Corporate Law

Narayan Bahadur Khadka
(Advocate and Legal Consultant)

Article 26(12) of the constitution of the kingdom of Nepal declares one of its state polices that the state shall take the policy of attracting foreign capital and technology while at the same time promoting indigenous investment for the purpose of national development. This is the very first constitutional guarantee of state’s foreign investment policy in its history. Following the restoration of democracy, the new government had adopted several policies including industrial policy of 1992 and foreign investment policy of 1992. Consequently the government introduced two major legislations which are Industrial Enterprise Act, 1992 and Foreign Investment and Technology Transfer Act, 1992 (FITTA). In this article, I will analyzes the major provisions of foreign investment and Technology Transfer Act 1992. Similarly, the short coming will be identified and recommendations will be submitted in this article.

Objective of FITTA is beared in the preamble of the Act as follows:

"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."

Foreign investment has been realized as important element for the development of Nepal. The Preamble has made clear that the FITTA has been enacted for attracting of foreign investment and technology transfer in Nepal. FITTA regulates mainly private sector investment. However, does this Act not dealing with foreign loans obtained by government foreign governments, Financial institutions of from private sector.

FITTA 1992 has defined the concept of foreign investment, technology transfer, foreign investor etc. According to section 2(b) of the Act, "foreign investment" means the investment in share, reinvestment of the earnings derived from the investment and investment made in the form of loan or loan facilities.

In 1997, the IMF defined foreign direct investment as:-

"... Investment that is made to acquire a lasting interest in an enterprise operating in an economy, other than that of the investor, the purpose being to have an effective voice in the management of the enterprise."

Investment can be classified as portfolio investment and direct investment. In portfolio investment, investor buys the stocks and share but he/she does not control the management of the enterprises. But in direct investment, investor control management of the enterprises in which investment is made.

Similarly the Act has defined the concept Technology Transfer" as well. According to section 2(c) of the Act ‘Technology Transfer means any transfer of Technology to be made under an agreement between an industry and a foreign investor on the following matters:-

a) Use of any technological right, specialization formula, process, patent or technical know-how of foreign origin.

b) Use of any trademark of foreign ownership.

c) Acquiring any foreign technical consultancy management and marketing services.

Approval Requirements

Under the Act, government approval or permission is essential for the foreign investment or Technology Transfer (sec.3). Foreign companies/investors have to fill up a prescribed form to the department of industries for approval. "Industrial promotion Board" established under section 12 of the Industrial enterprise Act will decide approving foreign investments under FITTA. If an application is made by a foreign company, enterprise or individual in the prescribed format to the department of industries. The Board will give the permission within 30 days of the application filed. The Board shall not give approval in following areas of business or industries.

Part - A

i) Cottage industries

ii) Personal service Business (Business such as hair cutting, beauty palour, tailoring, driving training etc.)

iii) Armsand ammunitions industries

iv) Explosive, gun powder

v) Industries related to radio-active materials

vi) Real estate business (Excluding construction industries)

vii) Motion pictures business (Produced in national languages and the language of the nations

viii) Security printing

ix) Currencies and coinage buisness.

The government cannot change the above list. Parliament may change the above restriction.

Part – B

i) Retail business

ii) Travel agency

iii) Trekking business

iv) Water rafting

v) Pony trekking

vi) Horse riding

vii) Cigarette, bidi (tobacco), alcohol (excluding these exporting more than 90%)

viii) Internal courier service

ix) Atomic energy

x) Tourist lodging

xi) Poultry farming

xii) Fisheries

xiii) Beekeeping

xiv) Consultancy services such as management, Accounting engineering and legal services.

Government may, by notification in the Nepal Gazette, make necessary changes or amendments in part (B) of the annex. The above mentioned restrictions don’t apply in the area of Technology Transfer.

Facilities and Concessions

The Act has given certain facilities to attract foreign investors in the country. In addition to facilities provided by industrial enterprises Act, FITTA also has provided certain facilities and concessions for foreign investment. Those facilities are namely; tax incentives, repatriation facilities, visa facilities and other miscellaneous facilities.

Tax Incentives:-

A foreign investor shall be levied income tax at the rate of fifteen percent only.

Repatriation:-

Pursuant to sec. 5(2) of the Act, a foreign investor who making investment in foreign currency shall be entitled to repatriate the following amounts outside the country:-

a) The amount received by sale of the whole or any part of share investment

b) The amount received as profit or dividend in lien of the foreign investment

c) The amount received as repayment of the principal and payment of interest on the loan;

d) The amount received under an agreement for the transfer of technology;

e) The amount received as compensation for the acquisition of any property;

f) Foreign experts working in Nepalese industries are permitted to repatriate in convertible currency up to 75 percent of the amount received by them as salaries, allowances etc.

Visa facilities:-

- Non tourist visa will be issued for up to six months to a foreigner who is undertaking any study or carrying out any research for the purpose of making investment.

- Business visa will be provided to a foreign investor or dependent family or authorized representative of such a foreign investor.

- Residential visa will be issued to the foreign investor who makes investment amounting not less than one hundred thousand US dollar or in convertible foreign currency equivalent.

Dispute settlement Mechanism:-

Section 7 of FITTA 1992 provides that any dispute that 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 in such way dispute could not settled through conciliation, it shall be finally settled through arbitration. The arbitration shall be held in accordance with existing arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL).

The arbitration shall be held in Kathmandu. The laws of Nepal will be applicable in arbitration. Notwithstanding anything contained in above dispute arising in respect to foreign investment made in industries may be settled in accordance with provisions mentioned in the agreements. The parties of the agreement are free to fix the procedure, laws and venue of the dispute settlement. (Se.7(4))

Foreign investment policy and FITTA have following positive factors for foreign investment in Nepal.

a) 100 percent of foreign investment is permitted

b) In large as well as medium scale industries foreign investment is allowed

c) Full remittance of profits, dividends and repatriation of capital is permitted

d) Transfer of technology in cottage and small industries has been allowed

e) Security of foreign investment is guaranteed

f) Facilities provided

g) Quick and efficient services to foreign investor through on door system is provided.

In spite of above mentioned positive step in foreign investment the following are the problems which has to be solved for the flourishment of foreign investment in Nepal.

a) A foreign investor must wait 30 days for the permission of foreign investment under FITTA. After then he/she has to register a firm or company or industry. The time limit of 30 days is more, that is why within a week permission should be given.

b) Security situation of Nepal is a major obstacle in foreign investment. Until or unless government cannot improve security situation investor never come in Nepal for investment.

c) Lack of full commitment of government to provide all kinds of facilities to the investors for the flourishment of business is another problem. The government should have full commitment. The government is also not giving due concentration to economic agenda.

d) To remove the existing short comings in foreign investment law new legislation in the field of anti-monopoly or completion law bankruptcy and protection of industrial property laws are required.

e) Foreign portfolio investment is not mentioned under FITTA, it should be clearly mentioned in the Act.

f) One window policy is not so effective. The policy should be effective as to meet its goal. There are a number of problems being faced by foreign investors regarding one window policy. Such as: Bureaucratic harassment, unavailability of skilled manpower etc.

g) The provisions regarding Transfer of Technology under the Act are not sufficient only. Section 4 deals with technology transfer therefore, provisions should be added in the FITTA or separate legislation relating to Technology Transfer is required.

h) Skilled manpower should be arranged in the Department of Industry.

i) Administrative delay under various institution should be removed. Visa issuing and dispute settlement mechanism should be strengthened in order to attract more and more FDI.

j) There is lack of harmonization among relevant corporate laws like labour law, Company Act, Privatization Act and various Banking law in Nepal. Therefore, our main task is to harmonize those laws with foreign investment and Technology Transfer Act. Furthermore, those laws should be updated in the eve of becoming the full member of WTO.

k) The opinions given by FNCCI, NAARC and other civil society should be taken into consideration very seriously. Human Resources should be developed.

l) Last, but not the unsound economic policies, ineffective political leadership, rampant corruption, immaturely in policy formulation, high interest rate, criminalization of politics are other problems which are hurdles in foreign investment.

Cable way Transportation in Nepal

- By Khim Lal Devkota

Nepal is a rich country in hydro-electricity but due to resource crunch the country has not been able to reap benefit from this resource. The demand of the hydro electricity depends upon the industrialization of the country but we have not sufficiently developed industries in our country. Without industrialization the consumption of hydro-electricity will be very low. So to fulfill the gap between demand of hydroelectricity and hydroelectricity potentiality, we must develop the cable car service, it is too expensive but in the long run it helps to self-sufficient to give transportation facility in Nepal. Because we are spending a large volume of our national income, which is earned from different sector of the economy for importing fuel. In one side, the demand of fuel is increasing and another side, we will not be able to export goods like food grain, timber and jute. It results in the deficit balance of payment, which is unfavorable for our economic development of the country. So to make favorable balance of payment and to utilize hydro-electricity, first of all we must use hydro-electricity based transport instead of petrol or diesel, which is possible only by extending cable car project. The development of car service is infrastructure for the industrialization of the country and it gives transportation facilities for the Nepalese people also.

In the context Nepalese economy which is growing slowly requires easiest and quickest means of social overhead system. The transportation system however must be able to keep-pace with the everyday rising volume of economic development. We need the most easiest and quickest means of transportation, which can ensure the transportation of development material for tomorrow. From this point of view cable car service is much more superior than any other sort of transport. No doubt, airway transportation is much more quicker than rope-way but the irregular land surface, economic condition of the country does not encourage the development of air traffic to that extent. One the one hand, suitable land for airfield are not readily available on the other, they are much more expensive and economic standard of the country do not justify the development of this transport. Moreover, development of road and railway transport are not easy due to physical causes.

As a Himalayan country like Nepal, mountain roads very frequently suffer from heavy damages due to landslides and floods. Consequently, they are closed for long periods, as they need frequent repairs and it is often impossible to carry out all of the activities at the same time. On the other hand, the rehabilitation and maintains costs are also very high. Road-ways are pro to disasters, environmentally non-friendly and time consuming also. Nature has gifted Nepal with several natural resources. Of them, the most importance and abundant is the water resource, which has the potentials of generating more than 83000 MW of electricity. Therefore, having great potentials of generation of hydro-electricity, cable car can prove to be the ideal mode of transportation. Road transportation system account for a significant amount of petroleum use and pollutant emission, motorized transportation also has a significant negative impact on the environment. Local air pollution results from the emission of lead, carbon monoxide, nitrogen oxides, sulfur dioxide and particulates. Cable-way transport offers the benefit of reduced air pollution and more effective use of primary energy resources. Various studies reveal that the cable way transport will be more economically feasible proposition compared to motor vehicle transport.

Nepal is technically, financially poor. Beside this, the topography, the land surface is rugged and irregular. So that the construction of road not only difficult but also costly to construct it. As mentioned above the construction of roadways in the hilly region of Nepal requires heavy cost. The laying of railroad is also difficult. Because the laying railway requires development of road or at least a track which can support the railway lines in the hilly areas. Considering all these facts cable way transport is the cheapest, feasible and best between those two types. Because the installation of cable car does not require bridge and tracks as required for railway. It can be taken from one hill to another hill easily. But however, it does not mean that cable car is cheaper, it simply meant that it is cheapest than those two i.e. road and railway where water transport is not possible.

Ropeway transport was one of the means of transportation into Kathmandu valley from the south. First in 1929 AD, the construction of ropeway was initiated and it was completed after two years. Formerly it covered a distance of 14 miles from Dhorshing the southern plain of Nepal to Matatirtha being designed with a capacity of 8 tons per hour bout before its expansion the capacity went down to 4 to 5 tons. The ropeway before the construction of the Tribhuwan Rajpath may be regarded as lifeline for Kathamndu with its rapidly increasing people both from within and without the country. After the successful operation of this ropeway for years the reliability and usefulness of this mode of transport in vigorous mountain region of Nepal has been strongly felt as needed in infrastructure development.

Nepal’s only ropeway is not working. But 9th plan envisaged that work will be started toward improvement and privatization of 42 km long Kathmandu-Hetauda ropeway. After identifying hilly and remote tourist places, lead projects based on feasibility for the development of ropeway will be implemented to encourage private sector in the development of ropeway for promotion of tourism.

Due to lack of repair and maintenance the ropeway service established in 1964 is not currently in operation. In line with the government’s policy of encouraging private sector participation in transport development, the concept of cable car has been introduced in Nepal in 1997 Ad by the private sector to carry passenger from Kurintar, at Prithvi Highway to famous temple of the Goddess Manakamana in Gorkha district. The length of cable way is 3 km. With the commissioning of the cable car one full day trekking up steep hill from Abukhaireni to Manakamana temple and back has been reduced to 30 minutes. Now both and especially the disabled, old and children can visit the famous temple by the new cable car. The flow of thousands of visitors to the region everyday has directly and indirectly uplifted and boosted the economy of the inhabitants of these regions bringing hope and prosperity.

There are many religious and touristically important places in the country where cable way transport system can be connected to main road network. The development of cable way transport system will enhance the economic activity of the area, opening the field for development of the tourism industry and development of people and entire area. It is globally recognized that the cable car system is one of the most attractive forms of transportation in the hills. It plays vital role especially in the countries of the hilly regions. It plays the major role in the economic development of the country. Therefore, the government should assist private entrepreneurs for acquisition of land and other property in developing cable way transport. There is no laws and rules regarding the development of cable way transport. In is, therefore, the government should assist private entrepreneurs for acquisition of land and other property in developing cable way transport. There is no laws and rules regarding the development of cable way transport. There is no laws and rules regarding the development of cable way transport. It is, therefore, the government should formulate the laws relating to construction, maintenance and operation of cable transport. The cable way transport is expected to complement the other transport modes especially roads rather than competing or replacing them.

The Author is associated with Forum for Economics Studies.