The Foreign Investment Bill 2019: A Review

On 26 February 2019, Government of Nepal (GoN) tabled the Foreign Investment and Technology Transfer Bill 2019 (“Bill”), which will replace the Foreign Investment and Technology Transfer Act (FITTA) 1992. The Bill intends to reform the existing legal framework of foreign investment in Nepal to facilitate investments. This article provides an overview of the proposals, key changes that have been proposed and improvements that should be considered by the parliament.

Approving authority: The Department of Industry (“DOI”) is proposed to remain as the authority to approve, regulate and facilitate foreign investment. Further, overlapping authority is provided to Nepal Rastra Bank (“NRB”), Securities Board of Nepal (“SEBON”) and Ministry of Industry (“Ministry”) for matters relating to loan, foreign listing of securities, investment funds, repatriation and appeals.

Approval limits: DOI will approve investments under NPR 5 billion, the threshold increased from the prevailing amount i.e. NPR 2 billion, and the Industry and Investment Promotion Board (“IIPB”) will approve investments over NPR 5 billion. Private Public Partnership and Investment Bill 2019, which is also tabled at the parliament provides that the Investment Board of Nepal (“IBN”) will approve private investments above NPR 6 billion. Accordingly, it seems that there is an overlap between the two boards with IIPB’s nominal significance and narrow margin for approvals. IIPB could have been entirely removed and replaced by the IBN.

Automatic approval: The bill mentions that foreign investment approvals may be granted through automatic route. However, the procedures of how automatic route will work are not specified and this is subject to future decision of the government and will not be effective until provisions are made in the regulations.

Second Approval from the NRB: Currently, two investment approvals are required for investment in Nepal- first, from either the DOI, IIPB or IBN, and second from the NRB. The bill proposes that second approval will not be required, however, it is unclear. Section 16(1) of the Bill provides that only notification to the NRB will be required to bring in foreign investment whereas sub-section (2) creates ambiguity by providing that “investors may bring investment after fulfilling procedures set out by the NRB”. This ambiguity needs to be clarified.

Capital investment funds: It has been proposed that investment will be allowed in “capital investment funds” after approval from the SEBON and DOI. Such funds will only be allowed to be invested in “equity” and not debt instruments. Further approvals will be required each time for the funds to invest, which is paradoxical. Investors will also be allowed to purchase shares of listed companies in industrial companies, but will not be allowed to own share in banks and financial institutions or trading companies. This provision will also not come into force immediately and is subjected to further decision of the GoN. Secondary investment is not likely to interest investors as non-financial institutions constitute a very low percentage of all listed companies. The Bill also keeps open the possibility to impose further restrictions on investment funds through delegated legislation, increasing uncertainty for investors.

Issuance of securities in foreign exchanges: Nepali companies will be allowed to issue securities (bonds, debentures and others) in foreign capital markets after gaining approval from the NRB and SEBON. It is unclear if issuance of shares will be allowed, as the provision does not specifically refer to it. This has the potential to enable Nepali companies to tap foreign capital markets.

Lease investment: Currently, leasing of plants, equipment, machineries and other assets from foreign companies is not considered as investments. There are uncertainties regarding custom clearance, repatriation of fees, and return of equipment leased (other than for aircraft leasing transactions). The Bill will clear these ambiguities on lease transactions.

Loans: Under the current FITTA, Nepali companies are allowed to borrow all types of loan and loan facilities from foreign persons and financial institutions (subject to interest rate caps and other requirements). However, the Bill only allows companies with foreign equity investment to take loan and does not allow locally owned companies from doing so. It is unclear if this is a drafting mistake or a government policy. Further, while approvals for foreign loans are currently provided by the DOI and NRB, the Bill proposes that loans now will be approved by the NRB following recommendation of the Ministry. It would have been better if a single authority approved all types of investments. Further, multiple authorities will cause problems in transactions involving both equity and loan investments.

Repatriation: The Bill allows investors to repatriate dividends, profits, earnings, proceeds of sale of shares and also, proceeds of liquidation and amounts recovered from legal proceedings, which were not clear previously. However, unlike current law which grants repatriation as a right to foreign investors, investors now have to prove that they have “complied with laws, agreements and obligations”. This is bound to create more uncertainty and discourage foreign investment. Further, the Bill retains dual approval system from approving authority and the NRB to obtain repatriation rights. In fact, some provisions go backwards imposing approvals on matters such as opening of foreign currency accounts, repatriation of royalties and service fees, which are allowed currently under automatic route by applying to banks directly.

Holding company ownership change notification: All transfers of ownership of foreign companies (of their holding companies) that have investments in Nepal need to be notified and tax needs to be paid in Nepal. This type of provision was expected after the Ncell indirect transfer tax scandal. However, this will not be practical for large companies with multi-tier corporate structures and listed companies as their shareholding may change regularly and such change may not be related to Nepal. Provision needs to be made to exempt holding companies that also invest and do business in countries other than Nepal.

Work permits and business visas: Currently, depending on the amount of investment, institutional investors are provided with 5 business visas for their personnel and additional for their family. However, the Bill backtracks and restricts business visas to maximum of 2 persons and their family only. Further, procedure to recommend for work permit is not harmonized in accordance with the Labor Act 2017. The Labor Act 2017 provides for 3 work permits for management personnel on fast track basis without having to announce vacancy or to prove that similar employees were not available locally, whereas, the Bill makes it conditional on evidencing that such persons are not available locally. Harmonizing these two regulations is essential.

Branch offices: The Bill provides provisions different from Section 154 of the Company Act 2006 with regards to branch offices of foreign companies and is bound to create confusion, which is not necessary.

Negative list: Certain items in the negative list are not in accordance with Nepal’s WTO commitment. They are set out below:

Overall, while efforts for reform seem to have been made in matters such as allowing Nepali companies to issue securities abroad and leasing, a lot of it seem to be half-hearted. Important issues such as whether second NRB approval for investment will be required is unclear, and automatic route for investment and provisions relating to investment funds are subject to further enactments. It would also be desirable if single regulatory authority provides investment approvals for all types of foreign investments.

Proposals such as notification of change in ownership of holding companies of foreign investors, restriction that foreign loan can only be availed by companies with foreign equity investment, and qualified repatriation rights are not likely to be welcomed by investors. Other proposals for branch office and working visas are also not coherent with provisions of other existing regulations.

These flaws in the Bill need to be addressed to make it an investment friendly regulation. It might be a big mistake to rush this bill before the Investment Summit at the end of March 2019. Proper stakeholder consultation needs to be undertaken before this is enacted.

Please note that this guide is published for information only and should not be considered as legal advice. You are requested to seek legal advice for specific factual situations.  This article was first published in the official website of Neupane Law Associates – https://www.neupanelegal.com/news-detail/foreign-investment-bill-2019-nepal.html

Author: Anjan Neupane