Conducting Due Diligence of a Company in Nepal

Introduction

Due diligence represents a systematic examination of a company’s financial, legal, and operational records before entering into business transactions, investments, or acquisitions. In Nepal, conducting thorough due diligence protects stakeholders from financial losses, legal liabilities, and reputational damage. The process involves reviewing corporate documents, financial statements, regulatory compliance, and contractual obligations under the framework of Nepalese law. This article outlines the essential steps and legal requirements for conducting due diligence of a company in Nepal.

Legal Framework for Due Diligence in Nepal

Due diligence in Nepal operates under multiple legal instruments. The Companies Act, 2063 (2006) establishes corporate governance standards and disclosure requirements. The Foreign Investment and Technology Transfer Act, 2075 (2019) mandates due diligence for foreign investors. The Securities Board Act, 2063 (2006) governs due diligence for listed companies. The Intellectual Property Rights Act, 2059 (2002) requires verification of intellectual property ownership. The Land Act, 2021 requires examination of property titles and ownership documentation. These laws collectively establish the legal foundation for conducting comprehensive due diligence investigations in Nepal.

Key Components of Company Due Diligence

Corporate and Legal Due Diligence

Corporate due diligence examines the company’s legal structure, registration status, and compliance with statutory requirements. This component verifies the company’s incorporation documents, memorandum and articles of association, board resolutions, and shareholder agreements. Investigators must confirm the company’s registration with the Office of the Company Registrar and verify that all regulatory filings remain current. Legal due diligence also assesses pending litigation, regulatory investigations, and compliance violations. This process ensures the company operates lawfully and possesses valid authority to conduct business transactions.

Documents to Review:

Certificate of incorporation and company registration documents from the Office of the Company Registrar.
Memorandum and articles of association containing company governance rules and procedures.
Board resolutions authorizing business transactions and capital expenditures.
Shareholder agreements defining ownership rights and profit distribution mechanisms.
Minutes of board meetings and shareholder meetings documenting corporate decisions.
Certificates of good standing confirming the company’s active legal status.

Financial Due Diligence

Financial due diligence involves comprehensive analysis of the company’s financial statements, accounting practices, and fiscal performance. Investigators examine audited financial statements for the preceding three to five years, including balance sheets, income statements, and cash flow statements. This process verifies the accuracy of financial reporting, identifies undisclosed liabilities, and assesses the company’s financial stability. Financial due diligence also examines tax compliance, bank statements, and accounts receivable and payable records. The Companies Act, 2063 requires companies to maintain accurate financial records and prepare annual financial statements in accordance with Nepal Accounting Standards.

Financial Documents to Examine:

Audited financial statements for the preceding three to five fiscal years.
Tax returns filed with the Inland Revenue Department and tax compliance certificates.
Bank statements and reconciliation records demonstrating cash flow accuracy.
Accounts receivable and payable aging schedules identifying outstanding obligations.
Loan agreements and debt instruments specifying repayment terms and conditions.
Insurance policies covering business assets and liability exposures.

Operational Due Diligence

Operational due diligence assesses the company’s business operations, management structure, and operational efficiency. This examination includes reviewing organizational charts, employment contracts, supplier agreements, and customer contracts. Investigators evaluate the company’s production capacity, supply chain reliability, and market position. Operational due diligence also examines the company’s compliance with labor laws, environmental regulations, and health and safety standards. The Labor Act, 2074 (2017) establishes employment standards that companies must observe, including wage requirements, working hours, and workplace safety provisions.

Operational Areas to Assess:

Organizational structure and management team qualifications and experience.
Employment contracts and compliance with the Labor Act, 2074 requirements.
Supplier and vendor agreements ensuring reliable supply chain operations.
Customer contracts and revenue concentration among major clients.
Production facilities and equipment condition and maintenance records.
Compliance with environmental regulations and waste management procedures.

Tax Due Diligence

Tax due diligence verifies the company’s compliance with Nepalese tax laws and identifies potential tax liabilities. Investigators examine income tax returns, value-added tax (VAT) filings, and customs documentation. This process confirms that the company has paid all assessed taxes and obtained necessary tax clearance certificates. Tax due diligence also identifies contingent tax liabilities and transfer pricing compliance for related-party transactions. The Income Tax Act, 2058 (2001) establishes tax obligations for companies operating in Nepal, and the VAT Act, 2052 (1996) governs value-added tax compliance.

Tax Documents to Review:

Income tax returns filed with the Inland Revenue Department for the preceding five years.
Value-added tax (VAT) registration certificates and VAT return filings.
Tax clearance certificates confirming payment of all assessed taxes.
Transfer pricing documentation for related-party transactions.
Customs declarations and import-export documentation for goods transactions.
Tax audit reports and correspondence with tax authorities.

Intellectual Property Due Diligence

Intellectual property due diligence verifies the company’s ownership of trademarks, patents, copyrights, and trade secrets. Investigators confirm that intellectual property registrations remain valid and that the company possesses proper documentation of ownership. This process identifies any licensing agreements, royalty obligations, or infringement disputes. The Intellectual Property Rights Act, 2059 (2002) establishes the legal framework for intellectual property protection in Nepal. Investigators must verify registrations with the Department of Industry and confirm that intellectual property does not infringe upon third-party rights.

Intellectual Property Documents to Verify:

Trademark registrations and renewal certificates from the Department of Industry.
Patent applications and granted patents with proof of ownership.
Copyright registrations and documentation of original authorship.
Licensing agreements permitting use of third-party intellectual property.
Trade secret protection measures and confidentiality agreements.
Intellectual property infringement claims and litigation records.

Real Property Due Diligence

Real property due diligence examines the company’s ownership of land and buildings, including title verification and encumbrance searches. Investigators obtain property documents from the Land Revenue Office and verify that titles are free from liens, mortgages, or other encumbrances. This process confirms that the company possesses valid ownership rights and that property is not subject to disputes. The Land Act, 2021 establishes the legal framework for property ownership and registration in Nepal. Investigators must verify that property transactions comply with legal restrictions on foreign ownership and that all property taxes remain current.

Real Property Documents to Examine:

Land ownership certificates (Lalpurja) from the Land Revenue Office.
Property survey maps and boundary documentation.
Mortgage and lien searches confirming absence of encumbrances.
Property tax payment receipts and current tax assessment records.
Lease agreements for rented properties and rental payment records.
Environmental clearance certificates for industrial properties.

Due Diligence Process and Procedures

Phase	Activities	Timeline	Responsible Party
Planning	Define scope, identify information requirements, establish timeline	1–2 weeks	Due diligence team lead
Information Request	Submit document requests to company management	1 week	Investigator
Document Review	Examine financial, legal, and operational documents	2–4 weeks	Analysts and legal counsel
Site Visits	Conduct facility inspections and management interviews	1–2 weeks	Operations and management teams
Analysis	Evaluate findings and identify risks and issues	1–2 weeks	Senior analysts
Reporting	Prepare due diligence report with findings and recommendations	1 week	Report writer

Common Due Diligence Risks and Red Flags

Investigators must identify warning signs indicating potential problems requiring further investigation. Inconsistencies between financial statements and tax returns suggest accounting irregularities. Significant related-party transactions without proper documentation indicate potential conflicts of interest. Frequent changes in auditors or accounting methods may signal attempts to conceal financial problems. Undisclosed litigation or regulatory investigations represent material risks. Concentration of revenue among few customers creates business continuity risks. Expired licenses or permits indicate non-compliance with regulatory requirements. Unresolved environmental violations suggest potential liability exposure.

Regulatory Compliance Verification

Due diligence must confirm that the company maintains compliance with all applicable Nepalese regulations. Investigators verify that the company holds all required licenses and permits for its business operations. This includes business registration certificates, sector-specific licenses, and professional certifications. The company must maintain current compliance with labor laws, environmental regulations, and tax obligations. Investigators obtain confirmation from relevant government agencies regarding the company’s regulatory status. Non-compliance with regulatory requirements creates legal liability and operational disruption risks.

Regulatory Compliance Areas:

Business registration and annual renewal with the Office of the Company Registrar.
Sector-specific licenses and permits required for the company’s business activities.
Environmental clearance certificates and pollution control compliance documentation.
Labor law compliance including employee registration and safety certifications.
Tax registration and current filing status with the Inland Revenue Department.
Professional licenses and certifications for key personnel.

Due Diligence Report and Findings

The due diligence report synthesizes investigation findings and presents conclusions regarding the company’s condition and risks. The report includes an executive summary, detailed findings organized by category, identified risks with severity assessments, and recommendations for addressing issues. The report must present factual findings supported by documentary evidence and avoid subjective conclusions. The report identifies material issues requiring resolution before transaction completion and highlights areas requiring ongoing monitoring. The due diligence report serves as the foundation for transaction decision-making and risk management planning.

Frequently Asked Questions

What is the typical duration of a due diligence investigation in Nepal?

Due diligence investigations typically require four to eight weeks, depending on company size and complexity. Smaller companies with straightforward operations may complete due diligence in three to four weeks. Larger companies with multiple subsidiaries or complex operations may require eight to twelve weeks for comprehensive investigation.

Which government agencies provide due diligence information in Nepal?

The Office of the Company Registrar provides corporate registration information. The Inland Revenue Department supplies tax compliance records. The Land Revenue Office furnishes property ownership documentation. The Department of Industry provides intellectual property registration details. The Department of Labor provides employment compliance information.

What costs are associated with conducting due diligence in Nepal?

Due diligence costs vary based on company size and investigation scope. Small company investigations cost between NPR 200,000 and NPR 500,000. Medium-sized companies typically cost NPR 500,000 to NPR 1,500,000. Large companies with complex operations may cost NPR 1,500,000 to NPR 5,000,000 or more.

Are foreign investors required to conduct due diligence in Nepal?

The Foreign Investment and Technology Transfer Act, 2075 requires foreign investors to conduct due diligence before making significant investments. Foreign investors must verify company compliance with Nepalese laws and regulations before committing capital.

What happens if due diligence reveals significant problems?

Significant problems may result in transaction termination, renegotiation of purchase price, or implementation of remedial measures. The acquiring party may require the seller to resolve identified issues before transaction completion or may adjust the purchase price to reflect identified liabilities.

Conclusion

Conducting thorough due diligence of a company in Nepal protects investors and business partners from financial losses and legal liabilities. The process requires systematic examination of corporate, financial, operational, tax, intellectual property, and real property records under the framework of Nepalese law. Investigators must verify compliance with the Companies Act, 2063, the Foreign Investment and Technology Transfer Act, 2075, and other applicable regulations. Comprehensive due diligence identifies risks, uncovers hidden liabilities, and provides the foundation for informed business decision-making. Engaging qualified legal and financial professionals ensures that due diligence investigations meet professional standards and produce reliable findings.