Recent Changes and Expected Further Improvements in FDI Regime

Amrit Kharel

Changes in the laws relating to lands
The Lands Act, 1964 restricts to hold lands exceeding the upper ceiling of 10 bighas land in the
Terai, 25 ropanis in the Kathmandu Valley, and 70 ropanis in hilly areas outside the valley
pursuant to Section 7(1). Likewise, Section 12(1) provides for industry, company, or institution
operating with land exceeding the ceiling without government approval before the
commencement of the Act to submit an application to the government within three months,
justifying the excess. However, it is added through the amendment after 12(A) that if an
application could not be submitted as per Subsection 12(1), such application can be submitted
within one year of the current amendment, justifying the reason. On the provisions for approval
fees, where deemed reasonable, approval can be given by charging 150,000 per bigha in the
Terai, 50,000 per ropani in Kathmandu, and 10,000 in other hilly areas. Now addition
amendment provides that records of land exceeding the ceiling must be maintained. Previously
land exceeding the ceiling could not be sold by company, industry or institution but now the
amendment provides that with the ministry’s approval, the land exceeding the upper ceiling can
be sold once without reducing employment and production in the institution. Section 12(F) has
been added which provides that in case a bank or financial institution seizes land as collateral
and cannot auction it, the land must be sold or auctioned within three years of the seizure.
In the Land Acquisition Act, 1977, new provisions have been added that the compensation will
not exceed three times the minimum valuation determined for registration purposes of the land
which is expropriated for the purpose of project development or to run industries.

Amendments in the Conservation Regime
The current amendment in the National Parks and Wildlife Conservation Act, 1973 designates
certain areas within national parks, reserves, and conservation areas as highly sensitive and
beyond those designated areas, the operations of national priority projects approved by the
Investment Board and of national pride can be conducted in other areas. Section 5 of the Act
previously prohibited building any kind of structure, shelter, or dwelling, occupying or clearing
land, inhabiting, farming, cultivating or harvesting crops, cutting, felling, removing, blocking or
damaging any tree, plant, shrub or other forest product, or doing any act that would damage or
dry out forest products, setting fire, or causing any harm to forest products or wildlife. It also
prohibited mining or excavating minerals, removing soil or other substances, or causing any
damage to forest products, wildlife, birds, or land within national parks or reserves. Earlier, the
Act also prohibited blocking, diverting, or using harmful or explosive substances in rivers,
streams, or water sources flowing within national parks or reserves. The amendment is believed
to facilitate the foreign investment by limiting the restrictions and hassles. The major
representative organizations of the private sector including Federation of Nepalese Chambers of
Commerce and Industries (FNCCI) has welcomed the recent amendments and expressed its
confidence that the reforms in legal framework would promote the share of FDI in total GDP
which linger currently at meager 0.2 percent.

Adjustments in PPPIA
Similarly, bureaucratic adjustments are made in the Public-Private Partnership and Investment
Act, 2019 especially in Section 9. The Secretary of Finance is added as a member of the
Monitoring and Facilitation Committee. The Vice-Chairperson of the Board will act as the
coordinator. Previously, the Chairperson of the Board could appoint one member to the
committee. This responsibility has been removed, and now the head of the Public-Private
Partnership Unit of the Board can appoint one member. Previously, the organizational structure
and staffing numbers of the office had to be approved by the government. Now, they will be
established based on the Board’s recommendation. The clause stating that the Chief Executive
Officer is the main officer working full-time has been removed. Previously, the government
provided the necessary staff to the Board. Now, permanent employees will be appointed from
those who have passed the Public Service Commission. These changes will ensure availability of
the competent human resources to look after regulation of Public-Private partnership.

Alterations in FITTA
Amendments in FITTA, 2019 has broadened the scope of technology transfer, approval of FDI
and definition of Non-Resident Nepali (NRN). A person who has obtained Non-Resident Nepali
citizenship or an identification card is now defined as NRN. Technology transfer previously
included patent, design, trademark, knowledge, and information related to technology. Now the
amendments add management and technical services and reverse engineering within technology
transfer. Amendment in the Section 7 of the FITTA allows even Nepali industries to transfer
their technologies to the foreign companies abroad. Previously, foreign investors could only
transfer technology and invest in Nepal. Now, industries established and operating in Nepal can
also transfer technology to industries, firms, and companies abroad. However, foreign currency
obtained from technology transfer must be brought to Nepal with approval from the central bank.
Regarding the approvals, previously, the Department of Investment could approve investments
up to 6 billion, and the Investment Board approved amounts above that. Now, the Department of
Investment can approve any amount without specifying a limit. Previously, industries with
foreign investment for primary production could not contract with other industries with similar
objectives for production. This has been amended to allow such contracts.

Modifications in Forest Act
Previously, forest products included rocks, soil, riverine, and mineral substances pursuant to the
Forest Act. The amendment removed riverine and mineral substances and added stones. In the
Section 43(2) of the Act, previously, to excavate for mineral substances in forest areas, an
environmental test and approval from the provincial ministry were required. The amendment
replaced “environmental test” with “environmental study” and removed the requirement for
government approval, allowing excavation based on the environmental study.

Changes in IEA
The ordinance has added the definition of startup enterprises to the definitions of small, medium,
and large industries, which is supposed as a breakthrough for the development of
entrepreneurship in the country. In the section 4 of the IEA, large industries are added, including
foreign industries. Previously, applicants had to be informed within 90 days if documents were
missing for industry registration whereas the amendment reduced this time to 21 days.
Previously, there was no provision for startup industry registration in the Act. The amendment
added Section 4(a), which clarifies startup industry registration, defining startups as new
enterprises with annual transactions not exceeding 140 million. In Section 9(a), it was provided
previously, if a registered industry could not start operations, production, or business, it had to
apply for an extension within 30 days. The amendment removed the 30-day limit. Similarly,
Subsections 3, 5, 6, and 7 were removed. The subsection 3 formerly included that if unable to
apply within 30 days, a delayed fee and application within six months were required. likewise,
Subsection 5 used to require approval from the Board for extending the operation period more
than three times. Subsection 6 used to specify that after the third extension, the industry had to
start within the specified time. Likewise, Subsection 7 used to state that if the industry did not
start as per Subsection 6, the registration would be canceled.
Through the new amendment in the Section 29, industries based on forest products in specific
areas are given special privileges, such as not having to pay fees and royalties for electricity
produced for their use (excess production can be sold as per law). Additional facilities and
benefits were added through amendments. The provision prohibiting taking loans by mortgaging
land exceeding the ceiling was amended to allow taking loans in the Section 32(6). The Section
60 is removed from the IEA, which included the old provision for applying for renewal and re-
registration within three months. In the Section 68, the directive, procedures, and standards for
startup enterprises are added.

Newer provisions in SEZ Act, 2016
Previously, industries could not be relocated and operated in the Special Economic Zone. The
amendment allows such relocation pursuant to Section 7 of the Act. Previously, machines, tools,
and materials used in operation could not be transferred to other areas. The amendment allows
such transfer. Similarly, pursuant to the amended Section 13, at least 15% of goods and services
produced in the Special Economic Zone had to be exported for the first four years of production
and at least 30% thereafter. Previously at least 60% of the goods and services produced in the
SEZ had to be exported.

The amendment provides for the relocated industries also to receive the income tax exemption
which was not provided earlier to such relocated industries. Previously, though industries
established in the SEZ received a 100% income tax exemption for the first five years and a 50%
exemption thereafter, industries relocated to the zone did not receive this benefit.

Rooms for further improvement
The recent amendment through the ordinance in the overall legal framework of the FDI is though
a facilitative approach shown by the State, there are still doubts on whether the ordinance would
be approved by the Federal Parliament due to the ongoing political rifts as shown in the Federal
Parliament between the ruling coalition and the oppositions.
The constitutional provisions with focuses on optimum mobilization of the available means and
resources with private sector are positive factors with regards to Nepalese legal framework of
FDI. However, in the federal structure, concurrent powers are vested in the Federation, State and
Local levels regarding the matters related to utility services such as electricity, water supply,
irrigation as per the Schedule-9 of the constitution. However, the federal laws brought in place to
make necessary arrangements on the part of revenue sharing, grants, loans, public expenditure
and fiscal discipline of the three tiers of the governments are lacking of the adequate provisions
on coordination in between the three tiers of government to implement the foreign investment.
The National Natural Resources and Fiscal Commission Act, 2017 and Intergovernmental Fiscal
Arrangement Act, 2017 do not yet provide for any coordination mechanism among multiple tiers
of governments to implement FDI in the areas falling under their concurrent powers.
In FITTA, 2019, the exclusion of the foreign loan from foreign investment category and the lack
of clear definition of what amounts to foreign loans have led the foreign investors to unclear
situation regarding loans and whether they can enter into loan agreements with their parent
company. The approval for FDI seems to be done on series basis i.e. approval from DOI,
approval from FERA for financial and other purpose, approval from SEBON, permission from
IIPB if necessary and recommendation from provincial level etc. It reflects the reverse policy of
Single Stop Service Centre as set up by FITTA. Approval regime in the new FITTA is still
cumbersome for the foreign investors due to the introduction of newer authorities including
SEBON. The continuation of dual approving procedures at NRB for the inward remittance of the
investing funds and additional requirement of certificate of registration with the Province and
recommendation of the Provincial Ministry looking industry affairs to set the industries at
regional level has further complicated the approval process. For the purpose of Technology
Transfer as well, the approval procedures must be followed as it has been placed under foreign
investment in new law. Expansion of the Negative List in new FITTA makes the foreign
investment regime more restrictive. Newer complexities have been added in the repatriation
process in new FITTA as the foreign investor has to pass through the prior ”compliance test”
procedure. The provisions to examine and ensure by approving authority that investor has
fulfilled their terms and liabilities before repatriation seems much rigid which could ultimately
discourage foreign investment.

Provisions of lengthy time period for repatriation approval, which
is more than twice compared to estimated time to be taken for approval of investment does not
seem promising for potential investors. Restrictive approach for business visa facilities only to a
maximum of two persons does not seem to facilitate the investment process. The additional
obligation burdened upon foreign investors to notify about the offshore trading of the share,
assets or ownership through their parent company to the authorities in Nepal is not at par with
global best practices.

The provision in PPPIA, 2019 to chair IBN meeting by the Prime Minster to approve a
hydropower project or any other industry doesn’t sound practical in view of international best
practices. Patronage by the executive head could be encouraging for investment but involvement
of the country’s Premier in each approval, licensing and micro-regulation of the project doesn’t
seem practically reasonable. The magnitude of investment and the sensitivity of the issue must
commensurate with such a meeting to be chaired by the Premier. PPPIA provides IBN
extraordinary power to terminate the license without effective compensation. If the license is
revoked, the licensee is not allowed to make any kind of claim. Absence of compensation for
termination of license by IBN yields additional risks to the investors in financing infrastructure
projects in Nepal.
Arbitration Act, 1999 facilitates foreign investors to settle the disputes by the arbitrators of their
own choice but simultaneous court proceedings combined with arbitration procedures often
prolong the investor dispute settlement for many years.
Availability of land has been one of the most problematic areas for foreign companies in Nepal.
JVs particularly in hydropower, infrastructure and manufacturing have been facing multiple
issues in the acquisition of land. eg: construction of the cement plant at Nawalparasi belonging to
Hongshi-shivam cement, a Nepal-China JV. There is a gap in between land acquisition and the
provision enshrined in the Environment Protection Act for conducting IEE/EIA. Because there
shall be no relevance of IEE/EIA, without confirming land availability. There would be no
meaning of IEE/EIA if such IEE/EIA conducted land could not be acquired.
The laws relating to labour also seems challenging for FDI in relation with trade union. It is good
to guarantee the collective bargaining, security, gratuity and so on in the Act. Labour registration
procedure is quite burdensome, As per the existing arrangement, JVs are required to go to the
department of labour where it takes at least 6 months to register their employees from other
countries.
The overall legal framework on FDI do not seem to be able to rightly answer why a foreign
investor should invest in Nepal leaving other countries aside, what competitive advantages are
there to invest in Nepal and what it worth for an investor in choosing Nepal has an investment
destination. The overall legal regime has been brought up with the regulatory mindset rather than
that of the investors. Investor’s perspective and mindset must be taken into consideration for the
overall facilitation and ease the investment process.
The law on investment regime is quite scattered and it seems urgent to have a consolidated
approach to bring all the laws relating to investment and FDI at one place. It is necessary to
enhance the overall quality of legislations in the area of foreign investment. The
holistic/integrated approach rather than piecemeal approach has to be followed during the very
beginning of policy making to phase of legislative drafting to implementation. Law is single
narrative while development is multidimensional. Thus legal instruments relating to investment
has to consider wider aspects of development including commercial and non-commercial
interests, balancing the interests of individuals, society and public, national interests and needs.

Consolidated Investment Code and Separate Investment Ministry is indispensable
A separate law seems necessary to ensure detail provisions regarding the coordination between
different tiers of governments in development of infrastructure projects including foreign direct
investment. A consolidated investment code should be made to bring all laws relating with
private investment, foreign investment and infrastructure financing at one place. It is necessary
to combine and codify all of the scattered laws and provisions on investment so as to make a
separate investment code, which is easily accessible to the interested investor desirous to make
capital investment in Nepal. The ministry of law and justice needs to work in this regard. A
separate ministry at Federal level to look after investment affairs seems necessary. The decision
of such a ministry should prevail in the investment matters whether it is relating to foreign direct
investment or any other forms of investment. Such a ministry should give utmost priority to the
investors’ concern and regulate the overall investment including the capital market. Wide reform
in FITTA provisions is recommended mainly in the following areas:
The representation of SEBON must be ensured at Single Stop Service Centre. The
representatives of the seven provinces should also be comprised within the SSSC for the purpose
of providing recommendation to industries. Multiple layers of approval regimes should be
streamlined according to the investor friendly approach. Foreign Loans should be clearly defined
and loans facilities to be obtained from parent company should be accommodated. The obscure
provision for testing the compliance of foreign investors before repatriation should be changed.
Repatriation process should also be approved within seven days in the like manner as in the
initial approval process during investment. The burden on foreign investors to notify about the
offshore trading of parent company’s shares and assets must be removed. Visa facilities should
be made more flexible and business visas should be provided in enough numbers as per the
necessity of the industry or projects based on the JV agreement or project proposals.
It is necessary to create a separate contracting authority under IBN to call proposals, evaluate and
grant approval of project, grant approval of investment and to enter into agreements as required.
The provisions on appropriate compensation to which the concessionaire shall be entitled should
be clearly stated in PPPIA, 2019. Such provisions should ensure compensation to investor in case
of termination of concession by the contracting authority or in case of substantial impacts on the
performance of project due to occurrence of change in law or other changes in country’s
economic conditions. The provisions to provide the concessionaire and bidders access to
enforceable court for reviewing the decisions of contracting and regulatory authority must be
specified in the Act.

The provision for certainty of land availability has to ensure for conducting IEE/EIA for seeking
approval from the concerned authority. Regarding the procurement procedure in infrastructure
facilities, the average bidding system should be introduced with assurance of quality in post
construction phase. The registration of politically inclined trade union should be discouraged by law.

In addition to this, the Trade Union Act, 1992 needs to be updated incompliance with the
Labour Act, 2017. Adequate, prompt and effective remedial mechanisms have to be made for
encouraging labours to work whether in SEZ or everywhere. It is good to make motivating laws
for providing incentives to those labours working in SEZ so that FDI may not face scarce of
human resource. GoN should bring policy and plan accordingly to develop human resources in
the area of international commercial and investment arbitration.

Author is Advocate, Supreme Court of Nepal; Managing Partner, Juris Nepal Law Associates.
Author is an expert on investment law and aviation law. He can be reached at advocate@jurisnepal.com

This article is published originally in the print publication of Media Eye, the publisher of www.arthiknews.com

published on the auspicious occasion of its 14th Anniversary.