1. Introduction

Foreign Direct Investment (FDI) is a composite package that includes physical capital, production techniques, managerial skills, production of goods and services, marketing expertise, advertising, and business organizational processes. Many argue that FDI significantly boosts the growth of host economies. According to the exogenous growth theory, FDI boosts the host country’s economy via capital accumulation, the introduction of new goods, and foreign technology, making it a key to the economic development of developing countries. A developing country like Nepal started its effort to attract FDI since the sixth five-year plan (1980-1985), but a promotion strategy was only adopted in 1992 by the advent of economic liberalization. In the fiscal year 2023/24, a total of 402 foreign firms committed to investing Rs 61.78 billion in FDI in Nepal, pursuant to the annual progress report by the Department of Industry (DOI). As a result, FDI is considered an indispensable impetus of Nepal’s economic growth and development.

2. Legal Framework on FDI

2.1. Relevant Law Governing Foreign Investment

• The Foreign Investment and Technology Transfer Act, 2075 (2019)
• Foreign Investment & Technology Transfer Regulation (FITTR) 2077
• The Industrial Enterprises Act, 2076 (2020)
• Industrial Enterprises Development Institute Act, 2053 (1996)
• The Companies Act, 2063 (2006)
• Special Economic Zone Act, 2073 (2017)
• Public Private Partnership and Investment Act, 2076 (2019)
• The Environment Protection Act, 2076 (2019)
• Private Firm Registration Act, 1958 (2014)
• Bonus Act, 2030 (1974)
• Partnership Act, 2020 (1964)
• The Patent, Design and Trade Mark Act, 2022 (1965)
• Nepal Standards (Certification Mark) Act, 2037 (1980)
• Nepal Petroleum Act, 2040 (1983)
• Mines & Minerals Act, 2042 (1985)
• Standard Measurement and Weight Act, 2025 (1968)
• Accreditation Act, 2079 (2023)

2.2. Regulatory Bodies for Foreign Investment

• Department of Industries (DOI)
• Investment Board Nepal (IBN)
• Nepal Rastra Bank (NRB)

3. Definition on Foreign Investment and Investor

3.1. Foreign Investment and Technology Transfer Act, 2075 (2019): The primary legislation governing FDI in Nepal is the Foreign Investment and Technology Transfer Act, 2019 (FITTA).

[Section 2(j) of the FITTA defined “Foreign investment” as the following investment made by a foreign investor in an industry or company:

Foreign currency,

Re-investment in an industry of dividends derived from foreign currency or shares,

Lease finance made of certain assets of aircraft, ship, machinery and equipment, construction equipment or similar other equipment,

Investment in venture capital fund,

Investment in listed securities through secondary securities market,

Investment by purchasing shares or assets of a company incorporated in Nepal,

Investment received through the banking channel after issuing securities in a foreign capital market by an industry or company incorporated in Nepal,

Investment made through technology transfer, or Investment maintained by establishing and expanding an industry in Nepal

[Section 2(k) of the FITTA defined “Foreign investor” as any’ foreign individual, firm, company, Non-resident Nepali or foreign government or international agency or other corporate body of similar nature that makes foreign investment, and also includes, in the case of a foreign investor that is an institutional foreign investor, the ultimate beneficiary of such an institution.]

4. Areas allowed and restricted for FDI under FITTA, 2019

4.1. Mode of Restriction for Foreign Investment

• Poultry farming, fisheries, bee-keeping, fruits, vegetables, oil seeds, pulse seeds, milk industry and other sectors of primary agro-production,
• Cottage and small industries,
• Personal service business (hair cutting, tailoring, driving etc.),
• Industries manufacturing arms, ammunition, bullets and shell, gunpowder or explosives, and nuclear, biological and chemical (N.B.C.) weapons; industries producing atomic energy and radio-active materials,
• Real estate business (excluding construction industries), retail business, internal courier service, local catering service, money changer, remittance service,
• Travel agency, guide involved in tourism, trekking and mountaineering guide, rural tourism including homestay,
• Business of mass communication media (newspaper, radio, television, and online news) and motion picture of national language,
• Management, account, engineering, legal consultancy service and language training, music training, computer training, and
• Consultancy services having foreign investment of more than fifty-one percent.
• Ride sharing with foreign investment more than 70%

4.2. Mode of Allowed for Foreign Investment

Foreign investment is allowed in industrial sector which has been classified as “Industry” under Industrial Enterprises Act, 2076 (2020) and includes the

• Investment in shares of an industry, in foreign currency,
• Reinvestment of dividend/profits from foreign currency,
• Investment through lease financing in airlines, ships, plant & machineries,
  and construction equipment (up to the prescribed threshold),
• Investment in equity through “Venture Capital Funds” (VCFs) by institutional
  foreign investors with approval of SEBON,
• Investment in listed securities through secondary market by VCFs,
• Investment through acquisition of shares or assets of existing companies
  registered in Nepal,
• Issuance of securities in foreign capital market through Banking Channels,
• Investment made through technology & know-how transfer agreement, and
• Investment maintained by establishing and expanding an industry in Nepal.

5. Agencies, Process, Procedure and Approval for Foreign Investment

5.1. Government and Private Sector Agencies in FDI Process

S.NAgenciesMajor Functions1Investment Board Nepal (IBN)Approve the foreign investment exceeding NRs. 6 billion and provide other facilitation.2Department of Industry (One Stop Service Center)Approve the foreign investment not exceeding NRs. 6 billion and provide industry administration related services.3Office of Company Registrar (OCR)Register company and provide administration related services.4Nepal Rastra Bank (NRB)Provide approval for bringing in foreign currency against approved investment, recording, and repatriation

It generally takes about 2-3 months to obtain approval from DOI and NRB and set up business in Nepal for Foreign investors. However, if approval from IIPB/IBN is necessary, it may take up to 6 months.

5.2. Registration Process Flowchart:

In Nepal, typically, the initiation of any industry begins with FDI approval. This is succeeded by the processes of company registration, local level registration, setting up a bank account, and obtaining VAT/PAN registration. Subsequently, investors are required to receive a notification letter from Nepal Rastra Bank for investment inflow. Finally, the industry must undergo registration at the Department of Industry, including any necessary licensing based on the proposed products and services. The diagram below visually represents the approval and licensing steps.

Flowchart reference – FNCCI

5.3. Procedure for the establishment and operation

• Obtaining Foreign Investment Approval from DOI or NIB
• Incorporation of Company at the Office of the Company Registrar
• Tax Registration at the Inland Revenue Office
• Business Registration at the Local Ward Office
• Registration of Industry at the DOI
• Obtaining Non-Blacklist Certificate from Credit Information Bureau
• Obtaining approval from NRB to infuse the Investment Amount
• Infusion of investment amount in local bank and obtaining Investment Certificate
• Recording of the infused investment amount at the NRB.

5.4. Documents Required to Obtain Approval

Any foreign investor willing to invest in any permitted industry in Nepal shall submit an application in the standard format along with the following documents to the approving authority in hard copies or through electronic medium as enshrined in the Rules 8 of the Foreign Investment & Technology Transfer Regulation (FITTR) 2077;

• Investment report and project report – 2 copies
• Joint venture agreement, if more than one investor
• Copy of the personal biodata, if individual investor
• Legal documents of investor, profile and board resolution in case foreign investor is a company
• Legal documents, partnership agreement, profile of firm and partners’ decision in case of partnership firm
• In case of NRN, documents to support of NRN
• Charter documents and documents revealing identity of directors in case of international organization
• Power of Attorney in case the foreign investor cannot be present in person. Where POA is issued, the responsibilities and period of validity of the POA has to be specified (Rule 23)
• Any other documents that is requested by the approving authority

The approving authority, after reviewing of the application submitted and ensuring its completeness, shall notify of the approval in the standard format or rejection with reasons thereof to the foreign investor within 7 days of the application.

6. Threshold, Time limit and Provisions for Visas

6.1. Minimum & Maximum threshold for foreign investment

The current minimum investment threshold for a foreign investor is NPR 20 million (approximately USD 155,000). The amount can be invested in tranches within prescribed time frame.

No maximum ceiling of the amount to be invested and the share of investment by a foreign investor wishing to make investment in Nepal shall be prescribed. However, a limit may be imposed for investments:

• For investment made through a Venture Capital Fund (VCF);
• For investment in the Service Sector which shall nevertheless be not lower than the commitment given by Nepal in its WTO agreement.

6.2 Time limit

FDI approval amountMinimum amount to be brought within 1 year of approvalUp to minimum threshold (i.e., NPR 20 Million) 25% of approved amountMore than the threshold limits up to NPR 25015% of approved amountMillion More than NPR 250 Million up to 1,000 10% of approved amountMillion More than NPR 1,000 Million5% of approved amount

However, in any case, at least 70 percent of the approved amount must be brought prior to the commercial production or transaction and balance amount to be brought within two years from the date of the commencement of commercial production or transaction from such industry or business. In case any foreign investor has taken approval for foreign investment by purchasing shares of an existing operating industry, then the investor has to make the investment within 1 year of such approval. In case any industry with FDI has not brought foreign investment at the start of this FITTA RULES 2077, then such industry has to submit and get approved its foreign investment plan and bring the foreign investment according to that approved plan.

6.3. Provisions for Visas

• Non-tourist Visa: Is allowed up to 6 months to the foreign national for conducting study, research and survey for foreign investment and for the period as per the industry requirements to high-skilled specialist, technical or managerial personnel after evidencing that equivalent workers are not available in Nepal after undergoing a vacancy procedure as per the prevailing laws.
• Business visa: Is allowed up to the period of foreign investment to the investor and his/her family member or 1 authorized representative of the investor and his/ her family member. Maximum of 2 person and their family members can obtain business visas if the investor is a company.
• Residential Visa: Is allowed up to the period of foreign investment to foreign investors who invest greater than USD 1 Million at a time or its equivalent to the investor or its authorized representative and his dependent family members.

6. Repatriation

Section 20 of FITTA, 2019 has enshrined on the Repatriation where the foreign investor making investment in foreign currency shall be entitled to repatriate the following amounts:

• The amount received by the sale of the share of foreign investment as a whole or any part thereof;
• The amount received as profit or dividend from foreign investment;
• The amount received as the payment of principal or interest on any foreign loan;
• The amount received under the agreement for the technology transfer in such currency as set forth in the concerned agreement as approved by the DOI; and/authorized.

7. Settlement of Disputes

Section 40 of the FITTA, 2019 has epitomized the settlement of disputes.

• For industries with fixed assets investment of up to NRs. 500 million, if the dispute cannot be settled by mutual consultations in the presence of the DOI, it shall be settled by arbitration in accordance with the prevailing arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL);
• The arbitration should be held in Kathmandu;
• The laws of Nepal shall be applicable in arbitration;
• For industries with fixed assets investment of above NRs. 500 millions, disputes may be settled as mentioned in the Joint Venture Agreement/Share Purchase Agreement.

8. Conclusion

Therefore, Nepal’s legal and regulatory framework for Foreign Direct Investment (FDI) demonstrates clear and investor-friendly policies. The comprehensive laws, streamlined procedures, and provisions for dispute settlement and repatriation collectively aim to create a predictable environment. This robust framework is designed to effectively leverage FDI as a critical catalyst for the overall economic growth and development of Nepal.