Executive Summary

With an annual Gross Domestic Product (GDP) of about USD 24.9 billion, and total trade of USD 12.9 billion, Nepal is a small contributor to the global economy.  Despite considerable potential, particularly in the agriculture, tourism, energy, IT, and infrastructure sectors, widespread corruption, cumbersome bureaucracy, and weak implementation of laws and regulations have generally kept investors at bay.  Historically, few American companies have invested in Nepal, in part due to a perception that the country’s small size, cumbersome bureaucracy, and political instability created too much risk for investors. The current government, which holds a 2/3 majority in parliament, recently pushed through several pieces of legislation, including the Foreign Investment and Technology Transfer Act (FITTA), intended to attract increased foreign investment.   However, as drafted, these pieces of legislation maintain various institutional and procedural impediments to smooth businesses practices which are expected to dissuade all but the most risk-tolerant investors. Proof of their impacts will be determined in large part through the content of their implementing regulations and actual implementation.

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. The MCC Compact should present opportunities for international firms, although tenders are not expected until 2019.

Nepal’s location between India and China – two of the world’s largest markets and fastest growing economies – could present opportunities for foreign investors, particularly in light of market access preferences which Nepali-made products enjoy in India.  In addition to a strategic market location, Nepal also possesses natural resources that have significant commercial potential.

  • Hydroelectric power – of which Nepal has an estimated 40,000 megawatts (MW) of commercially-viable potential – could be a major source of income and help meet South Asia’s growing energy needs.
  • Other sectors offering potential investment opportunities include agriculture, tourism, the IT sector, and infrastructure.
  • In addition the recently passed FITTA, the Industrial Enterprise Act, the Special Economic Zone Act, a revised Labor Act, and a new Intellectual Property Rights policy are modest steps 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 investment barriers remain.

  • Corruption, laws limiting the operation 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 drain on an already poorly trained workforce.
  • The proliferation of politicized trade unions – each typically affiliated with a political party – cartels, and syndicates masked as associations that actively try to prevent new players from entering the market, and unpredictable general strikes also create business risks.
  • Immigration laws and visa policies for foreign investors can be cumbersome and obstructive.  These regulations are exacerbated by an inefficient government bureaucracy, a relatively high turnover rate of civil servants and government officials, and occasionally overt corruption.
  • Political uncertainty has been another challenge for foreign investors in Nepal, although new constitutional provisions, and the super-majority government in office should ease that for the near term.  Nepal’s southern Terai, home to half the country’s population, saw protests as well as a prolonged blockage of Nepal’s border with India in 2015-16. Although tensions have subsided in the Terai, protests could erupt again if the government does not meet the demands of political parties in this region.
  • Government restrictions on the media and non-governmental organizations in practice and increasingly through laws and regulations highlight a tendency toward intervention.  This has also manifested in politicized actions against, or giving preference to, individual companies such as through shop closures when the GON determines that prices charged are too high, or in the adoption of poorly-informed ad hoc regulations regarding operations, prices, and procedures.
  • The persistent and pervasive use of intimidation, extortion, and violence – including the use of improvised explosive devices – by insurgent groups has added a degree of insecurity targeting domestic political leaders, GON entities, and businesses.
  • Nepal’s geography also presents challenges.  The country’s mountainous terrain and poor infrastructure increase the cost of transportation of raw materials as well as finished goods.  The nearest seaport is in Kolkata, India, about 900 kilometers from Kathmandu.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 124 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 110 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 108 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 N/A http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 $800 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

There is recognition within the Government of Nepal (GON) that foreign investment is necessary to boost economic growth, and that domestic resources are insufficient to meet the GON’s economic targets (e.g. achieving an 8 percent annual growth rate, becoming a middle-income country by 2030, etc.). In other words, the GON welcomes foreign direct investment (FDI) and has passed several laws in the last three years that could modestly improve the investment climate.  A few laws were further revised in the last several months with the intent of presenting an optic of Nepal as an attractive investment destination ahead of the second Nepal Investment Summit held on March 29-30, 2019. The first Investment Summit was held in March 2017, also with the intent of drawing more foreign investors to Nepal. Many of the corruption- or petty bureaucracy-based hindrances impeding the smooth conduct of business, however, remain unaddressed in the absence of pay-offs or personal interventions with cabinet-level officials.  So while the GON’s overall stated attitude toward FDI is positive, how well this will translate into practice remains to be seen.

The most significant foreign investment laws are the recently revised FITTA and the Public-Private Partnership (PPP) and Investment Act, 2019, the Foreign Exchange Regulation Act of 1962 (currently under revision), the Immigration Rules of 1994, the Customs Act of 1997 (currently under revision), the Industrial Enterprise Act of 2016, the Special Economic Zone (SEZ) Act of 2016 and its 2019 amendment, the Electricity Act of 1992, the Privatization Act of 1994, and 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, 2019 attempts to create a friendlier environment for foreign investors. While stopping short of providing “automatic approvals,” it streamlines the entry process for foreign investment by requiring the approval authority to approve FDI within 7 days of application, reducing delays that many foreign investors faced in the past. Similarly, the profit repatriation approval process has also been streamlined to within 15 days. The revised FITTA has set up a Single Window Service Center, through which foreign investors can avail the full-range of services from various government departments, including the Department  of Industry, Labor and Immigration Departments, Central Bank, etc. in one single point. This should reduce the time and hassles that foreign investors frequently face in obtaining permissions from different government agencies, although the Service Center has yet to become operational as of April 2019. Given Nepal’s history of non-implementation of provisions of law and regulation, the actual implementation of the Service Center or how these procedural and time-limited provisions play out remains to be seen. The new FITTA commits to providing “national treatment” to all foreign investors meaning they will generally be treated in the same way as domestic companies. Foreign companies will not be nationalized. Under the FITTA, investments up to NPR 6 billion (approx. USUSD  52 million) come under the purview, including approval authority, of the Department of Industry (DOI), and anything above that amount falls under the authority of the Investment Board Nepal (IBN).

Other relevant laws include the Industrial Enterprise Act (this act aims 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 an environmental assessment is being carried out), the Special Economic Zone Act, an updated Labor Act and a pending draft bill for Intellectual Property Rights.  The newly enacted FITTA, and these other laws, are intended to create a more open and friendly environment for foreign investors. Some argue that these recent reforms are still modest. In practice, American and other foreign companies say that corruption, bureaucracy, lack of implementation of existing procedures and requirements, and a weak regulatory environment make investing in Nepal very difficult. It is unclear yet if Nepal’s new legislation will improve the investment climate, particularly for foreign investors.

Another significant piece of legislation that could impact investors in Nepal is the Customs Act (revised in 1997), which established invoice-based customs valuations and eliminated many investment tax incentives, replacing them with a lower, uniform rate.  In 2017, the Department of Customs started to use the Automated System for Customs Data (ASYCUDA) world software platform, although it is not yet fully implemented. In addition, the Electricity Act defines 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 to broaden participation of the private sector in the operation of such enterprises.

The terms and conditions of intellectual property protection are defined by the 1965 Patent, Design, and Trademark Act and the 2002 Copyright Act.  The latter covers electronic audio and visual materials and subjects violators to fines and imprisonment, as well as the confiscation of unauthorized materials.  Violators must also pay compensation claimed by the copyright holder. However, the law 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 controlling black markets and misleading advertisements.  In March 2017, Nepal’s Cabinet approved a new Intellectual Property Rights (IPR) policy which is the foundation of new IPR legislation that is currently being drafted.

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 affiliation.

The Investment Board of Nepal (IBN) was formed in 2011 to promote economic development in Nepal.  The IBN handles investments larger than approximately USD 52 million, while the Department of Industry (DOI) is responsible for investments less than USD 52 million.  In addition to approving large-scale investment projects, the IBN is also the GON implementing and managing agency for various public-private partnership (PPP) projects. It has the task of attracting large foreign investors to Nepal and was the key organizer of the past two Investment Summits. It is the focal organization for large investors, especially those engaged in public infrastructure projects. The focal point for smaller, private investors is the DOI and its Single Window Service Center once it becomes operational.

The Nepal Business Forum (http://www.nepalbusinessforum.org/) was formed in 2010 with the “aim of improving the business environment in Nepal through better interaction between the business community and government officials” although Post is not aware of how often this actually happens in practice. We are not aware of other formal mechanisms or platforms to enable on-going dialogue between foreign investors and the GON, aside from these 3 agencies – 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 reduces the number of restricted sectors for foreign investment, which are listed below. Outside of these sectors, 100 percent foreign investment is permitted in most sectors.  Depending upon the sectors foreign entities intend to operate in, approval and registration requirements may vary.  Over the past year, the Market Monitoring unit of the Commerce Ministry’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 appear to be 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, fishery, bee-keeping, oil-processing (from seeds or legumes), milk-based products 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 radio-active materials,
  5. Real estate (excluding construction industries), retail business, domestic courier service, catering service, money-changer and remittance services
  6. Tourism-related services – trekking, mountaineering and travel agencies, tourist guides, rural tourism including homestay
  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 service where foreign investment is above 51 percent

Investment proposals are screened by the Department of Industry or the Investment Board of Nepal to ensure compliance with the FITTA and other relevant laws.  Historically, the lack of clear, objective criteria or timeframes for making decisions has resulted in complaints by prospective investors. While the new FITTA aims to resolve some of this, much will only be addressed in the implementing regulations which remain to be drafted.  How well the law and regulations translate into practice thus remains to be seen.

The Investment Board’s website provides resources to prospective investors including the Nepal Investment Guide (http://www.ibn.gov.np/). Similarly, the Ministry of Industry also 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. firms 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 investment policy reviews of Nepal in the last three years.  The last one by UNCTAD was conducted in 2003. The World Trade Organization (WTO) conducted a trade policy review in 2019, available online at:  https://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm#bycountry. The 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 that Nepal is “open for business” and explicitly welcomed foreign investment.  A second Investment Summit was organized in March 2019, where over 800 foreign delegates attended from 40 different countries. While the GON likes to appear enthusiastic in attracting foreign investors, it is as yet unclear if the reality will match this rhetoric.  Three laws directly impacting foreign investment (FITTA, PPP and Investment, and SEZ) were hurriedly revised and passed by Parliament ahead of the Summit, but this left little time for consultations or transparency in the process. English translations of these Acts are still unavailable, more than a month since their passage.  Both foreign and domestic businesspeople often state that the GON has not done enough to improve the business environment. This year Nepal slipped to 110th (out of 190) in the World Bank’s Doing Business Report. While welcome provisions have been included in the new FITTA 2019—for example, a streamlined approval process and single window service center—the true impact of the reforms remain to be seen in their implementation, especially given the GON’s past record of making lofty announcements without delivering them in practice.

Nepal’s Office of Company Registrar (OCR) maintains a website (www.ocr.gov.np/index.php/en/) where it is possible for a foreigner to register a company, after first obtaining a letter of approval from the Department of Industry or Investment Board of Nepal.  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 this portal, registering a company takes “between three days and a week with the law authorizing up to 15 days.” However, independent think tanks have noted that the online system still has not eliminated corruption and bureaucrats frequently request additional documentation that must be submitted in person, rather than online. In theory, the new Single Window System (as per FITTA 2019) should eliminate these problems and enable business registration smoothly within 15 days, but it has yet to become operational.

Users ranked Nepal’s business registration website (http://www.theiguides.org/public-docs/guides/nepal), which is maintained by UNCTAD and the International Chamber of Commerce, four out of ten, according to the Global Enterprise Registration website www.GER.co (maintained by UNCTAD and the Global Entrepreneurship Network).

There are no policies that discriminate against women or underrepresented minorities participating in the economy.  For example, World Bank data shows that men and women need to follow the same steps to register a business. However entrenched cultural values can make it difficult for women and minorities to be equal participants in Nepal’s economy.  For example, land is usually registered in a husband’s name, which can make it difficult for women to take out a bank loan, since property is often used for collateral. Similarly, many business chambers and associations are dominated by firms from Kathmandu, making it harder for underrepresented minorities outside of the Kathmandu Valley to receive equitable treatment in the economy.

Outward Investment

The Act Restricting Investment Abroad (ARIA) of 1964 prohibits outward investment from Nepal to all countries and sectors.  Some enterprising Nepalis have found ways around this act, but for most Nepali investors, outward investment is impossible. However, 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. This will be a major change to Nepal’s policy on outward investment, if it materializes, and may take a year or more before it is fully operationalized.

2. Bilateral Investment Agreements and Taxation Treaties

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

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

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

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

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 0.0 on its “Global Indicators of Regulatory Governance” index, and notes that ministries in Nepal do not 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 have been established.  Some roles and responsibilities will be transferred to the provincial governments, but the delineation has not yet been finalized. Details and a timeline for implementing the new federal system and devolving relevant authorities from the center to the provinces remain 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 the provincial governments become more established.

Traditionally, once acts are drafted and passed by Parliament, it is incumbent upon the related government agencies and ministries to draft regulations to enforce the act.  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 analysis for such purposes. Public comments may be received through consultative sessions with private sector representatives or sector experts and incorporated into the draft regulations.  In theory, the government agencies and ministries should hold discussions with relevant stakeholders, although it is unclear if this always happens. The World Bank notes that the Government of Nepal 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 on general business reputations unless companies use international accounting standards.

Publically 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 publically 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. However, Parliamentary rules limit draft amendments to bills from being proposed to 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 Information and Communications, 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 put up periodic reports on the regulatory actions taken against agencies violating laws, rules, and regulations.  Such summaries and reports are available online in Nepali.

The relevant ministries are responsible for enforcement of regulations.  The enforcement process is legally reviewable and made accountable to the public.  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 were widely and easily accessible to the general public.  The Budget was substantially complete and considered generally reliable. Nepal’s supreme audit institution reviewed the government’s accounts and its reports were publicly available.

International Regulatory Considerations

Nepal is one of eight members in the South Asian Association for Regional Cooperation (SAARC), a regional intergovernmental organization and geopolitical union of nations in South Asia:  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 percent by 2016.  However, tariff barriers remain due to lists of 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), which includes 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, transport, and infrastructure.  The four BBIN nations agreed on a motor vehicle agreement (both cargo and passengers) in 2015. In early 2018, Bangladesh, India, and Nepal also agreed on operating procedures for the movement of passenger vehicles.

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

Nepal joined the WTO in March 2004.  According to its WTO accession commitments, the GON is supposed to provide notice of all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).  However, when asked, GON officials were unsure if this procedure is being followed.

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 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.” Nepal’s December 2018 policy review 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 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 requisites, as defined here:

  • Category A:  Provisions that Nepal will implement by the time the Agreement enters into force (or in the case of a least-developed country Member within one year after entry into force)
  • Category B:  Provisions that the Member will implement after a transitional period following the entry into force of the Agreement
  • Category C:  Provisions that the Member will implement on a date after a transitional period following the entry into force of the Agreement and requiring the acquisition of assistance and support for capacity building.

Legal System and Judicial Independence

Nepal’s court system is based on common law and its legal system is generally categorized under civil and criminal offences and laws.  Contract law is codified.  In theory, contracts are automatically enforced, and a breach of contract can be challenged in a court of law. In practice, enforcement of contracts is weak. Nepal ranks 154th in the World Bank’s 2018 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 mandated 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; however in some isolated or high-profile cases, court judgments have come under criticism for alleged political interference favoring a particular group.  Perceptions of bribery or judicial conflicts of interest in court cases remain widespread.

Laws and Regulations on Foreign Direct Investment

In March 2019, three laws directly impacting foreign investment (the above mentioned FITTA, PPP and Investment, and SEZ Acts) were hurriedly revised and passed by Parliament ahead of the 2019 Investment Summit.  This left little time for consultations or transparency in the process. While welcome provisions have been included in the new FITTA 2019 (for example a streamlined approval process and single window service center), the true impact of these reforms remain to be seen, especially given the GON’s past record of making lofty announcements without delivering them in practice.  The single window service center is not expected to come online until early 2020. As drafted these pieces of legislation maintain various institutional and procedural impediments to smooth businesses practices which are expected to 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 involved foreign investment. Nepal’s 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 protect consumers.

Nepal’s private sector has been dominated by cartels and syndicates, often calling themselves associations, which have often been successful in limiting competition in different sectors.  In 2018, the GON issued new permits for transport companies. The Minister of Physical Infrastructure and Transport called the cartels “a curse to the nation” and that the GON “has taken initiative to end the transport syndicate.”  Subsequently, few steps have been taken to crack down on additional 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 there are 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 possible expropriations 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 New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Award.

Investor-State Dispute Settlement

As mentioned above, the GON is signatory to the New York Convention and Nepal’s Arbitration Act of 1999 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 last ten years, Post is aware of two cases in which a U.S. investor claimed that the GON did not honor portions 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.

In theory, local courts recognize and enforce foreign arbitral awards issued against the government, based on the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  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 Department of Industry.  If the dispute cannot be resolved, cases may be settled either in a Nepali court or in another legal jurisdiction, depending on the amount of the initial investment and the procedures specified in the contract. Commercial disputes under the jurisdiction of Nepali courts and laws typically drag on for years.

Local courts recognize and enforce foreign arbitral awards issued against the government, based on the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  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 where local courts have refused to determine whether documents issued by an SOE were genuine.

Bankruptcy Regulations

There is no 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 83rd in the category of resolving insolvency in the World Bank’s 2018 Doing Business Report.  According to the report, it takes two years on average to resolve insolvency cases and costs nine percent of the debtor’s estate, with the most likely outcome being that the company will be sold as piecemeal sale.  The average recovery rate is 43 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 are greater in value than 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 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, is slated to open in mid-2018. This company will be owned in part by Dun and Bradstreet, headquartered in the United States.

4. Industrial Policies

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 a reduced or subsidized interest rate on bank loans. There is no discrimination against foreign investors with respect to export/import policies or non-tariff barriers.  The GON offers tax incentives to encourage industries to locate outside the Kathmandu Valley. Newly-formed provincial governments could also offer investment incentives in the near future.

The GON is keen to undertake projects under the Public Private Partnership (PPP) model. An agreement was recently signed between GON agencies (the Investment Board and the Special Economic Zone Authority) and the International Finance Corporation to jointly work on developing the Simara Special Economic Zone (SEZ). Post is unaware of the GON issuing guarantees for FDI projects, but it is not averse to jointly financing them.

Foreign Trade Zones/Free Ports/Trade Facilitation

The GON is developing the country’s first two special economic zones in Bhairahawa and Simara, both in southern Nepal, near the border with India.  Construction of factories at the Bhairahawa site began in mid-2018 after the Nepal Electricity Authority finally provided electricity supply to the site.  The SEZ in Simara is expected to come into operation within the next fiscal year (2019/20) and will focus mostly on garment production. The GON eventually plans to have a network of up to 15 SEZs throughout the country.  China and Nepal have signed a memorandum of understanding to build an SEZ in Rasuwagadhi on Nepal’s northern border and are also working together to develop an “econ-industrial” park in Jhapa district in eastern Nepal (although it is not clear if this will be an SEZ).  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 this Act in 2019 has apparently provided more incentives, including relaxation of an earlier requirement for industries within an SEZ to export 75 percent of their produce, which has now been reduced to 60 percent.

Performance and Data Localization Requirements

There are no mandates for local employment.  However, many foreign investors and foreign workers have complained about the difficult process for obtaining work visas and reported cases of demands for bribes from the Department of Industry before renewing such visas.  The GON generally limits the number of expatriate employees permitted to work at a company and has expressed concern about foreign workers “taking jobs” from Nepali citizens. There are no mandates for local employment of senior management and boards of directors.

Numerous foreigners have said that obtaining work visas is an extremely onerous process, requiring the approval of multiple GON agencies and instances of demands for bribes.  A recommendation letter from the relevant ministry overseeing the investment has become a de facto requirement. Representatives of foreign companies have also told Post that immigration laws are extremely inflexible, making it difficult to legally get a visa for short-term employees or consultants.

In January 2018, the GON informed the U.S. Embassy that, effective immediately, Nepal’s Department of Immigration would issue visas to U.S. citizens for certain purposes of travel for the same fees and valid for the same length of time as similar visas issued by the United States to Nepalis.  Please see the below table for details on the new fees and visa lengths.  Additional information can be found here: https://np.usembassy.gov/lower-fees-longer-visas-u-s-workers-students-press-nepal/.

Type of Visa Visa Length Visa Fee
Work 3 years USD 190
Press / Journalism 5 years USD 160

There are no government imposed-conditions on permission to invest, other than those already mentioned, such as restricted sectors for foreign investment.  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 currently being formulated. While the new regulations may clarify the 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 were are no laws relating 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

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 84th in the 2018 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 Foreign Investment and Technology Transfer Act (1992), which governs foreign investment in general, and related laws governing foreign investment clearly state that investors can own any property, the title of which rests with the business/company, and not the owner.

The GON does not maintain official statistics on untitled land.  The Ministry of Land Reform and Management (now Minister for Agriculture, Land Management and Cooperatives) has been working for decades to identify property titles and registration.  However, political instability, poor record-keeping, and resistance from stakeholders has made this an arduous 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 the land.  Although such occupation would not be legal, 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 Indigenous and Tribal Peoples Convention (1989), which guarantees the rights of indigenous peoples.  However, Post is not aware of this convention being used in any legal cases in Nepal.

Intellectual Property Rights

There is currently no exclusive legislation in Nepal for the protection of intellectual property rights (IPR), and protections remain weak with little enforcement in general.  The GON recently finalized its IPR Policy and this will be the foundation for new IPR legislation in the future. 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 adequate periods of protection. Nepal became a member of 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 so small that they are not deterrents. 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 become a top priority for the U.S. Embassy, and the United States Patent and Trademark Office (USPTO) has conducted nearly a dozen training courses for Nepali officials over the past two years on various aspects of IPR policy.  Nepal’s Cabinet approved a new IPR Policy in March 2017 that will be the foundation for new IPR legislation. Representatives from USPTO reviewed the bill in draft form 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 either of these bills become law.  The GON has requested assistance from the USPTO to help draft these bills. As Nepal works to update its IPR legislation, the U.S. Embassy will 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

There are few opportunities for foreign portfolio investment in Nepal.  Foreign investors are not allowed to invest in the Nepal Stock Exchange, and therefore nor permitted to trade in the shares of publicly-listed Nepali companies.  However, the new FITTA 2019 allows for the setting-up of a “venture capital fund” to enable foreign institutional investors to take equity stakes in Nepali companies. Occasionally the Nepal Rastra Bank (NRB, Nepal’s central bank) will issue 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 repatriate the foreign currency savings of Nepalis working abroad through a formal channel so that these earnings are not used purely for consumption. In 2018, the NRB issued NRs. bonds worth USD 5 million targeted at foreign workers.

The Nepal Stock Exchange (NEPSE) is the only stock exchange in Nepal, with more than 220 companies listed, although the majority of them are banks and hydropower companies.  Foreign investors are not allowed to trade stock; only Nepali citizens and Non-Resident Nepalis (NRNs) may do so. 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 current view is that the NEPSE is still far from becoming a mature stock exchange, and may not have sufficient liquidity to allow the entry and exit of sizeable positions at all times.

Post is not aware of any policies designed to facilitate the free flow of financial resources into the product and factor markets.  In fact, the GON has been reluctant to allow for the free flow of financial resources into the country, citing concerns about money laundering.

The GON and NRB refrain from imposing restrictions on payments and transfers for current international transactions.  Foreign investors can access credit locally, but the investor must be incorporated in Nepal under the Companies Act of 2006 and listed on the stock exchange.  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.

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. However, the banking sector has grappled with credit crunches (i.e. 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 is hoped this problem will be reduced in the coming years.

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 December 2018, there were 28 commercial banks, 33 development banks, and 24 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 may function as banks and financial institutions (BFIs).  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 historically many parts of the country are underbanked.  A 2015 study by the 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 unbanked. These unbanked local units arein remote locations with few suitable buildings and a lack of proper security or internet connection options.

Nepal’s banking sector is relatively healthy, although there are a number of issues.  The sector is fragmented and bank supervision by the NRB, while improving, remains weak, allegedly due to politically-influenced bank supervision and reviews, according to several private sector representatives.  The GON hopes to strengthen the banking system by reducing the number of smaller banks and it has encouraged consolidation of commercial banks—there are currently 28 commercial banks, down from 78 in 2012. Rural areas continue to be underbanked, as most banks situate their branches in the Kathmandu Valley and the large cities of the Terai (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 rather 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.  This long-pending legislation, first introduced in 2013, is designed to strengthen corporate governance by setting term limits for Chief Executive Officers and board members of banks and financial institutions.  The bill also aims to reduce potential conflicts of interest by prohibiting business owners from serving on the board of a bank from which their business has taken loans.

In 2018, Nepal’s Central Bank 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 saw as cartel behavior.

As 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, 1.49 percent of total assets were estimated to be non-performing. However, financial sector experts believe that the low NPL ratio is due to an unhealthy practice of ‘loans evergreening,’ and the actual 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 also determines exchange rates of foreign currencies.  As the government’s bank, NRB maintains all government income and expenditure accounts, issues Nepali bills and treasury notes, as well as loans to the government, and determines monetary policy.

Existing banking laws do not allow retail branch operation by any foreign banks, which compels foreign banks to set up a local bank to operate in Nepal.  For example, Standard Chartered has 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.

Other issues

Although some Nepali entrepreneurs have been promoting blockchain, the Government of Nepal has not announced any plans to implement blockchain technologies in its banking transactions.  The Nepal Rastra Bank 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 Policies

The Foreign Investment and Technology Transfer Act (FITTA) of 2019 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.  Repatriation facilities (such as opening bank accounts or obtaining permission for remittance of foreign exchange) are available based on the recommendation of the Department of Industry, which normally provides approval of the original investment.

In practice, despite these official policies, repatriation is difficult, time consuming, and not guaranteed.  The relevant GON department and the NRB, which regulates foreign exchange, must approve the repatriation of funds.  In most cases, approval must also be obtained from the Department of Industry. In the case of telecommunications, 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 2019 comes into operation.

In the past, several foreign companies reported that the Government of Nepal insists on signing contracts using Nepal rupees 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 term of borrowing, whichever is less.  Provisions for repatriation are governed by Nepal Rastra Bank procedures, as is conversion of foreign investors’ funds into other currencies.  Nepal’s currency has been pegged to the Indian rupee (INR) since 1993 at a rate of 1.6 NPR to 1 INR. As such, the NPR fluctuates relative to world currencies in line with the INR.

Remittance Policies

The recently passed FITTA 2019 has, in legislation, made it easier to remit investment earnings. The practice will depend on how soon the single window is established and how effectively it, as well as associated approvals and procedures, will function.

Until then, foreign investors will likely have to continue 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 Department of Industry and then to the NRB.  At the first stage of obtaining remittance approval, foreign investors must submit remittance requests to a commercial bank. However, final remittance approval is granted by the NRB foreign exchange department, a process that is often reported to be opaque and time-consuming.  After administrative approvals, a lengthy clearance process in the banking system also slows the transfer of foreign exchange. The experience of U.S. and other foreign investors so far indicates serious discrepancies between the government’s stated policies towards repatriation and their implementation.

Sovereign Wealth Funds

Nepal has no sovereign wealth funds.

7. State-Owned Enterprises

There are 37 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 either little government interest or the existing state-owned enterprises perform poorly.  Many government-controlled sectors are not open for foreign investment.

The government maintains a list of SOEs on the Ministry of Finance’s website (http://mof.gov.np/en/archive-documents/soe-information–yellow-book-29.html).  Information on the SOEs’ annual performance can also be found on this website.

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 any 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 the market.

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 Office of the Company Registrar (OCR).  Although some reforms have been initiated, many have not been 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.  However, procedural delays, resistance from trade unions, and a lack of will within the GON have created obstacles in the privatization process.  The Corporate Coordination and Privatization Division of the Ministry of Finance is responsible for management of the privatization program (http://www.mof.gov.np/en/).  Foreign investors can participate in privatization program of state-owned enterprises.

8. Responsible Business Conduct

General awareness of expectations of or standards for 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 largely remain unattended or very poorly promoted or 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 government 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 International Labor Organization (ILO) is working to promote RBC in the agricultural sector, focusing on the tea, ginger, cardamom, and dairy industries. This project aims to build the capacity of associations to promote RBCs.

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 or 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 minor penalties provide little deterrence. Post is not aware of any cases of private sector impact on human rights.

Various government agencies monitor business entities’ compliance with different standards and codes.  For instance the Office of the Company Registrar 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.

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 river beds and the country does not participate in the Extractive Industries Transparency Initiative.

9. Corruption

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 Commission for the Investigation of Abuse of Authority (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 2017 Corruption Perception Index released by Transparency International (TI), Nepal ranked 122nd among 167 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 to 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 no companies use such programs.  American consulting firm Frost and Sullivan (www.frost.com) maintains an office in Kathmandu and could vet 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:

Dirgha Raj Mainali
Joint Secretary
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

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 about 50 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.

Criminal violence, sometimes conducted under the guise of political activism, remains a problem, though a declining one.  Bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide.  However, in the last two to three 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. In February 2019, a small bomb was placed overnight outside the entrance of NCell, Nepal’s second largest mobile carrier.  One person died and another was seriously injured. The Indian-run Arun 3 hydro-power plant has been targeted by improvised explosives 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. Over the past two years, Biplav, a splinter Maoist group, has threatened or attempted to extort “donations” from 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 a shortage of skilled workers and an abundance of political party-affiliated unions.  Thousands of Nepalis depart each year to work in foreign countries, primarily Qatar, the United Arab Emirates, Saudi Arabia, and Malaysia.  Thousands more also seek employment in India, which shares an open border with Nepal. As a result, there is a shortage of skilled and unskilled labors.  The agricultural and construction sectors struggle to find enough workers, and many companies import labor from India.

According to the 2015-16 Nepal Household Survey, the country’s literacy rate is 65.9 percent, with the literacy rate for men at 74.2 percent and 58.2 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.  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 Immigration. The Act and Labor Regulations of 2018 limit the number of foreign employees a firm can employ and limit the term 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 firms 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 any employee based on religion, color, sex, caste and ethnicity, origin, language or belief or other any 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 with 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 conditions.  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 affect 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 Special Economic Zone (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, much of which is employed in informal sectors.  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 in the past 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 fixing workers’ salaries.  Trade unions, employers, and government representatives actively engage in this practice.  Nepal’s Labor Act, updated in 2017, includes two types of labor dispute resolution mechanisms, one for individual dispute 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 within 15 days. If 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 for appeal to the Labor Court.

However, the Labor Act is applicable only to companies, private firms, partnership firms, 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, 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.  There were no new labor-related laws 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, nor has the GON acceded to the 2000 UN TIP Protocol.  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/2018-country-reports-on-human-rights-practices/.  The Department of Labor’s 2016 Findings on the Worst Forms of Child Labor is available at: http://www.dol.gov/ilab/reports/child-labor/nepal.htm

Nepal has a modest level of trade with the United States, with USD 154 million in bilateral trade in 2018.  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 2.2 million worth of goods in 2017 under this program. To remain eligible for this program, Nepal must meet certain labor standards.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) 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.  OPIC has not played a large role in Nepal to date, in part due to relatively few American investors operating in the country.  However, OPIC’s products such as political risk insurance could help mitigate the risks American firms face while doing business in Nepal, while OPIC loans and guaranties could help U.S. companies be more cost competitive.  Given the large number of hydropower projects in the pipeline in Nepal, OPIC involvement in this sector could make it more attractive for American investors. While an OPIC agreement between Nepal and the United States has been in place since 1963, OPIC has yet to fund a project in Nepal.

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 construction of a new 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

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2016 $21,200 2017 $24,900 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 $106 2017 $196.3 https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=NP
Host country’s FDI in the United States ($M USD, stock positions) 2016 $0 2017 $0 Not Permitted under Nepali law
Total inbound stock of FDI as % host GDP 2016 6.3% 2017 6.9%  UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx

 

Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $1,638 100% Total Outward Amount 100%
India $319 19% N/A
China, P.R.; Mainland $166 10% N/A
Ireland $69 4% N/A
Singapore $67 4% N/A
Australia $59 4% 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 learnt that this Law may be abrogated soon, but until now 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

Molly Rivera-Olds
Economic and Commercial Officer
U.S. Embassy Kathmandu
+977 1 423 4192

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

2019 Investment Climate Statements: Nepal
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