Critical analysis in FITTA

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

1.3 Significance of the study

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

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at the present context, it is essential that it create the necessary and amicable condition to attract

FDI.

1.4 Limitation of the study

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.

3

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

4

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

5

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.

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

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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 long-

term interest in enterprises operating outside of the economy of the investor."

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.

1 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT,OECD BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT, at 7(1999)

7

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

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.

2 M.SORNARAJAH,THE INTERNATIONAL LAW ON FOREIGN INVESTMENT, Cambridge, Cambridge University press, at 4 (1994).

3 UNCTAD WORLD INVESTMENT REPORT, UNITED NATIONS. Geneva and New York, at 293 {2006)4 UNCTAD WORLD INVESTMENT REPORT, supra note 10 at 294.

8

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

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.

5 BRYAN GERMAN ED, THE BLACK’S LAW DICTIONARY, London, West group, at 831 (7th ed 1999)6 THE FOREIGN INVESTMENT AND TECHNOLOGY TRANSFER ACT, 1992, sec 2(d)7 GOVERNMENT OF NEAPL DEPARTMENT OF INDUSTRIES, Procedural Manual for foreign Investment in Nepal, 2007 at 16.

9

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

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

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

9 Id.

10

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

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

10 id.11 id.

11

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2.2 Transfer of technology

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 recipient’s capability to learn and absorb

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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,`

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2.3 Historical background of foreign investment in Nepal

Pre – 1951 stage

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 GON’s 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 country’s 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

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

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

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

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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:

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

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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 state’s foreign investment policy in its history.

New industrial policy 1992

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

investment and joint collaborations;

ii. 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)

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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,

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

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. 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.

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).

19

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

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

20

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

investment and joint collaborations;

ii. 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

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.

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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).

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:

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This Act may be called "The Foreign Investment And Technology Transfer Act, 1992.

It shall come into force at once.

3.3Definitions:

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:

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

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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.

"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.

3.4Permission 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

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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.

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,

25

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.

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.

3.6Provisions 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.

26

3.7Settlement 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.

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.

3.8Power to Frame Rules:

His Majesty's Government may frame necessary rules for carrying out the objectives of

this Act.

3.9This Act to Prevail:

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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:

His Majesty's Government may, by notification in the Nepal Gazette, make necessary

alterations or amendments in Part (B) of the Annex.

3.10Repeal 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)

28

Cottage Industries

Personal Service Business (Business such as Hair Cutting, Beauty Parlor, Tailoring,

Driving Training, etc.).

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.

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

Internal Courier Service.

Atomic Energy.

Tourist Lodging.

29

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-

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.

30

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

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.

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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

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 Nepal’s “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

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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.

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.

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(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 Nepal’s 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

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

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Business taxation is administered badly and is amended frequently. The Government’s 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

Available in electronic version only from the Division’s web page at:

i. http://www.unctad.org/en/subsites/dite/index.html

ii. Prospects for Global and Regional FDI flows: UNCTAD's Worldwide Survey of

Investment Promotion

iii. Agencies. 15 p. Free of charge. Available at:

iv. http://www.unctad.org/en/subsites/dite/docs/rnote031405.pdf .

v. http://www.unctad.org/en/subsites/dite/1_itncs/1_tncs.htm .

vi. http://www.unctad.org/wir/contents/wir92content.en.htm .

$45.http://www.unctad.org/wir/contents/wir93content.en.htm.

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

viii. http://www.unctad.org/wir/contents/wir93content.en.htm.

ix. http://www.unctad.org/wir/contents/wir94content.en.htm.

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

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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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