Nepal’s FDI Law Should Have One Interpretation

With the promulgation of the new constitution, Nepal has entered into a new phase of expectation to see foreign investment coming in areas like hydropower and cement. A Columbia University Law Graduate, GANDHI PANDIT, attorney at law and founder of Gandhi and Associates, with his international expertise on foreign investment, is leading his corporate and commercial law firm in Nepal as a major legal solution provider at national and international levels. Pandit spoke to New Spotlight on various issues. Excerpts:

Issue Name : Vol 10, No 5, October 7 (Asoj 21, 2073)
Nepal’s FDI Law Should Have One Interpretation

Advocate Gandhi Pandit

A year has already passed since the promulgation of the new constitution, how do you see the environment for foreign investors building in Nepal?

Of course, Nepal has a new constitution with so many liberal values. However, the nothing has changed internally. The mindset of bureaucrats is still negative and non-cooperative attitudes exist to dissuade investors. Nepal has enough laws related to foreign direct investment. It is unfortunate that each institution involved in the FDI process has own interpretation of related laws.

What do you mean by that?

For instance, Department of Industry is the nodal department to register, regulate and decide the issue of repatriation of foreign currency, labor and all other matters related to FDI. This is not so when it comes to implementation. For instance, Nepal Rastra Bank, which regulates foreign currency, does not abide by DoI order. Similarly, Department of Immigration has its own interpretation on the visa issue. Department of Labor has its own. What I mean is that there is anarchy and foreign investors have a difficult time to deal with the complexities. The scenario in foreign investment is very bleak.

Don’t we have clear laws?

I have told you that there are laws to regulate the foreign direct investment and institutions as well. However, there is no coordination among them and each institution interprets the law to suit their own interest. The mindset of civil servants needs to change along with some laws.

How do you see the state of FDI at present?

Our firm has a long experience of dealing with FDI and it has established itself as a professional law firm of global standards. As most of our clients are foreign investors, we have been dealing with various problems related to them. What I can say is that most of the investors who want to invest in Nepal face many nitty-gritty issues. The bureaucratic process is so lengthy and slow and they take many days to move a file. For instance, Nepal Rastra Bank has been holding one of my client's files for almost a year, delaying the process of repatriation of foreign currency as per the decision of DoI. Knowing the process of Nepal, no renowned multinationals are coming to Nepal. Even many others are in the process of withdrawing. Except a few multinationals like Coke, Pepsi, Standard Charter, few have shown interest to invest in Nepal.

Then, what kind of foreign investors are coming?

There are many foreign companies applying for investment, particularly in hydro and cement sector. But, they are not renowned multi-national companies. Even India’s renowned companies like GMR and Satlaj extended the period of financial closure for another two years. We can understand the financial situation of GMR. However, Satlaj is a government owned company operating big projects in India and is reluctant to invest in Arun III project. Because of overall environment, Satlaj is also showing reluctance to invest. 

How friendly is Nepal for foreign investors?

What I can say is that our law is unfriendly towards them. As investors are coming with a big investment, it is natural for them to bring some people to handle the business. Unfortunately, until now our immigration laws and regulations restrict the foreign workers in Nepal.  Only investors can come to Nepal with millions of dollars. However, they cannot bring their employees. This is damaging the country’s image.

How do you look at the issue of repatriation of foreign currency?

Repatriation is another stumbling block for foreign investors in Nepal. As Nepalese laws and regulations are not friendly towards the foreign investors, many renowned companies are not coming to Nepal.

Who is responsible for FDI?

 

In order to invest in Nepal, a foreign investor needs approval. Department of Industry is responsible to issue the approval. It is the authorized agency to decide on all kinds of FDI related issues. After the Department permits investment, the investor has to go to NRB.

Why did the Foreign Direct Investment (FDI) not come to develop mega projects?

For foreign investors, there are problems of project development agreement and the problems of foreign currency repatriation, land acquisition, visa, labor and local people. Who do you blame for this: law or government officials? When you are talking about development of mega projects or hydro projects, foreign investors have to go through a lot of painful process. Of course, laws are there to protect them but every institution interprets things on their own way. There is the need to have a holistic approach and piecemeal basis cannot work. The government should work out ways for this.

Despite proper laws being there, why is land acquisition a problem?

Of course, Nepal has proper laws, which explain the compensation process and other land acquisition. However, a developer cannot acquire the land as it wants because the government officials do not act or do not support the project. When local people know some projects are coming, they increase the land price as much as they can and government officials endorse the price attached by locals rather than going through the legal provisions. When an investor wants to develop a power project, they need land for the project, transmission and road. Local people put the demands here, sometimes one hundred times higher than the existing market value.

What do the foreign investors need?

First they need a law to allow them to repatriate their profit. When the issue of repatration comes, the central bank is giving a lot of trouble. The file of one of my clients has not moved for almost one year. He is roaming premises of the central bank for approval but the bank neither approves it nor disapproves it. It is very unfortunate that a file is lying on the table of NRB without any decision. There is nobody to challenge them, whether they take the decision at the right time or wrong time. In the name of regulating foreign currency, the central bank is doing everything possible to discourage the investors. The central bank is also encroaching on the jurisdiction of other government bodies. The areas of foreign investment lie within the DoI as it is the final authority to say anything on foreign investment. Foreign Investment and Technology Transfer Act (FITA) has a clear cut provision on whether to approve or disapprove foreign investment. Only with approval from DoI, one can go to the central bank. However, the central bank is working as a central authority here to decide everything, including rejecting the DoI’s role.

What logic is there behind NRB stance?

NRB does not abide by it saying that it is their prerogative to decide on FDI. Foreign investors are so frustrated that the decisions are not taken properly. The other aspect is the involvement of several ministries in the same decision. The process is lengthy and interpretation of law is made differently by different organizations. There is a policy inconsistency in the government on FDI.

Don’t you think Nepal has good areas to invest?

Although Nepal has good areas for investment, nobody likes to invest here because of so many hassles involved in the process. Big countries will be unlikely to come here because they are accountable and responsible. There are laws and investors complying with them. However, a lot of companies are coming with a Nepali local agent to handle the business as they have so much good connections and help in getting things done. Without local agents, one cannot do business in Nepal. An investor has to give at least 10 percent of expenses free of cost for local agent. In Myanmar, Laos and Bhutan many foreign companies are going for investment, including Indian and Chinese. However, even Indian and Chinese companies don’t want to invest in Nepal in bigger scale in energy sector.

Cannot we change the situation by bringing new laws?

There is also the need of some new laws like in project financing. We do have a secure transaction law. We do have a secure transaction registry. Without that you cannot do a project financing. Without project financing, you cannot develop big infrastructure projects, including hydropower. The other thing is that laws are there but they are not interpreted properly. Nepal needs to revamp the overall system. We need to have a feeling to let Nepali work. The question is again the mindset and accountability. 

Don’t you think Nepal has enough opportunity?

Yes, there is an ample opportunity. However, this opportunity sometime creates a lot of problems. As a corporate lawyer, I always think about our legal system. All the laws must follow the transaction law. Compliances are not a big problem, the problem is managing the office. As a lawyer, when we visit the offices, the officials think us to be persons, who may be snatching their bread and butter. If everything goes as per the law, there is nothing left for government officials to bargain.

Who is responsible for this?

I think, to a great extent, the government officials are responsible for this. They don’t act as per the law. Nepal has all kinds of law related to FDI but the problem is that nobody interprets it as what the law says. There are many weaknesses in the government. As there is frequent change of higher officials, it weakens the capacity of the government. If the officials are weak and less capable, they cannot take decisions. There is a lack of accountability among the government officials and they are accountable to nowhere in decision making.

If the situation of FDI is bleak, what is the state of investment of internal banks given the recent information regarding domestic investment?

There is a trend to sign the agreement on a piecemeal basis. When they signed the agreement with Sino-Hydro, policymakers gave five years to complete the construction. However, Nepal Electricity failed to construct the transmission line. Sino-Hydro itself built the transmission from Bhulbhule to Upper Marshyangdi.  Nepal does not have transmission line as it has already saturated. There are many projects which are in the process of completion. There are many other projects in total capacity of 100 MW under completion in Lamjung district. If NEA is unable to complete the transmission line, it will create a lot of problems as we have to live in dark with power at the river.

 

As it is reported that there is enough money at the local banks to invest in hydropower of up to 500 MW, why do we need foreign investment?

Our banks have a good deposit in the recent times with the flow of remittances growing. There is no doubt that their money can be invested to generate the power. Nepal’s annual demand is increasing and banks cannot put all their deposit in hydropower sector only as there are several other areas to invest. Even Nepal Rastra Bank’s direction makes it clear that they cannot invest in more than 30 percent in one particular sector. Even if they are allowed to invest all their money in hydropower, the generation of electricity will not be enough to fulfill the demand. As Nepal is declaring its intent to export hydropower, there is no option other than to invite FDI. Even for the local use, a certain percentage of FDI will be required. I don’t understand the reason when Nepal has been using a huge amount of its foreign currency reserve (US$) to import oil, there is nothing wrong to pay a certain amount in dollars for our own electricity. Hydropower projects constructed in Nepal will finally be handed over to Nepal after 30 years. My argument is that if somebody invests money in dollar, they should be permitted to repatriate their investment in dollar. Business is not a charity and no sane people are there to invest in US dollar and agree to get the money in Nepali currency.

If you see the data of the last two decades, there is no more investment but disinvestment. How do you see the legal diligence process?

It is the early process of establishment of industry. This will tell foreign investors what the legal systems, tax laws and politics and other situation are. Foreign investors like to know what problems they will be likely to face following their investment. They don’t want to get trapped in. This is the way to understand legal, political and social issues before making decision. Most of my focus is now to conduct the legal diligence.  Many visit us for this. There are many interesting and funny things in the Nepalese law. Labor law is worse in Nepal where foreign husband of Nepalese woman cannot be allowed to work but to depend upon the income of his wife. Similarly, investors can invest money here but they are not allowed to have salary and they cannot bring any accountant as Immigration Department declines the visa.

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