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Chapter 1: Introduction and methodology

1.1 Introduction
1.2 Statement of problems
Main problems of this study are as follows:
1. Whether the investment policy of Nepal compatible or not.
2. Are the provisions made under the Nepal FITTA act is sufficient in all respect.
3. Problems and difficulties of FITTA.

1.3Objective of the Study

The specific objectives of the study are as follows:


1. To study and analyze the investment structure.
2. To examine the problems of FITTA.
3. To provide findings and suggestions.

1.3 Significance of the study


1

Nepal, a capital poor economy with low domestic saving rate where development expenditure, to
a significant extend, are dependent on the foreign aid, foreign direct investment are very
necessary lubricant to generate economic growth. FDI is frequently viewed as instrumental in
promoting industrial growth and foreign trade particularly in developing countries. FDI
maintains relatively open economies, stable macro-economic conditions and limited restrictions
on foreign exchange transactions. It frequently stimulates competition, productivity and
innovation by local suppliers because local suppliers compete for lucrative contracts with
multinational enterprise. Further, it generates income and employment opportunities resulting in
higher wages, competitive price, more revenue, skills and technology transfer and increased
foreign exchange earnings. It contributes to the development of a host country by increasing the
countries investment level beyond what would be permitted by domestic saving alone. Similarly,
it enhances entrepreneurial capability when the foreign firms bring with it some firm specific
knowledge in the form of technology, managerial expertise, and marketing know-how. It also
allows new local entrants to learn about exports markets, provide training for workers and
stimulates competition with local firms. Thus, Nepal is to achieve faster rate of economic growth
at the present context, it is essential that it create the necessary and amicable condition to attract
FDI.

1.4 Limitation of the study


2

The study has the following limitations:

1. Secondary data are use to analyze for result interpretations, so the accuracy of the findings
depends on the reliability of the available information.

2. The study mostly focused on previous literature, reports and data on mapping the mindset of
inflow of FDI in Nepal.

3. The study covers the collection of data only a period of 5 years from the fiscal year 2010 to
2015 and conclusion drawn confines only to the above period.

4. Lack of knowledge gap on FDI issues prior to the study.

1.5Methodology of the study

This study is carried out in semi-doctrinal method. Analytical and historical method of
research will also be applied throughout this research seminar. The study is carried out on the
basis of primary and secondary sources of information. Primary sources of information
includes Constitution, Acts, Regulations, Judicial decisions and other international
instruments whereas secondary sources of information are collected from various books,
articles, law journals, reports and other legal materials. Many libraries of concerned
governmental and non-governmental offices are observed to collect materials including data
and information regarding the subject matter.

1.6 Relevant Documents


Out of all the documents mentioned on the references, the following are the most important
relevant documents.
1. Foreign Investment and Technology Transfer Act 1992 & Industrial Enterprises Act
1992 published by Department of Industries, HMG in March 2003.
2. An Investment Guide to Nepal Opportunities and Conditions published in January 2003
by UNCTAD & International Chamber of Commerce.
3. NEPAL Trade and Competitiveness Study published in March 29, 2004 the report
prepared for Ministry of Industry, Commerce & Supplies by World Bank.
4. Industrial Development Perspective Plan Vision 2020, an Analytical Report prepared for
Ministry of Industry, Commerce & Supplies by UNIDO.
Review

Chapter 2: Conceptual framework of foreign investment and transfer of technology

2.1 Foreign investments


Foreign direct investment simply means the investments made by the foreigners. In
simple manner foreign investment comprises of two word i.e. foreign and investment where
former means out of the country and the latter means the act of investing property for the sake
of generating wealth and profit. Foreign investment comes through the foreign person who may
be natural or legal which differs from donation or financial assistance to the government. Hence
foreign investment is the process of transformation of property from one country to another in
the motive to perform business activities. Foreign investment can be differentiated in two kinds
i.e.
A. Portfolio investment
It is distinct from direct investment, which involves taking a sizeable
stake in a target company and possibly being involved with its day-to-day
management.
B. Foreign direct investment
Foreign Direct Investment refers to international investment in which the
investor obtains a lasting interest in an enterprise in another country.
5

Foreign direct investment reflects the objective of obtaining a lasting interest by a resident
entity in one economy (direct investor) in an entity resident in an economy other than that of
the investor (direct investment enterprise). The lasting interest implies the existence of a
long-term relationship between the direct investor and the enterprise and a significant degree of
influence on the management of the enterprise. Direct investment involves both the initial
transaction between the two entities and all subsequent capital transactions between them and
among affiliated enterprises, both incorporated and unincorporated.1

OECD takes a broader perspective and argues that Foreign direct investment reflects the
objective of obtaining a lasting interest by a resident entity in one economy in an entity
resident in an economy other than that of the investor The lasting interest implies the
existence of a long term relationship between the direct investor and the enterprise and a
significant degree of influence on the management of the enterprise (OECD, 1996).

According to the IMF FDI means, "... refers to an investment made to acquire lasting or longterm interest in enterprises operating outside of the economy of the investor."
1 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT,OECD

BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT, at 7(1999)

The investment is direct because the investor, which could be a foreign person, company or
group of entities, is seeking to control, manage, or have significant influence over the foreign
enterprise.
M. Sornarajah has defined FDI as foreign investment involves the transfer of tangible or
intangible assets from one country into another for the purpose of use in that country to
generate wealth under the total or partial control of the owner of asset.2
World investment report has define the term foreign investment as An investment involving a
long term relationship and reflecting a lasting interest and control by a resident entity in one
country (foreign direct investor or parent enterprises) in an enterprise resident in any economy
other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign
affiliate).3
Foreign direct investors may also obtain an effective voice in the management of another entity
trough means other than acquiring an equity stake. These are non-equity forms of investment,
and they include, inter alia, subcontracting, management contract, turnkey arrangements,
franchising licensing and product sharing.4

M.SORNARAJAH,THE INTERNATIONAL LAW ON FOREIGN INVESTMENT,


Cambridge, Cambridge University press, at 4 (1994).
2

3 UNCTAD WORLD INVESTMENT REPORT, UNITED NATIONS. Geneva and New York, at

293 {2006)

4 UNCTAD WORLD INVESTMENT REPORT, supra note 10 at 294.

The actual meaning of foreign investment influx of the capital and technology in the country by
those person who are not the citizen of country to be invested where the capital and technology
is used for commercial purpose. In the context of Nepal, investment by alien entrepreneur for
the purpose of commercial transaction is considered as foreign investment.

Black law dictionary states the meaning of investment as expenditure to acquire property or
aspects to produce revenue, a capital outlay.5

Foreign investment and Technology Transfer Act (FITTA) 1992 has defined the term foreign
investment and technology transfer in separate manner where former is related to tangible
goods property and latter related to intangible property. Foreign Investment and Technology
Transfer act 1992, foreign investment means the following investment made by a foreign
investor in any industry.6
1. Investment in share (equity),
2. Reinvestment of the earning derived from the investment as referred to in sub section (I)
above,
3. Investment made in the form of or loan facilities.
In FITTA the definition of investment is narrow. It is silent in that terms where above
distinctions are only the funds but not the investment. Procedural manual for foreign investment

5 BRYAN GERMAN ED, THE BLACKS LAW DICTIONARY, London, West group, at 831

(7th ed 1999)

6 THE FOREIGN INVESTMENT AND TECHNOLOGY TRANSFER ACT, 1992, sec 2(d)

in Nepal 2007 has the procedure required to be followed while making foreign investment in
kind.7
Theories in FDI
DUNNINGS ECLECTIC PARADIGM
The OLI paradigm contributes in such a way that it gives a structure for the debate of the
intentions of FDI.
Dunning (1977, 1981), efficiently summarizes the micro and macro economic theories and
further clarification in his popularly known "ECLECTIC PARADIGM" or the OLI
rationalization of the theory of FDI.
For a company to effectively invest in a foreign country, it should have advantages that no other
company owns: also called Ownership. The country in which it desires to invest should present
location advantages: also called Location. Also, it should be competent of internalizing
operations: also called Internalization.8
VERNON'S THEORY: PRODUCT LIFE CYCLE
In the 1960's Vernon (1966) put in the thought of the product life cycle into the international
trade so as to elucidate the subsistence of overseas production as well as trade. Vernon suggested
7 GOVERNMENT OF NEAPL DEPARTMENT OF INDUSTRIES, Procedural Manual for

foreign Investment in Nepal, 2007 at 16.

8 Theories Of Foreign Direct Investment Economics Essay, Micro And Macroeconomic Theories
Of Foreign Direct Investment Economics Essay (July 25,1:31 pm), http://www.ukessays.com

that, the distinctiveness of the produce changes as the produce goes along the PRODUCT LIFE
CYCLE.
We may consider Vernon's input as an important and informative factor in FDI as had explained
a few of the outflows of Foreign Direct Investment in the US during the 50's and 60's.This theory
at the time was also considered to be of great importance as it looked at trade and direct investing
as being the vibrant option to provide the demand in the foreign boundaries.9
HYMER'S THEORY
Theory of International Operations, proposed by Hymer (1960) set the early
stage of modern theories on Foreign Direct Investment. His theory tells us
why companies decide to go global and not just export their products into
other markets. His first argument was that prospective FDI companies
desired to remove conflicts. He also argued that if one company controlled all
the other enterprises rather than separate firms operating, it would yield
better and quantitative results. Hymer also argued that a few manufacturers
benefitted from a company specific benefit over local firms. The theory lastly
argued that the credit that earnings in one business are over and over again
inversely correlated with profits in another business. Internalization Theory
The theory of internalization is related to Buckley and Casson (1985). They
wanted to enlighten how transnational companies organize their business in
international

markets

for

in-between

9
Id.
10

products

which

include

labor

possessions and other reserve inputs. Buckley and Casson (1985) argued
that companies could cut down on transaction and manufacturing costs by
internalizing the market for marketing and management resources, from
which maximum profit could be extracted.10
Kojima (1984).
Kojima (1984) argues that FDI will arise in the source nation's comparatively
disadvantaged (or marginal) industry, which is potentially comparatively
advantaged in the recipient nation. The host country has the prospect to
decrease its relative disadvantage as Kojima's theory on FDI states.11

2.2 Transfer of technology

10
id.
11
id.
11

Nepal foreign investment and technology transfer ACT (FITTA) 1992 has defined the term
foreign investment and technology transfer separately. Foreign investment is related with
tangible property and technology transfer is related with intangible property. FITTA has defined
technology transfer as any transfer of technology to be made under an agreement between an
industry and a foreign investor on the following matters.
1. Use of any technological right, specialization, formula, process, patent, or technical
knowhow of foreign origin,
2. Use of any trademark of foreign ownership,
3. Acquiring any foreign technical, consultancy, management and marketing service.
Hence the FITTA has recognized the following transfer as foreign investment in
different terms. According to our legal provisions, we can divide foreign investor in
Nepal into four types.
1. Foreign citizens
2. Foreign entities
3. Foreign citizens of Nepalese origin, and
4. Non-residential citizens.
The technology transfer concept is not only concern about the transfer of technological
knowledge or information but also the technology recipients capability to learn and absorb
technology into the production function (Maskus, 2003). Das (1987) argues that technology
transfer can be of two types: 1) production of new product (product or embodied technology
transfer); and 2) more efficient production of existing products (process or disembodied
technology transfer).12

12

Sazali Abdul Wahab, Defining the Concepts of Technology and Technology Transfer: A
Literature Analysis,`
12

2.3 Historical background of foreign investment in Nepal

Pre 1951 stage

13

Since the initial stage of industrialization, the investment policy of the government has been to
encourage investment in the private sector , both from Nepalese and foreigners. But there is no
clear picture of GONs policy before the democratic political change in 1952.Due to which
handful of Indian companies strangely operated in Nepal. 13Those companies were only guided
by the then Company Act of 1936 which lacked the or else have no any provisions in regard to
foreign company and managing agency operation in Nepal. Those industries established in
between 1936-1950 rather benefited the Rana family then to the natural development.
Nevertheless it paved the way for countrys industrialization process.

First Industrial Policy and the Industrial Enterprises Act, 1961

After 1951 and more precisely starting with development planning process, the government had
taken to formulate its foreign investment policies. The government for the fist time in its first
year plan (1956-1961) accepted the concept of foreign private capital welcoming the foreign
capital and technology especially in connection with the large scale industries. Government
then announced the Industrial policy in June 1958 but it lacked the strategies and administrative
measures to make the plan operative. Therefore after the review of the policy resulted in the
introduction of Industrial Enterprises act 1961 (IEA). IEA aimed in administrating and
regulating the foreign investments and also empowered GON to grant permission to establish
medium or large scale industries to foreign investors. Similarly it dealt with the settlement of
dispute through arbitration, implemented non discriminatory approach etc. Industrial
13

BHARAT B. KARKI, DEVELOPMENT OF COMPANY LAW AND PRACTISE IN NEPAL,


DHUNGEL AND ET AL, (eds.), THE LEGAL SYSTEM OF NEPAL, LAWsPUBLICATION,
90, (1968).
14

Enterprises Rules, 1964 made procedural arrangements in regard to supply of foreign exchange
and remittances of profits by foreign investors.

Second Industrial Policy and the IEA,1974


In order to remove investment rigidity and streamline procedures government made a change in
the policy and declared a new industrial policy in 1974. Coordination among government
agencies in providing facilities to industries, channelization of various policies relating to
industrial development through one window, fixation of certain time limits in licensing and
financial processes etc were the measures envisaged by the IEA 1974. Similarly private sectors
were provided extensive system of incentives comprising of increased income tax exemptions,
duty free imports of raw materials and spare parts etc. though amended twice many difficulties
were noticed during implementation of the act and hence the revision of the policy of 1974
introduced a new Industrial Policy in 1981 in the second year of sixth plan (1980-1985).

Third industrial policy and industrial enterprises Act, and foreign investment and technology
act, 1981

1981 industrial policy had a separate chapter on foreign investment which was considered
relatively liberal in respect to private domestic and foreign investment. For the enforcement of
this act it was transformed into various acts. In order to boost up the foreign investment flow in
the country the government came up with completely new and special act named Foreign
investment and technology act (FITA) 1981. The basic features of FITA were:

15

a. Foreign investment in industrial enterprises was encouraged on the grounds of


equity participation and industrial financing through medium and long term
loans, acquisition of knowhow and technology access to foreign markets,
increase in employment opportunities and higher management standards;
b. Foreign investment was welcome in the form of wholly-owned enterprise in the
large scale industries and majority ownership or joint venture in the medium
scale industries;
c. Foreign investment was welcome in certain desirable financed by foreign
investment had to be incorporated as a limited liability company in Nepal.
d. An industrial enterprise financed by foreign investment had to be incorporated as
a limited liability company in Nepal. A foreign investor could have been a
government, firm, individual, company, or an international institutions;
e. HMG or its designated agency had to stand guarantee on long term loans under
prescribed terms and conditions.

The New Constitution of the kingdom of Nepal 1990, and the foreign investment policy, 1992
Constitutional provisions
The popular movement of 1990 restored multi-party democracy followed by new constitution
on 9th November the same year. The constitution of the kingdom of Nepal 1990 under its article
26(12) declared one of its state policies that the state shall, for the purpose of national
development, pursue a policy of taking measures necessary for the attraction of foreign capital
and technology, while at the same time promoting indigenous investment. This is the very first
constitutional mention of states foreign investment policy in its history.

New industrial policy 1992

16

The new elected government made new policy measures to pave the way for the accelerated
economic and social development of the country. In the field of industry and trade the
government announced an open and liberal industrial policy in may 1992 giving the private
sector a dominant role. The eighth plan which was implemented since july 1992 had made the
following commitments:
i.

High priority was accorded to increase the participation of the private sector, foreign

ii.

investment and joint collaborations;


Foreign investment was made to be encouraged in order to promote foreign capital,
modern technologies management and technical skills in the domestic industries.

In order to make the investment environment more conductive, GON promulgated new a
industrial, foreign investment and one window policy based on IEA, 1992 and Foreign
Investment and Technology Transfer Act (FITTA)

2.4 Objectives and significances of foreign investment

Foreign investment plays a crucial role in the boosting up and strengthening the economy of
any nation. Some studies have highlighted the role of FDI on economic growth and concludes
that FDI from advanced economies has positive effect on economic growth in less developed
host economies through the of process technological diffusion (Borensztein et al., 1998 ; Findly,
17

1978 ; Wang et. al., 1992). As well it is claimed, that FDI, influences the process of economic
growth by filling up the saving-investment gap, fills trade gap, increasing productivity and
employment opportunities, raises the revenues for the development, transferring advanced
technology, provides not only capital requirements, but also managerial, technological skills and
innovations in techniques, encourages the local enterprise, increase government revenue and so
on. Since FDI is often seen as an important catalyst for the economic development of poor
economies. Also foreign investment has become an important means of financial private external
finance for developing countries and also a dynamic catalyst for modern economic development.

2.4 Gradual development of foreign investment act and laws

1, First industrial policy and industrial enterprises act, 1961

. The government for the first time in its first year plan (1956-1961) accepted the concept of
foreign private capital welcoming the foreign capital and technology especially in connection
with the large scale industries. Government then announced the Industrial policy in June 1958
but it lacked the strategies and administrative measures to make the plan operative. Therefore
after the review of the policy resulted in the introduction of Industrial Enterprises act 1961
(IEA). IEA aimed in administrating and regulating the foreign investments and also empowered
GON to grant permission to establish medium or large scale industries to foreign investors.

18

Similarly it dealt with the settlement of dispute through arbitration, implemented non
discriminatory approach etc.

2. Second Industrial Policy and the IEA, 1974

In order to remove investment rigidity and streamline procedures government made a change in
the policy and declared a new industrial policy in 1974. Coordination among government
agencies in providing facilities to industries, channelization of various policies relating to
industrial development through one window, fixation of certain time limits in licensing and
financial processes etc were the measures envisaged by the IEA 1974. Similarly private sectors
were provided extensive system of incentives comprising of increased income tax exemptions,
duty free imports of raw materials and spare parts etc. though amended twice many difficulties
were noticed during implementation of the act and hence the revision of the policy of 1974
introduced a new Industrial Policy in 1981 in the second year of sixth plan (1980-1985).

3. Third industrial policy and industrial enterprises Act, and foreign investment and technology
Act, 1981.

In order to boost up the foreign investment flow in the country the government came up with
completely new and special act named Foreign investment and technology act (FITA) 1981.
The basic features of FITA were:
a. Foreign investment in industrial enterprises was encouraged on the grounds of
equity participation and industrial financing through medium and long term

19

loans, acquisition of knowhow and technology access to foreign markets,


increase in employment opportunities and higher management standards;
b. Foreign investment was welcome in the form of wholly-owned enterprise in the
large scale industries and majority ownership or joint venture in the medium
scale industries;
c. Foreign investment was welcome in certain desirable financed by foreign
investment had to be incorporated as a limited liability company in Nepal.
d. An industrial enterprise financed by foreign investment had to be incorporated as
a limited liability company in Nepal. A foreign investor could have been a
government, firm, individual, company, or an international institutions;
e. HMG or its designated agency had to stand guarantee on long term loans under
prescribed terms and conditions.
4. New industrial policy 1992
In the field of industry and trade the government announced an open and liberal industrial
policy in may 1992 giving the private sector a dominant role. The eighth plan which was
implemented since july 1992 had made the following commitments:
i.

High priority was accorded to increase the participation of the private sector, foreign

ii.

investment and joint collaborations;


Foreign investment was made to be encouraged in order to promote foreign capital,
modern technologies management and technical skills in the domestic industries.

In order to make the investment environment more conductive, GON promulgated new a
industrial, foreign investment and one window policy based on IEA, 1992 and Foreign
Investment and Technology Transfer Act (FITTA) 1992.

The foreign investment and technology transfer act (FITTA), 1992

20

This act is the leading act which regulates the foreign investment and technology transfer. This
act provided the definition of technology transfer and FDI. Similarly it also dealt with the
permission to be obtained by the foreigners from prescribed department desiring to avail the
foreign investment of technology transfer. It also has the provision relating yo visa likewise
facilities and concessions, dispute settlement process, power to frame rules etc.

CHAPTER-3

ANALYSISNG

FOREIGN

INVESTMENT

AND

TECHNOLOGY

TRANSFER ACT, 1992


An act made to provide for matters relating to foreign investment and technology transfer
which was published in Nepal Gazette 12 November 1992 (o49/7127).
21

3.1 Preamble:
Whereas, in the process of industrialization of the country, ~it is expedient to promote foreign
investment and technology transfer for making the economy viable, dynamic and competitive
through the maximum mobilization of the limited capital, human and the other natural resources,
Be it enacted by Parliament in the twenty first year of the reign of His Majesty King Birendra Bir
Bikram Shah Dev.
3.2 Short Title and Commencement:
This Act may be called "The Foreign Investment And Technology Transfer Act, 1992.
It shall come into force at once.

3.3 Definitions:
Unless the subject or context otherwise requires, in this Act :

"Industry" means any industry as referred to in Section 3 of the Industrial


Enterprises Act, 1992.

"Foreign Investment" means the following investment made by a foreign


investor in any industry:

22

Investment in share (Equity),

Reinvestment of the earnings derived from the investment as referred to in


sub-section (l) above,

Investment made in the form of loan or 10an facilities.

"Technology Transfer" means any transfer of technology to be made under an


agreement between an industry and a foreign investor on the following matters:1.
Use of any technological right, specialization; formula, process, patent or
technical know how of foreign origin. 2 Use of any trademark of foreign
ownership. 3. Acquiring any foreign technical, consultancy, management and
marketing service.

"Foreign Investor" means any foreign individual, firm, company or corporate


body involved in foreign investment or technology transfer including foreign
government or international agency.

"Board" means the Industrial Promotion Board constituted under Section 12 of


the Industrial Enterprises Act, 1992.

"Department" means the Department of Industries or Department of Cottage and


Small Industries of His Majesty's Government or any other department, omce or
agency as specified by His Majesty's Government.

23

"Prescribed" or "As prescribed " means prescribed or as prescribed in rules


made under this Act or in an order issued by His Majesty's Government by
notification published in the Nepal Gazette.

3.4 Permission to be Obtained:

Permission of the Department shall be required to be obtained for foreign


investment or technology transfer.

A person desiring to avail the foreign investment or technology transfer shall be


required to make an application to the Department in the prescribed form along
with the prescribed particulars for obtaining permission in that behalf.

* If an application is made pursuant to sub-section (2) above, the Department


shall~ in the case of an industry with fixed assets up to five hundred million
rupees, itself, and in the case of an industry with fixed assets in excess "hereof, in
accordance with the decision of the Board, grant permission within thiny days
from the date of application. The Department shall communicate the decision
made in regard to such permission to the applicant.

* Notwithstanding anything contained in sub-sections (1) and (2) above, no


permission shall be granted for making foreign investment in the industries set
forth in the Annex.

24

Provided that permission may be granted for the transfer of technology in such
industries.

3.5 Facilities and Concessions:


1. ** No income tax shall be imposed to a foreign investor on the interest income
earned from foreign loan.
* 1 a) A foreign investor shall be levied income tax at a rate of fifteen percent
only, on the income earned from foreign technical as well as management service
fees and royalty.
2. A foreign investor making investment in foreign currency shall be entitled to
repatriate the following amount outside the Kingdom of Nepal:

The amount received by the sale of the share of foreign investment as a


whole or any part thereof,

The amount received as profit or dividend in lieu of the foreign


investment,

The amount received as the payment of the principal of, and interest on,
any foreign loan.

25

A foreign investor shall be entitled to repatriate outside the Kingdom of Nepal the
amount received under an agreement for the transfer of technology in such
currency as set forth in the concerned agreement.

3.6 Provisions Relating to Visa:

A foreign national visiting the Kingdom of Nepal in connection with undertaking


any study or carrying out any research with the objective of making investment in
the Kingdom of Nepal shall be provided a non tourist visa for up to six months.

** A foreign investor or dependent family or authorized representative of such a


foreign investor, and dependent family of such authorized representative shall for
the purpose of stay in the Kingdom of Nepal be provided a business visa until the
foreign investment is retained.
Provided that a foreign investor who, at a time, makes investment in an amount no
fees than one hundred thousand United States dollar or in convertible foreign
currency equivalent "hereto, and his dependent family shall be granted a
residential visa until such investment is retained.

3.7 Settlement of Disputes:

If any dispute arises between a foreign investor, national investor or the concerned
industry, the concerned parties shall be required to settle the dispute by mutual
consultations in the presence of the Department.
26

If the dispute could not be settled in the manner as referred to in sub-section ( I )


above, it shall be settled by arbitration in accordance with the prevailing
arbitration rules of the United Nations Commission on International Trade Law
(UNCITRAL).

The arbitration shall be held in Kathmandu. The laws of Nepal shall be applicable
in the arbitration.

* Notwithstanding anything contained in sub-sections (1), (2) and (3) above,


disputes arising in regard to foreign investment made in the industries with
investment as prescribed may be settled as mentioned in the foreign investment
agreement.

3.8 Power to Frame Rules:


His Majesty's Government may frame necessary rules for carrying out the objectives of
this Act.
3.9 This Act to Prevail:
Notwithstanding anything contained in the existing laws, matters stipulated under this Act
and rules made "hereunder shall be dealt accordingly.
*9A. Power to Make Alteration or Amendment in Annex:

27

His Majesty's Government may, by notification in the Nepal Gazette, make necessary
alterations or amendments in Part (B) of the Annex.
3.10 Repeal and Savings:

The Foreign Investment and Technology Act, 1981 is hereby repealed.

All acts performed or actions taken under the Foreign Investment and Technology
Act, 1981 shall be deemed to have been performed or taken under this Act.

**Amended by the First Amendment


#Repealed by the First Amendment
* Inserted by the First Amendment
3.11 Annex
Relating to sub-section (4) of Section (3)]Industries not to be granted permission for making
foreign investment
Part (A)

Cottage Industries

Personal Service Business (Business such as Hair Cutting, Beauty Parlor, Tailoring,
Driving Training, etc.).
28

Arms and Ammunition Industries.

Explosives, Gunpowder

Industries related to Radioactive Materials

Real Estate Business (Excluding Construction Industries).

Modon Pictures Business (Produced in national languages and the language of the
pation).

Security Printing.

Currencies and Coinage Business.

Part (B)

Retail Business.

Travel Agency.

Trekking Agency.

Water Rafting.

Pony Trekking.

Horse Riding.

29

Cigarette, Bidi (Tobacco), Alcohol (excluding those exporting more than 90%).

Internal Courier Service.

Atomic Energy.

Tourist Lodging.

Poultry Farming.

Fisheries.

Bee-keeping.

Consultancy Services such as Management, Accounting, Engineering and Legal Services.

Chapter 4: findings and recommendations


Foreign investors are equally treated as local investors and the same act prevail regarding
incentives and facilities to foreign investors. Any foreign national are granted 6 months non-

30

tourist visa if he or she want to conduct some survey, study or research with the objective of
making investment in Nepal. After that if he or she invest or establish an industry, then the
investor along with his dependant family is granted with business visa until their investments are
retained. Similarly if a foreign investor at a time makes an investment of US $ one hundred
thousand is granted a residential visa to him and his dependant family. All these are highly
encouraging statements. However in actual practice, the investors have to face various problems
from time to time. This is 3 mainly due to fact that DOI is only an recommending body whereas
granting of visa is the authority of the Immigration Department.

According to FITTA and IEA, there are some fiscal incentives including income tax relief. But
the amended Revenue Act and New Income Tax Act have withdrawn all such incentives, which
is highly controversial. Similarly, there is duty draw back facility to those who export their
products, but they have to face many difficulties in getting such facility in one hand and even if
they get , they get after long gap of time. Some time they are given Government bond instead of
cash which may be of no value to the foreign investors.
In order to overcome the natural barriers, Nepal must make an extra effort to improve the
investment climate relative to its other competitors. At present, FDI is lowest in Nepal even
among other landlocked countries. Although the rules governing foreign investment are liberal in
principle but ambiguous and less friendly in practice.
The overriding Income Tax Act of 2002 have withdrawn all the investment incentives whereas
such incentives still prevails as per FITTA. This has created uncertainties to investors with
respect to investment incentives. This shows that coordination between 4 the line ministries are
31

weak. Moreover, there are many duplication of institutions responsible for areas of investment
approval, investment incentives, trade facilitation, export promotion, investment promotion etc.
The number of such institutions should be reduced to one or two only.

Investment for hydropower development is very large and the gestation period is long.
Currently investment in hydropower development is not attracted.
Similarly, a mechanism for fast settlement of FDI disputes does not exist at present.

The suggested actions begin with revisions of the foreign investment law. At the same
time, the key elements of the business climate also need to be improved including taxation
and labour regulation and their administration in particular. Improvement in these key elements
should be the priority. Once this has been done and a new FDI law is in place, Nepal would be
able to consider policy enhancements such as abolition of exchange controls. High level attention
will be needed within the Government to achieve changes of the breadth required.
1. Revise the foreign investment law
A best-in-the-region objective would entail substantial revision of the Foreign Investment and
Technology Transfer Act of 1992. A decade of experience is an appropriate amount of time for
reflection and to take into account the general trends of liberalization of FDI policy among other
developing countries. Attention should be given to the following areas of the foreign investment
framework:
2. Selectively relax entry restrictions

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Many countries restrict FDI in areas of small-scale businesses, particularly personal services, to
protect local business and/or to guard against economic migration in the guise of foreign
investment. At least two areas on Nepals negative list should be reconsidered. First, it is
unusual to prohibit FDI in professional services (such as legal, accounting,
engineering and management services) of a kind that should operate to open and competitive
international standards. This rule is not a helpful signal to the investment climate and does not
help to transfer international professional standards and skills to Nepal. Secondly, the ban on
the establishment of international travel agencies cannot be in the interests of promoting Nepal to
the global tourist market. Doubtless the major international services firms have been able to
establish relationships with national firms that enable them to sell services to Nepal. But these
relationships are unlikely to motivate foreign firms to expand services into Nepal. More
generally, a blanket prohibition on FDI in the negative list industries is questionable policy. It
prevents national investors from exercising their business judgment to bring in foreign partners
to expand their businesses. Secondly, it prevents, without recourse to wider considerations of
national interest, large-scale or strategic foreign investments in the negative list industries, for
example in retail business or restricted agro-industries. The policy is too inflexible. Nepal
appears to have a critical mass of national businesses. Linkages should be encouraged.
(a) Confine entry screening to the negative list
Currently all FDI requires prior government approval. Technically, even re-investment of
earnings must be approved according to the foreign investment law. However, if a sector is
legally open for FDI there is no strong reason why a prospective investment should require
approval. Normal regulatory concerns will be dealt with in the secondary permitting stage, as
with any other business.

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Better practice would be to introduce flexibility in the negative list as suggested in (a)
above and require prior approval of FDI applications in respect of the negative list industries
only. The practical effect should be to speed up establishment of foreign investments in
unrestricted activities and enable government resources to concentrate on the special issues
involved in applications for FDI on the negative list. If desired, the Government could establish a
simple notification procedure for FDI in open activities. It could, and should, also continue to
offer investor facilitation services to foreign investors through the Department of Industries. The
Single Window system is reasonably successful and its facilitation services should be available
to investors who request them.
(b) Abolish dual screening of foreign technology transfer and foreign loans
The foreign investment law is duplicative and therefore unnecessary for approving
these transactions. The essential public interest in foreign technology transfer is to guard
against transfer pricing; but this can be done through the ample tax avoidance provisions of
the Income Tax Act.
The approval of foreign loans is already an exchange control function of the Central
Bank. Thin capitalization issues which are separate regulatory matters are also dealt with
in the Income Tax Act.
(c) Improve investor treatment and protection provisions
The terms of Nepals BITs provide high levels of assurance to foreign investors from
treaty countries in relation to issues of national treatment, non-discrimination, funds transfer,
expropriation and settlement of disputes with the State. The provisions for funds transfer
provide particularly wide assurances. Moreover, Nepal has good standards. The current
foreign investment law, on the other hand, does not have provisions on all these issues except

34

for funds transfer. Nepal should thus consider two actions: (a) if changes to the foreign
investment law are being made it could take the opportunity to modernize the treatment and
protection provisions to reflect the BIT terms; and (b) it could develop a wider BIT network
to entrench these assurances.
It should be a priority to conclude a modern BIT with India.
(d) Intrude less into dispute settlement terms between commercial parties
The current foreign investment law strays too far into the commercial area in its restrictions on
venue and governing law for settlement of disputes between commercial parties.
3. Improve the administration and design of business taxation
Business taxation is administered badly and is amended frequently. The Governments actions
are extremely damaging to the investment climate and there seems to be no urgency or priority to
attending to the problems.

Chapter 5: Bibliography

A. .Electronic materials
i.
ii.

Available in electronic version only from the Divisions web page at:
http://www.unctad.org/en/subsites/dite/index.html
Prospects for Global and Regional FDI flows: UNCTAD's Worldwide Survey of

iii.
iv.
v.
vi.

Investment Promotion
Agencies. 15 p. Free of charge. Available at:
http://www.unctad.org/en/subsites/dite/docs/rnote031405.pdf.
http://www.unctad.org/en/subsites/dite/1_itncs/1_tncs.htm.
http://www.unctad.org/wir/contents/wir92content.en.htm.
$45.http://www.unctad.org/wir/contents/wir93content.en.htm.
35

vii.
viii.
ix.
x.

Executive Summary. 34 p. UNCTAD/DTCI/10 (Overview). Free of charge.


http://www.unctad.org/wir/contents/wir93content.en.htm.
http://www.unctad.org/wir/contents/wir94content.en.htm.
No. E.92.II.A.19. $45. http://www.unctad.org/wir/contents/wir92content.en.htm.
B. .Journals

Transnational Corporations Journal (formerly The CTC Reporter). Published three times a year.

C. Serial publications

1. Production. 290 p. Sales No. E.93.II.A.14.


2. Production. An Executive Summary. 31 p. ST/CTC/159 (Executive Summary). Free of
charge.
3. Summary. 30 p. ST/CTC/143 (Executive Summary). Free of charge.
4. World Investment Report 1992: Transnational Corporations as Engines of Growth. 356
p. Sales
5. World Investment Report 1992: Transnational Corporations as Engines of Growth. An
Executive
6. World Investment Report 1993: Transnational Corporations and Integrated International
7. World Investment Report 1993: Transnational Corporations and Integrated International
8. World Investment Report 1994: Transnational Corporations, Employment and the
Workplace.

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