government was drafting amendments to the Companies Act, Electronic Transactions Bill, Mercantile Court Bill, and an Insolvency Bill which 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.

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 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, which provides 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, according to media reporting the agreement is not yet in effect and, the Solih administration intends to review the pending China FTA.  The Government of Maldives also initiated free trade agreement discussions with Hong Kong in 2017.

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 on 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, mainly 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 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 new Parliament, sworn in in April 2019, regularly makes draft bills and regulations available for public comments.  Since inauguration in November 2018, the Solih administration has taken steps to improve fiscal transparency, for example beginning in December 2018, the Ministry of Finance began issuing weekly updates on fiscal operations which can be found at: http://www.finance.gov.mv/publications/statistical-releases/weekly-fiscal-developments .  A limited write-up on total annual debt obligations for 2020 and projected annual debt obligations for 2021 and 2022 were included in a “budget book,” published on the Ministry of Finance website, along with the 2020 proposed budget.  It includes the total amount of debt, disaggregated into the totals of domestic and foreign debt.  It does not include details of contingent or state-owned enterprise debt.  The Maldives Monetary Authority (the Maldivian Central Bank) included information on domestic debt obligations on a monthly basis on their website: http://mma.gov.mv/#/research/statisticalPublications/mstat/Monthly percent20Statistics .  The Ministry of Finance published a mid-year “Fiscal and Debt Strategy Report” on their website in July 2019.  This report included details of the position of the debt portfolio at the end of 2018 and the estimated position by the end of 2019:https://www.finance.gov.mv/fiscal-and-debt-strategy-report. 

The website of the Attorney General’s Office (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 Attorney General’s Office 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).

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: a 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.

The judicial process is 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 frequently subjected 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.  Judicial reform is a top priority for President Solih’s administration.  In 2019, the Judicial Service Commission was overhauled and 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 magistrate 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: https://www.maldivesembassy.or.th/media/attachments/2019/08/23/doing-business-maldives-trade-min.pdf  and the tax guide: 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 for the first time 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 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 Anti-Trust 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, which is undergoing parliamentary review prior to enactment as of June.

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 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.  Maldivian courts have failed to enforce the reward.

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 have to 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 depend on the business area of the investment and the scale of the investment.

As of April 2020, 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.

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), which 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 companies listed on the exchange 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 are 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 located 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 Maldives Monetary Authority 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 Maldives Monetary Authority.

Foreign Exchange and Remittances

Foreign Exchange

Rules relating to the foreign exchange market are stipulated in the Monetary Regulation of the Maldives Monetary Authority (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.  The government imposes a three percent remittance tax on money transferred out of Maldives by foreigners employed in the Maldives.  Effective from 1 January 2017, the coverage of the remittance tax was broadened to include the withdrawal of cash abroad in instances where the withdrawal is made from a bank account opened in the Maldives or by using a prepaid cash card issued by a bank in the Maldives.

Sovereign Wealth Funds

In 2016, Maldives Finance Minister Ahmed Munawar announced plans to establish a “Sovereign Development Fund (SDF)” that would support foreign currency obligations incurred to executive public sector development projects.  In March 2020, the government announced the SDF has amassed USD 272 million.

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 30 SOEs in 2019.  Major SOEs include the State Trading Organization, Dhiraagu (a telecom provider), Maldives Water and Sewerage Company, and Maldives Airports Company Limited.

Maldivian SOEs do not strictly adhere to the OECD Guidelines on Corporate Governance for SOEs.  When SOEs are involved in investment disputes, domestic courts, which are not transparent, 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. The Government of Maldives has not announced any upcoming privatization drives.

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.

Maldives scored 130 out of 180 countries in the Transparency International Corruption Perception index in 2019 with a score of 29 out of 100, below regional competitors like Sri Lanka, India, and Pakistan.  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 June, 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, were rarely cooperative and 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 but has yet to do so as of June.

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 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.

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. http://www.state.gov/j/ct/rls/crt/2015/index.htm

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 several 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.

Skilled and unskilled labor are scarce.  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.  Notwithstanding the labor shortage, unemployment in Maldives is also high, as many youth 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 a necessity.  Please 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 yet been identified.  Maldives became the 165th member of the Multilateral Investment Guarantee Agency of the World Bank Group, on May 20, 2005.

* Source for Host 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.

Susan Walke
Economic and Commercial Chief
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 Government of Nepal (GoN) that foreign investment is necessary to boost economic growth to the annual eight percent needed to meet the GoN’s economic target of becoming a middle-income country by 2030. In policy pronouncements, the GoN welcomes foreign direct investment (FDI) and has passed several laws during the past three years that modestly improve the investment climate.  In the months leading up to Nepal’s second Investment Summit, held in March 2019, several laws were revised with the intent of presenting Nepal as an attractive investment destination. Persistent corruption and bureaucratic hindrances remain unaddressed, however, impeding the smooth conduct of business. While the GoN’s stated attitude toward FDI is positive, this has not yet translated into practice.

The most significant foreign investment laws are the revised FITTA and the Public-Private Partnership (PPP) and Investment Act of 2019, the Foreign Exchange Regulation Act of 1962, the Immigration Rules of 1994, the Customs Act of 1997 (a revised act is under Parliamentary review), the Industrial Enterprise Act of 2016, the Special Economic Zone (SEZ) Act of 2016 and its 2019 amendment, the Electricity Act of 1992, and the Privatization Act of 1994. 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. While stopping short of providing “automatic approvals,” it did streamline the process for inbound foreign investment by requiring approval of FDI within seven days of application, reducing delays that many foreign investors faced in the past. 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. Created with the intent to reduce the time and hassle foreign investors face in obtaining permissions from different government entities, as of April 2020, the Service Center was still not fully operational. 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 (USD 415,000) from the existing NPR 5 million (USD 41,500). Given Nepal’s inconsistent history of implementing its laws and regulations, the operation of the Service Center and how the procedural and decisional timelines-will be implemented remains to be seen. 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 (USD 50 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), a high-level government body chaired by the Prime Minister.

Other relevant laws include the Industrial Enterprise Act, the SEZ Act, an updated Labor Act and a pending Intellectual Property Rights bill. 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 conjunction with the FITTA, the GoN hoped that these laws would create a more open and friendly environment conducive to foreign investment. In practice, American 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 (revised in 1997), 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 in an effort to broaden participation of the private sector in the operation of such enterprises.

The terms and conditions of intellectual property protection in Nepal are defined by the 1965 Patent, Design, and Trademark Act and the 2002 Copyright Act.  The latter covers electronic audio and visual materials and includes penalty provisions under which violators face exposure to fines, imprisonment, and the confiscation of unauthorized materials produced.  Violators must also pay compensation claimed by the copyright holder. The Copyright Act, however does not meet the standards for trade-related intellectual property rights required by the World Trade Organization.  The Competition Promotion and Market Protection Act (2007) controls anti-competitive practices, protects against monopolies, promotes fair competition, and regulates mergers and acquisitions. The Competition Promotion and Market Protection Act also contains special provisions for protecting consumers against misleading advertisements and for controlling black markets and similar economic activity that takes place outside government-sanctioned channels.  In March 2017, Nepal’s Cabinet approved a new Intellectual Property Rights (IPR) policy which is the foundation of new IPR legislation in various draft stages since 2018.

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.  The IBN handles investments larger than USD 50 million, while the Department of Industry (DOI) is responsible for investments less than USD 50 million.  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 past two Investment Summits. It is the primary point of contact for large investors, especially those engaged in public infrastructure projects. The point of contact for smaller investors remains the DOI and the FITTA authorized Single Window Service Center once it becomes fully operational.

The Nepal Business Forum (NBF) (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 – 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. Depending on the sector, foreign investment approval and registration requirements vary.

Over the past year, the Market Monitoring Unit of the MOIC’s Department of Supply Management has 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;
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;
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 drafting of implementing regulations remains incomplete, and thus how the law will work in practice remains unclear.

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.  A second investment summit was organized in March 2019 and more than 800 foreign delegates attended from 40 different countries. 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 ahead of the summit, but this 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. Nepal ranked 94th (out of 190) in the World Bank’s 2020 Doing Business Report. 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, especially given the GoN’s past record of making lofty announcements without delivering them in practice.

After obtaining a letter of approval from DOI or IBN, Nepal’s Office of Company Registrar (OCR) maintains a website (www.ocr.gov.np/index.php/en/ ) 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. In theory, the new Single Window System introduced under the FITTA should eliminate these problems and enable business registration to progress smoothly within the statutory 15-day period. The Single Window System, however, has not yet become fully operational. 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 .

There are no policies that discriminate against women or underrepresented minorities participating in the economy.  World Bank data shows that men and women need to follow the same steps to register a business. Entrenched cultural values, however, can make it difficult for women and minorities to participate equally in Nepal.  For example, land is traditionally registered under the name of a male head of household which can make it difficult for women to use property as collateral to qualify for a bank loan. Similarly, many business chambers and associations are dominated by firms from Kathmandu, making it harder for underrepresented minorities outside of the Kathmandu area to receive equitable treatment.

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. If ARIA is annulled, it will represent a major change in Nepal’s policy on outward investment.

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.  Due to the complex, opaque, and subjective regulatory system, businesses frequently encounter demands for cash payments to officials to receive necessary approvals. 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 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.  Some roles and responsibilities are being transferred to the provincial governments, but the delineation has not yet been finalized. Details and timelines for implementing the new federal system and devolving authority from the central to the provincial governments remains unclear, as does the extent to which these changes will affect foreign investors.  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. Public comments may be received through consultative sessions with private sector representatives or sector experts and incorporated into draft regulations.  Government agencies and ministries sometimes hold discussions with relevant stakeholders, but the process lacks transparency. 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.

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.  In 2015, the Asian Development Bank (ADB) issued a report noting that Nepal would need to take 104 actions required to fully implement the TFA.  A subsequent ADB report issued in 2017 noted that 82 of these actions are in the areas of legal/procedural reforms, institutional framework, and human resources/training.  The 2017 report also 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 offenses 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 ranks 151st in the World Bank’s 2020 Doing Business Report, in the category of contract enforcement. 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.

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 reforms have not been fully implemented 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 recent months, 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 calling themselves 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.

Nepal is ranked 87th in the category of resolving insolvency in the World Bank’s 2020 Doing Business Report.  According to the report, it takes two years on average to resolve insolvency cases, costs average nine percent of the debtor’s estate, and the most likely outcome is that the company will be sold off piecemeal.  The average recovery rate is 41.2 cents on the dollar.

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.

Nepal’s first credit rating agency, ICRA Nepal, a subsidiary of ICRA Limited, an independent and professional investment information and credit rating agency of India, opened in 2011.  In late 2017, Care Rating Nepal Limited was granted permission by the Securities Board of Nepal to operate as a credit rating agency.  A third agency, Nepal Rating Agency (NRA) majority owned in 2016 by U.S.-based Dun & Bradstreet, was expected to come into operation in 2020. Post has recently learned that the successor company to Dun & Bradstreet has decided against pursuing involvement and it is unlikely that the NRA will come into existence.

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.

The GoN is keen to undertake projects under the Public Private Partnership (PPP) model. An agreement was recently signed between the IFC and GoN agencies, including IBN and the SEZ Authority, to jointly develop the Simara Special Economic Zone (SEZ). 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 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 recent revision to the SEZ Act in 2019 has apparently 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. Both are located in southern Nepal near the border with India.  Construction of factories at the Bhairahawa site began in mid-2018 after the Nepal Electricity Authority established electricity supply to the site.  Prior to the COVID pandemic, the SEZ in Simara was expected to come into operation within the fiscal year, mostly focused on garment production. China and Nepal have signed a memorandum of understanding to build an SEZ in Rasuwagadhi near the primary Nepal-China border crossing and the two countries are also working together to develop an “econ-industrial” park in Jhapa district in eastern Nepal, though it is not clear whether it will operate as an SEZ.

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). 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 the GoN stated would serve 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. The GoN has started drafting updates to both its Copyright Act of 2002 and the Patent, Design, and Trademark Act of 1965, although it could be several years before any new IPR protections are codified into law.  As Nepal works to update its IPR legislation, USPTO and the U.S. Embassy continue to advocate for stronger IPR protection.

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 .)

The GoN has generally shown reluctance to allowing the free flow of financial resources into the country, citing concerns about money laundering. Occasionally Nepal Rastra Bank (NRB), Nepal’s central bank, has issued bonds that foreign investors can purchase, but generally there are few instruments available for foreign portfolio investment.  The NRB has been issuing bonds targeted at migrant workers and non-resident Nepalis since 2009, in an attempt to channel foreign currency into productive investments in the domestic economy.

Nepal moved to full convertibility (no foreign exchange restrictions for transactions in the current account) for current account transactions 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 political stability, 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 2020, there were 27 commercial banks, 24 development banks, and 22 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 December 2018, 76 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 December 2018, 76 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 region 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.

At the end of Nepal’s FY 2017/18, total assets at Nepal’s commercial banks stood at USD 29.7 billion. During the same period, only 1.49 percent of total assets were estimated to be attributed to non-performing loans (NPL). However, financial sector experts believe that the low NPL ratio is due to an unhealthy practice of ‘evergreen loans’ and the real NPL ratio is higher.

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 international Financial Action Task Force (FATF) in 2020 to assess its anti-money laundering regime. Although unlikely, Nepal risks losing its correspondent banking relationships 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.

Although some Nepali entrepreneurs have been promoting blockchain, the GoN has not announced any plans to implement blockchain technologies in its banking transactions.  The NRB has announced that until regulations are developed, transactions using bitcoin or other blockchain technologies are illegal. Seven Nepalis were arrested in October 2017 for carrying out illegal bitcoin transactions.

Millions of Nepalis work overseas and send remittances back to families in Nepal.  Rather than remit payments using formal channels, many Nepalis continue to use the “hundi” system, essentially an order made by a person directing another to pay a certain sum of money to a person named in the order.  The hundi system is illegal in Nepal and the NRB is encouraging migrant workers to remit money through formal channels, as this helps the central bank control the country’s money supply and reduces the potential for money laundering.

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, other 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.

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.business-anti-corruption.com/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 2019 Corruption Perception Index released by Transparency International (TI), Nepal ranked 113th 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 Government of Nepal 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. This dissatisfaction led to widespread strikes across the Terai and blockages along the India-Nepal border that halted cross-border trade and transit. The disruptions across the Terai lasted from August 2015 until February 2016. Some protests resulted in violent clashes with security personnel and 55 protesters and police were killed. 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. In 2018, the Communist Party of Nepal (Unified Marxist Leninist) and the Communist Party of Nepal (Maoist Center) merged to form the Nepal Communist Party, currently in power.

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, or by personal appearance at the Consular Section, located at the U.S. Embassy Kathmandu. The Consular Section can provide updated information on travel and security, 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, or online at http://np.usembassy.gov.

U.S. citizens also should consult the Department of State’s Consular Information Sheet for Nepal and Worldwide Caution Public Announcement via the Internet on the Department of State’s home page at http://travel.state.gov or by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, 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 put out 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. Over the past two years, Biplav, a splinter Maoist group, has threatened or attempted to extort NGOs, businesses, and educational institutions across Nepal. Violence does not always follow a rejection, but the threat remains.

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 percent) 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 pre-COVID, shared an open border with Nepal. Nepal’s unemployment rate of 11 percent 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 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 under development but the GoN hopes to eventually have as many as 15.

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. A U.S. company in Nepal was shut down twice in 2013 and 2014 by workers associated with the Maoist-affiliated ANTUF-R. 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, and 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, 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 March 2020, the GoN acceded to the 2000 UN TIP Protocol, however, it has not been fully ratified. Children in Nepal are engaged in child labor, including in the production of bricks, carpets, and embellished textiles. 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/2019-country-reports-on-human-rights-practices/nepal/.  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 USD 214 million in bilateral trade in 2019. 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 USD 3.1 million worth of goods in 2019 under this program. To remain eligible for this program, Nepal must meet certain labor standards.

The DFC is free to operate in Nepal without restriction.  Services include direct loans and loan guarantees, political risk insurance, and investment funds. Nepal is also a member of the Multilateral Investment Guarantee Agency.  Although DFC’s predecessor, the Overseas Private Investment Corporation (OPIC) had an agreement with Nepal in place since 1963, OPIC never funded a project in Nepal, in large part due to the fact that few American investors are operating in the country. However, DFC’s products could help mitigate risks American firms face trying to do business in Nepal and DFC’s loans and guarantees could help U.S. companies be more cost competitive. Given the large number of hydropower projects in the pipeline in Nepal, DFC involvement in this sector could make it more attractive for American investors.

China is providing significant investment financing, both through state-owned companies and through the China Export-Import (ExIm) Bank. China ExIm has provided a loan for the construction of an international airport in Pokhara and for construction of several hydropower projects. India has also pledged significant resources for Nepal’s development, but it is unclear how much of that funding has been delivered.

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 2020, no outward investment is permitted from Nepal.

Table 4: Sources of Portfolio Investment
Data not available. Nepal does not allow foreign portfolio investment.

Michelle Lorenzo
Economic Professional Associate
U.S. Embassy Kathmandu
+977 1 423 4191
Email: lorenzom@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 greater foreign direct investment in order to boost its economic growth, particularly in the energy, agriculture, 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.  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.

Incentives introduced through the 2015-18 Strategic Trade Policy Framework (STPF) and Export Enhancement Packages (EEP) remain in place.  These incentives are largely industry-specific and include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.  A new STPF policy has been approved by the Prime Minister but must be submitted to the Economic Coordination Committee and then the cabinet for final approval.  The new STPF reportedly envisages incentivizing 26 non-traditional sectors to boost exports and plans to improve the tax refund process.

The Foreign Private Investment Promotion and Protection Act, 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan.  The Foreign Private Investment Promotion and Protection Act 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.

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

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners, except Indian and Israeli citizens/businesses, can establish and 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 private firms to adopt articles of incorporation discriminating against foreign investment.  The 2013 Investment Policy eliminated minimum initial capital investment requirements across sectors so that no minimum investment requirement or upper limit on the share of foreign equity is allowed, 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, or 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 agricultural 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 USD 2.6 million) is restricted to Pakistani investors.

Foreign banks can establish locally incorporated subsidiaries and branches, provided they have USD 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 USD 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 if 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 last three years.

Business Facilitation

The government works with the World Bank 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 improving electronic submissions and processing of trade documents.  Starting a business in Pakistan normally involves 5 procedures and takes at least 16.5 days.  Pakistan ranked 108 out of 190 countries in the World Bank Doing Business 2020 report’s “Starting a Business” category.  Pakistan ranked 28 out of 190 for protecting minority investors.

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 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 is also available for foreign investors.

Outward Investment

Pakistan does not promote or incentivize outward investment.  Although the cumbersome government approval process can discourage potential investors, larger Pakistani corporations have made major investments in the United States in recent years.

Pakistan has signed Bilateral Investment Treaties (BITs) with 49 countries, with only 27 entered into force.  U.S.-Pakistan Bilateral Investment Treaty (BIT) negotiations began in 2004 and the text closed in 2012; however, the agreement has not been signed.  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).  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.  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, calculating these payments requires that businesses spend over 283 hours per year.

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

Most draft legislation is made available for public comment but there is no centralized body to collect public responses.  The relevant authority gathers public comments, if deemed necessary; otherwise legislation is directly submitted to the legislative branch.  For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback from local chambers and associations – such as the American Business Council and Overseas Investors Chamber of Commerce and Industry (OICCI) – rather than publishing regulations online for public review.

Prior to implementation, non-government actors and private sector associations can provide feedback to the government on different laws and policies, but authorities are not bound to collect nor implement their suggestions.  Respective regulatory authorities conduct in-house post-implementation reviews for 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, foreign companies must address provincial, and sometimes local, government laws in addition to national law.  Foreign businesses complain about the inconsistencies in laws and policies from different regulatory authorities.  There are no rules or regulations in place that discriminate specifically against U.S. investors, however.

The SECP is the main regulatory body for foreign companies in Pakistan, but it is not the sole regulator.  Company financial transactions are regulated by the SBP, labor by the Social Welfare or EOBI, and specialized functions in the energy sector are overseen by bodies such as the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, and Alternate Energy Development Board.  Each body is overseen by autonomous management but all are required to go through the Ministry of Law and Justice before submitting their policies and laws to parliament or, in some cases, the executive branch; parliament or the Prime Minister is the final authority for any operational or policy related legal changes.

The SECP is empowered to notify accounting standards to companies in Pakistan, however, execution and implementation of the notifications 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.

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 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 may be appealed within the court system and enforcement actions may also be appealed through the courts.  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 has a written contractual/commercial law with the Contract Act of 1872 as the main source for regulating Pakistani contracts.  British legal decisions, where relevant, are also cited in courts.  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.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy, subject to obtaining relevant permissions.  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.  Companies operating in Pakistan are statutorily required to retain full-time audit services and legal representation.  Companies 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 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.

There is no “single window” website for investment which provides relevant laws, rules and reporting requirements for investors.

Competition and Anti-Trust Laws

Established in 2007, the Competition Commission of Pakistan (CCP) ensures private and public sector organizations are not involved in any anti-competitive or monopolistic practices.  Complaints regarding anti-competition practices can be lodged with CCP, which conducts the investigation and is legally empowered to award 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-competition practice within six months from the date in which it becomes aware of the practice.

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

In 2008, the Pakistani government instituted a Rental Power Plant (RPP) plan to help alleviate the chronic power shortages throughout the country.  Walters Power International Limited was a participant in three RPP plants and brought power generation equipment into Pakistan to service these plants.  Subsequently, in 2010, the Supreme Court of Pakistan nullified all RPP contracts due to widespread corruption in cash advances made to RPP operators.  Walters Power International Limited settled with the Pakistan National Accountability Bureau (NAB) and the Central Power Generation Company Limited by returning advance payments plus interest.  In mid-2012, NAB formally acknowledged that settlement with the Walters Power International Limited had been made, which under Pakistani law released Walters Power International Limited from any further liability, criminal or civil, and should have permitted re-export of equipment.  However, the Government of Pakistan (a) has refused to allow the equipment to be exported so that some salvage value could be obtained, and (b) prevented the plant from operating despite a critical need for power in the country during the disputed period.  Despite repeated efforts by Walters Power International Limited, NAB has declined to instruct the appropriate parties to issue a Notice of Clearance to Pakistan Customs to allow the re-export of the equipment.  Walters Power International Limited alleges that the unreasonable delay in permitting re-export of equipment following settlement constitutes expropriation.  The case is still pending with NAB.

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.

In 2019 the International Center for Settlement of Investment Disputes awarded a consortium of foreign companies which had invested in the “Reko Diq” mining project USD 5.84 billion in damages for Pakistan’s breach of contract.  The government is currently in discussions with the consortium to arrive at an out-of-arbitration settlement.

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.

Foreign Trade Zones/Free Ports/Trade Facilitation

Providing unique fiscal and institutional incentives exclusively for export-oriented industries, the government established the first Export Processing Zone (EPZ) in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Diq, and Duddar; today, only Karachi, Risalpur, Sialkot, and Saindak remain operational.  EPZs 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 Act, amended in 2016, allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  According to the country’s 2013 Investment Policy, manufacturers introducing new technologies that are unavailable in Pakistan receive the same incentives available to companies operating in Pakistan’s SEZs.

Pakistan has a total of 23 designated special economic zones (SEZs); 10 of these were recently established by the government.  All potential investors in SEZs are provided with a  basket of incentives, including a ten-year tax holiday, one-time waiver of import duties on plant materials and machinery, and streamlined utilities connections.  Despite offering substantial financial, investor service, and infrastructure benefits to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due to lack of basic infrastructure.  None of the identified SEZs are fully developed, but they have attracted some investment and are available to any company, domestic or foreign.  KP’s Peshawar Economic Zone Office, in an attempt to attract additional foreign investor interest, opened an Industrial Facilitation Center to provide potential investors with timely services and a one-stop shop for existing and new foreign investors.  Pakistan intends to establish nine SEZs under CPEC’s second phase, which is focused on promoting Pakistan’s industrial growth and exports.  The government plans to open the first CPEC SEZs in Rashakai, Khyber Pakhtunkhwa (KP); Faisalabad, Punjab; and Dhabeji, Sindh in 2020.  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 business officials have struggled to get business visas for travel to Pakistan.  When permitted, business people typically receive 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 special work permits.  In 2019 Pakistan announced updates to its visa and no objection certification (NOC) policies to attract foreign tourists and businesspeople; however, the new visa policies do not apply to U.S. passport holders.  The new NOC policy implemented in May 2019 permits visitor travel throughout Pakistan, though travel near Pakistan’s borders still requires a NOC.

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 obtaining security clearance from the Ministry of Interior.  Such requirements discourage foreign nationals from becoming board members of  Pakistani companies.

Companies operating in Pakistan have not registered complaints with the embassy regarding encryption issues.  Officially, accreditation from the Electronic Certification Accreditation Council (under the Ministry of Information Technology) is required for entities using encryption and cryptography services, though it is not consistently enforced.  The Pakistan Telecommunication Authority (PTA) initially demanded unfettered access to Research in Motion’s BlackBerry customer information, but the issue was resolved in 2016 when the company agreed to assist law enforcement agencies in the investigation of criminal activities.  PTA and SBP prohibit telecom and financial companies from transferring customer data overseas.  Other data, including emails, can be legally transmitted and stored outside the country.  Recent draft regulations requiring social media companies to maintain local servers in Pakistan received significant criticism in the press and from service providers.  The government subsequently allowed for additional comment and revisions to draft data protection legislation; the comment and revision process remains ongoing.

Real Property

Though Pakistan’s legal system supports the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of property rights.  With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding land lease 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 with insufficient 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 protection for legal purchasers of land are provided, even if unoccupied, clarity of land titles remains a challenge.  Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments dedicating significant resources to digitizing land records.

Intellectual Property Rights

The Government of Pakistan has identified intellectual property rights (IPR) protection as a key economic reform and has taken concrete steps over the last two decades to strengthen its intellectual property (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 institutions, confusion surrounding enforcement agencies’ roles still constrains performance on IPR enforcement, leaving IP rights holders struggling to identify the right forum to address IPR infringement.  Although IPO established 10  enforcement coordination committees to improve IPR enforcement, and has signed an MOU with the FBR to share information, the agency labors to coordinate disparate bodies under current laws.  IPO has been in discussions with CCP and SECP for more than a year on data sharing and enforcement MOUs that  remain unsigned. Weak penalties and the agencies’ redundancies allow counterfeiters to evade punishment.

IPO 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.”  No board meeting was held in 2018 due to the political transition which occurred that year, but two board meetings were held in 2019.  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 in the first half of 2020.

IPO is also charged with increasing public awareness of IPR through collaboration with the private sector.  In 2019, in collaboration with various academic institutions and chambers of commerce, IPO conducted over 100 public awareness sessions.  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 IPR-specific course in its curriculum and Lahore University of Management Sciences has content-specific courses as part of their 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 plans to create two more tribunals, with the proposal 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 as well.  Pakistan’s IP legal framework consists 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 unsuccessful attempt 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 in the process of updating Pakistan’s IPR laws to minimize inconsistencies and improve enforcement.

The U.S. Mission in Pakistan, with the support of the United States Trade Representative (USTR), the Department of Commerce, and USPTO, has been engaged with the Government of Pakistan over several years seeking resolution of long-standing software licensing and IPR infringements committed by offices within the Government of Pakistan which undermine Pakistan’s credibility with respect to IPR enforcement.

Pakistan is currently on the USTR Special 301 Report Watch List  Pakistan is not included in the Notorious Markets List.

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

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

Foreign portfolio investment halted its decline and increased in the last three months of 2019 and into early 2020 as investor confidence increased due to improvement in Pakistan’s current account deficit, relatively high interest rates, and the initiation of Pakistan’s most recent IMF program, according to the SBP.  Prior to the COVID-19 pandemic, indicators had pointed to improved inflows of foreign investment.  The full impact of COVID-19 on foreign portfolio investment remains to be seen.

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSE 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 PSE 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 15 percent 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 free flow of financial resources for domestic and foreign investors is supported by financial sector policies, with the SBP and SECP providing regulatory oversight of financial and capital markets.  Interest rates depend on the reverse repo rate (also called the policy rate).  Interest rates reached a high of 13.25 percent in July 2019 but by May 2020 had decreased to eight percent.

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 banks’ equity with effect from December 2013.  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, only 23 percent of the adult population uses formal banking channels to conduct financial transactions while 24 percent are informally served by the banking sector; women are financially excluded at higher rates than men.  The remaining 53 percent of the adult population do not utilize formal financial services.

Pakistan’s financial sector has been recognized by international banks and lenders for performing well in recent years.  According to the latest review of the banking sector conducted by SBP in December 2018, 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 11.7 percent during 2019.  The five largest banks, one of which is state-owned, control 50.4 percent of all banking sector assets.  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 8.6 percent at the end of December 2019.  In 2019, total assets of the banking industry were estimated at USD 140.1 billion.  As of December 2019, net non-performing bank loans totaled approximately USD 900.3 million – 1.7 percent of net total loans.

The penetration of foreign banks in Pakistan is low, having minimal contribution to the local banking industry and the overall economy.  According to a study conducted by the World Bank Group in 2018, 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 Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the newly established 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 that foreign banks hold at minimum $300 million in capital reserves at their Pakistan flagship location, and maintain at least an eight 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: USD 28 million in assigned capital;

6 to 50 branches: USD 56 million in assigned capital;

Over 50 branches: USD 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 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.  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 USD 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.

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.

The second round of the Government of Pakistan’s extensive 15-year privatization campaign came to an abrupt halt after 2006 when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings.  As a result, large and inefficient state-owned enterprises (SOEs) retain monopolistic powers in a few key sectors, requiring the government to provide annual subsidies to cover SOE losses.  There are 197 SOEs in the power, oil and gas, banking and finance, insurance, and transportation sectors.  Some are profitable; others are loss-making.  They provide stable employment and other benefits for more than 420,000 workers.  According to the IMF, in 2019, Pakistan’s total debts and liabilities for SOEs exceeded USD 7 billion, or 2.3 percent of GDP – a 22 percent increase since 2016, but roughly the same since 2017.  Some SOEs have governing boards, but they are not effective.

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 USD 7 billion in 2019.  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 USD 8.2 billion in CPEC loans and grants to modernize its mail rail lines.  PR relies on monthly government subsidies of approximately USD 2.8 million to cover its ongoing obligations.  In 2019, government payments to PR totaled approximately USD 248 million.  In 2019, the Government of Pakistan extended bailout packages worth USD 89 million to PIA.  Established to avoid importing foreign steel, PSM has accumulated losses of approximately USD 3.77 billion per annum.  The company loses USD 5 million a week, and has not produced steel since June 2015, when the national gas company cut its power supplies due to over USD 340 million in outstanding 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 for both foreign and local investors are the same.  The government announced plans to carry out a privatization program but postponed plans due to 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 percent 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 provides 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 in Pakistan.  Though large companies, especially multi-national corporations, have an awareness of RBC standards, there is a lack of wider awareness.  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.

Pakistan does not have domestic measures requiring supply chain due diligence for companies sourcing minerals originating from conflict-affected areas and does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.

Pakistan ranked 120 out of 180 countries on Transparency International’s 2019 Corruption Perceptions Index.  The organization noted that corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion, and relatively low salaries.

Bribes are criminal acts punishable by law but are widely perceived to exist at all levels of government.  Although high courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political 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 staffing and is viewed by political opposition as a tool for score-settling by the government in power.  Like NAB, the CCP’s mandate also includes anti-corruption authorities, but its effectiveness is also hindered by resource constraints.

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

Sohail Muzaffar
Chairman
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.  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, has coordinated airport-to-airport security and secure lodging for foreign investors.  To inquire about this service, investors can contact the BOI for additional information.

Post is not aware of any damage to projects and/or installations. 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 Baluchistan, the minimum wage for unskilled workers is PKR 17,500 per month (USD 109).  In Sindh, it is PKR 17,000 per month (USD 106).  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.  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 extremely 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 2018 “Export of Manpower Analysis,” the bureau had registered more than 11.11 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries.  Pakistanis working overseas sent more than USD 19 billion in remittances each year since 2015.

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 2014 Decent Work Country Profile states that in 2013, 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.”  The Pakistan Institute of Labour Education and Research in its 2015 “Status of Labour Rights in Pakistan” noted that according to non-official data, there were 949 registered trade unions with a total membership of 1,865,141 – approximately four percent of the total estimated labor force.  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 labour practices in the form of child and bonded labour remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labour, worst forms of child labour, or forced labour.”  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 GSP beneficiary, which requires labor standards to be upheld.

The Development Finance Corporation is active in Pakistan and has provided financing or insurance for projects totaling USD 597.6 million (since 2010), including investments in microfinance and hospital care in rural Pakistan.  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/

* Source for Host Country Data: All host country statistical data used from State Bank of Pakistan which publishes data on a monthly basis.

Source:  IMF Coordinated Direct Investment Survey (CDIS) http://data.imf.org/CDIS

Source:  IMF Coordinated Portfolio Investment Survey (CPIS) http://cpis.imf.org

Michael Boven
Trade and Investment Officer
U.S. Embassy Islamabad
+92-51-2015668
BovenMD@state.gov

Policies Towards Foreign Direct Investment

Sri Lanka is a constitutional multiparty 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.  President Gotabaya Rajapaksa, who came to power in December 2019, has largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI.

The new government’s economic goals, outlined in an election  manifesto, include positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines), improving trade logistics, attracting export-oriented FDI, and boosting firms’ abilities to compete in global markets.

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.  There are plans to establish new regulatory authorities, including a separate investment authority.

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 that 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 the 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, importation of a number of “non-essential” items have been temporarily suspended to curtail foreign exchange outflow as the Sri Lankan Rupee (LKR) depreciated around 10 percent during 2020 and is expected to be under further pressure in the medium term.

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: 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.  Foreign ownership in excess of 40 percent can be preapproved on a case-by-case basis by the BOI.

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: OIA transactions were suspended until January 21 in an attempt to ease pressure on the Sri Lankan rupee.

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.

While law making 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.

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.  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.”

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 Deutsche Bank and Ceylon Petroleum Corporation regarding an oil hedging agreement, concluded with the proceeding being decided in favor of Deutsche 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 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:

The standard rate of corporate tax is 28 percent.  A concessionary rate of 14 percent applies for: a) small and medium companies (with an annual income of less than LKR 500 million, $3.2 million); b) companies exporting goods and services; and c) companies engaged in agricultural business; education services; promotion of tourism; and information technology services.  A 40 percent corporate tax rate applies to companies engaged in gaming, liquor, and tobacco related 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 12 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.

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.  As a result, safeguards based on this 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 working to formulate 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 v 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 Cabeca, 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.  In March 2020, CBSL suspended importation of a wide list of non-essential goods and motor vehicles.  The import control department also imposed further regulations restricting certain imported food items and instituted a 3-month credit term for importation of certain essential imports.  The import restrictions are currently in effect until January 1, 2021.

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 5.2 percent in April of 2020, and the average prime lending rate was 9.49 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 are allowed to borrow from foreign sources.  FDI finances about 6 percent of overall investment.  Foreign investors are allowed to 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 2019 there were over 2,900 commercial banking outlets and over 5,100 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 although a staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed

Total assets of commercial banks stood at LKR 10,944 billion ($59 billion) as of December 31, 2019.  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 5.35 percent (up from 4.79 percent in 2019).  The People’s Bank currently holds a NPL ratio of 4.79 percent (up from 3.68 percent in 2019).  Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state.

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 look into the possible adoption of blockchain and cryptocurrencies.

Sri Lanka has as rapidly growing alternative financial services industry which 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 is currently selling non-strategic 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 and is looking to list SOEs on the Colombo Stock Exchange and partially privatize non-strategic SOEs.  However, the government does not always follow an open bidding process when selling outside the stock exchange.  For instance, in the case of the sale of the Hambantota Port in 2017, the government allowed a PRC company to secure the deal without an open bidding process.  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.

While Sri Lanka has adequate laws and regulations to combat corruption, enforcement is reportedly 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 disproportionate to the conduct (i.e. overly strict or 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.  Sri Lanka signed and ratified 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 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.  In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets.

Following his election in November 2019, President Gotabaya Rajapaksa announced major tax cuts as part of a pro-growth strategy.  The outbreak of COVID-19 shortly after the dissolution of Parliament in March delayed Parliamentary elections until August of 2020.  During the August elections, President Rajapaksa’s party secured a commanding two thirds majority in parliament.

Demonstrations occasionally take place in response to world events or local developments.  Demonstrations near Western embassies are not uncommon but have been well-contained with support from the Sri Lankan police and military.

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 fairly 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 $6.7 billion in 2019, making up Sri Lanka’s largest source of foreign exchange. The majority 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.  The majority of foreign workers are from India, Bangladesh, and the PRC, many reportedly without proper work visas.

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 14, although the government is seeking to raise the legal minimum age to 16.  The minimum age for employment in hazardous work is 18 years.

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.  The U.S. International 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 2019 was $262 million.  FDI inflows from the United States were $20 million 2019.  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