Nepal’s Ministry of Industry, Commerce and Supplies (MoICS) has issued a notice in the Nepal Gazette on 9 August 2021, regarding the terms and conditions to be complied while establishing an Investment Company as mentioned in the Serial Number 65 of Schedule 8 of the Industrial Enterprises Act 2076. Investment Company was included as a service industry in the Schedule 8 through notice in Nepal Gazette dated 3 August 2020 (2077/04/19) by MoICS to facilitate the investment company as a service industry.

Nepal Government vide this new notice has allowed foreign investors to open and invest in an Investment Company to be registered as industry in Nepal. The minimum investment required for such Investment company is NPR 1 Billion. While registering as an industry, the Investment Company is required to identify the sectors where the investment company will make its investment. Investment shall be made only in those industries as classified by the Industrial Enterprises Act 2076 (IEA) and allowed for foreign investment by Foreign Investment and Technology Transfer Act 2075 (FITTA). As per the terms of the notice such Investment Company can invest only in the form of Share Capital in Nepal and cannot invest in the form of loans, loan facilities, bonds and debentures. The Investment Company, after registering as industry, is further required to take approval of foreign investment for each sector from the Industry Registering Authority for doing investment in other companies/industries. Also the investment company can invest and work only within Nepal. The Investment Company is required to disclose whether it will invest in Nepal in Nepalese Currency or Foreign Currency. It means the Investment Company can keep its money in both Nepalese and Foreign Currency and can make investment in either currency. This provision will help the foreign investors to manage the exchange risk. Such Investment Company must comply the provisions of FITTA while bringing the foreign investment amount into Nepal and shall also comply the directives and procedures issued by Nepal Rastra Bank (NRB) while remitting the foreign currency into or out of Nepal.

There are some restrictions imposed by the terms of the notice regarding activities to be carried out by Investment Company with foreign investment registered as industry. Such Investment company cannot carry out any activities covered by the laws relating to Banking and Financial Institutions. Further it cannot be involved in such activities being carried out by Cooperatives established and operating as per the Cooperatives Act of Nepal. Also, Investment from ‘Shell Company’ and carrying out financial transactions with ‘Shell Bank’ are strictly prohibited. .After establishment, such Investment Company cannot purchase Shares or Debentures from the Secondary Market and cannot invest in sectors such as Share Broker, Market Maker, Real Estate etc. Moreover, as per the terms of the notice the Investment Company cannot take loan from Nepalese Banks and Financial Institutions and also cannot take loan from Nepalese Banks on the basis of Guarantee issued by a Foreign Bank, that means such investment company should bring the investment fund from outside of Nepal, and not supposed to use the resources within Nepal.

The notice has also made some provisions to avoid the risk of money laundering and tax evasion. It has prohibited any investment made through Shell Company and any transactions through Shell Bank. The Investment Companies must disclose their Ultimate Beneficiaries and provide details with supporting documents at the time of Industry registration.

Reanda Biz Serve Comments

The Government has opened the door for foreign investors to establish Investment Company in Nepal and make investments in other projects through this investment company. This is a good step taken to facilitate big foreign investors. However there are certain provisions which need to be clarified to make this more effective.

As per the notice, the Investment Company is further required to take approval of each investment as ‘foreign investment’ for each sector where it is going to invest from the Industry Registering Authority. This provision will increase the administrative hassle to the foreign investors as for every investment it has to take approval from  the registering authority. Once the screening is done and the foreign investor is allowed to open an Investment Company, then again asking to take approval for each sector seems just duplication of all administrative work and additional burden to the Investor. On the other hand, as the Investment company is required to take approval of foreign investment for each sector / industry, it is not clear that whether the limit of NPR 50 million for foreign investment will be applicable or not for each investment to be made by the Investment Company. Where an investor has already taken approval for ‘Investment Company’ with minimum investment of NPR 1 Billion then again creating barricade for the further investment will not be an investment friendly prospect.

As the notice has come with reference to the “Investment Company” as mentioned in the Serial Number 65 of Schedule 8 of the Industrial Enterprises Act 2076, some provisions of this notice seems to be equally applicable for Investment Company established/to be established by Nepalese Investors also. For such Investment Company to be registered as industry under the Industrial Enterprises Act, the minimum investment requirement is also NPR 1 Billion.This requirement will be a big setback for Nepalese Investors who want to get registered as Industry under the Industrial Enterprises Act. While registering as an industry, it is compulsory to disclose sectors where the investment will be made. Such Investment Company can invest only in the form of Share Capital in Nepal and cannot invest in the form of loans, loan facilities, bonds and debenture, also they can’t get loan from the local bank, which will be harder for the local investors to manage their business.

Further, some of the restrictions imposed by the notice regarding activities to be carried out by Investment Company are also equally applicable to the Investment Company established by Nepalese Investors like, they cannot carry out any activities covered by the laws relating to Banking and Financial Institutions and they cannot be involved in such activities being carried out by Cooperatives, they cannot purchase Shares or Debentures from the Secondary Market and cannot invest in sectors such as Share Broker, Market Maker, and Real Estate, and  cannot take loan from Nepalese Banks and Financial Institutions . It means, there may be a question mark on existing investment companies which are already working as an investment company and doing some or all of those activities.

To view more articles like this do visit our website www.bizserve.com.np and subscribe to the newsletter to get frequent updates.

‍