Table of Contents
Foreign direct investment is the investment in one country by a corporation or individual into business interests located in another country. It normally takes the form of either establishing operations or acquiring tangible assets such as property or manufacturing facilities in a foreign country.
Legal Framework
- Foreign Investment and Technology Transfer Act, 2019
- Foreign Investment and Technology Transfer Regulations, 2021
- Industrial Enterprises Act 2020
- Company Act 2006
- Public and Private Partnership and Investment Act 2019
Government authorities for foreign investment
- Investment Board Nepal (IBN): For investments above NPR 6 billion.
- Department of Industry (DoI): For investments below NPR 6 billion.
- Office of the Company Registrar (OCR): For company registration.
- Nepal Rastra Bank (NRB): For foreign currency regulations and repatriation.
Requirements for FDI
- The industry must not be listed in the Negative List of Industries for Foreign Investment.
- Business must be classified as an industry under Industrial Enterprise Act.
Industries Not Granted Permission For Foreign Investment
1. Cottage Industries:
Traditional handloom, traditional blacksmith, pottery, and other traditional small-scale industries, except for the export-oriented and those involving traditional art and craft.
2. Personal Service Businesses:
Businesses such as hairdressing, beauty parlors, tailoring, driving training schools, etc.
3. Bidi Production:
Manufacturing of Bidi (a traditional hand-rolled cigarette).
4. Real Estate:
Real estate business, including buying and selling of land and houses (excluding real estate development companies meeting certain conditions).
5. Retail Trading:
Retail trading of consumer goods, except for international retail chains with a significant minimum investment threshold.
6. Tobacco Products:
Manufacturing of tobacco and tobacco products, including cigarettes.
7. Alcohol Production:
Production of alcohol and alcoholic beverages, except for export purposes.
8. Weapons and Ammunition:
Manufacturing of arms, ammunition, and explosives.
9. Radioactive Materials:
Production and processing of radioactive materials.
10. Security Services
Private security services and related businesses.
11. Money Laundering Activities:
Businesses involved in financial transactions related to money laundering.
12. Criminal Activities:
Any business involving illegal activities, including narcotics and human trafficking.
13. Gambling and Betting:
Operations related to gambling and betting activities.
Additional Restricted Sectors
Certain sectors may have restrictions on the extent of foreign ownership or require special approvals and conditions. These include:
1. Media:
Foreign ownership is limited to a maximum of 20% in media businesses, including print and broadcast media.
2. Agriculture:
Specific restrictions on foreign investment in primary agricultural production.
3. Financial Services:
Banking, insurance, and other financial services have regulatory requirements and restrictions on foreign investment.
4. Tourism:
Some tourism-related businesses may have specific conditions or restrictions.
Education and Health Services:
Investment in these sectors requires special permissions and adherence to national policies and regulations.
Process For Establishing and Operation Of FDI
Step 1: Obtain Approval for FDI
1. Approval from Investment Board Nepal (IBN):
- For investments above NPR 6 billion, obtain approval from IBN.
- Apply with the business plan and financial details.
2. Approval from the Department of Industry (DoI):
- For investments below NPR 6 billion, apply to the DoI.
- Submit the required documentation and obtain an approval letter.
Step 2: Company Registration
1. Reserve Company Name:
- Apply to the Office of the Company Registrar (OCR) to reserve a company name.
2. Documents Required:
- Memorandum and Articles of Association.
- Details of promoters (passport copies, photos, etc.).
3. Submission:
- Apply the required documents to the OCR.
- Obtain a Certificate of Incorporation upon approval.
Step 3: Register for Tax and Other Licenses
1. Tax Registration:
- Register with the Inland Revenue Department (IRD) to obtain a Permanent Account Number (PAN) and Value Added Tax (VAT) registration if applicable.
2. Sector-specific Licenses:
- Obtain necessary licenses and permits specific to the industry you are investing in (e.g., environmental permits, sectoral clearances).
Step 4: Foreign Currency Exchange and Capital Injection
1. Foreign Currency Exchange:
- Open a foreign currency account in a local bank.
- Transfer the investment amount through the banking channel.
2. Capital Injection:
- Inject the capital into the company’s account.
- Obtain a remittance certificate from the bank.
NPR 20 million (about USD 155,000) has been set as the minimum amount needed to receive clearance for foreign investment.
Documents required for FDI Approval
- Project proposal
- Company profile of foreign investor
- Copy of passport of foreign investor
- Joint venture agreement (if applicable)
- Bank certificate confirming investor’s financial credibility
- Environmental impact assessment report (if required)
- Power of attorney
- Commitment letter for investment schedule
- Other supporting documents as per sector requirements
FDI has been a very crucial driver in the economic development of any country, mainly bringing capital, technology, and expertise. The FDI was governed under important authorities such as IBN and DoI by comprehensive legal frameworks in Nepal, such as the Foreign Investment and Technology Transfer Act 2019.
The Nepalese government has outlined clear procedures for FDI approval, company registration, tax compliance, and capital injection. However, specific industries remain reserved for the local people to prevent foreign influence on cottage industries, personal services, and tobacco production.
With the imposition of minimum investment thresholds and observance of sector-specific restrictions, Nepal has ensured that FDI in the country is in tune with the country's economic priorities and social values. When properly regulated, FDI promotes industrial growth and employment opportunities and intensifies Nepal's integration with the international economy while protecting its national interests.