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.
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.
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.