“Our Attitude To Foreign Investors Should Change” Gandhi Pandit

Having worked as a lead lawyer in many foreign companies, GANDHI PANDIT, Attorney at Law and founder of Gandhi and Associates, a Columbia University (New York) graduate, is already an established corporate lawyer. Running a well organized and profess

Jan. 21, 2017, 5:45 p.m. Published in Magazine Issue: Vol 10. No. 11,January. 20,, 2017 Magh 07,2073)

There is a growing concern of investors in Nepal about Labor Act, Foreign Investment Act and FITTA, among others. How do you look at this?

There are so many problems, challenges and issues in regard to foreign investment in Nepal. The difficulty for me in talking about this is: Where do I start? When you are talking about foreign investment, you need to be aware of many Acts, Regulations, Administrative orders and departmental memos. The other equally important Act is the Foreign Exchange (Regulation) Act. FITTA is a major law providing approval to foreign investors. However, other associated laws, regulations and administrative orders are also equally important in this respect.

What do you mean by that?

When you talk about foreign investment, the first institution involved in the process is the Department of Industry (DoI), where one can register applications for foreign investment approval. Similarly, the investors also need to get additional approval from the Central Bank regarding their investment in foreign currency and repatriation. Although DOI is the final authority to make a decision in regard to foreign investment approval, there are several other government institutions, where an investor needs to visit and obtain necessary approval as well. The process to get the legal approval in these government institutions is lengthy and time consuming. Despite so many efforts, that cumbersome process has not been simplified.

How is the related legal regime?

Laws and regulations related to foreign investment are not transparent. There are provisions for investment but the procedures are unclear. In some cases, the laws and regulations overlap. Even regulations and administrative orders bar the laws. In other countries, there are clear legal procedures for investment. However, it is very difficult in Nepal to suggest which procedure needs to be followed. Once an investor gets involved in the process, many other hidden processes appear to be important and need to be complied with. What I mean to say is there are so many hassles for foreign investors. Laws are unclear and procedures are cumbersome.

How is the process for approval?

After getting the approval from the DOI, an investor needs to comply with several other processes and hidden requirements. The first step will be to get foreign investment approval from DOI and thereafter the investor needs to register the company in the office of the Company Registrar, where the investor has to go through its own process. One of the major challenges is the lack of coordination among the government institutions, including DoI and office of the Company Registrar. In addition to these two, the foreign investors have to visit other offices for additional purposes, including approval, such as Nepal Rastra Bank, Department of Immigration, Department of Land Reform, and so on. In each step, the investors need to comply with various requirements which make them feel harassed.

Is there no one-window policy?

There is one window in principle, but in practice, there are several windows. For instance, an investor in hydropower sector has to visit at least a dozen government departments following the approval and registration. During the construction period, the investor has to get the approval from the Ministry of Land Management to acquire land, the clearance from the Ministry of Forest and Soil Conservation for land and forest as well as Ministry of Home for mining and other approval. After all this comes the local community. The moment local people get information about the establishment of projects in their areas; the local people increase the price of land by many folds. In addition to this, they also demand investment in school, hospital and other local needs. Such lengthy processes and hassles increase the project cost. This gives negative impression regarding investment by foreign entity in Nepal.

How does the law protect the investors?

Investors have to manage everything on their own. Even if an investor is able to purchase the land from local people, he or she has to go to the Ministry of Land Reforms to get the clearance on ceiling restrictions. This is one of the major problems for the foreign investors in Nepal.

Is land ceiling applicable to an industry?

Yes. An investor cannot own land of up to 75 ropanies for any industry. However, most of the industries need more land than that. For this, they need another approval and permission from the Ministry of Land Reforms. Currently many foreign investors are getting trouble for obtaining approval for this purpose.

How is the role of bureaucracy?

It is unfortunate that bureaucracy is very lethargic and unhelpful. Bureaucrats are very negative and they do the dilly dally in issuing the permission. There are also the issues of corruption. In every place, the foreign investors get a harsh response and they get a lot of trouble. Due to so many complexities and difficulties, it is time consuming for foreign investors to get the approval and work.

Having worked in the area for long as a senior lawyer, what is your overall experience?

I have worked with a number of foreign companies in Nepal. My experience of working with the foreign investors has showed that Nepal is one of the most difficult places for investment. This is the reason many world renowned and big companies are not coming to Nepal. Even big and renowned Chinese and Indian companies, which are investing in war-torn countries in Africa, are unwilling to invest furhter in Nepal because of so many hassles.

How stable is the policy?

As the government changes every six or eight months, a frequent change of policy is like a norm here. This is another challenge for foreign investors. These are some of the issues that even FITTA cannot address. All these escalate the cost of the projects and uncertainties in the mind of investors.

Do you see any hurdles in FITTA?

There are two hurdles in FITTA, which include restricted and non-restricted areas. In certain areas, the FITTA has failed to address certain issues like equity and loan investment. In every project finance, there are two aspects, one is equity investment, which is about 30% of total investment, and the other is 70% investment in the form of loan. Nepal's laws, including FITTA, do not look at the interest and concern of foreign lenders, who usually lend money as loan. Unless their issues and concerns are addressed and taken care of, they would hesitate to make lending in any project in Nepal. Thus, we need to look at the concerns of big investors/lenders. If we change the Act without addressing these issues, there is no meaning.

How secure is Nepal for foreign investment?

Given so many complexities in relation to non-recourse project financing, there is a high risk for the foreign lender in Nepal. The existing laws and regulations are not favorable to foreign lenders due to the lack of not having rules and regulations for non recourse project financing. Even the laws and regulations are interpreted depending on cases and moods of bureaucrats at the time. Foreign investors are coming to Nepal for investment. Their investments do generate production and employment as well. After paying taxes and all dues, investors naturally want to generate the profits and they want to repatriate their profits. At the end of the day, it is the profit and conducive environment, which can lure the investors. It is unfortunate that is not there in Nepal. There are legal risks and policy risks.  In this regards, the role of central bank in assisting foreign investor in repatriation of foreign currency is not conducive.

How can Nepal be made safe and secure for foreign investors?

Along with drafting the new laws, regulations and policies, the government officials need to be cooperative and interpret the laws and regulations as per their words and spirits. The officials need to be positive so that foreign investors will not want to escape.

What is the most important concern of investors?

Investors should get an easy access for repatriation of their profit money. That is the bottom-line. Our officials and politicians need to be positive on the repatriation issue. Specially foreign Exchange Regulation needs to be very positive and investor friendly.

How is the role of the central bank here?

The central bank of Nepal, which regulates the incoming and outgoing foreign currency exchange, has always been negative whenever the issue of repatriation of profits of foreign investors comes. Most of the time, the central bank looks at repatriation of foreign currency through anti-money laundering glasses. They see, as if, unless proven, all money is illegal. Obtaining permission for foreign investment here and repatriation of profits from Central Bank is very difficult. There are so many types of scrutiny. I am not saying there is a need of a free for all. What I mean is the government agencies need to abide by the law and follow the legal process. Foreigners should not feel that they are overburdened. The intention of the central bank may be good but the hurdles created by the bank or their procedures discourage foreign investors in Nepal.

What suggestions do you have for a better investment environment?

If Nepal needs to be an attractive place for investment, we need to reform the tax law, labor law, land act, foreign exchange law and other laws and regulations along with FITTA. Certain provisions of labor act are so strict that owners are not allowed to shut down their entity even in a hostile situation. In addition to this, if we wish to promote foreign lender in lending the foreign loan, we need to amend several provisions in Civil Code (MulukiAin), which are in contrast with the system of project financing. Another important law that needs to be implemented is Secure Transaction law, which helps lenders to create secure interest in movable property of the project.

How do you view the statements of ministers and government officials about foreign investment?

They speak sweet words but their actions are completely different when it comes to their implementations and interpretations. Although the government laws, regulations and policies talk about foreign investment, the officials are always negative. Just visit the Immigration Department. You can see how negative they are in issuing and extending the visa for foreign investors. The department rarely differentiates between the billion dollar investors and investors of one hundred thousand dollars. From their perspectives, all investors, big or small, are the same. When you are coming to invest in Nepal, you are not allowed to bring another employee, handling their account and finance, on employment visa.

Do you view Nepal as a protectionist state? Is that what you are saying?

Nepal is not a protectionist state legally. However, Nepal has certain protectionist features in some ways. Although our acts and regulations are liberal as in other countries, the officials interpret them with negative eyes and in restrictive manners. The government officials need to look at foreign investment in a holistic approach. The problem here is they interpret them in a piecemeal basis. At a time when there is a huge competition and most countries want to attract foreign investors, giving them special treatment, Nepal’s bureaucratic setup needs to change their mindset. Too much protectionism in interpretation of law is not good for foreign investment.

How do you view investment in the overall scheme of things?

Investment is not only money, it is also technology. Along with money, foreign investors are also bringing knowledge and technology to boost their own production. They will also teach various techniques to Nepalese. Having new technologies and expertise, Nepal will be more competitive and its market will grow.

Recently Minister for Industry Nabindra Raj Joshi said that his ministry will take all necessary steps to create conducive environment for foreign investment, how do you look at it? Does Nepal need new laws?

The issue is not bringing the new laws. What is required is the implementation of the laws as per their true spirits and words. Obstructions and difficulties are created for foreign investors in Nepal not only by laws and regulations but by their interpretations. There are two ways for interpretation, backward looking and forward looking. A country like ours needs to have a forward looking approach to lure investors. Some of the laws are unclear. However, the officials need to be pragmatic in the interpretation of the laws. If we are not forward looking in interpreting the laws and rules in favor of foreign investment, nobody will come here.

As the United States has announced preferential treatment to Nepali products, what does Nepal need to do now?

As the act opens new avenues for Nepal, Nepal also needs to ease the restrictions on American investors as well. There is the need to give some reciprocity. If we provide conducive environment for American investors, they will come to Nepal with money and technology to make Nepalese products more competitive in American market as well. If we continue to put restrictions, we can neither generate market, nor can we produce competitive products. We need to create the interest of investors in our market.

There is a huge trade deficit now as we are importing ninety percent and exporting just ten percent.

We also need to change our attitudes and mindset. Instead of promoting industry and getting more taxes out of it, the Ministry of Finance is more concerned to generate revenues by increasing the customs. This way, we are encouraging more consumptive import rather than promoting more production in the country. The more we import, the government generates more revenues from customs, depleting the treasury. Once you have industries, you will generate revenues as well as products for export, which help reduce trade deficit.

How has NCELL issue affected Nepal?

NCELL is one of the largest income generating companies paying a huge amount of tax to the government and generating employment opportunities as well. As a multi-national company, it has brought investment and new technologies as well. But its facing a lot of hassles, including in transfer of shares to repatriation of profits. The recent government's attitude towards NCELL has damaged our reputation in the international sector. The message the NCELL gives is that Nepal is a country where it is very difficult to repatriate the profits. We have to look at foreign investment with international perspectives. If we send a wrong message, nobody will come to invest here.

Do you mean our laws are weak and not at par with the international standards?

I would say that the weak law can be fixed even without amendment. As long as the bureaucracy wants to implement it in a certain way, nothing will change. Policy consistency and implementation are very important. The biggest problem of Nepal is that we make the laws with dubious interpretation, inviting a situation that encourages corruption. Big multi-national companies do not want to indulge in such kinds of a situation, so they are not coming in Nepal.

How do you see the foreign investment trend?

Right now, bigger size investments are not coming. Smaller companies, with less employment generating prospects, are coming to Nepal. Big companies pay more taxes and generate more employment. You are allowed to bring money but no repatriation easily. You have to have a mechanism to check. Before approval, you need to look at it in detail. However, once they invest, let them do their work freely. Don’t think that all people are dishonest. We have to think that only good and honest people are coming to invest in Nepal.

What is this mentality like?

Our mentality is still closed. We need to open our mind. We don’t say anything about restrictions, but there are restrictions. We need to have highly specialized manpower. We have big possibilities to bring foreign investors in hydro, tourism, mineral industries and agriculture. A lot of Chinese companies are coming to Nepal. They want to invest in agriculture. We are importing electricity of over 16 billion rupees, knowingly or unknowingly, we are tending to restrict foreign investor in power sector.

How is Nepal’s overall situation then?

Nepal is still a virgin market as there are many areas for investment. We can still lure many foreign investors, given a proper environment and aligning investment policy in line with international standards. We need to follow the PPP model and let the private sector invest in infrastructure, including roads, with public sector. At the end of the day, we still have huge potentiality for foreign investment. Just let the government take serious steps in promoting foreign investment.

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