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Promoting Private Equities in Nepal
Promoting Private Equities in Nepal
Promoting Private Equities in Nepal
EQUITIES IN NEPAL
FEBRUARY 2016 SYNOPSIS REPORT
Researched by:
EQUITY
under the legal framework of Nepal. Investments are made by
resident or non-resident individuals/institutions of Nepalese
origin or foreign origin in private level. There is also no official
definition of Private Equity Industry in Nepal but for the
INVESTMENTS
purpose of the study, formal investments vehicle, recognized
and regulated by well-defined regulations, that participates in
risk capital formation in the form of equity investments or its
derivatives in any new/growing/or sick businesses for growth/
IN NEPAL
turn around. Private Equity market, depending upon the
choice of entrance in the business or ownership interest can
be venture capital investments, private equity investments or
Foreign Direct Investments (FDI).
The Industrial Policy of 1992 recognizes the need to economy post enactment of IEA, 1992 as the government
promote industrial investment to meet the needs of began to withdraw from the economy. Replacement of FITA,
domestic as well as foreign consumers through higher 1981 by Foreign Investment and Technology Transfer Act
level of industrial production, to generate employment (FITTA), 1992 accelerated the role of foreign investments
opportunities, and to bring improvements in the balance in the Nepali economy. The important thrust of these acts
of payments situation. In an attempt to encourage and policies were promotion of market-driven business
investments, the policy framed two components as its strategies and operations, and involvement of domestic
wings in the same year; Industrial Enterprises Act (IEA); the and foreign private enterprises. In last one decade, a
Foreign Investment and Technology Transfer Act (FITTA), total of 2545 projects with foreign investments have been
and the One-Window Policy. recorded which amounts to project costs of US$ 2583.96
Active private participation became prominent in the million with foreign investment worth US$ 1608.24 million.
Investment in Nepal Between 2061 to 2072 Number of Projects with Foreign Investments
2400 400 800
Domestic
Total Foreign Investments No. Of Project
Investment
Total Foreign Investments (in Billion)
Foreign
Investment
1800 300 600
Investments
100 200
600
0 0
0
2060/61 2062/63 2064/65 2066/67 2068/69 2070/71
LARGE MEDIUM SMALL
2061/62 2063/64 2065/66 2067/68 2069/70 2071/72
4
CURRENT INVESTMENT-RELATED
LEGAL SCENARIO IN NEPAL
2.1 ACTS
Several acts and regulations govern investments in Nepal. Some of the important ones that regulate investments are as
follows:
easier, simpler and more transparent. Securities Related Act, 2007, the Securities Board of Nepal
has postulated certain rules and guidelines that regulate
BANKING AND FINANCIAL INSTITUTION ACT (BAFIA) the registration, issue, operation and exit of securities in
Nepalese financial market.
This act was passed by the House of Representatives in
2063 (2006) to make financial activities timely in order
to promote the trust of the general public in the overall
TAX ACT
banking and financial system of the country and protect Tax Act was passed by Constitution Assembly pursuant to
and promote the rights and interests of depositors, provide Sub-articles (1) of Article 83 of the Interim Constitution of
quality and reliable banking and financial intermediary Nepal, 2063. This act dictates guidelines regarding some
services to the general public through healthy competition charges, taxes, duties, excises and fees, continue or alter
among banks and financial institutions, minimize risks the existing ones and also to amend the laws in force
relating to the banking and financial sector, boost and relating to revenue administration.
The act was passed by the House of Representatives in human and natural resources.
2006 which covers laws relating to securities by amending Nepal opened up avenues for foreign investments after
and consolidating such laws in order to regulate and the enactment of Foreign Investment Transfer Act, 1981;
manage activities of the securities markets and persons however, the concept of investment flourished only after
the introduction of Industrial Enterprise Act in 1992.
• To formulate and implement rules, regulations • To issue license to prescribed industries and to
and policies regarding the medium & large scale register all the medium and large scale industries.
industries according to changing environment and • To approve the industrial project of foreign
implement them. investment and provide them consultancy service
• To perform promotional activities on industrial through providing data, information and replying
investment and disseminate knowledge and their queries.
information in that respect.
SEBON There are also two section under the Corporate Finance
Department namely, Public Issue Section and Collective
The GoN established Securities Board of Nepal (SEBON)in
Investment Scheme Section.
1993 as an apex regulator of Securities Markets in Nepal.
It has been regulating the market under the Securities Act,
2006. Strictly in the context of equity investments,
NEPAL RASTRA BANK (NRB)
NRB is the central bank of Nepal, which is responsible
• To grant permission to operate collective investment for regulating and monitoring the activities of banks
schemes and investment fund programs, and to and financial institutions in Nepal. NRB is also the sole
6
ISSUES RELATED TO
PE INVESTMENT IN NEPAL
3.1 ISSUES RELATED TO FOREIGN INVESTORS
Automatic Approval Absence of Blanket Approval Automatic approval of FDI in Mitigating the uncertainty
Route Route or an Automatic certain sectors (Reference: of deal flow due to the
Approval Route for foreign India). time lag and possibility of
investments. change in the company's
performance.
Protectionism by Restricts foreign capital and Lower MCR on FDIs. Low MCR would help
increasing MCR expertise to reach the lower SMEs to grow with foreign
strata of the economy. capital and technical
expertise.
Debt Financing Permitted in the positive Dilution of such clauses This would facilitate deal
sectors with prior flow and bring in huge
permission from NRB; only amount of investments
in the case of unavailability from abroad.
of domestic debt; at an
interest rate no greater than
LIBOR +5.5%.
Valuation No standard method of Assignment of Brings about transparency
valuation in the financial internationally acceptable in the transactions.
system. valuation methodologies to Feasible for both investors
facilitate fair deal flow. and investee to negotiate
deals.
Hybrid Instruments No legal restrictions on the Introduction of Hybrid Foreign Investors prefer
use of hybrid instruments; Instruments in the market. to use variety of hybrid
however, lack of guidelines instruments that suit
related to the use of hybrid their interests. This would
instruments restrains encourage inflow of FDI.
the use of such financial
instruments.
Tedious Approval Foreign PE funds are Provision to allow This would shorten the
Process required to seek permission investments in all the time-lag and smoothen
for every investment they permitted sectors without investment procedures.
undertake. prior approval but with
a clause of transparent
documentation.
Lock-In Period Lock-in Period for private Foreign Equity Investors Private Equity investment
equity investors is 3 years can be exempted from being closed-end investors
post IPO. this obligation so in order would be encouraged to
to increase the number of invest in Nepal.
undertaken projects.
Repatriation Repatriation is legally free Free flow of repatriable Motivate investors to
and applies no income or income with clear undertake huge projects.
dividend caps; however, the bureaucratic guidelines.
procedure is unclear and
time-consuming.
8
Issues Present Situation Suggestions Implications
Blacklisting Norms As per NRB's approach to The norms should be Investors would be
blacklisting, if an investee relaxed for the domestic encouraged to invest
company with 15% of its investors. in risky yet profitable
stakes controlled by PE ventures.
investor, defaults from Seed investments and
any commercial loan, the Venture capitals would
PE investor is subject to be active in the domestic
blacklisting and is forced economy.
to withdraw all the existing
investments.
STRUCTURING
Alternative Investment Alternative asset classes Alternative investment class AIFs are of great
Fund offer a wide range should be added to the importance to portfolio
of possibilities, from existing traditional mixed- investors as they are
commodities, futures asset portfolio. major determinant of
contracts to vintage cars. investment performance
However, Nepalese capital and the most critical
market is yet to introduce decision in the investment
AIFs under its umbrella. process.
Lack of Clarity in Laws related to investment All the acts, policies and This would bring
Existing Laws and disinvestments lack directives should be revised momentum in the
clarity. Few acts governing to bring about clarity in investments, minimize
investment procedures them. operational costs and save
contradict with each other. time.
ENTRY
Recognition of PE PE funds are not recognized Recognize PE funds as an Identifying PE fund would
Funds as an independent financial individual financial tool organize investments
strategy. Equity investments capable of performing in Nepal under legal
are governed either by FIP specific financial decorum.
or Companies Act. transactions.
Space for SPVs and
Investment Firms should
be built and so should the
regulation necessary to
guide them.
Valuation No specified method of Guidelines to evaluate Terms of transaction
valuation different sectors with would be fair and both
unique approach should be parties would benefit
introduced. mutually.
OPERATIONS
Personal Guarantors Equity Investors are Recognize the unique nature PE firms would be more
required to be the personal of equity fund. experimental and would
guarantor for ventures Legal acceptance of equity be able to undertake
undertaken. as a financial asset by the many small to big risky
commercial banks. ventures.
Director's Liability and Director is liable several Provision to relax some Motivation to investors.
Penalty Driven Filings penalties (sometimes clauses in the companies act
imprisonment) in the to protect the interest of PE
event of bankruptcy, and investors who chair the seat
other intentional and of directors.
unintentional mishaps.
10
3.4 ISSUES RELATED TO ENTREPRENEURS
STRUCTURAL
Investors' Goals Short-term Investments Insurance for private equity Promote entrepreneurship
Domestic investors are more undertakings and start-ups.
inclined in making short-
term investments. Introduction of AIF in the
economy to promote
Risk Intake Capacity venture and equity
Domestic Investors have investments.
low risk intake capacity,
which is a drawback for PE
investments.
Traditional Assets
Due to limited asset class
in the economy, investors
are secured investing in
traditional assets over new
ventures.
Investment Advisory There is no recognized Regulations to bring such Facilitate private equity
Firm investment advisory body to firms into existence deal flows. Protects the
negotiate and facilitate a fair interest of investees and
deal between investor/s and investors through win-win
entrepreneur/s. scenario.
ENTRY
New Companies
There is no mechanism to
evaluate potential financial
worth of a new industry.
OPERATION
Sweat Equity There are no legal guidelines Guidelines monitoring and Protect the interest of
to regulate the issue of supervising the tax issues of entrepreneurs especially
sweat equity. sweat equity. in the service sector.
EXIT
Valuation IPO Shorten the time frame Allows new firms with
Dividend distribution record potential growth to
of minimum three out of five generate capital for
years; a difficult condition further expansion
for start-ups.
Repatriation Repatriation though legal Guidelines for repatriation Incentivizes foreign
has many operational to stimulate process of investments resulting in
hurdles. repatriation. increased number and
amount of investments.
STRUCTURING
Collective Investment Existence of provision for Introduction of Alternative This like Mutual Fund
Scheme using CIS under Security Investment Fund Regulation Regulation would facilitate
Act of Nepal; however, venture financing in a
regulations governing VCFs structured manner.
is absent.
Classification of Shares There is no system of rating Classification of shares on Would facilitate investors
shares based on their the basis of their liability and in making rational decision
liability. based on their interests.
IPO Rating The current securities A provision to rate IPOs This would bring about
regulations requires risk based on their potential risk clarity in the investors,
ratings of IPOs, there is and return. providing an array of
no system to measure the rational options to choose
different instruments issued from.
by the private companies
based on their risk-return
credibility.
Limited Liability There is no concept of LLP Encode the concept of LLP in This would prove to an
Partnership in Nepal. the legal books of Nepalese incentive to the investors
financial system. as liability
Company Act Recognizes all companies as Investment fund should be Investment Fund is all
the same type excluded from the umbrella together a different
of Companies form of company/trust
that requires special
recognition.
12
Issues Present Situation Suggestions Implications
OPERATIONS
Company Act Section 9 of the Company Upon recognition, Investment funds are able
Act prohibits any private Investment Fund can be to generate more funds
company to have more than exempted from this clause. if the ceiling of permitted
50 shareholders. number of shareholders
Investment fund should be is raised.
Section 176 of the Act exempted from the Clauses
restricts any company to of Section 176. This would increase the
invest beyond 60% of its investible fund of any
paid up capital or 100% of investment company.
its free reserve; whichever
is higher. This clause is
not applicable to financial
institutions and some other
institutions.
BAFIA Section 47 restricts all the Investment Fund should This would facilitate
domestic organizations be clubbed with banks and investments through
apart from banks and other financial institution, combination of debt and
financial institution to make which are exempted from equity in companies that
loan investments. this clause. have high-risk association
along with higher degree
Banks are restricted from Provision for the Banks of scalability.
making any Private Equity to invest in the PE up to a
Investments. prescribed limit. This would allow domestic
enterprises to flourish
through additional
injection of funds in the
economy.
Blacklisting Norm Equity Investors are This norm should be This provision allows
subject to the risk of restructured so that all investors to undertake
being blacklisted if they portfolio of companies several risky yet
are members of BoD in a invested by PE form do potentially profitable
defaulting company. not get adversely and ventures.
unnecessarily affected due
to problem in one company.
Forfeiting Share Forfeiting of shares is often Quick and easy process This would curtail
time consuming. resulting in forfeiture of operational lags of the
shares in case of default by investee companies.
investor/s.
Reorganization No existing provision that Liberal conditional banking Facilitate the distressed
Process facilitates reorganization of norms. company to adopt
an underperforming firm. structural changes.
14
Currently the function of One Window Policy is One Window Clearance System should be introduced,
managed by the DoI/BoI and is limited to providing which facilitates the investors to get all their documentation
necessary facilities and concessions to the industries, done from one office.
making recommendation for time-bound provision of
infrastructure for the industries and providing initial EXIT:
approval for foreign investments in Nepal.
Repetitive permission is to be sought from various
LOCK-IN PERIOD
departments upon each investment from the fund. This
One of the crucial demands of all the PE funds is sufficient
often turns out to be time-consuming leading to delay in
liquidity. The firm is open to such investments where the
investment procedures.
lock-in period is short and the exit is hassle-free.
One Window Policy is required to be more deterministic.
ENTRY:
VALUATION
Valuation methods are not defined in any of the regulations. Any company preparing for an exit is required to submit
its valuation to the NRB; however, there is no specific valuation method and guidelines to be followed. Ambiguity in the
choices of valuation method often results in exit delays. This is a serious issue for foreign investors as smooth and quick
repatriation procedure is a mandatory requisite.
There is a need to prescribe methods of valuation for investments, and repatriating disinvestment, dividends, and sales
proceeds.
OPERATIONS:
PENALTIES
During the operation phase, there are numerous filing Failure to comply with filing and reporting of prescribed
requirements. Companies registered in Nepal are documents within the designated time imposes penalties
required to file corporate documents before the Office and fines upon the companies and in some cases upon the
of the Company Registrar (OCR). Some of the documents nominee directors.
demanded by OCR appear to be irrelevant and unnecessary Director’s Liability
like annual filing of share-capital structures (even when In many cases, failure to file documents in the specified
there has been no change in capital structure for a period), time frame can result in fine imposed to the directors.
the requirement to inform regarding appointment of
auditor etc.
16
RECOMMENDATIONS
TO PROMOTE PE IN NEPAL
NEW REGULATION
A new regulation has the ability to change the magnanimity of PE investments in Nepal. In addition to it, a set of guidelines
can be introduced; a set of regulations amended to address pertinent problem that exist in the current situation and pave
way for smoother investment ventures at different stages. The following table recommends few strategies that can be
adopted if a regulating PE was to come in Nepal.
STRUCTURING
ENTRY
EXIT
Lock-in Period As per the guidelines by SEBON Hedge against investors' risk
(generally 5 to 7 years) that is to be
followed strictly in all the cases of
normalcy.
STRUCTURING
ENTRY
OPERATIONS
EXIT
Investment undertakings by investment firm can be organized by the bringing about changes in the existing laws or
through new regulation all together.
18
4.3 ORGANIZING INVESTMENTS WITH NEW REGULATION
INVESTMENT UNDERTAKINGS
STRUCTURING
ENTRY
STRUCTURING
ENTRY
OPERATIONS
Forfeiture of Shares Sub-Section (3) of Section 53, Smooth operation by protecting the
Company Act interests of investee companies
Director's Penalties and Liabilities Section 81, 160,161,162, Company Protects investment manager
Act
Sweat Equity Company Act Addresses the issues related to
sweat equity
Classification of Shares Company Act Determine rights of investors
EXIT
Divestment
Inclusion of provision to divest
through IPO
Dividend Record
Sub-Regulation (3) of Regulation 10,
SRI Regulations, SEBON
Valuation Market PriceMethod Company Act Easier deal flow
and SEBON Fair valuation of equities
Buy Back of Shares Section 61, Company Act Easier exit
20
REFERENCES
ACTS AND REGULATIONS: Private Equity Market Landscape, Nepal
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(1992) Dr. Suman Regmi
The Industrial Enterprises Act, Nepal (1992) Investment Contours of Venture Capital Funds in India: An
Nepal Rastra Bank Act, 2058 (2002) Analysis, Dr. T. Satyanarayana Chary
Income Tax Act, Nepal 2058 (2002) Private Equity: Breaking Boarders (2014), Earnst and Young
The Companies Act, Nepal (2006) The Preqin Private Equity Committed Capital Index (2015),
Foreign Exchange (Regulation) Act, Nepal 2019 (1962) Preqin
Foreign Investment and One-window Policy, Nepal (1992) Private Equity Investments, Grant & Smith LLP
Foreign Investment Tax Rules, Nepal 2020 (1963) Private equity Asia-Pacific: Rebounds, globalization, and
Securities Registration and Issue Regulations, SEBON other tales, McKinsey & Company (2010)
(2003) A Handbook of Government Finance Statistics (2014), Ne-
Merchant Bankers’ Regulations, SEBON (2008) pal Rastra Bank
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Securities and Exchange Board of India (Alternative Invest- port, Preqin Private Equity Exits in China and India, Faculty
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Securities and Exchange Board of India (Venture Capital Annual Report 2071, SEBON
Funds) Regulations (1996) Doing Business 2015: Going Beyond Efficiency, World Bank
Securities and Exchange Board of India (Issue of Sweat Eq-
uity) Regulations (1996)
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http://www.sharesansar.com/
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