Review of Foreign Investment and Technology Trasnfer Act, 2075 (2019)

A Brief Overview of the Foreign Investment and Technology Transfer Act, 2075 (2019) The prime minister of Nepal, K.P. Sharma Oli while addressing in the inaugural session of Nepal Investment Summit-2019 called Nepal almost a virgin land for investment.

However, Nepal so far has not been able to create a conducive environment for foreign investors in comparison to other Asian countries such as Bangladesh, Myanmar, Sri Lanka, etc. Lack of investment friendly laws, cumbersome approval process and tedious bureaucratic hassles are considered the primary reasons for Nepal’s failure to lure foreign investors. The government of Nepal introduced three new laws; (i) Foreign Investment and Technology Transfer Act “(FITTA”), 2075 (2019), (ii) Public Private Partnership and Investment Act, 2075 (2019), and (iii) Special Economic Zone Act (First Amendment), 2075 (2019) just in time for Nepal Investment Summit to reiterate its commitment towards improving legal framework governing foreign investment in Nepal.

FITTA, 2075 (“Act”) exemplifies the proverb haste makes waste as the bill was hastily prepared on the backdrop of the Nepal Investment Summit 2019 and was accorded the assent by the President in 2075/12/13 (2019/03/27), two days before the Nepal Investment Summit-2019. As a result, we now have a law that had so much potential but is merely a reflection of what was already in practice with few ambitious changes and some regressive steps.

MAJOR FEATURES of FITTA 2075 1. Definition of Foreign Investment The Act defines “Foreign Investment” as the investment made by foreign investor in industry or company as follows; • Share investment in foreign currency, • Reinvestment of dividend amount obtained from foreign currency or share in industry, • Lease investment/ Lease finance, • Investment made in the venture capital fund, • Investment made in the listed securities via secondary market, • Investment made by buying share or assets of a company incorporated in Nepal, • Investment received from banking channels for the securities issued by Industry or Company incorporated in Nepal in the foreign capital market, • Investment made through technology transfer • Investment made from establishment and expansion of industry in Nepal

FITTA 2049 had included investment made in the form of loan or loan facilities under the definition of Foreign Investment. FITTA 2075 has excluded it from the definition and has a separate provision under which only industries with Foreign Investment can receive project loan or project financing that too only from foreign financial institutions. Earlier, the Act did not specify the source of such loan and accordingly the loan could be obtained from other sources besides financial institutions including shareholders. This was further clarified by the notice issued by Nepal Rastra Bank (NRB) pursuant to Foreign Exchange (Regulation) Act, 2019 according to which loan could be obtained from foreign bank and financial institutions, foreign finance companies, foreign shareholders. By limiting to only foreign financial institutions, FITTA, 2075 has narrowed the scope of loan investment and it will most certainly be not favorable for the potential investors. It is a regressive step and not on par with international practice 2. Definition of Technology Transfer The Act defines technology transfer as the technology transfer made through agreement between Industry and Foreign Investor in regards to the following; • Patent, design, trademark, goodwill, technological specialization, formula, procedure, • User’s license, know-how sharing, franchise, • Acquiring any foreign technical consultant, management and marketing services or other technical skills or knowledge.

3. Major differences with the existing laws 3.1 Approving Authority Previous Provision FITTA 2075 The previous arrangements to approve FDI were The Current provisions are as as follows; follows; (Sec-17) • Department of Industry (DOI) could • DOI shall approve FDI of approve FDI of upto 2 Billion Rupees. upto 6 Billion Rupees.

• Industry and Investment Promotion • IBN shall approve FDI of Promotion Board (IIPB) could approve FDI more than 6 Billion of between 2 to 10 Billion Rupees.

Rupees.

• Investment Board Nepal (IBN)would have a final say on FDI of more than 10 Billion Rupees.

By eliminating IIPB, the act has reduced one authority and widened the jurisdiction of the IBN. 3.2 Time to approve FDI Application.

Previously, it would take about a month to decide on any Foreign Direct Investment (FDI) approval application. The new Act has ambitiously reduced this time to within 7 days. Furthermore, the following steps are involved in foreign investment; Steps Approximate Time taken FDI approval 1 month (in practice) Company registration 1 week Tax Registration 1-2 days Industry Registration 1 and half week NRB Approval 1 month Total 3 months Since, in practice it takes about three months to make foreign investment in Nepal, reducing FDI approval period to a week is not bound to bring drastic change unless the time period needed to complete other steps are reduced too. Furthermore, Although, this is a very welcome change, looking at the past bureaucratic hassles, one cannot help but be sceptic as to its implementation.

3.3 Tiers of Approval Previous Provision As per FITTA 2049, two tiers of investment approvals were required.

First, either from DOI, IIPB or IBN and second approval was needed from Nepal Rastra Bank (NRB).

FITTA 2075 There is ambiguity as to the second approval from NRB. As per section 16(1), it is enough to inform NRB that the foreign investment amount is from a legal source through self-declaration.

However, section16(2) contradicts section 16(1) saying the foreign investment amount can only be brought through banking channels by fulfilling the procedures set out by NRB.

This ambiguity will only hinder the smooth implementation of this Act. Furthermore, approval from NRB is also subjected to Foreign Exchange (Regulation) Act, 2019 (1962) which has given wide powers to NRB. So, NRB can frame any set of procedures needed as per section 16 (2) of FITTA, 2075. So, unless FITTA, 2075 is harmonized with Foreign Exchange (Regulation) Act, 2019 (1962), there won’t be any material change in terms of practical application.

3.4 Repatriation of Profit Previous Provision Although the provision to obtain repatriation was not directly addressed through FITTA 2049, nonetheless, the Procedural Manual for Foreign

FITTA, 2075 FITTA 2075 has directly addressed the procedure to obtain the repatriation facility for which dual approval is needed.

As per section 20, the investor needs to first

Investment in Nepal 2016, investment guidelines prepared by Investment Board Nepal as well as under the Unified directives 2074, to obtain the repatriation facility, the foreign investor or the technology supplier or the foreign expatriate or the concerned company must obtain recommendation from the DOI followed by recommendation from the central bank.

apply to the DOI or Investment Board for approval. Only if it is seen that the foreign investor has fulfilled all the terms and conditions and obligations as per the prevalent laws and foreign investment agreement, then the approval to repatriate the amount can be granted after which the investor can apply to NRB for second approval.

This new provision has not brought any drastic change as such. It has only mentioned what was already in practice explicitly. Nothing can take away from the fact that this is a cumbersome procedure and for now, it seems it will remain complicated.

Furthermore, the provision that the foreign investor has fulfilled all the terms and conditions and obligations as per the prevalent laws and foreign investment agreement first to get approval from DOI or Investment Board will create confusion and only discourage potential investors.

3.5 Investment in the form of Loan / Loan Services Previous Provisions FITTA 2075 The foreign investor could invest in any Loan investment is removed from the industry in the form of loan or loan definition of foreign investment. services. All types of loan and loan Furthermore, only those companies facilities from foreign persons and having foreign investment in shares can financial institutions were allowed get loan from foreign bank and financial which were subject to interest rate institutions. The Act is silent about locally caps and other requirements. The owned companies to receive loan from approvals for foreign loans were foreign bank and financial institutions. In provided by DOI and NRB. addition, the approval from NRB with recommendation from Ministry of Industry, Commerce and Supplies is needed to receive project loan or project financing.

Addition of recommendation from the Ministry of Industry, Commerce and Supplies only adds to the bureaucratic hassles. Having only a single authority would have made the process swift and investment friendly. Additionally, this new provision also restricts foreign investor from receiving shareholder’s loan.

3.6 Non-Tourist Visa Provisions

Previous Provision FITTA 2075 On the basis of the investment amount, The business visa is restricted to a institutional investors were provided maximum of 2 persons and their families. with 5 business visas for their personnel and additional for their families.

3.7 Work permit Previous Provision As per Labour Act 2074, 3 work permits could be provided for management personnel without having to announce vacancy or to prove the unavailability of local people having similar skills.

FITTA 2075 Such work permits can only be after proving such personnel in higher management could not be sourced locally. So, it directly contradicts with the existing provisions of labour laws.

This discrepancy makes it clear that there was lack of coordination between the governmental bodies which is also evident from the NRB approval procedure. It is easy to see the FITTA Bill was approved in haste for Nepal Investment Summit 2019.

The discrepancy only creates more confusion and should be amended to harmonize with the labour laws of the country.

3.8 Lease Investment Previous Provision FITTA 2075 Lease Financing was not considered as Lease financing is considered as foreign foreign investment. investment. The foreign investors can make lease investment in airplanes, ship, machineries and equipment within a fixed limit. The foreign investors can repatriate the lease rent amount.

This new provision welcomes the foreign investors. There is now a regulatory mechanism to bring machineries and equipment. So far however, there are uncertainties regarding the procedural aspects of custom clearance, repatriation and return of leased equipment. It is yet to be seen how future regulations and guidelines shall address these uncertainties and how the addition of this important aspect shall increase foreign investment in Nepal.

4. Venture Capital Fund The Act has provided for foreign investment through Venture Capital Fund. For this, institutional foreign investor can incorporate company and then take approval from Securities Board Nepal (“SEBON�) for the purpose of equity investment by creating Venture Capital Fund. Such company needs to submit details of the fund to DOI every six months. For securities transaction, the foreign investor needs to

register with SEBON. The foreign investor can make securities transaction via the secondary securities market of the industries eligible for foreign investment.

This is a welcome step for the foreign investors.

One of the major concerns of the foreign investors was bringing investment in a pool and investing in multiple projects through an investment vehicle. This was addressed by the Industrial Enterprise Act, 2049 where it allowed to form an investment company. The Industrial Enterprise Act, 2074 removed the legal provision and thus creating a vacuum. This concern has been addressed by FITTA 2075 by providing for legal framework for venture capital fund, which is a progressive step. FITTA, 2075 has addressed this issue in the form of Venture Capital Fund.

5. Issuance of loan, debenture or other securities in the foreign capital market Any public company incorporated in Nepal or any organized institution having the power of attorney as per prevailing laws can obtain approval from Nepal Rastra Bank “NRB� and SEBON to issue loan, debenture or other securities in the foreign capital market or receive foreign currency. Furthermore, any company incorporated in Nepal with foreign investment can receive loan within Nepal by issuing securities. In addition, any foreign currency or loan received by issuing securities should be invested in Nepal.

6. No limitation in foreign investment amount: The Act provides that no limitation shall be imposed on the amount or investment portion for a foreign investor wishing to invest in Nepal provided that limitation may be imposed on the concerned sectors and sub-sectors of service industry to align with the commitment made by Nepal while receiving membership from the World Trade Organization. Limitation may also be imposed on foreign investors for the securities transaction made through secondary securities market.

7. Escrow Agreement: For any foreign investment related work in Nepal, any foreign investor can enter into a tripartite (escrow) agreement with partner investor or another foreign investor and any commercial bank or infrastructure development bank of Nepal to secure any transaction. The bank which is a party to the escrow agreement shall act as agent of the other two parties.

8. Investment Period and Cancellation: The foreign investor needs to invest the amount approved for investment within the fixed time period, failure of which may result in the cancellation of the

approval. The approval granted shall be valid as long as such investment is made in Nepal. The approval shall ipso facto be void under the following conditions; i) If no initiation has been done to bring the investment in Nepal within two years of receiving approval without any valid reasons, ii) If 100% of the ownership of the industry receiving foreign investment is transferred to Nepali investors, iii) If the registration of the industry approved for foreign investment or the registration of the company establishing such industry gets cancelled.

9. Cumbersome notifications: Companies and industries with foreign investment need to submit related details to IBN or DOI whenever there is a change in ownership of any property, assets, shares or financial instruments with foreign investment within 30 days of such transaction. Unless the authorities are notified of changes along with submission of tax filing documents, such changes shall not be recorded by the concerned authorities.

10. One Stop Service Centre: The Act has provided for a one stop service centre to attract foreign investors. It’s a new concept and much welcomed if it is implemented as promised. To ease bureaucratic hassles through one stop service centre, the government may provide the following services; • Registration and administration of Industry, • Foreign investment and loan approval, • Registration of company and company administration, • Work permit, • Visa facilities, • Quality measurement and control of the goods produced by the industry, • Environment Impact Assessment (EIA) approval, • Focal point for coordination among institutions related with energy and infrastructure development, • Any exemption and facilities to be received by the industry, • PAN registration, • Foreign exchange approval, • Any other related services needed as per the Act and any regulations to be made.

However, again it needs to be seen how effectively it will be implemented in the upcoming days as there will always be some kind of approval needed for technology transfer, capital injection or repatriation of profit..

11. Foreign Currency Transaction Facility: Any foreign investor or any industry with foreign investment can open exchangeable foreign currency account at any bank or financial institutions approved by the prevailing laws to provide such services. However, approval from NRB is needed to open account in exchangeable foreign currency to conduct transaction. To reduce the risk from the fluctuation in the exchange rates, the industry having foreign investment can use derivatives approved from bank or financial institution.

Furthermore, the foreign investment approved industries can also use foreign currency by taking approval from NRB for the following purposes; •

• •

To pay the remuneration of the foreign specialist, technical or managerial staff appointed at high managerial position (they can repatriate the amount saved after paying income tax in Nepal), To pay the principal or interest of the loan or debenture issued at the foreign capital market, To repatriate the foreign investment amount and profit made from it.

12. Visa facility: • A foreign citizen who wants to come in Nepal for study, research or survey for foreign investment shall be provided with 6 months non-tourist visa.

• Foreign investor or one representative of the foreign investor and the family of such foreign investor or representative shall be provided with business visa as long as the fixed minimum investment amount is being invested.

• However, for investors investing more than the fixed investment amount, business visa is provided to up to two investors and their families.

• For a foreign investor investing more than 1 million USD or equivalent amount in exchangeable currency at one time, such investor or representative and family of such investor or representative shall be provided with residential visa as long as fixed minimum amount is being invested.

• For the foreign specialist, technician or managerial staff working in the industry, non-tourist visa is provided.

13. National treatment to be provided: Except in certain conditions, for any foreign investment made after the implementation of this Act, national treatment shall be provided in terms of

management, construction, use, transfer and terms and conditions for sale of such investment as long as such investment stays in Nepal.

14. Nationalization and Acquisition of Industry: Any industry having foreign investment as per this Act shall not be nationalized.

Furthermore, except for public use fulfilling the procedures of existing laws, no acquisition of any kind shall be made on such industry.

15. Joint Agreement: Nepali investor and foreign investor investing in a industry in Nepal can enter into joint agreement regarding such investment. The Act provides such agreement should have terms and conditions related to joint investment, profit distribution and dispute resolution among others.

16. Settlement of dispute: If any dispute arises between Nepali and foreign investor, the dispute shall be solved in the following manner; • Firstly, through mutual discussion or negotiation • Secondly, If dispute could not be resolved by mutual discussion or negotiation within 45 days of arising of dispute, the dispute shall be resolved as per the joint investment agreement or dispute resolution agreement if any. In the absence of any such agreement or if the parties feel such agreement is inadequate to resolve the dispute, the parties can enter into an agreement to resolve such dispute even after the occurrence of dispute as long as they inform about it to the DOI or the Investment Board Nepal. The DOI or the Investment Board Nepal should be informed about dispute resolution within 15 days of resolving such dispute.

• Failing to resolve the dispute even after taking the above measures, the dispute shall be resolved according to the prevailing arbitration laws of Nepal.

• Unless the parties have agreed otherwise, the arbitration shall be done following UNCITRAL arbitration procedures.

• The Arbitration shall be done in Nepal following Nepali laws.

17. Automatic Route: The Act provides for automatic route for various services such as registration of company, registration of industry, approval of investment, etc. to make foreign investment procedure simple and convenient. We have to wait a while to see how this provision plays out.

18. Contract manufacturing operations: Industries with foreign investment can enter into contract with other industry only to produce accessories or intermediate goods or service and not finished goods.

This provision is problematic as numerous foreign investment firms hire contract manufacturers to produce finished goods for them. The cheap labor lowers production cost which is advantageous to them. However, with FITTA, 2075, they will not be able to hire other firms to produce finished goods which could be a huge drawback for them.

19. Industries prohibited for investment a.

Animal husbandry, pisciculture, bee keeping, fruits, vegetables, oilseeds, dairy products and other prioritized production sectors of agriculture, b.

Small and household industry, c.

Personal service businesses such as hair salon, tailoring, driving, etc. d.

Industry manufacturing arms and ammunitions, explosives, nuclear, biological and chemical weapons, atomic energy and radio-active materials, e.

Buying and selling of real estate (except construction) industry, retail business, domestic courier service, local catering service, money changer, remittance service, f.

Travel Agency, tour guides, trekking and mountaineering guides, rural tourism such as homestay, g.

Business of mass communication medium such as newspaper, radio, television, online news, national language movie business, h.

Management, accounting, engineering, legal consultation services and language training, music training, computer training, and i.

Any consulting services with more than 51% of foreign investment.

The restrictions imposed on investment in retail business, domestic courier business, remittance business and management, accounting, engineering and legal consultancy services are against the World Trade Organization (WTO) commitments made by Nepal. However, it is to be noted that on various industries such as security printing and currency business, Beedi (local cigarette), renting of domestic food processing methods, etc. the restrictions imposed for foreign investment has been lifted whereas on other industries such as travel agency, trekking and mountaineering, mass communication media and language, music and computer training businesses, etc. where foreign investment were allowed previously, now are restricted from receiving any foreign investment.

Furthermore, the initial bill presented had only restricted investment in education consultancy business and institutions, language training, music training, computer training businesses provided the investment is less than the amount fixed by the

Government of Nepal. The initial bill also restricted investment in management, accounting, engineering, legal consultancy business provided that the foreign investment exceeds 51%. However, the final bill that was approved has completely restricted foreign investment in these areas with no conditions. This drastic change needs to be clarified..

Conclusion In conclusion, • Looking at many discrepancies with the existing law, it seems there was lack of adequate consultation with relevant stakeholders. In between Foreign Investment Policy 2071 and FITTA, 2075, government had ample time to take recommendation from all stakeholders, but it seems these recommendations were ignored to a great extent.

• Although the government has claimed FITTA, 2075 as more investment friendly, prima facie it does not appear so. In certain areas such as tourism industry, restrictions have been imposed that were not there before.

• Limitation imposed on number of visas for foreign investors, conditions imposed on hiring high level managerial staffs contradicting the existing labour laws, involvement of multiple government institutions on for a lot of procedures doesn’t seem to align with government’s claim of FITTA, 2075 being more investment friendly than previous FITTA, 2049.

• Nevertheless, a number of new provisions are also introduced. The foreign investment in lease finance, introduction of venture capital fund, transaction in foreign currency, etc. are some of the positive aspects of this Act. • The introduction of the one stop service centre and automatic route for various important services are a much welcome additions in the new Act. Although, it remains to be seen when and how well the one stop service centre and automatic route provisions will be implemented in the coming days, it is not difficult to assume that should these provisions be implemented effectively and as promised, they will provide a huge relief for the investors discouraged by the tedious bureaucratic hassles in foreign investment.

• Overall, this new Act only seems to put into words what was already in practice with some changes here and there. Right now, it is too early to say to what extent this Act shall impact the foreign investment scenario in Nepal.

Prepared by; Sonuj Giri LexpertEase Advisory 3rd Floor, 150, Saras Marg, Kathmandu, 44605, Nepal Mob: +977-9860013240 | Tel: +977-(0)1-4102798

DISCLAIMER: This document is prepared for general understanding and should not be taken for any legal purpose without consulting legal professionals. Please contact the following for legal advice.