“FDI Setback Due To Practical Hurdles”

Nepal is seeking to lure foreign direct Investment in the country.

March 22, 2015, 5:45 p.m. Published in Magazine Issue: Vol. : 08 No.- 18 March. 20 - 2015 (chaitra 6, 2071)

Renowned corporate lawyer GANDHI PANDIT, attorney of law  and founding  partner, says there is a legal guarantee in Nepal to bring foreign investment, but there are some practical irritants hindering the process. Pandit, who has an LLM from Columbia University, USA, and MCL from Delhi University, India,  spoke to NEW SPOTLIGHT at his office. Excerpts:

Tell me about the context of Foreign Investment in Nepal. How easy is it for foreign investors to invest here?

We have Foreign Investment and Transfer of Technology Act, which allows foreign investment in terms of equity as well as loan investment. There is a certain restriction where foreign investment is not allowed. Other than that, in most of the areas, foreign investment is allowed.  The act also gives some benefits for foreign investors once they make investment. If they want to repatriate their money or interest, they are allowed to do so. The law guarantees the repartition. The law also gives some protection to the investor that there will be no nationalization of their property. Besides, there are some basic laws which also guarantee foreign investment is open in Nepal.  That is the generic sense about foreign investment in Nepal. When it comes to really making investment and implementing projects, one has to face many hurdles, one after another, starting from work at the Department of Industry for registration. Despite the legal guarantee, the situation in the practical level is not so positive. For instance, the Department of Industry creates a lot of hindrances for foreign investors.

As there are so many laws to guide foreign investment, they make it very difficult for foreign investors.  How do you look at this?

Foreign investment attracts many other laws while making investment. Foreign Investment and Transfer of Technology Act is a generic law which allows foreign investors to come to Nepal for investment. However, the moment foreign investors come to Nepal, other ministries and departments, which also regulate foreign investment, come in the picture. For example, the Ministry of Industry has separate rules for registering industries. Similarly, the Ministry of Energy has different sets of rule for hydropower. The Health Ministry has different sets of rule for pharmaceuticals and hospitals.  Along with the registration in the Department, one needs approval and permission from other concerned ministries. There is no clarity in the law. When you go there, they will create problems. In the same way, the Foreign Investment and Transfer of Technology Act allows repatriation of foreign currency. However, the investors have to face a lot of problems in repatriating the dollars. The law does not address foreign currency exchange risk. For instance, a foreigner comes to Nepal and makes investment in dollars when incorporating the company; he cannot show investment in dollars, he or she needs to convert it in Nepali at the time of investment.  When one invests in dollars, converting the money in Nepali, the exchange rate fluctuation creates problems for investors as Nepali currency is weak. Thus there is a high risk. You make profits in Nepali currency.  The laws, regulations and policies are not in harmony with the Foreign Investment and Technology Transfer Act. There are laws which are published in websites about foreign investment. However, when an investor really comes to invest in Nepal he has to face many hurdles due to internal policies and guidelines. These guidelines and policies are not published for the public but they are more important than the laws. For instance, Foreign Investment and Technology Transfer Act does not restrict foreign investment. However, the policy restricts it. These kinds of non-compatibilities are also creating hurdles to lure foreign investment in Nepal.

What do you suggest for increasing Foreign Direct Investment?

First of all we need to simplify laws and procedures, changing our mindset and being positive towards the FDI. At the moment, officials and bureaucrats start thinking about everything from the negative perspective. Bureaucrats need to change their attitude. There is no consistency in policy. Even in the same department, if you talk about the same law, different persons give you different interpretations. Laws are made with many clauses which have ambiguity. Bureaucrats do not want to see clarity in laws, policies and guidelines. If the laws, policies and guidelines have clarity, people do not need to knock on different rooms. As a lawyer, the biggest problem is frequent changes in the policies and guidelines of FDI. We advise clients on the basis of one policy. However, the client gets to deal with other policies. Many reputed and best companies do not want to deal that way. Many big companies hold the view that Nepal is not an easy place to invest. Even if some companies want to come to Nepal, they do it by appointing a middleman with an access to higher political and bureaucratic connection. It means that the commission agent would be there. If that is the case, many genuine parties may not come. The general impression is that nothing can be done without middleman. If laws and policies are clear, why do you need middleman? Nepal government has to say if it wants foreign investment, it needs to make laws, policies and guidelines accordingly. Nepal needs foreign capital and technology to develop the country and make it prosper. You only need to consider how much employment it generates and how much income it makes for the country. Once you have a good hydropower project, it will give  tens of thousands of dollar in benefit to the country. Similarly, tourism will also start generating money. For instance, one tourist generates employment for nine people. It similar is the case in agriculture sector where new technology will enhance productivity. Nepal needs technology as well as capital.

How do you see Nepalese bureaucracy?

Nepalese bureaucrats are not accountable to the country and they are not serious about foreign investment. They don’t look at FDI from positive perspectives and restrict themselves in a negative way. Their negative attitude will have direct impact on Nepal’s foreign investment. Nepal’s Foreign Direct Investment law does not address the issue of foreign currency risk. Policies and guidelines are not coming to public. The law is clear about foreign investment but the official escapes showing the rules and regulations. Foreign Investment does not restrict anything but the internal policy restricts the investment. This kind of non-transparency creates hurdles for foreign investment.

Some companies are even complaining that the government is not allowing them to repatriate their profit money in convertible currency. In this scenario, how do you convince your party  that his or her money will be repatriated in convertible currency?

One of the major issues in Nepal is the repatriation of foreign currency. The law says that one can invest in Nepal in cash or kind. If there is cash, it has to come through proper banking channels and it has to be deposited somewhere. If it is in kind or goods, one needs to capitalize it in terms of how much money is involved in it. However, you have to report it to Nepal Rastra Bank. When somebody invests in Nepal in foreign currency, he is allowed to repatriate his money in convertible currency. Here the central bank comes into the scene and the central bank is the institution which will issue permission and make necessary arrangement to repatriate your money in convertible currency. When the issue of repatriation comes, you have to get the approval from DOI. After this, you also need to notify to the central bank about how you can make money and to show that the money is properly created in Nepal.  Recently, I also heard that Nepal’s Central Bank stopped the process of repatriation of such profit. In some cases, the central bank also asks how they brought the money. The company has to prove how the money is generated.

How do you link repatriation with foreign investment?

So far as FDI and repatriation of currency are concerned, there are two issues involved. First, the government needs to be specific about investment. Instead of harping on the need of foreign investment with words friendly to FDI, the government must have a clear vision about FDI. Despite so many rosy words expended by government leaders on the topic, there are many problems at the implementation level. The approach of bureaucracy towards FDI is not positive. Bureaucracy in Nepal is not accountable to anybody and they are not serious about foreign investment. They don’t look at foreign investment in a positive way. Their intention is to restrict it.  Their restricting attitude will directly impact future investment in Nepal. For example, I had a client who finished the construction of hydropower. In six to seven months they are in the process of generating electricity. However, there is a law which says any company which wants to buy more than 75 ropanies of land has to get approval from Nepal government. Without the prior approval, private land cannot be transferred to company’s name. My client has already got 250 ropanies of land and the land revenue office did not restrict my client. When my client applied to buy another 50 ropanies of land again, the office rejected to issue the permission. Land Registry Office questioned the legality of our land purchased before. Here again there is no coordination between Ministry of Energy and Ministry of Land Reform. In this scenario, how a can the developers invest money when they have to run here and there at the last minute. In this scenario, how can one expect that investors will come in. It is the duty of the government to make a one-window policy to facilitate investors. The government officials should not play in the weakness of the investors and create the problems.

We have been talking about the FDI. It is often said that our immigration law is so harsh that it is difficult even to seek a visa for foreigners. How do you look at this?

This is one of the biggest problems of Nepal. Immigration is one of the problems. This shows that Nepal   does not have a holistic approach to bringing the foreign investment.  When you ask someone to bring billions of rupees in Nepal, you need to give him or her entry of their foreign employees as their need. On the one hand you are asking somebody to invest money and on the other hand you are restricting them by not allowing their people to bring it in Nepal. The officials often ask investors to follow the process. However, one cannot get the visa by following the process. As per the present practice, Department of Immigration issues visa for only investors and declines visa for their mangers, accountants and other subordinates. This is the tragedy of present day Nepal as you are asking someone to bring money not his people.

How do you look at Nepal’s visa policy?

Nepalese officials often complain about the visa policies of other countries. We have rarely talked about our visa policy. Our visa policy is very unrealistic and this is the area where genuine investors have been facing a lot of problems. The immigration office does not make a difference between investors, traders and touristis. They deal with all in a similar manner. They issue all the eggs in from same basket. Immigration officials are treating investors of 20,000 dollars or 1 billion dollars the same way. We issue six months tourist visa but they create a lot of hurdles for genuine investors to issue a longer visa. It is unfortunate that Department of Labor does not care about foreign investment and investment. There are some cases of misuse of the visa by someone but this cannot apply to all. Labor law is against the country’s needs. It is against the spirit of foreign investment.

What are the lacunas in Labor Act?

Another interesting thing about Nepal’s foreign investment law is that it opens room for transfer of technology but it restricts the visit of experts involved in transfer of technology. If a Nepali investor wants to bring a scientist for the transfer of technology, his visit is restricted. Although the transfer of technology is just not only an exchange of book or transfer of knowledge or a pen drive, it also means bringing experts to transfer the knowledge. In the past, along with technology, experts were allowed in to transfer the technology. It is unfortunate that Department of Industry has now stopped recommendation for such persons. Foreign investment is allowed and transfer of technology is allowed. However, you are not allowed to bring the technicians and experts. They don’t think about the international perspectives in making internal policies. They don’t think about the future.

How do you see the immigration law?

As I have already told you that immigration law is a big problem in Nepal and it is creating hurdles for foreign investors to come here. Our officials stop issuing visa when they find some problems in issuing visa.  Without doing any study, they make blanket agenda. I don’t think anybody will come to stay in Nepal for a long period of time. Who will come to stay in Nepal? Nobody. Thus, there is no sense to restrict the visa for visitors. Even a person can get certain facilities in USA if he or she invests 1 million dollars, they will allow you to bring 10 people. Here in Nepal you cannot bring even a couple of people investing a billion dollar. If somebody invests a billion dollar, he generates thousands of employment and it has a big impact in the economy.

How do you see Nepal’s civil servants?

Nepal’s civil service is not trained and oriented to bring or allow foreigners to come in. Our mindset is negative and it will take many more years to change the mindset. There is the need to tune up the Immigration Act and Labor Act in accordance with FDI. If some investors come, they do the legal gorund work. This means they want to see whether the investment environment is conducive or not. They like to know whether they are friendly or not? While doing ground work, they look at what is the tax system, what the laws are and, the labor laws and what other compliance issues are. They hire lawyers and auditors to look at this. One of the barriers for restricting the foreign investor is the Labor Law. Tax is another issue. If you want to bring foreign investment, there is the need to give a certain tax holiday. The market is very competitive in the world and Nepal is not the only country for foreign investors. The entire businesses want to see a one-door policy.

Nepal is very much globalised, but our mindset is very much localized. How do you see our judiciary?

While doing groundwork, one of the things they do is how Nepal’s judiciary is delivering the judgment. They are looking at how they settle a case if it arises. This is one area where they want to be clear about. Our mindset is not ready for globalization. Judiciary has a major role to play. If the judiciary is competent, Nepali judges have not been given enough exposure to international system. Nepal’s legal system is also very traditional and the practices based on litigation. There is no specialization and focus. Ninety nine percent of lawyers in Nepal are litigation lawyers.  They are trained to bring the law suit, writ and other public interest ligation. I have to admit the fact that this is changing now and there are some very well trained Nepalese lawyers working in Nepal. Nepalese are yet to prepare themselves looking at the global market. We need to prepare to read sophisticated legal documents. I must admit that Nepal’s bureaucracy gives the least priority to the legal issue and agreement so they are losing the cases. Even if they give priority; it is on the basis of their own biasness.

How do you see Nepal’s FDI policy?

Nepal’s foreign investment policy is directed just to cash in on small entrepreneurs not big ones. Nepal foreign investment means bringing some money from lenders. Our focus is limited. Our current foreign investment policy is directed to petty investment issues.  They are not looking at the bigger investment prospects. Only twenty percent of share can be put by promoters as equity and the remaining needs to come from lenders or financial institutions. This is all about project financing. If Nepal wants bigger projects with foreign investment, it needs to have project financing system. Nepal’s law is not clear about project financing and it is not developed to attract big investors. Since 1980, no big private banker from the world came to invest in Nepal. Making foreign investment by the government is not foreign investment. Nepal needs foreign investment on the basis of BOOT and PPP.

Do you think signing the PDA with the Indian companies will bring investment?

Signing the PDA is just the first stage. Now you need to have project financing act and project financing is a long process. Unless, we have project financing act, nobody will come to invest in Nepal.  Money needs to be brought from around the world. GMR and Sutlaz signed the agreement.  Signing PDA, they have just completed fifty percent of work. The coming process of project financing is more difficult and complicated for them. The question now is how GMR and Sutlaz bring bankers in their project. No developer will put money.

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