On January 10th, the Oli-led government introduced a series of ordinances, including one aimed at amending laws related to economic environment and investment promotion, with the goal of improving Nepal’s business and economic climate.
Industry associations have wholeheartedly welcomed the ordinance, which entails provisions they have long lobbied for. The ordinance, endorsed by the President on 13th January, will now be reviewed at the parliament, which is set to convene tomorrow.
The ordinance comprise of — amendments, addition and replacements of several laws in the prevailing 11 Acts which includes Foreign Exchange (Regulation) Act (1962), Company Act (2006), Special Economic Zone Act (2016), Foreign Investment and Technology Transfer Act (2019), Public Private Partnership and Investment Act (2019), Industrial Enterprise Act (2020) and Arbitration Act (1999), among others.
What do some of these new laws entail:
On issuance of ‘sweat equity’ and business to business investment
Companies can now grant stocks to founders and employees through non-cash means. Employees can be compensated with non-cash incentives, such as equity, in exchange for their contributions including intellectual property, goodwill, know-how sharing and technical assistance. Employees can be offered with equities, through a written agreement, as an alternative to salary or benefits.The amendment places a threshold of 40% of such equity for startups and 20% for general enterprises. [Addition of Section 18 (3) in the Company Act]
In addition, companies can provide loans and guarantees, or invest in other companies but not beyond 60% of their paid-up capital and free reserve or 100% of its free reserve (whichever is higher). [Amendment to Section 176 (1), Company Act]. For this, they are exempted from the requirement to pass a special resolution in a general meeting.
On eligibility for outbound/foreign investment
Despite existing legal restrictions, certain individuals and companies and organisations incorporated in Nepal will now be allowed to invest abroad [Section 10A (2) under Foreign Exchange Act, 2019]:
- Industries exempted to invest abroad based on Section 3 (2) of the Act Restricting Investment Abroad, 1964 with approval from the Government of Nepal through notification in the Nepal Gazette.
- Industries classified as an IT industry
- Earnings generated while residing abroad
Moreover, the ordinance has introduced a new provision Section 66A – Employee Share Sale Scheme under the Company Act 2063. Employees can acquire shares of the parent company of Nepal-based firms or their foreign-based subsidiaries without exchanging the country’s foreign currency and also earn dividends from those shares. Company directors can buy such shares only if they are in regular employment. The conditions and sectoral limits for investing abroad will be formulated by the NRB.
On compliances
Private/public companies eligible to issue shares at a premium price (in accordance with other prevailing laws) are no longer required to submit financial statements to conceded authority for the past three years. Also, private companies converting into public no longer require a separate approval from the Office of Company Registrar (OCR). [Removal of Section 29 (4) and amendment of 63 (1) , Company Act].
Companies that are yet to provide the required documents at the OCR can request an extension and submit them within the end of the ongoing fiscal year. The penalty has been reduced by 90% [Section 81 (6), Company Act].
Similarly any industrial enterprise operating without registration at the DoI so far can now register within a period of a year (starting from the implementation of this Amendment) after paying the specified penalties [Addition of Section 3 (1A), Industry Enterprise Act, 2076].
On foreign investment and repatriation
A foreign investor can invest in an industry’s equity either by investing in a Venture Capital Fund with SEBON approval or by purchasing units of Specialized Investment Funds (SIFs) registered with SEBON. [Addition of Section 9A, FITTA]
Any foreign investors seeking to repatriate their investment—either in the same foreign currency in which the investment was made or in any other convertible foreign currency with the approval of the NRB—after the settlement of applicable tax liabilities arising from the proceeds from the sale of SIFs and profit or dividends earned from SIFs. [Section 20 (2), FITTA]
Foreign investors seeking to repatriate their investment in SIFs must first obtain approval from SEBON. Foreign investors will not require recommendation/approval from the DoI or NRB for repatriation. [Addition of Section 20 (2) and 20 (6A) in FITTA]
The updated FITTA includes provisions for foreign investment, allowing up to 80% in international airlines, 49% in domestic airlines, and up to 95% in aviation training and maintenance institutions [.
Likewise, any industry, with approval from the NRB, can now access project loans and financing from foreign financial institutions. Any exemptions, facilities, and concessions outlined in the FITTA for industries with foreign investment will also be applicable to industries availing such loan facilities. [amendment to Section 12, FITTA].
On limits to profiteering and revenue leakage
Section 3(1) of the Black Market and Other Social Crime Act, 2032, previously imposed penalties or up to 5 years in prison, or both, on business entities involved in trading goods in violation of standard rules or earning a profit margin exceeding 20% on a transaction. This provision has now been removed from the Act.
Similarly, businesses, organisations, or individuals found guilty of revenue leakage up to NRs 30 million rupees can avoid lawsuits if they agree to pay the owed taxes, including income tax, VAT, excise duty, customs duty, and other taxes or fees and fines. Previously, the law only allowed for avoidance of prosecution in cases involving revenue leakage of up to five million rupees. Legal action will however be pursued if evidence suggests intentional tax evasion. For cases involving revenue leakage exceeding NRs 30 million, legal proceedings will initiate automatically. [Amendment to 13A and addition of 13A (7), Revenue Leakage (Investigation and Control), Act 2052 (1995)]
On dissolution of company
If a company has remained inactive, not conducted its business, failed to meet compliance requirements such as submitting details or paying penalties, it can be dissolved by passing a decision in a general meeting and applying to the OCR. If the company can’t hold a meeting or meet quorum requirements, the directors or shareholders can apply for the dissolution instead.
When submitting the cancellation application, a fixed fine or amount equal to 0.5% of the company’s paid-up capital (whichever is lower)—must be paid along with the required details.
If the OCR finds reasons against the dissolution, a 30-day notice will be published in a national daily, allowing time for objections. The office shall proceed with the dissolution if no objections are received or if the objections are unsatisfactory. Once canceled, the office will notify the relevant directors and update the information on the OCR’s website.
On industries inside Special Economic Zone (SEZ)
Industries established in mountain or hilly-based SEZs will receive a 100% income tax rebate for the first 10 years and a 50% rebate for the following 10 years. However, industries relocating to such SEZs will only receive the rebate for the remaining period from their original establishment date.
A licence holder must enter into agreement with the SEZ authority to establish and operate their industry within 120 days of receiving license, and can request for extension if it fails to do so. The SEZ authority can grant an extension of up to 30 days. [Section (11), Special Economic Zone Act]
Earlier, all industries based in SEZs were required to only export their outputs. Now onwards, in case of any unforeseen circumstances (such as war, flood, earthquake, pandemic, fire accident, industrial accident and adverse change in trade policy, etc), industries can sell their output at the domestic market for the time period with pre-approval from the authority. [Section 13(1)].
Additionally, SEZ based industries can now avail loans from banks and financial institutions mortgaging fixed assets (other than land) and license agreements as collateral. [Section 26 (A)].
IT related industries such as software development, data processing, business process outsourcing, knowledge processing firms with revenue exceeding NRs. 50 million revenue/year will be entitled to support and concessional loans outlined in the section 29 of the Industry Enterprise Act, 2076 (one of the two clauses)].
On government contracts and arbitration
To accelerate the resolution of disputes involving government contracts, the government has introduced a provision for expedited arbitration. Under this new measure, arbitration decisions will remain enforceable unless explicitly suspended by a court, ensuring smoother implementation. A mere petition to annul an arbitration ruling will no longer be sufficient to halt its enforcement. [Addition of Section 13 (A) and replacement of Section 32, Arbitration Act 1999]
