Foreign Direct Investment (FDI) through share purchase represents a significant pathway for international investors seeking to enter the Nepalese market. This investment mechanism allows foreign entities to acquire ownership stakes in existing Nepalese companies, contributing to the nation’s economic growth while providing investors with established business operations. Nepal’s legal framework governing such investments has evolved considerably, aiming to balance foreign capital attraction with protection of national interests.
Legal Framework Governing FDI in Nepal
The primary legislation governing foreign investment in Nepal is the Foreign Investment and Technology Transfer Act, 2019 (FITTA) and its implementing regulations. This legal framework replaced the previous 1992 Act, introducing more investor-friendly provisions while maintaining certain protective measures for the domestic economy.
Under Section 3 of FITTA 2019, foreign investment is permitted through various means, including the purchase of shares in existing companies. The Act defines foreign investment to include equity investments made by foreign investors in Nepalese industries, with specific provisions for share acquisition outlined in Section 3(1)(a).
The Investment Board Nepal Act, 2010 established the Investment Board, which plays a crucial role in approving and facilitating large-scale foreign investments. Additionally, the Companies Act, 2006 (Second Amendment, 2020) provides the corporate governance framework within which share transfers must operate.
Eligibility Criteria for Foreign Investors
Qualified Foreign Investors
According to FITTA 2019, qualified foreign investors include:
- Foreign individuals
- Foreign companies or corporate bodies
- International development institutions
- Foreign governmental or semi-governmental agencies
- Non-resident Nepalese citizens
- Foreign investment funds established under foreign jurisdiction
The Nepal Rastra Bank’s Foreign Investment and Foreign Loan Management Bylaws, 2021 further clarifies eligibility requirements for foreign investors seeking to purchase shares in Nepalese companies.
Restricted Sectors for FDI
Despite Nepal’s increasingly open investment climate, certain sectors remain restricted for foreign investment as per Schedule-1 of FITTA 2019:
- Poultry farming, fisheries, and bee-keeping (with exceptions for technical partnerships)
- Primary agriculture sectors including traditional agriculture
- Cottage industries and small enterprises with investment below specified thresholds
- Personal service businesses (hair salons, tailoring, etc.)
- Arms and ammunition industries
- Real estate business (excluding construction industries)
- Travel agencies, trekking agencies, and tour operators
- Rural tourism
Minimum Investment Threshold
FITTA 2019 establishes a minimum threshold for foreign investment at NPR 50 million (approximately USD 380,000). This requirement applies to share purchases as well, meaning foreign investors must invest at least this amount when acquiring shares in Nepalese companies. However, the government may revise this threshold through notifications in the Nepal Gazette.
Initial Due Diligence
Before initiating a share purchase, foreign investors should conduct comprehensive due diligence on the target company, including:
- Financial assessment of the company’s assets, liabilities, and profitability
- Legal compliance review regarding taxation, labor laws, and environmental regulations
- Verification of ownership structure and any encumbrances on shares
- Assessment of existing contracts and potential liabilities
- Evaluation of intellectual property rights and their protection status
This due diligence process is not statutorily mandated but represents essential business practice to mitigate investment risks.
Obtaining Regulatory Approvals
The share purchase process requires multiple regulatory approvals:
- Department of Industry (DOI) approval – Primary approval authority for investments under NPR 6 billion
- Investment Board Nepal (IBN) approval – Required for investments exceeding NPR 6 billion
- Nepal Rastra Bank (NRB) approval – Necessary for foreign currency transactions related to share purchases
- Sector-specific regulatory approvals – May be required depending on the industry (e.g., Nepal Telecommunications Authority for telecom companies)
According to Section 17 of FITTA 2019, the DOI must decide on investment applications within 15 days, while the IBN has 30 days to render decisions on larger investments.
The share transfer process requires preparation and submission of several documents:
- Share Purchase Agreement (SPA) between the foreign investor and existing shareholders
- Board resolution of the target company approving the share transfer
- Application to DOI/IBN for investment approval with prescribed forms
- Company registration documents of the foreign investor (authenticated and translated)
- Financial credentials of the foreign investor
- Proposed business plan post-acquisition
- Tax clearance certificates of the target company
- Valuation report of the shares being purchased
Post-Approval Compliance Requirements
After obtaining regulatory approvals, investors must complete several compliance steps:
- Registration of the share transfer with the Office of the Company Registrar
- Updating the company’s share register to reflect new ownership
- Notification to Nepal Rastra Bank regarding the foreign investment
- Compliance with any conditions stipulated in the approval letters
- Filing of updated ownership information with relevant tax authorities
Section 38 of FITTA 2019 mandates that foreign investors must report their investment status annually to the relevant investment approval authority.
The valuation of shares for foreign investment purposes typically employs one of these methodologies:
- Net Asset Value (NAV) method – Based on the company’s book value
- Discounted Cash Flow (DCF) method – Based on projected future earnings
- Market Comparable method – Based on valuation multiples of similar companies
- Earnings-based valuation – Using price-to-earnings ratios
The Nepal Rastra Bank may scrutinize the valuation to ensure it reflects fair market value, particularly to prevent capital flight through overvaluation.
Tax Implications for Foreign Investors
Share purchases by foreign investors trigger several tax considerations:
- Capital Gains Tax – 25% for non-resident entities on gains from share transfers
- Dividend Tax – 5% withholding tax on dividends paid to foreign shareholders
- Income Tax – Corporate income tax at 25% on company profits
- Tax Deducted at Source (TDS) – Various rates applicable to different payment types
The Income Tax Act, 2058 (2002) governs these tax obligations, with Section 57 specifically addressing taxation of non-residents.
Repatriation of Profits and Capital
FITTA 2019 guarantees foreign investors the right to repatriate:
- Annual profits or dividends from investments
- Proceeds from the sale of shares
- Payment of principal and interest on foreign loans
- Technology transfer fees, royalties, or management fees
- Amounts received as compensation for nationalization or expropriation
However, all repatriations must be processed through banking channels with Nepal Rastra Bank approval, as stipulated in Section 17 of the Foreign Exchange Regulation Act, 2019.
Post-Acquisition Considerations
Corporate Governance Requirements
Following share acquisition, foreign investors must adhere to Nepal’s corporate governance framework:
- Compliance with the Companies Act, 2006 regarding board composition and meetings
- Regular filing of annual returns and financial statements
- Maintenance of statutory registers and records
- Adherence to sector-specific regulatory requirements
- Compliance with corporate social responsibility provisions for larger companies
Employment of Foreign Nationals
Foreign investors may bring in expatriate personnel, subject to these conditions:
- Work permits required for all foreign employees
- Preference must be given to Nepalese nationals when equally qualified
- Technology or knowledge transfer plans must be implemented
- Maximum duration of work permits typically limited to 5 years
The Labor Act, 2074 (2017) and Labor Rules, 2075 (2018) govern employment relationships, including those involving foreign nationals.
Dispute Resolution Mechanisms
In case of disputes, foreign investors have several recourse options:
- Negotiation and mediation as primary dispute resolution methods
- Arbitration under Nepal’s Arbitration Act, 2055 (1999)
- International arbitration if specified in investment agreements
- Judicial remedies through Nepalese courts
Section 37 of FITTA 2019 specifically recognizes foreign investors’ right to international arbitration for dispute resolution.
What is the minimum investment amount required for foreigners to purchase shares in Nepalese companies?
The minimum investment threshold for foreign investors is NPR 50 million (approximately USD 380,000) as stipulated by FITTA 2019. This minimum applies to the total investment amount, including share purchases. The government may revise this threshold through notifications in the Nepal Gazette.
How long does the regulatory approval process typically take for share purchases by foreigners?
According to FITTA 2019, the Department of Industry must decide on investment applications within 15 days for investments below NPR 6 billion. For larger investments, the Investment Board Nepal has 30 days to render decisions. However, in practice, the entire process including all regulatory approvals may take 2-3 months.
Can foreign investors purchase 100% of shares in Nepalese companies?
Yes, foreign investors can purchase 100% of shares in most Nepalese companies, except in sectors with foreign investment restrictions or caps. Banking and financial institutions have specific ownership caps, with foreign investment limited to 85% of paid-up capital as per Nepal Rastra Bank regulations.
What are the key tax considerations for foreign investors purchasing shares in Nepal?
Foreign investors must consider capital gains tax (25% for non-residents), dividend withholding tax (5%), and potential double taxation issues. Nepal has Double Taxation Avoidance Agreements (DTAAs) with several countries that may provide tax relief. The Income Tax Act, 2058 (2002) governs these tax obligations.
How can foreign investors repatriate their profits and investment capital from Nepal?
FITTA 2019 guarantees foreign investors the right to repatriate profits, dividends, proceeds from share sales, and loan repayments through banking channels with Nepal Rastra Bank approval. Investors must submit documentation proving the legitimacy of the funds being repatriated and comply with foreign exchange regulations.
What due diligence steps should foreign investors take before purchasing shares in Nepalese companies?
Foreign investors should conduct comprehensive due diligence including financial assessment, legal compliance review, verification of ownership structure, assessment of existing contracts, and evaluation of intellectual property rights. Engaging local legal and financial advisors is highly recommended to navigate Nepal’s business environment effectively.
Are there any restrictions on subsequent transfer of shares by foreign investors?
Foreign investors can transfer their shares to other eligible foreign investors or Nepalese nationals, subject to regulatory approvals similar to the initial investment process. Any transfer must comply with FITTA 2019 requirements and obtain necessary approvals from the Department of Industry or Investment Board Nepal, depending on the investment size.