With an annual Gross Domestic Product (GDP) of approximately USD 30.7 billion, and trade totaling USD 13.6 billion, Nepal is a comparatively small contributor to the global economy. Despite considerable potential – particularly in the agriculture, tourism, energy, IT, and infrastructure sectors – political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws and regulations have generally kept investors away. Historically, few American companies have invested in Nepal, in large part due to the perception among investors that risks outweigh potential returns in a small market economy with cumbersome bureaucracy and political instability. The current government, which holds a two-thirds majority in parliament, pushed through several pieces of legislation, including the 2019 Foreign Investment and Technology Transfer Act (FITTA), intended to attract increased foreign investment. As promulgated, however, the FITTA and other new pieces of legislation failed to resolve many long-standing institutional and procedural impediments to improved business practices. As the Government of Nepal (GoN) struggles to confront the economic and social effects of the COVID pandemic, it is unlikely a concentrated effort to improve the investment climate will be a high priority.
In 2017, the Millennium Challenge Corporation (MCC) signed a USD 500 million Compact with the GoN that will focus on the electricity transmission and road maintenance sectors. The GoN has agreed to contribute an additional USD 130 million for these Compact programs. Once implemented, the MCC Compact should present opportunities for international firms to bid on tenders for construction and consulting projects expected to be issued in late 2020 and early 2021.
Nepal’s location between India and China – two of the world’s largest markets and fastest growing economies – presents opportunities for foreign investors, particularly in light of market access preferences for Nepali-made products exported to India. In addition to its strategic market location, Nepal also possesses natural resources that have significant commercial potential.
Hydropower – Nepal has an estimated 40,000 megawatts (MW) of commercially-viable hydropower electricity generation potential which could become a major source of income through electricity exports to help meet South Asia’s growing energy needs.
- Other sectors offering potential investment opportunities include agriculture, tourism, the IT sector, and infrastructure.
- The FITTA, the Industrial Enterprise Act, the Special Economic Zone Act (SEZ), a revised Labor Act, and a new Intellectual Property Rights policy were modest steps the GoN took towards improving the investment climate.
Nepal offers opportunities for investors willing to accept inherent risks and the unpredictability of doing business in the country. While Nepal has established some investment-friendly laws and regulations, significant barriers to investment remain.
Corruption, laws limiting the operations of foreign banks, limitations on the repatriation of profits, limited currency exchange facilities, and the government’s monopoly over certain sectors of the economy, such as electricity transmission and petroleum distribution, undermine foreign investment in Nepal.
Millions of Nepalis seek employment overseas, creating a talent drain, especially among educated youth.
Trade unions – each typically affiliated with parties or even factions within a political party and unpredictable general strikes create business risk. Cartels and syndicates masked as business and industry associations actively seek to suppress new market entrants.
Immigration laws and visa policies for foreign workers are cumbersome. Inefficient government bureaucratic processes, a high rate of turnover among civil servants and government officials, and corruption exacerbate the difficulties for foreigners seeking to work in Nepal.
Political uncertainty has been another challenge for foreign investors in Nepal. New constitutional provisions and a government in power since 2018 with control over a super-majority of parliament raised expectations, but intraparty feuds and competition for power within the ruling Nepal Communist Party (NCP) government have not delivered to investors the political certainty for which they had hoped. Nepal’s southern Terai region, home to half the country’s population, remains a flash point for political disturbances.
Government restrictions on the media and non-governmental organizations highlight an increased tendency toward censorship. This tendency has also manifested in actions taken against or preference given to individual companies. For example, the GoN has closed shops when it deems prices charged are too high and has adopted ad hoc regulations regarding operations, prices, and procedures without adequate notice and opportunity for stakeholders to respond.
The persistent use of intimidation, extortion, and violence – including the use of improvised explosive devices – by insurgent groups targeting domestic political leaders, GoN entities, and businesses is an additional source of instability.
Nepal’s geography also presents challenges. The country’s mountainous terrain and poor transportation infrastructure increases costs for raw materials and exports of finished goods. The nearest seaport is in Kolkata, India, more than 500 miles from Kathmandu.
|TI Corruption Perceptions Index||2019||113 of 180||http://www.transparency.org/
|World Bank’s Doing Business Report||2020||94 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2019||109 of 129||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, historical stock positions)||2019||NA||http://apps.bea.gov/international/
|World Bank GNI per capita (USD)||2018||$970||http://data.worldbank.org/indicator/
1. Openness To, and Restrictions Upon, Foreign Investment
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:
- Primary agricultural sectors including animal husbandry, fisheries, beekeeping, oil-processing (from seeds or legumes), milk-based product processing;
- Small and cottage enterprises;
- Personal business services (haircutting, tailoring, driving etc.);
- Arms and ammunition, bullets, gunpowder and explosives, nuclear, chemical and biological weapons, industries related to atomic energy and radioactive materials;
- Real estate (excluding construction industries), retail business, domestic courier services, catering services, money exchange and remittance services;
- Tourism-related services – trekking, mountaineering and travel agents, tourist guides, rural tourism including arranging homestays;
- Mass media (print, radio, television and online news), feature films in national languages;
- Management, accounting, engineering, legal consultancy services, language, music and computer training;
- 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 .
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.
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.
3. Legal Regime
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.
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.
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.
4. Industrial Policies
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.”
5. Protection of Property Rights
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/ .
6. Financial Sector
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
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.
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.
7. State-Owned Enterprises
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.
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.
8. Responsible Business Conduct
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
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
10. Political and Security Environment
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 email@example.com, 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.
11. Labor Policies and Practices
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.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs
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.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
|Host Country Statistical source||USG or international statistical source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($M USD)||2017||$24.9||2018||$29.04||www.worldbank.org/en/country|
|Foreign Direct Investment||Host Country Statistical source||USG or international statistical source||USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||2017||$196.3||2018||$68.2||https://data.worldbank.org/
|Host country’s FDI in the United States ($M USD, stock positions)||N/A||$0||N/A||$0||Not permitted under Nepali law|
|Total inbound stock of FDI as % host GDP||2017||7.1%||2018||6.7%||UNCTAD data available at https://unctad.org/en/Pages/DIAE/
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward $1,466||Amount||100%||Total Outward||Amount||100%|
|China, P.R.:Mainland $149||Amount||10%||N/A|
|“0” reflects amounts rounded to +/- USD 500,000.|
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.
14. Contact for More Information
Economic Professional Associate
U.S. Embassy Kathmandu
+977 1 423 4191
U.S. Embassy Kathmandu
+977 1 423 4469