2013 Investment Climate Statement - Nepal

2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013

Openness to, and Restrictions Upon, Foreign Investment

Since the April 2008 Constituent Assembly election, Nepal has seen four governments. The current government, formed in August 2011, is led by the Unified Communist Party of Nepal-Maoist and supported by a coalition of regional parties. As with previous governments, the current Government of Nepal (GON) has continued its liberal trade and investment policies and states in its public proclamations to foreign investors that Nepal is open for business. However, political instability, labor unrest, continuing bureaucratic delays and inefficiencies, pervasive corruption, and perennial power shortages create an uncertain environment for foreign and private investment.

At the end of FY 11/12 (Nepal’s fiscal year runs from mid-July to mid-July), there were 2,335 foreign investment projects in Nepal, worth a total of approximately USD 2.76 billion, according to official GON statistics. India was by far the most important foreign investor in Nepal with 525 ventures, accounting for nearly 46.32 percent of total foreign investment. Ten of the 20 largest foreign enterprises in Nepal had Indian investment. China, with 478 ventures, ranked second, accounting for 10.46 percent, and the United States, with 198, ventures ranked third, accounting for 6.84 percent of total foreign investment. South Korea, Norway, Canada and the United Kingdom are also prominent sources of foreign investment.

Reform of laws and regulations has allowed the growth of private operations in sectors that were previously government monopolies, such as telecommunications and civil aviation. In 2005, the GON also opened some service sectors to foreign investment. Licensing and regulations have been simplified, and 100-percent foreign ownership is now allowed in the travel and tourism sector, and in the production of cigarettes and alcohol. Government policy also permits 51 percent foreign investment in consultancy services, such as management, accounting, engineering and legal services, and retail chain stores and franchises having a presence in more than two countries. New banking institutions and a small stock exchange provide alternative sources of investment capital. On January 1, 2010, per its accession commitments to the World Trade Organization (WTO), Nepal opened the domestic banking sector to foreign banks, which are now allowed to engage in wholesale, but not retail, banking. Foreign banks operating branches in Nepal can invest only in major infrastructure projects.

The Government has opened the hydropower generation sector to private development, including foreign ownership. In August 2011, the Ministry of Energy announced the new Hydropower License Management Procedure, which promised to award licenses for hydropower projects above 10 MW through a competitive process. However, the process for obtaining licenses for hydropower projects remains cumbersome, and the new policy has created uncertainty about pending license applications. Unreasonable delay in the evaluation of hydropower survey license applications, a poor security environment, corruption, and political instability also discourage long-term investment in this sector. Additionally, Parliament has yet to approve the Nepal Electricity Regulatory Commission Act, designed to unbundle the functions of the bankrupt Nepal Electricity Authority (NEA), and create an independent regulatory body. Experts consider these steps necessary to reform NEA and stimulate private investment in the energy sector. Although a small number of private-sector hydropower projects have either begun operations or are in the planning stages, development of the sector has been very slow, and projects designed for the export of electricity to India remain politically sensitive.

Despite these steps to open additional sectors, significant barriers to increased foreign investment remain. Basic infrastructure needed to support investment is inadequate. The supply of power and water is insufficient. Transport is difficult and expensive, a problem compounded by the fact that Nepal is landlocked. Most products imported and exported by ship enter through Kolkata, India, and are then shipped overland. Nepal also lacks trained personnel and basic raw materials. In addition to these challenges, foreign investors must also deal with inadequate and obscure commercial regulations, vague and changeable rules governing labor relations, a non-transparent and capricious tax administration system, and difficulties in obtaining long-term visas. Furthermore, there is often variance between the letter of the law and its implementation.

Foreign investors complain about complex and opaque government procedures and a working-level attitude that is often more hostile than accommodating. The GON has long been aware of the deficiencies in the investment climate, but has moved slowly on creating a more investor-friendly climate. The Foreign Investment and Technology Transfer Act of 1992 abolished the minimum capital investment requirement and eliminated other significant barriers to investment. The Act also allowed investment in the legal sector, management consulting, accounting and engineering services, with a 51-percent limit on foreign ownership. Efforts intended to establish a "one window policy" and streamline government procedures related to foreign investment have produced few results, but there have been some promising signs that the recently created Investment Board has been able to better coordinate domestic and foreign investors. The Board is focusing on large investment projects worth more than Rs. 10 billion (approximately USD 115 million) and certain key sectors, and could help cut through bureaucratic delays and improve interagency coordination. Legislation

The most significant foreign investment laws are: the Foreign Exchange (Regulation) Act of 1962; the Foreign Investment and One Window Policy of 1992; the Foreign Investment and Technology Transfer Act of 1992 and its Amendments; the Immigration Rules of 1994; the Customs Act of 1997; the Industrial Enterprises Act of 1992; the Electricity Act of 1992; the Privatization Act of 1994 and the annual Finance Act , which outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.

The Foreign Investment and One Window Policy lists acceptable forms of investment, allows for foreign shares up to 100 percent in business areas not on its "negative list," establishes currency repatriation guidelines, and outlines visa arrangements, arbitration guidelines, and a special "one window committee" for foreign investors. The Foreign Investment and Technology Transfer Act (FITTA) 1992, which was revised in 1996, 2000, 2002, and 2010, eliminated the minimum investment requirement, while opening legal, management consulting, accounting, and engineering services to foreign investment, with a 51-percent ownership limit. It also clarified rules relating to business and resident visas. In general, under the FITTA all agreements related to foreign investment are governed by Nepali law and subject to arbitration in Kathmandu under United Nations Commission for International Trade Law rules. However, foreign law can be applicable in cases where the foreign investment exceeds NRS 500 million (approximately USD 6 million) and where the parties make this choice clear in their agreement.

The Customs Act and the Industrial Enterprises Act, revised in 1997, established invoice-based customs valuations and eliminated many investment tax incentives, replacing them with a lower, uniform rate. The Electricity Act defines special terms and conditions for investment in hydropower development. The Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises to broaden participation of the private sector in the operation of such enterprises.

Additionally, the terms and conditions of intellectual property protection are defined by the 1965 Patent, Design and Trademark Act and the 2002 Copyright Act. The latter covers all types of electronic audio and visual materials and subjects violators to fines and imprisonment, as well as the confiscation of unauthorized materials. Violators also have to pay compensation claimed by the copyright holder. However, it does not meet the standards for trade-related intellectual property rights required by the World Trade Organization. The Government of Nepal is working to revise its intellectual property rights legislation to meet international standards.

The Competition Law 2004 controls anti-competitive practices, protects consumers against monopoly rights of trading enterprises, promotes fair competition for the growth of trade and commerce, and includes provisions for the control of mergers and acquisition of two or more firms that have the potential of gaining dominance in the market and acquisition of monopoly rights. The Competition Law also contains special provision for controlling black marketing and misleading advertisements.

Most of the acts and policies, and their amendments, governing foreign and private investment in the potential sectors were brought out during the last decade. However, implementation and enforcement of these laws and policies remain a challenge. Moreover, the unpredictable political atmosphere renders the investment climate in Nepal uncertain.

Institutional Arrangements

In August 2011, a high-level Investment Board was created to serve as a one window facility for domestic and foreign investors pursuing large projects greater than Rs. 10 billion or approximately USD 115 million or projects in “priority areas” such as highways, hydropower projects over 500 MW, railways, medical colleges, tunnel roads, bridges, cable cars, international and regional airports, urban solid waste management, chemical fertilizers, and petroleum refinery plants. The Board, chaired by the Prime Minister, has the authority to formulate investment policies, prioritize and approve projects, facilitate the signing of agreements among different ministries, provide financial and nonfinancial facilities, procure land, monitor project progress, order government agencies to issue necessary project approvals and override any regulations in the existing laws in the name of investment promotion. The creation of the Board is meant to help cut through bureaucratic red-tape and expedite investments coming into Nepal.

Prior to the establishment of the Investment Board, the Department of Industry, under the Ministry of Industry, was designated as the "one window servicing agency" for all foreign investment to facilitate corporate registration, land transfers, utility connections, administrative services agreements, and coordination among various agencies. The Department also registers and classifies foreign investments and manages the income tax and duty drawbacks granted to some foreign investments. The Department of Industry remains the focal point for foreign investments of less than NRs. 10 billion (approximately USD 115 Million), or investments outside of the priority areas.

The Industrial Promotion Board (IPB), chaired by the Minister of Industry, is the primary government agency responsible for foreign investment. It is charged with coordinating policy-level institutions, establishing guidelines for economic policy, approving foreign investment proposals, and determining applicable investment incentives.

Under current administrative procedures, foreign investors are required to obtain licenses for manufacturing or service sector investments, and each license request is considered individually. Investments below 2 billion rupees (approximately USD 25 million) are referred to the Department of Industry for action and are typically approved at the departmental level without the involvement of the IPB. However, investors frequently complain about bureaucratic delays and lack of transparency in procuring investment licenses. For investments exceeding Rs. 2 billion, up to six ministries other than the Ministry of Industry review a business proposal prior to consideration by the IPB.

The Department of Electricity Development, under the Ministry of Energy, is responsible for licensing all investments in hydropower projects. However, decisions on project proposals that involve foreign investment are invariably made by the Ministry of Energy itself. Similarly, Nepal Rastra Bank (NRB), the country’s central bank, is responsible for issuing licenses to operate commercial banks and financial institutions. The Insurance Board (IB) is responsible for issuing licenses to operate insurance companies, both life and general. The Civil Aviation Authority of Nepal (CAAN) is responsible for granting operating licenses to both domestic and foreign airline operators, and the Nepal Telecommunications Authority (NTA) is responsible for issuing licenses for operating any type of telecommunications and information technology services.

Licensing of new investments is often time-consuming and requires legal counsel and patience. The IPB, for example, is mandated by law to make a licensing decision within 30 days of submission of an application, but this deadline is not generally met because of the legal provision that all necessary information must have been submitted before a decision can be made. In practice, multiple meetings are usually required before the information is deemed sufficient.

Eligible Sectors

Foreign investment proposals must fall within eligible industry categories. These include: agriculture and forestry; manufacturing; electricity, both water and diesel-generated; civil aviation, including airport construction and installation of navigational equipment and facilities; road construction; hotels and resorts; transport; communications; housing and apartments; and a restricted range of services. The GON opened service sectors, along with a few others, in December 2005 to comply with its WTO commitments. These sectors include business and management consulting, accounting, engineering and legal services, travel and trekking services, hotels and resorts, international retail sales services, and production of alcohol or cigarettes. In 2010, the GON further opened the commercial banking sector to foreign investment. Foreign investment is forbidden in the defense sector, and the IPB will not license foreign investments that are judged to be either hazardous to general health or the environment.

Foreign investors are permitted to acquire real estate in the name of the business entity they own, but are not allowed to acquire real estate as personal property. Although local law permits foreign investors to buy shares on the local stock exchange, in practice investment in the stock exchange is not yet open to foreign investors. This is due mainly to the provisions of the Foreign Investment and Technology Transfer Act of 1992, which requires the Department of Industry to approve the purchase of local shares by foreigners. Also, in cases of investment in banks and insurance companies, prior approval of the regulator is required. Further, approval by the NRB is also required for such purchase of shares under the Foreign Exchange (Regulation) Act 1962. All of these hurdles make investment in the local stock market cumbersome for foreign investors.

Foreign investors are allowed to buy shares of government corporations by participating in the bidding for privatization of such corporations. In such cases, Nepal’s Ministry of Finance sells the shares to the buyer after carrying out a lengthy screening during the bidding process. Through a July 2006 amendment in the licensing policy of financial institutions, the NRB increased the maximum foreign equity participation limit in domestic financial institutions to 85 percent from 67 percent. With the amendment, equity participation of foreign investors in joint venture financial institutions can range between 20 percent and 85 percent, with the remaining shares open for purchase by the general public. Joint venture financial institutions with less than 50 percent foreign equity participation are required to earmark at least 30 percent of their shares for sale to the general public. The Privatization Act of 1994 generally does not differentiate between national and foreign investors. However, in cases where proposals from two or more investors are identical, the government gives priority to Nepali investors. The process of privatization, dissolution and liquidation of government-owned private enterprises started in 1993. To date, 15 state-owned corporations have been privatized, seven corporations have been liquidated and two other corporations have been closed. The last privatization completed by the government was in January 2006. Foreign investors have taken over two of the 15 corporations privatized. The privatization process of three other state-owned corporations, which began in early 2006, was put on hold in April 2006 when Nepal’s monarchial rule ended. Since the Constituent Assembly elections held in April 2008, no government has demonstrated a willingness to restart the privatization process. In fact, leaders of various political parties often express their support for reviving moribund state-owned corporations.

On June 17, 2010, the Privatization Committee of the Constituent Assembly directed the GON to furnish detailed plans for divestment of two state-owned corporations, the Agricultural Development Bank Limited (ADBL) and Nepal Telecom (NT), to strategic partners. Plans are still pending. In August 2010, the Finance Ministry announced it would sell shares of eight other public enterprises and run them under the public private partnership (PPP) model; however no further action was taken.

Hydropower is a sector with enormous possibilities – the estimated generation potential is 83,000 megawatts, more than half of which has been identified as economically feasible to develop, but Nepal’s installed hydro capacity is only about 652 MW. The demand for electricity continues to increase faster than generating capacity. All hydropower plants, except one, are run-of-river facilities, the generating capacities of which are greatly diminished during the winter dry season.

Nepal’s demand for power is estimated to grow at an annual rate of 12 percent but its supply has not kept pace. The monopoly power supply corporation, the NEA, has predicted peak demand during the 2012-13 dry season to exceed 1,026 MW, during which time it expects to be able to fulfill only 33 percent of the required power. However, given the tremendous hydropower potential in the country, even a few medium sized hydroelectric projects could provide Nepal with excess power during the monsoon season. If this were to happen, the country could be in a position to export power to neighboring states in India (Northern-Grid), which have an average monthly power deficit of roughly 3,100 MW. The GON opened the sector to private development, including foreign investment, but has done little else to realize a greater share of hydropower’s vast potential.

In April 2004, the state-owned Nepal Telecommunications Corporation was converted into a public limited company, and its name was changed to Nepal Doorsanchar Company Limited (commonly known as Nepal Telecom). However, the GON retained full ownership of the company. At the time of conversion, the estimated amount of paid-up capital and authorized capital of the corporation stood at 15 billion Nepali rupees (USD 238 million) and 25 billion Nepali rupees (USD 397 million) respectively.

On January 23, 2008, Nepal Telecom launched an initial public offering (IPO) to sell 15 million shares, a 10-percent stake in the company. It also sold a 5-percent stake in the company – 7.5 million shares – to its employees as required by the government. The IPO fell well short of government expectations, with the public purchasing roughly five million shares. In September 2008, the Finance Minister announced that the unsold shares would be sold through secondary markets. However, further action in this regard was never initiated. On March 29, 2010, Nepal Telecom passed a resolution to sell minority shares to an international telecommunications operator – a change deemed necessary for Nepal Telecom to remain competitive. In May 2010, the Government formed a high-level task force that recommended divesting 26 to 30 percent stake of the company to a foreign strategic partner. The Privatization Committee of the Constituent Assembly directed the Ministry of Information and Communications to present detailed plans for divesting shares, but so far the Government has decided to do so. The GON retains a 91.5 percent stake in Nepal Telecom.

Per its accession commitments to WTO, on January 1, 2010, the GON opened the domestic banking sector to foreign banks to engage in wholesale but not retail banking. Foreign banks operating branches in Nepal can invest only in major infrastructure projects. Investment in the retail banking sector is available through joint ventures only, and any such operations are required to be incorporated in Nepal.

Since 2003, the World Bank has been working to restructure two of the largest state-owned commercial banks, the Rastriya Banijya Bank ("National Commercial Bank" or RBB) and the Nepal Bank Limited (NBL). Even after eight years of direct supervision and NRs. 8 billion (approximately USD 92 Million) in subsidized loans, the NRB failed to prepare the two banks for divestment. In early December 2010, the GON made it clear that it will not inject additional funds to recapitalize the two ailing banks and hinted at divestment of its shares to induct strategic partner to turnaround their financial outlook. However, the reform, revitalization, and professionalization of these institutions are long-term tasks, and the banks have not indicated that they are ready for privatization.

The civil aviation sector has emerged as another potential sector for foreign investment in Nepal. The sharp increase in the number of air travelers in and out of Nepal in the last few years has brought in 28 international airlines companies operating roughly 63 international flights a day, and 18 airline companies operating around 217 flights in the domestic sector. In order to address the need, the GON is upgrading a number of domestic airports and the international airport in Kathmandu, and planning the construction of a second international airport, though the execution of these plans could take years or even decades. Visas

The GON offers different types of visas to investors and businesses. Potential investors are generally given six-month visas to conduct research and feasibility studies. To obtain a six-month visa, applicants must provide biographic information and a description of relevant work and professional experience. If the Department of Industry can readily identify the applicant as a legitimate business representative, the process can be expedited. Endorsement by a recognized foreign industrial enterprise is one means of accomplishing this. The Foreign Investment and Technology Transfer Act allows foreign investors to have one residential representative in Nepal. In cases where the foreign investor wishes to have more than one representative, the visa process becomes difficult. In the past, investors have even had problems obtaining visas for a second foreigner to serve as general manager responsible for their Nepali operations.

Business visas are generally issued to approved investors for a period of one to five years. However, investors describe the business visa process as bureaucratic and time-consuming. Many say they spend more than 24 work hours per visa, over a period of 20 to 30 days.

Although the GON authorized five-year, multiple-entry visas for resident foreign investors and their families in 1998, very few have been issued. Investors have complained that although there have been no legal revisions to the five-year business visa provision, the government generally issues only one-year business visas. Nepal’s business visa fee is USD 300 for a five-year visa and USD 100 for a one-year visa for investors who bring more than NRS 10 million (roughly USD 115,000), and USD 1,000 for a five-year visa and USD 300 for a one year visa for investors who bring NRS 10 million or less. A non-tourist visa, however, costs USD 60 per month for the initial six-month period. This visa period can be extended for another six months or more at an additional USD 60 per month.


The following table lists Nepal’s most recent ranking by organizations that monitor economies’ economic corruption, freedom, and ease of doing business.




TI Corruption Index



Heritage Economic Freedom



World Bank Doing Business


108 out of 185

MCC Gov.t Effectiveness


0.08 (60th percentile)

MCC Rule of Law


-0.08 (45th percentile)

MCC Control of Corruption


0.10 (55th percentile)

MCC Fiscal Policy


-1.4 (75th percentile)

MCC Trade Policy


60.8 (25th percentile)

MCC Regulatory Quality


0.04 (53rd percentile)

MCC Business Start Up


0.922 (63rd percentile)

MCC Land Rights Access


0.65 (71st percentile)

MCC Natural Resource Management


66.6 (58th percentile)

Conversion and Transfer Policies

The Foreign Investment and Technology Transfer Act of 1992 permits foreign investors to repatriate all profits and dividends, all money raised through the sale of shares, all payments of principal and interest on any foreign loans, and any amounts invested in transferring foreign technology. Foreign nationals working in local industries are also allowed to repatriate 75 percent of their salaries, allowances, and emoluments, etc. Repatriation facilities (such as opening accounts or obtaining permission for remittance of foreign exchange) are made available on the recommendation of the Department of Industry, which normally provides approval of the original investment.

However, convertibility is difficult and not guaranteed. The relevant GON department and the NRB, which regulates foreign exchange, must approve the repatriation of funds. In most cases, approval must also be obtained from the Department of Industry. In the case of telecommunications, the Nepal Telecommunications Authority must approve the repatriation. In joint venture cases, the NRB and the Ministry of Finance must grant approval. After administrative approvals, a lengthy clearance process in the banking system also slows the transfer of foreign exchange. The experience of U.S. and other foreign investors indicates there are discrepancies between the government's stated policy of repatriation and its implementation.

Foreign investors must apply to the NRB to repatriate funds from the sale of shares. For repatriation of funds connected with dividends, principal and interest on foreign loans, technology transfer fees, expatriate salaries, allowances, and emoluments, the foreign investor applies first to the Department of Industry and then to the NRB. At the first stage of obtaining remittance approval, foreign investors must submit remittance requests to a commercial bank. Generally, foreign investors rated services provided by private banks as satisfactory. However, final remittance approval must be made by the NRB foreign exchange department, at which stage the process slows down significantly. For this reason, foreign investors rated the NRB’s administration of exchange regulations as unsatisfactory.

In general, Nepalis are not permitted to invest outside of Nepal. Exceptions, however, can be granted on a case-by-case basis, and policing of the prohibition is weak. In 1995, a private airline was permitted to invest in a regional carrier based in Kolkata. However, the Nepali airline closed down in 2005. The next year, another private airline operator formed a joint venture with a regional carrier based in India to operate flights in northeastern Indian states. These are the rare instances of approved direct foreign investment by Nepali nationals. During the peak of the Maoist insurgency in 2004 and 2005, a few industrial houses made unauthorized investments in India and Gulf countries.

Expropriation and Compensation

The Industrial Enterprise Act of 1992 states that "no industry shall be nationalized." The GON routinely reiterates this point in negotiations with private-sector firms interested in the hydropower sector. To date, there have been no cases of nationalization in Nepal, nor are there any official policies either existing or planned that suggest official expropriation should be of concern to prospective investors. Nevertheless, companies can be sealed or confiscated if they do not pay taxes in accordance with Nepali law. Such cases have not involved major Nepali business houses, however.

Dispute Settlement

In the event of a dispute with a foreign investor, the concerned parties are encouraged to settle it through mediation in the presence of the Department of Industry. If the dispute cannot be settled, cases involving investments of less than NRS 500 million (approximately USD 6.5 million) are referred to arbitration in Nepal in accordance with the Arbitration Rules of the United Nations Commission for International Trade Law (UNCITRAL). For investments that exceed this amount, the GON will permit stipulation of legal jurisdiction other than Nepal in shareholder agreements and contracts. Commercial disputes under the jurisdiction of the Nepalese courts and laws typically drag on for years. In most of the cases that have come to the attention of the U.S. Embassy in Kathmandu, the delays have caused the international party to the case to opt for a settlement of far less than the value of the claim.

Disputes have not been frequent, but investors should be aware that in recent years there have been two investment disputes in which the U.S. investor claimed the GON did not honor portions of contracts.

All real property transactions must be registered, and property holdings cannot be transferred without following established procedures. Even so, property disputes account for half of the current backlog in Nepal's overburdened court system, and such cases can take years to settle. Moreover, laws and regulations regarding property registration, ownership and transfer are unclear, and interpretation can vary from case to case.

Liquidation is covered by both the Company Act and the Insolvency Act of 2006. If a company is solvent, its liquidation is covered by the Company Act. If the company is insolvent and unable to pay liabilities, or liabilities are more than assets, then its liquidation is covered by the Insolvency Act. Under the Company Act, the claimant priorities are: 1) government revenue; 2) creditors; and 3) shareholders. Under the Insolvency Act the government ranks with all other unsecured creditors. Monetary judgments are made in local currency.

Nepal is a signatory to and adheres to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, and it has updated its legislation on dispute settlement to bring its laws into line with the requirements of that convention. The Arbitration Act of 1999 allows the enforcement of foreign arbitral awards and limits the conditions under which those awards can be challenged.

Performance Requirements and Incentives

The Nepal Laws Revision Act of 2000 eliminated most tax incentives, even those connected with performance requirements. Exports, however, are still favored, as is investment in certain "priority" industries such as tourism, civil aviation and hydropower. There is no discrimination against foreign investors with respect to export/import policies or non-tariff barriers. There is no local content or export performance requirement. There is no requirement that nationals own the shares of foreign investors, that the share of foreign equity be reduced over time, or that technology be transferred. However, to promote joint ventures with Nepali nationals, foreign investment in the service sectors is limited, ranging from 51 to 80 percent. Foreign investment in cottage industries is still not allowed. The GON offers tax incentives to encourage industries to locate outside the Kathmandu Valley to reduce pollution and overpopulation in the Valley and to encourage investors with an interest in developing poorer parts of the country.

Profits from exports are taxed at 20 percent. Customs, value added tax (VAT), and excise duties on raw materials used in the production of export items are supposed to be reimbursed within 60 days. In practice, however, these duty paybacks are often extensively delayed. Although income in certain priority industries, such as garments, carpets and jewelry, used to be taxed at a concessional rate of 10 percent, the Income Tax Act 2002 removed most of these concessions.

The Electricity Act of 1992 governs foreign investments in hydropower generation. The Act exempts developers from income tax for the first 15 years of a project's operation and provides a flat 1-percent customs rate on all imported construction materials, equipment and spare parts, provided that such goods are not manufactured in Nepal.

Foreign investors are not required to disclose proprietary information to government agencies as part of the regulatory approval process. There are no restrictions on participation by foreign firms in government-sponsored research and development programs; however, depending upon the nature of the job and expertise required, government agencies sometimes limit such participation to Nepali nationals.

Right to Private Ownership and Establishment

Foreigners are free to establish and own business enterprises and engage in all forms of business activity with the exception of defense industries and security printing. In addition, investment is restricted in some areas, such as certain service industries. The GON is moving slowly toward open competition in most sectors of the economy. Former public monopolies in banking, insurance, airline services, telecommunications and trade have already been eliminated, and the remaining restrictions on private and foreign operations in other areas are being scaled back. Foreigners, however, are not permitted to engage only in the trading of goods and services without having some kind of manufacturing operation in Nepal. The Competition Promotion and Market Protection Act, which came into force in January 2007, defines anti-competitive practices and bars them. The Act outlaws tied selling, bid rigging, cartel formation, collective price fixing, market restrictions, dial-system, market segregation, undue business influences, syndicates, and exclusive dealing. It also prevents companies from engaging in business takeovers which would help establish monopolies in the market. The sale of inferior quality goods is illegal. The law was drafted through a joint initiative of the private sector and the then Ministry of Industry, Commerce, and Supplies but, to date has been largely ineffective because the government has not established the necessary enforcement mechanisms.

Protection of Property Rights

In accord with its commitments on accession to the World Trade Organization, Nepal must enact new legislation on trade-related intellectual property rights to bring the country into compliance with international norms. Trademarks must be registered in Nepal to receive protection. Once registered, trademarks are protected for a period of seven years. However, protection of intellectual property rights is inadequate. Patents registration, under the Patent, Design and Trademark Act of 1965, does not provide automatic protection to foreign trademarks and designs. Similarly, Nepal does not automatically recognize patents awarded by other nations. The Copyright Act of 2002 is similar in that it does not recognize foreign registrations. The Act, however, covers most modern forms of authorship and provides adequate periods of protection. Enforcement is weak, with the result being that much of the software and most audio and visual recordings now circulating in Nepal are pirated. Nepal has not yet signed the World Intellectual Property Organization (WIPO) Copyright Treaty or the WIPO Performances and Phonograms Treaty.

Transparency of the Regulatory System

Foreign investors in Nepal must deal with a largely non-transparent legal system in which basic legal procedures are neither quick nor routine. The bureaucracy is generally reluctant to accept legal precedents. As a consequence, businesses are often forced to re-litigate issues that had been previously settled. Furthermore, legislation limiting foreign investment in financial, legal, and accounting services has made it difficult for investors to find help cutting through regulatory red tape.

Labor, health, and safety laws exist but are not properly enforced. Some companies report that the process of terminating unsatisfactory employees is cumbersome and that protective labor laws make it very difficult to bring skilled foreign-national specialists, such as pilots, engineers, and architects, into Nepal.

Efficient Capital Market and Portfolio Investment

Credit is generally allocated on market terms, although special credit arrangements exist for farmers and rural producers through the Agricultural Development Bank of Nepal. Foreign-owned companies can obtain loans on the local market. The private sector has access to a variety of credit and investment instruments. These include public stock and direct loans from finance companies and joint venture commercial banks.

Legal, regulatory, and accounting systems are neither fully transparent nor consistent with international norms. Though auditing is mandatory, professional accounting standards are low, and many practitioners are either poorly trained or lack in business ethics. Under these circumstances, published financial reports are often unreliable, and investors are better advised to rely on general business reputations, except in the few cases in which companies have applied international accounting standards.

The Nepali banking system is relatively small, and, in some cases, plagued by bad loans. Banking system assets totaled approximately USD 36.34 billion as of mid-November 2012, while its capital (total deposits) totaled USD 24.55 billion. As of July 15, 2012, 3.6 percent, of the total asset base was estimated as non-performing. Foreign commercial lending is scarce and expensive. Currently, there are no resident or non-resident foreign commercial banks that have standing credit limits for loans of a maturity of more than one year.

There is no regulatory system to encourage and facilitate portfolio investment in the industrial sector. Lack of transparency or regular reporting of reliable corporate information also presents problems for potential foreign investors. There are no legal provisions to defend against hostile takeovers. The GON has made certain exceptions to promote foreign direct investment (FDI) in tourism and hydropower by allowing 100 percent foreign ownership. The Clean Energy Development Bank has established a development fund of approximately US$ 3 million for funding feasibility studies of small- and medium-sized hydropower projects. The “Hydro Development Fund” will fill the early-stage financing gap for development of small- and medium-sized hydropower plants in Nepal.

Competition from State Owned Enterprises

There are 37 state owned enterprises in Nepal. Since 1993, Nepal has initiated numerous market policy and regulatory regime reforms in an effort to open eligible government-controlled sectors to domestic and foreign private investment. These efforts have had mixed results. Therefore, the majority of private investment has been made in manufacturing and tourism, sectors where there was either very little government interest or the existing state-owned enterprises performed miserably. Although some other sectors have opened for foreign investment, a large part remains under state monopoly of some form. For instance, regulatory changes allowed 100 percent foreign direct investment in hydropower generation, but distribution of electricity remained under state monopoly, effectively limiting the ability of the private sector to sell electricity. Investors face the added burden of passing through a maze of regulatory requirements and negotiating with multiple agencies in India, while the state-owned Nepal Electrical Authority enjoyed the advantage of using GON clout to negotiate a deal with various Indian agencies.

Corporate governance of state owned enterprises (SOEs) is poor, with heads often appointed by politically-appointed line Ministers. Board seats are generally allocated to senior government officials – typically the secretary of a ministry – and the SOEs are often required to consult with government officials before making any major business decisions. However, in late 2011, the GON adopted a new policy to encourage the selection of heads of SOEs through a competitive and merit-based selection process, a positive development.

The Telecommunications Act 1997 and other policies enacted subsequently opened the sector to private investment, but the state-owned Nepal Telecommunications Company often used its influence to deny certain privileges to private sector telecom service operators and indirectly blocked them from expanding their services. The Privatization Act of 1994 generally does not discriminate between national and foreign investors; however, in cases where proposals from two or more investors are identical, the government gives priority to Nepali investors.

Corporate Social Responsibility

The level of Corporate Social Responsibility (CSR) in the business community is generally low, except among trade and industry association leaders who have benefitted from studying aboard and/or exposure to multinational company practices. Very few companies are listed on the stock exchange, so there is little shareholder pressure on companies to act in a socially responsible manner. Furthermore, there are no laws or government policies promoting CSR.

Those most visibly engaged in CSR activities are multinational companies, of which there are very few in Nepal. Nepali businesses are mostly small- and medium-sized enterprises owned by individuals or one of the small number of business houses. The CSR activities of these companies are driven by the owners’ personal convictions and interests rather than by corporate norms or standards.

Political Violence

The signing of the Comprehensive Peace Agreement (CPA) in November 2006 marked the official end of a bloody, 10-year Maoist insurgency. The Department of State lifted its Travel Warning for Nepal on December 6, 2011, to reflect improvements in country conditions. Nonetheless, criminal violence, sometimes conducted under the guise of political activism, continues to be a problem. Additionally, bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide.

Business owners, especially those in the Tarai, the southern plains bordering India, are sometimes the target of extortion and kidnapping by political party activists and criminal groups aligned with them. In a bid to extort ransom, armed groups often target business entrepreneurs and local government employees, and generally not foreigners. Most of these criminal acts took place in the Central and Eastern Tarai regions. Such incidents, however, have decreased significantly over the years.

U.S. citizens who travel to or reside in Nepal are urged to register with the Consular Section of the Embassy by accessing the Department of State’s travel registration site at https://travelregistration.state.gov or by personal appearance at the Consular Section, located at the U.S. Embassy, Maharajgunj, and Kathmandu. The Consular Section can provide updated information on travel and security, and can be reached through the Embassy switchboard at (977) (1) 400-7200 or directly by fax (977) (1) 400-7281. Email: consktm@state.gov, web site: http://nepal.usembassy.gov.

U.S. citizens also should consult the Department of State's Consular Information Sheet for Nepal and Worldwide Caution Public Announcement via the Internet on the Department of State's home page at http://travel.state.gov or by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, a regular toll line at 1-202-501-4444. These numbers are available from 8:00 a.m. to 8:00 p.m. Eastern Time, Monday through Friday (except U.S. federal holidays).

(Note: During the insurgency, the U.S. Government designated the Communist Party of Nepal - Maoist as a “Specially Designated Global Terrorist” organization under Executive Order 13224 and included it on the "Terrorist Exclusion List" pursuant to the Immigration and Nationality Act. On September 6, 2012, the Department of State de-listed the Communist Party of Nepal (Maoist) and its aliases as a Specially Designated Global Terrorist entity under Executive Order 13224, and as a “terrorist organization” from the Terrorist Exclusion List (TEL) under the Immigration and Nationality Act (INA),”


Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law. According to the Corruption Perception Index 2011 released by Transparency International (TI) in December 2012, Nepal ranked 139th and fell in the range of “highly corrupt” countries. The TI reports in 2009, 2010 and 2011 indicate Nepal as second most corrupt country in the South Asia after Afghanistan.

It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anti-corruption laws of both the foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U.S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.

U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more detailed information on the FCPA, see the FCPA Lay-Person’s Guide at: http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf.

Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental to the expansion of the international framework to fight corruption. Several significant components of this framework are the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Antibribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements. This country is party to United Nations Convention against Corruption 2003, but is yet to ratify the convention and translate its terms into domestic law and regulation. Generally all countries prohibit the bribery and solicitation of their public officials.

OECD Antibribery Convention: The OECD Antibribery Convention entered into force in February 1999. As of December 2009, there are 38 parties to the Convention including the United States (seehttp://www.oecd.org/dataoecd/59/13/40272933.pdf). Major exporters China, India, and Russia are not parties, although the U.S. Government strongly endorses their eventual accession to the Convention. The Convention obligates the Parties to criminalize bribery of foreign public officials in the conduct of international business. The United States meets its international obligations under the OECD Antibribery Convention through the U.S. FCPA. Nepal is not a party to the OECD Convention.

UN Convention: The UN Anticorruption Convention entered into force on December 14, 2005, and there are 143 parties to it as of December 2009 (see http://www.unodc.org/unodc/en/treaties/CAC/signatories.html). The UN Convention is the first global comprehensive international anticorruption agreement. The UN Convention requires countries to establish criminal and other offenses to cover a wide range of acts of corruption. The UN Convention goes beyond previous anticorruption instruments, covering a broad range of issues ranging from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The Convention contains transnational business bribery provisions that are functionally similar to those in the OECD Antibribery Convention and contains provisions on private sector auditing and books and records requirements. Other provisions address matters such as prevention, international cooperation, and asset recovery. Nepal is a signatory to the UN Convention, but has not ratified it yet.

OAS Convention: In 1996, the Member States of the Organization of American States (OAS) adopted the first international anticorruption legal instrument, the Inter-American Convention against Corruption (OAS Convention), which entered into force in March 1997. The OAS Convention, among other things, establishes a set of preventive measures against corruption provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment, and contains a series of provisions to strengthen the cooperation between its States Parties in areas such as mutual legal assistance and technical cooperation. As of December 2009, the OAS Convention has 33 parties (see http://www.oas.org/juridico/english/Sigs/b-58.html)

Council of Europe Criminal Law and Civil Law Conventions: Many European countries are parties to either the Council of Europe (CoE) Criminal Law Convention on Corruption, the Civil Law Convention, or both. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and account offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia. The Group of States against Corruption (GRECO) was established in 1999 by the CoE to monitor compliance with these and related anti-corruption standards. Currently, GRECO comprises 46 member States (45 European countries and the United States). As of December 2009, the Criminal Law Convention has 42 parties and the Civil Law Convention has 34 (see www.coe.int/greco.)

Free Trade Agreements: While it is U.S. Government policy to include anticorruption provisions in free trade agreements (FTAs) that it negotiates with its trading partners, the anticorruption provisions have evolved over time. The most recent FTAs negotiated now require trading partners to criminalize “active bribery” of public officials (offering bribes to any public official must be made a criminal offense, both domestically and trans-nationally) as well as domestic “passive bribery” (solicitation of a bribe by a domestic official). All U.S. FTAs may be found at the U.S. Trade Representative Website: http://www.ustr.gov/trade-agreements/free-trade-agreements. [The United States and Nepal plan are near signing the U.S.-Nepal Trade and Investment Framework Agreement (TIFA) in 2011. TIFA provides a framework for resolving bilateral trade and investment issues, prepares the ground for expanding trade and investment opportunities, and seeks to eliminate bribery and corruption]

Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. and Foreign Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.

Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company’s overarching compliance program when choosing business partners or agents overseas. The U.S. Foreign and Commercial Service can be reached directly through its offices in every major U.S. and foreign city, or through its Website atwww.trade.gov/cs.

The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department’s Advocacy Center and State’s Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center “Report A Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp.

Guidance on the U.S. FCPA: The Department of Justice’s (DOJ) FCPA Opinion Procedure enables U.S. firms and individuals to request a statement of the Justice Department’s present enforcement intentions under the antibribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ’s Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Counsel, U.S. Department of Commerce, Website, athttp://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Websites listed below.

Exporters and investors should be aware that generally all countries prohibit the bribery of their public officials, and prohibit their officials from soliciting bribes under domestic laws. Most countries are required to criminalize such bribery and other acts of corruption by virtue of being parties to various international conventions discussed above.

Public sector corruption, including bribery of public officials, remains a challenge for U.S. and foreign firms operating in Nepal. U.S. firms and other foreign investors have identified pervasive corruption as a major obstacle to making, maintaining and expanding direct investment in Nepal. There are also frequent allegations of corruption perpetrated by government officials in the distribution of permits and approvals, in the procurement of goods and services, and in the award of contracts, even though giving or accepting a bribe is officially a crime punishable by a fine and/or imprisonment under Nepali laws.

Combating corruption is the responsibility of the Commission for Investigation of Abuse of Authority (CIAA) and of the National Vigilance Center (NVC) under the Ministry of Home Affairs. Parliament’s Public Accounts Committee (PAC) also plays an active role in publicizing misconduct by GON officials, but it lacks statutory authority to pursue cases. Since restoration of the multi-party system, local media have been particularly active in unearthing and reporting cases of corruption within the government. Investigative commissions and committees are often formed to look into major cases of corruption that come to light. Additionally, the current interim constitution provides for the impeachment of the Chief Justice and other judges on several grounds, including bad conduct and not fulfilling his/her responsibility honestly.

The CIAA had been proactive in prosecuting cases involving prominent political figures and government officials. In some cases, the Special Court convicted the accused and, in at least one case, the convicted official is serving a jail sentence. CIAA’s handling of corruption cases has often come under fire. In June 2007 the CIAA filed a case against the Governor and one of the executive directors of Nepal’s central bank, the Nepal Rastra Bank (NRB), for alleged misuse of funds. Critics claimed that the charges were framed without merit and perhaps brought at the behest of others to deter initiatives taken by NRB against bank defaulters. In March 2008, the Supreme Court convicted the Governor and the Executive Director of NRB of corruption and imposed a fine of USD 51,538 each. With the conviction, the two were stripped of their posts. In September 2008, the two appealed to the Supreme Court challenging the verdict convicting them on the corruption, and on July 15, 2009, the Supreme Court acquitted both the Governor and the Executive Director from all charges. Except for one former minister, most of the high-profile government ministers charged with corruption have, however, been acquitted by the Court in the past.

In a recent issue regarding procurement of two new aircraft by the state-owned Nepal Airlines Corporation (NAC), the local media reported alleged irregularities in the deal by senior executives of the NAC, purportedly with support from key officials in the GON. In spite of concerns from the Public Accounts Committee (PAC) and the Ministry of Finance, senior government officials and airline executives continued to push for the purchase and signed an MOU with Airbus. The CIAA investigated the alleged irregularities and filed a corruption case against six NAC executives in the Special Court on December 24, 2010. The Special Court acquitted all charges on April 19, 2011, and the aircraft purchase deal has remained on hold.

In the past, both the PAC and the CIAA have investigated several corruption cases involving senior government officials. For instance, CIAA filed corruption charges against 34 police officials and a private broker in relation to the procurement of armored personnel carriers (APCs) in 2008. The CIAA filed cases in the Special Court against a lawmaker and eight government officials for alleged misuse of diplomatic passports, and instructed the Nepal Electricity Authority (NEA) to stop supplying free electricity to its employees. In addition, CIAA has issued directives to the government to provide transfer details of civil servants, and expedite appointment of a new Managing Director of the NEA through a competitive process.

In recent years, the PAC has held several hearings on allegations of corruption and misappropriation of government funds by ministers and senior government officials. For instance, the PAC has reprimanded the government for its failure to punish Nepali businesses for producing fraudulent tax invoices to evade taxes.

Both the PAC and the CIAA have been inactive since May 2012. The PAC dissolved with the dissolution of parliament on May 27 and the CIAA has been hampered by key vacancies that would normally be filled with the input of parliament.

Anti-Corruption Resources

Some useful resources for individuals and companies regarding combating corruption in global markets include the following:

  • Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a “Lay-Person’s Guide to the FCPA” is available at the U.S. Department of Justice’s Website at: http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf.
  • Information about the OECD Antibribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html. See also new Antibribery Recommendation and Good Practice Guidance Annex for companies:http://www.oecd.org/dataoecd/11/40/44176910.pdf
  • General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.
  • Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is available at: http://www.transparency.org/publications/publications/other/corruption_perceptions_index_2011. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. It includes an in-depth analysis of a focal theme, a series of country reports that document major corruption related events and developments from all continents and an overview of the latest research findings on anti-corruption diagnostics and tools. See http://www.transparency.org/publications/gcr.
  • The World Bank Institute publishes Worldwide Governance Indicators (WGI). These indicators assess six dimensions of governance in 212 countries, including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. Seehttp://info.worldbank.org/governance/wgi/sc_country.asp. The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.
  • The World Economic Forum publishes the Global Enabling Trade Report, which presents the rankings of the Enabling Trade Index, and includes an assessment of the transparency of border administration (focused on bribe payments and corruption) and a separate segment on corruption and the regulatory environment. Seehttp://www3.weforum.org/docs/WEF_GlobalEnablingTrade_Report_2010.pdf.
  • Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at //2009-2017.state.gov/g/drl/rls/hrrpt/.
  • Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries with respect to governance and anti-corruption. The report highlights the strengths and weaknesses of national level anti-corruption systems. The report is available at: http://report.globalintegrity.org/.

Bilateral Investment Agreements

Nepal has bilateral investment treaties with Britain, Finland, France, Germany, India, Mauritius, and Norway. Nepal signed a Bilateral Investment Promotion and Protection Agreement (BIPPA) with India in October 2011, but the agreement has not yet entered into force.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) is free to operate in Nepal without restriction. Services include direct loans and loan guarantees, political risk insurance, and investment funds. Nepal is also a member of the Multilateral Investment Guarantee Agency, which it joined in 1993.

The Export-Import Bank of the United States (Ex-Im Bank) is the U.S. Government's official export credit agency, whose mission is to assist in financing the export of U.S. goods and services to international markets. Ex-Im Bank provides export credit insurance, loan guarantees and project and structured finance for U.S. exporters and foreign buyers of U.S. goods and services.


The most distinguishing features of labor in Nepal are the shortage of skilled, educated workers, the increasing dominance of militant political party-affiliated unions, which commonly abrogate negotiated agreements to press new demands, and laws and regulations that are generally not business friendly. These problems, coupled with others, make it difficult to assemble and retain qualified, reliable staff. Dismissing underperforming employees is also problematic. Nevertheless, Nepal’s labor force has some advantages. For example, according to a U.S. company involved in software development in Nepal, Nepali workers are loyal to the company when compared to neighboring countries, and Nepal’s top engineering schools are producing highly qualified employees.

According to the Nepal Living Standards Survey (NLSS-III 2010-2011), the overall literacy rate is 56.6 percent, with literacy rate for males at 71.6 percent and 44.5 percent for females. Vocational and technical training are poorly developed, and the national system of higher education is overwhelmed by high enrollment and inadequate resources. Many secondary school and college graduates are unable to find jobs commensurate with their education. Hiring foreign workers is not, in most cases, a viable option as the employment of foreigners is restricted. The Department of Immigration must approve the employment of foreigners for all positions, except the most senior ones.

The Constitution provides for the freedom to establish and join unions and associations. It permits restrictions on unions only in cases of subversion, sedition, or similar conditions. Labor laws permit strikes, except by employees in essential services such as water supply, electricity, and telecommunications. Sixty percent of a union’s membership must vote in favor of a strike for it to be legal. The laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affects the nation's economic interests, though, in practice, this is rarely done.

Total union participation is estimated to be around one million, or about 10 percent of the total workforce, much of which is employed in informal sectors. The three largest trade unions are affiliated with political parties. The Maoist-affiliated All Nepal Trade Union Federation (ANTUF) is the most active and has been aggressive in its efforts to establish control over industries and business sectors. The ANTUF’s organizing tactics have led in the past to violent clashes with other trade unions.

The ANTUF is aggressive in its defense of members and frequently engages in disputes with management in various sectors, often on issues that are traditionally viewed as being solely within the purview of management. For instance, a fast food chain in Kathmandu shut down its two restaurants on August 14, 2012 after workers associated with the splinter group of the Maoist party assaulted the Chief of the Human Resources Department and other senior managers. The restaurants reopened on September 16, 2012, after company management and All Nepal Hotel and Restaurant Workers´ Union-Revolutionary (ANHWU-R), which is affiliated with the CPN-Maoist Party, agreed to reopen the outlets. Similarly on May 22, 2011, Maoist-affiliated labor activists stormed and burned down the facilities of GMR, an Indian hydropower company that was developing a 300 MW hydropower project on the upper Karnali river. The Maoist national leadership claimed the violence was contrary to party policy. Surya Nepal Garments, an Indian-owned readymade garment factory, announced the permanent closure of its Nepal operation on August 16, 2011, citing labor problems after union members connected to the Maoist-affiliated All Nepal Trade Union Federation – Revolutionary (ANTUF-R) held 38 management staff hostage in the factory for over 36 hours. The detained staff members were later released by the district administration with assistance from the police.

Much of the union labor agitation is conducted in violation of valid contracts and existing laws, but rarely are the unions held accountable for their actions. Unions, particularly the CPN-Maoist affiliated ANTUF, most frequently target joint ventures involving foreign investment and hotels. Coca-Cola, Colgate Palmolive, Unilever, and Dabur Nepal are among the numerous multinational companies that have been forced over the past few years to suspend operations or reduce production due to labor protests.

Foreign Trade Zones/Free Trade Zones

Nepal currently has no Foreign Trade Zones or Free Trade Zones. However, in its annual budget for FY 2008/09, the GON announced its intention to set up Special Economic Zones in 10 different locations – Jhapa, Dhanusha, Birgunj, Dhangadhi, Bahiaraha, Nuwakot, Jumla, Banepa, Mahendranagar, and Panchkhal – the latter three strictly for the information technology sector. Special Economic Zone (SEZ) legislation is currently being drafted. Under the draft act, an industry exporting 75 percent or more of its products would be entitled to apply for a space in a SEZ and import of raw materials and capital goods without paying custom duties, excise taxes or sales taxes. An Industry located in the Special Economic Zone shall be exempted fully from the income tax for five years from the date of commencement of commercial transaction or production, and fifty percent subsequently. The Licensee shall be entitled to full exemption from Value Added Tax chargeable while importing machinery, equipment, spare parts of machine, and necessary raw materials.

Foreign Direct Investment Statistics (as of July 15, 2012, the end of Nepal’s Fiscal Year 2011/12)

  • Total No. of projects 2,335
  • Manufacturing 712
  • Agro-Based 114
  • Energy-Based 55
  • Construction 83
  • Tourism 629
  • Mineral 36
  • Transport and Communications 97
  • Housing and Apartment 27
  • Service 582
  • Total Project Cost: USD 2,759.19 million
  • Total Fixed Cost: USD 2,357.46 million
  • Total Foreign Investment: USD 1,130.54 million
  • Total Employment Generated: 164,482

Source: Foreign Investment Division, Department of Industry, Nepal

U.S. Investment in Nepal (as of July 15, 2012, the end of Nepal’s Fiscal Year 2011/12)

  • Total No. of projects 198
  • Agriculture and Forestry 7
  • Manufacturing 53
  • Energy-Based 1
  • Tourism Industry 47
  • Service Industries 90
  • Total Project Cost: USD 244.15 million
  • Total Fixed Cost: USD 220.56 million
  • Total Foreign Investment: USD 86.53 million
  • Total Employment Generated: 12,876

Source: Foreign Investment Division, Department of Industry, Nepal