HomeReportsBureau of Economic and Business Affairs2017 Investment Climate Statements...Nepal

# 					2017 Investment Climate Statements: Nepal			

 In this section										/

													Executive Summary											

                -  Executive Summary 
                -  1. Openness To, and Restrictions Upon, Foreign Investment   
                -  2. Bilateral Investment Agreements and Taxation Treaties   
                -  3. Legal Regime   
                -  4. Industrial Policies   
                -  5. Protection of Property Rights   
                -  6. Financial Sector   
                -  7. State-Owned Enterprises   
                -  8. Responsible Business Conduct   
                -  9. Corruption   
                -  10. Political and Security Environment   
                -  11. Labor Policies and Practices   
                -  12. OPIC and Other Investment Insurance Programs   
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                -  14. Contact for More Information   

## Executive Summary

With an annual Gross Domestic Product (GDP) of about $21 billion, and total trade of $7.27 billion in 2015 (including $129 million in U.S.-Nepal bilateral trade), Nepal is a small contributor to the global economy. However, its location between India and China – two of the world’s fastest growing economies – may make Nepal attractive to some foreign investors.

Nepal’s natural resources have significant commercial potential.

Hydroelectric power – of which Nepal has an estimated 40,000 MW of commercially viable potential – could be a major source of income and help meet South Asia’s growing energy needs.

Other sectors offering potential investment opportunities include agriculture, tourism, and infrastructure.

The Government of Nepal (GON) is taking steps to improve the investment climate through new legislation that could make investment opportunities more attractive. These new laws include the Industrial Enterprise Act, a Special Economic Zone Act, an amendment to the Companies Act, and a new Intellectual Property Rights policy. Parliament is also reviewing a new Foreign Investment bill and a revised Labor bill that could be approved in 2017. While this new legislation is a welcome development, the GON will have to ensure that the new laws are fully implemented in order for the investment climate to improve.

Nepal offers opportunities for investors willing to accept inherent risks and the unpredictability of doing business in the country. While Nepal has established some investment-friendly laws and regulations, significant investment barriers remain.

Corruption, laws limiting the operation of foreign banks, limitations on the repatriation of profits, limited currency exchange facilities, and the government’s monopoly over certain sectors of the economy, such as electricity transmission and petroleum distribution, undermine foreign investment in Nepal.

Millions of Nepalis look for employment overseas, creating a drain on an already poorly trained workforce.

The proliferation of politicized trade unions, typically affiliated with one or more political parties, and unpredictable general strikes also limit investment.

Immigration laws and visa policies for foreign investors can be cumbersome and obstructive, which are exacerbated by an inefficient government bureaucracy and a relatively high turnover rate of officials.

Political uncertainty is another challenge for foreign investors in Nepal. The country has made considerable strides since the end of a ten-year Maoist insurgency in 2006. Nepal has held free and fair Constituent Assembly elections in 2008 and 2013, completed the integration of former combatants into the Nepalese Army, and promulgated a constitution in 2015. However, widespread dissatisfaction with some constitutional provisions led to prolonged protests across much of Nepal’s southern Terai belt, as well as a prolonged blockage of Nepal’s border with India. A series of elections – local, provincial, and national – constitutionally-mandated to take place before January 2018 could spark further unrest.

Nepal’s geography also presents challenges. The country’s mountainous terrain and poor infrastructure increase the cost of transportation of raw materials as well as finished goods. The nearest seaport is in Kolkata, India, about 900 kilometers from Kathmandu.

*Table 1*

*Data after 2012 is not available.

							1. Openness To, and Restrictions Upon, Foreign Investment					

**Policies Towards Foreign Direct Investment**

The GON officially welcomes foreign direct investment (FDI) and has passed several laws in recent months that – if properly implemented – could improve the investment climate. The new laws include the Industrial Enterprise Act, the Special Economic Zone Act, and a new policy for intellectual property rights. Additional legislation, including an updated Foreign Investment bill could be signed into law in 2017. The GON organized an investment summit in March 2017 during which leaders of the three major political parties emphasized that despite political differences, they agreed on the need for foreign investment to increase economic growth rates. In practice, however, American and other foreign companies say that corruption, bureaucracy, and a weak regulatory environment make investing in Nepal very difficult. While Nepal’s new and pending legislation is promising, it remains unclear whether the legislation, once adopted, will effectively improve the investment climate, particularly for foreign investors.

The most significant foreign investment laws are the Foreign Investment and Technology Transfer Act of 1992 (since amended and due for a complete overhaul if Parliament approves the draft Foreign Investment bill, currently under review), the Foreign Investment and One Window Policy of 2015, the Foreign Exchange Regulation Act of 1962, the Immigration Rules of 1994, the Customs Act of 1997, the Industrial Enterprise Act of 2016, the Electricity Act of 1992, the Privatization Act of 1994, and the annual budget, which outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.

In February 2015, the GON issued the new Foreign Investment and One-Window Policy 2015, which replaced the Foreign Investment Policy of 1992. The new policy defines priority sectors for foreign investment, including hydropower, transportation infrastructure, agro-based and herbal processing industries, tourism, and mines and manufacturing industries. The Foreign Investment and One Window Policy also establishes currency repatriation guidelines, outlines visa regulations and arbitration guidelines, permits full foreign ownership in most sectors, and creates a “one window committee” for foreign investors.

The Foreign Investment and One Window Policy opened the retail sector to foreign investment for the first time, but with some conditions. Foreign multi-brand retail stores (i.e., Wal-Mart or Tesco) are now permitted, provided the investor has operations in more than two countries and invests more than $5 million in fixed capital. The policy also states that foreign investors will be treated the same as domestic investors, and industries run by foreign investors cannot be nationalized. The new policy also aimed at easing visa policies for investors, family members, and assisting foreign investors with land acquisition, industrial security, and repatriation of investment and profits.

The Foreign Investment and Technology Transfer Act (FITTA) of 1992, as amended, eliminated the minimum investment requirement and opened 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 the United Nations Commission for International Trade Law rules. However, foreign law can be applicable in cases where the foreign investment exceeds approximately $6 million and where the parties make this choice clear in their agreement. The FITTA will likely be replaced by the Foreign Investment bill, currently under Parliamentary review.

The Customs 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.

The Nepal Stock Exchange does not allow foreign investors to own or trade any publicly traded companies on the exchange. Stock trading is available only for citizens of Nepal.

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 electronic audio and visual materials and subjects violators to fines and imprisonment, as well as the confiscation of unauthorized materials. Violators must also pay compensation claimed by the copyright holder. However, the law does not meet the standards for trade-related intellectual property rights required by the World Trade Organization. The Competition Promotion and Market Protection Act (2007) controls anti-competitive practices, protects against monopolies, promotes fair competition, and regulates mergers and acquisitions. The Competition Promotion and Market Protection Act, also contains special provisions for controlling black markets and misleading advertisements. In March 2017, Nepal’s Cabinet approved a new Intellectual Property Rights (IPR) policy that will serve as the foundation of new and revised IPR legislation in the coming years.

There is no public evidence of direct executive interference in the court system that could affect foreign investors. However, in recent years there has been public and media criticism of the politicization of the judiciary, including appointments of judges to Appellate Courts and the Supreme Court allegedly based on political affiliation.

The Investment Board of Nepal (IBN) was formed in 2011 to promote economic development. The IBN handles investments larger than approximately $100 million, while the Department of Industry is responsible for investments less than $100 million. In addition to approving large-scale investment projects, the IBN also is the implementing agency for the GON for various public-private partnership (PPP) projects falling under its mandate.

Post is not aware of any formal, regularly scheduled dialogue between investors and the GON.

**Limits on Foreign Control and Right to Private Ownership and Establishment**

Foreign and domestic private entities have the right to establish and own business enterprises and engage in various forms of remunerative activity. However, the FITTA restricts certain sectors from foreign investment, including small-scale and “traditional” industries (such as handicrafts, wood carvings, and artwork), real estate, some types of primary agriculture and agribusiness, and weapons production. The Foreign Investment Policy of 2015 reduced the number of restricted sectors, but these changes will not be implemented until Parliament approves the draft Foreign Investment bill. Approval and registration requirements vary depending on the sector in which a foreign entity intends to operate.

Other than the restricted sectors mentioned above, 100 percent foreign investment is permitted in most sectors. Some limits on foreign ownership are imposed for certain services sectors, such as banking and financial institutions, where foreign investment is only permitted through joint venture, with a minimum of 20 percent and a maximum of 85 percent foreign ownership. Such joint ventures must be incorporated in Nepal in accordance with relevant Nepali laws. Branch operations of a foreign bank are only allowed in the wholesale banking sector, not in the retail banking sector. To operate a branch office of a foreign bank in Nepal, the minimum capital requirement is $20 million, and an additional $5 million is required for each new branch office. Restrictions on branch operations of foreign banks in the retail banking sector and requirements for mandatory domestic joint venture partner(s) have discouraged many international banks from entering Nepal’s banking sector.

Investment proposals are screened by both the Department of Industry and the Investment Board of Nepal, largely to ensure compliance with the Foreign Investment and Technology Transfer Act (FITTA) and other relevant laws.

**Other Investment Policy Reviews**

There have been no investment policy reviews in the last three years. In 2012, the World Trade Organization (WTO) conducted a trade policy review, available online at: https://www.wto.org/english/tratop_e/tpr_e/tp357_e.htm .

**Business Facilitation**

Nepal scores fairly low on the World Bank’s Doing Business Report for starting a business, ranking 107th in the 2017 report. The report found that the average business requires seven procedures to register, taking 17 days on average to complete. Users ranked Nepal’s business registration website (http://www.theiguides.org/public-docs/guides/nepal ), which is maintained by UNCTAD and the International Chamber of Commerce, four out of ten, according to www.GER.com .

Nepal does not have a business registration website, although UNCTAD and the International Chamber of Commerce maintain an information portal (http://www.theiguides.org/public-docs/guides/nepal ). The draft Foreign Investment bill calls for the creation of a business registration website.

**Outward Investment**

Under current Nepali law, outward investment is not permitted.  Domestic investors are not allowed to invest abroad, according to the Foreign Exchange Act.

							2. Bilateral Investment Agreements and Taxation Treaties					

Nepal has Bilateral Investment Agreements in force with four countries: France (1985), Germany (1988), the United Kingdom (1993), and Finland (2011). In addition, Nepal has Bilateral Investment Agreements signed but not in force with Mauritius (signed 1999) and India (signed 2011).

Nepal has a free trade agreement with India (the Indo-Nepal treaty of trade, signed in 2002). Nepal is a member of the South Asian Free Trade Area along with Bangladesh, Bhutan, India, Pakistan, Sri Lanka, and the Maldives.

Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area, along with Bhutan, Myanmar, Sri Lanka, Bangladesh, India, and Thailand.

Nepal does not have a bilateral investment treaty or free trade agreement with the United States. Nepal has a “Double Tax Avoidance” treaty with China, India, Mauritius, Sri Lanka, Pakistan, South Korea, Thailand, Austria, Norway, and Qatar. Post is not aware of any recent or upcoming changes to the taxation regime.

							3. Legal Regime					

**Transparency of the Regulatory System**

The GON has many policies and laws that look good on paper, but for which interpretation or enforcement are inconsistent and/or inadequate. Frequent government changes and staff rotations within the civil service result in officials who often are unclear on applicable laws and policies or interpret them differently than their predecessors. Due to the complex and opaque regulatory system, businesses frequently encounter demands for cash payments to officials to receive necessary approvals.

Post is not aware of any informal regulatory processes that are managed by nongovernmental organizations or private sector associations.

Rule-making and regulatory authority resides almost exclusively with the central government in Kathmandu, and foreign businesses can expect to interact with bureaucrats at the central government level. Nepal’s 2015 constitution calls for the state to transition to a federalist model, with some roles and responsibilities to be transferred to newly-create provinces, the delineation of which has not yet been finalized. Details and a timeline for implementing the new federal system and devolving relevant authorities from the center to the provinces remain unclear, as does the extent to which these changes will affect foreign investors.

Legal, regulatory, and accounting systems are neither fully transparent nor consistent with international norms. Though auditing is mandatory, professional accounting standards are low, and practitioners may be poorly trained. As a result, published financial reports can be unreliable, and investors often rely on general business reputations unless companies use international accounting standards.

Publically listed companies in Nepal follow the Nepal Financial Reporting Standards (NFRSs) 2013, which is prepared on the basis of International Financial Reporting Standards (IFRSs) 2012. Audited reports of publically listed companies are usually made available.

Draft bills or regulations are made available for public comment. The government agency that drafts the bill is responsible for undertaking a public consultation process with key stakeholders by issuing federal notices for comments and recommendations. Additionally, all parliamentarians are given copies of the draft bills to share with their constituencies. This applies to all draft laws, regulations, and policies.

Generally, the government agency that drafted the bill, legislation, policy, or regulation posts the actual draft (in Nepali language) online. However, once approved, the Department of Printing, an office that is part of the Ministry of Information and Communications, posts all acts online.

Several government offices, including the Parliamentary Accounts Committee, the Office of the Auditor General, and the Center for Investigation of Abuse of Authority, oversee the government’s administrative processes.

Regulatory actions and summaries of these actions are available at the Office of the Auditor General and the Ministry of Finance. Both of these government agencies release periodic reports on the regulatory actions taken against agencies violating laws, rules, and regulations. Such summaries and reports are available online in Nepali.

Since Nepal promulgated its new constitution in September 2015, the GON has announced many regulatory reforms, including several that are relevant to foreign investors. The Cabinet recently approved a new Intellectual Property Rights (IPR) policy. In 2016, Parliament approved a new Industrial Enterprise Act that aims to promote industrial growth in the private sector by making it easier to hire and fire workers, streamlining registration processes, and expediting environmental review processes. Parliament also approved the Special Economic Zone (SEZ) Act, which provides preferential taxation provisions for investors in SEZs, guarantees electricity in designated SEZs and also prohibits strikes in these zones. The Ministry of Industry is finalizing a new Foreign Investment Act (FIA) that will replace the Foreign Investment and Technology Transfer Act (FITTA) of 1992, which currently governs foreign investment in Nepal. According to sources at the Ministry of Industry, the new act would ease licensing and registration of foreign companies and repatriation of funds by foreign investors.

Reforms initiated during the early 1990s significantly contributed to the expansion of the banking and financial, civil aviation, hydropower, telecommunications, and IT sectors in Nepal. However, there has been little economic reform in the past two decades and foreign investment has declined. The current push to pass new or revised legislation is intended to lead a ‘second wave of liberalism’ following the reforms of the 1990s.

Traditionally, once bills are drafted and passed by the Parliament through the legislative process, it is incumbent upon the relevant GON ministries or departments to draft the implementing regulations to help enforce the act. Regulations, however, are generally passed by the Cabinet and do not need Parliamentary approval.

Concerned ministries are responsible for enforcement of regulations. The enforcement process is legally reviewable and made accountable to the public.

Public comments are received through consultative sessions with private sector representatives or sector experts and incorporated into the draft regulations. However, Nepal is still far behind international standards in developing a mechanism or system for the review of regulations based on scientific or data-driven assessments, or for conducting scientific studies or quantitative analysis for such purposes. Consultative sessions with private sector representatives or sector experts are the most common type of review. The World Bank notes that the GON is not required by law to solicit comments on proposed regulations, nor do ministries or regulatory agencies report on the results of the consultation on proposed regulations.

**International Regulatory Considerations**

Nepal is member of the South Asian Free Trade Area (SAFTA) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC).

SAFTA, which came into force on January 1, 2006, created a duty-free trade regime among the member countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. According to SAFTA rules, member countries were supposed to reduce formal tariff rates to zero percent by 2016. However, tariff barriers remain high owing to lists of “sensitive” goods produced by different member countries. This list includes hundreds of sensitive products that do not qualify for duty-free status.

BIMSTEC, another forum for regional cooperation, came into effect on June 6, 1997, and includes Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal.

Bangladesh, Bhutan, India and Nepal, known collectively as BBIN, are working together to develop a platform for sub-regional cooperation in such areas as water resources management, power connectivity, transport, and infrastructure.

Nepal’s regulatory system generally relies on international norms or standards developed by international organizations and regulatory agencies, such as the United Nations, World Bank, World Trade Organization (WTO), and others.

Nepal joined the WTO in March 2004. According to its WTO accession commitments, the GON is supposed to provide notice of all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). However, when asked, GON officials were unsure if this process is happening.

**Legal System and Judicial Independence**

Nepal’s court system is based on Common Law and its legal system is generally categorized under civil and criminal offences and laws. Contract law is codified. In theory, contracts are automatically enforced, and a breach of contract can be challenged in a court of law. In practice, enforcement of contracts is weak. Nepal ranks 152nd in the World Bank’s 2017 Doing Business Report in the category of contract enforcement.

Nepal’s contracts are guided by the Contract Act of 2000. Nepal does not have a commercial code. All courts are civil, but they are mandated to hear commercial complaints.

The judicial system is independent of the executive branch. In general, the judicial process is procedurally competent, fair, and reliable; however in some isolated or high profile cases, court judgments have come under criticism for alleged political interference, favoring a particular group, or bribery.

Regulations or enforcement actions are appealable, and they are adjudicated in the national court system.

**Laws and Regulations on Foreign Direct Investment**

Nepal has established some investment-friendly laws and regulations, but practical problems remain. Laws limiting the operation of foreign banks, practical limitations on the repatriation of profits, limited currency exchange facilities, and the government’s monopoly over certain sectors of the economy, such as electricity transmission and petroleum distribution, weaken the investment climate in Nepal. Foreign investment in Nepali firms is based on book value on a par basis, not on market value or other negotiated price, and all investment must receive government approval.

In disputes involving a foreign investor, the concerned parties are encouraged to settle through mediation in the presence of the Department of Industry. If the dispute cannot be resolved, cases may be settled either in a Nepali court or in another legal jurisdiction, depending on the amount of the initial investment and the procedures specified in the contract. Commercial disputes under the jurisdiction of Nepali courts and laws typically drag on for years.

The Industrial Enterprise Act, approved in October 2016, includes a “no work, no pay” provision that has been a top objective of the Nepali private sector for many years. The Special Economic Zone (SEZ) Act, approved in August 2016 prohibits workers from striking in any SEZ in Nepal. There is only one SEZ under development but the GON hopes eventually to have as many as 15. An IPR Policy approved in March 2017 will serve as the foundation for new IPR legislation. In addition, the Ministry of Industry has drafted a new Foreign Investment Act that is expected to receive Parliamentary approval this year.

For foreign investment requests and proposals less than $100 million, the Department of Industry is the primary GON agency. Proposals larger than $100 million are handled by the Investment Board of Nepal (IBN). However, other regulatory bodies may be responsible for approvals and licensing, depending upon the area of investment, and all foreign and national investors are required to obtain a Department of Industry-issued license before launching a business. Most of the relevant laws, rules, procedures, and reporting requirements for investors are available on the Department of Industry website: http://www.doind.gov.np/ 

**Competition and Anti-Trust Laws**

The Competition Promotion and Market Protection Board, comprised of GON officials from various ministries and chaired by the Minister of Supplies, is responsible for reviewing competition-related concerns. Post is not aware of any competition cases that involved foreign investment.

**Expropriation and Compensation**

The Industrial Enterprise Act of 2016 states that “no industry shall be nationalized.” To date, there have been no cases of nationalization in Nepal, nor are there any official policies that suggest expropriation should be a concern for prospective investors. However, companies can be sealed or confiscated if they do not pay taxes in accordance with Nepali law, and bank accounts can be frozen if there are suspicions of money laundering or other financial crimes.

Nepal does not have a history of expropriations. There have been no government actions or shifts in government policy that indicate possible expropriations in the foreseeable future.

Nepal does not have a history of expropriations

**Dispute Settlement**

*ICSID Convention and New York Convention*

Nepal is a signatory to and adheres to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Award. The Arbitration Act of 1999 allows the enforcement of foreign arbitral awards and limits the conditions under which those awards can be challenged.

The GON has updated its legislation on dispute settlement to bring its laws into line with the requirements of New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Award.

*Investor-State Dispute Settlement*

The GON is signatory to a treaty or investment agreement that recognizes international arbitration of investment disputes as binding.

Nepal does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States.

Investment disputes involving U.S. or other foreign investors have not been frequent. In the last ten years, Post is aware of two cases in which a U.S. investor claimed that the GON did not honor portions of a contract. In a third case, a U.S. investor complained about monetary compensation given to a landowner. This case was eventually resolved in favor of the investor.

In theory, local courts recognize and enforce foreign arbitral awards issued against the government, based on the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Post is not aware of any cases that have involved foreign arbitral awards.

There are no known cases of extrajudicial action against foreign investors.

*International Commercial Arbitration and Foreign Courts*

Other than arbitration, Post is not aware of any alternative dispute resolution mechanisms available in Nepal.

In disputes involving a foreign investor, the concerned parties are encouraged to settle through mediation in the presence of the Department of Industry. If the dispute cannot be resolved, cases may be settled either in a Nepali court or in another legal jurisdiction, depending on the amount of the initial investment and the procedures specified in the contract. Commercial disputes under the jurisdiction of Nepali courts and laws typically drag on for years.

Local courts recognize and enforce foreign arbitral awards issued against the government, based on the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Post is not aware of any cases that have involved foreign arbitral awards.

Domestic courts have a history of siding with SOEs (or any government entity) in cases involving investment disputes. There have been cases where local courts have refused to determine whether documents issued by an SOE were genuine.

**Bankruptcy Regulations**

There is no specific act in Nepal that exclusively covers bankruptcy. The 2006 Insolvency Act provides guidelines for insolvency proceedings in Nepal and specifies the conditions under which such proceedings can occur. Additionally, the General Code of 1963 covers bankruptcy-related issues. Creditors, shareholders, or debenture holders can initiate insolvency proceedings against a company by filing a petition at the court.

Nepal ranked 89th in the category of resolving insolvency in the World Bank’s 2017 Doing Business Report. According to the report, “resolving insolvency [in Nepal] takes 2 years on average and costs 9 percent of the debtor’s estate, with the most likely outcome being that the company will be sold as piecemeal sale. The average recovery rate is 42.3 cents on the dollar.”

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 its liabilities, or if its liabilities are greater in value than its assets, then liquidation is covered by the Insolvency Act. Under the Company Act, the order of claimant priority is as follows: 1) government revenue; 2) creditors; and 3) shareholders. Under the Insolvency Act, the government is equal to all other unsecured creditors. Monetary judgments are made in local currency. Firms and entrepreneurs who have declared bankruptcy are blacklisted from receiving loans for 10 years.

							4. Industrial Policies					

**Investment Incentives**

The Nepal Laws Revision Act of 2000 eliminated most tax incentives; however, exports 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. The GON offers tax incentives to encourage industries to locate outside the Kathmandu Valley.

**Foreign Trade Zones/Free Ports/Trade Facilitation**

The GON is developing the country’s first SEZ in Bhairahawa in southern Nepal, near the border with India. The GON eventually plans to have a network of up to 15 SEZs throughout the country. In August 2016, Nepal’s Parliament approved the SEZ Act, which provides numerous incentives for investors in SEZs, including exemptions on customs duties for raw materials, streamlined registration processes, and guaranteed access to electricity. The act also prohibits labor strikes in an SEZ.

**Performance and Data Localization Requirements**

There are no mandates for local employment. Nor are there mandates for local employment of senior management and boards of directors.

Many foreign investors and foreign workers have complained about the difficult process for obtaining a work visa. The GON generally limits the number of expatriate employees permitted to work at a company and has expressed concern about foreign workers “taking jobs” from Nepali citizens.

There are no government imposed conditions on permission to invest.

The GON does not use “forced localization” policies.

Nepali laws are either silent or unclear on performance requirements. While the 2015 Foreign Investment Policy is supposed to ease the process of getting visas for foreigners, challenges remain, according to anecdotal reports.

Performance requirements and investment incentives are applied uniformly to both domestic and foreign investors, but are rarely applied systematically.

There are no requirements for foreign companies to provide technology to local companies. Nor are there are measures that prevent the free flow of data. Nepal has no laws relating to storage of data for law enforcement or privacy purposes.

							5. Protection of Property Rights					

**Real Property**

The Secured Transactions Act (2006) applies mortgage or lien in all transactions where the effect is to secure an obligation with collateral, including pledge, hypothecation, and hire-purchase, sale of accounts and secured sales contracts, and lease of goods. The GON has established the Secured Transactions Registration Office for registering notices under this Act. Pursuant to this Act, the GON may also designate any office to perform the notice registration function.

The government does not provide special protections for traditional use rights for indigenous peoples. Most arable land has a title, although titles have sometimes been acquired in a fraudulent manner.

There are no exclusive regulations for land lease or acquisition by foreign and/or non-resident investors. The Foreign Investment and Technology Transfer Act (1992), which governs foreign investment in general, and related laws governing foreign investment clearly state that investors can own any property, the title of which rests with the business/company, and not the owner.

The GON does not maintain official statistics on untitled land. The Ministry of Land Reform and Management has been working for decades to identify property titles and registration. However, political instability, poor record keeping, and resistance from stakeholders has made this an arduous task.

For legally purchased property, ownership does not revert to other owners. But, if that property remains unoccupied or unused for an extended period, there is the possibility that squatters may occupy the land. Although such occupation would not be legal, there are hundreds of cases of unsettled or unlawful occupation of property languishing in Nepal’s court system, most dating back to the Maoist insurgency, from 1996 to 2006.

**Intellectual Property Rights**

There is no exclusive act for the protection of intellectual property, and protections in general remain weak with little enforcement. Nepal signed the 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights. However, patent registration under the Patent, Design, and Trademark Act does not provide automatic protection to foreign trademarks and designs. Similarly, Nepal does not automatically recognize patents awarded by other nations. Trademarks must be registered in Nepal to receive protection. Once registered, trademarks are protected for a period of seven years. The Copyright Act of 2002 covers most modern forms of authorship and provides adequate periods of protection. However, enforcement is weak. Nepal faces serious challenges in preventing the sale of counterfeit goods. The primary marketplaces in Nepal are flooded with counterfeit products, including electronic equipment, clothing, digital media, and pharmaceutical products.

Nepal became a member of World Intellectual Property Organization (WIPO) convention in 1997, but has not yet signed the WIPO Copyright Treaty or the WIPO Performances and Phonograms Treaty. Nepal is not listed in the USTR’s Special 301 report nor is it listed in the notorious market report. The GON recently finalized its IPR Policy and approved an updated Industrial Enterprise Act.

Enforcement of existing IPR violations is sporadic at best. Law enforcement officials do not have adequate training on IPR issues and offenders can often pay a small bribe to avoid prosecution. Some of Nepal’s IPR laws are several decades old and penalties are so small that there is little deterrent.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at: www.wipo.int/directory/en/ .

Nepal’s Cabinet approved a new IPR Policy in March 2017 that will become the foundation for new IPR legislation. Post does not yet have an English-language version of the policy, but representatives from the United States Patent and Trademark Office reviewed the bill in draft form and provided the GON recommendations on how the policy could be strengthened.

Nepal does not track seizures of counterfeit goods. Nepal does not have a strong track record of prosecuting IPR violations.

Nepal is not listed on USTR’s Special 301 report, nor is it listed in the notorious market report.

							6. Financial Sector					

**Capital Markets and Portfolio Investment**

There are few opportunities for foreign portfolio investment in Nepal. Foreign investors are not allowed to invest in the Nepal Stock Exchange. Occasionally the Nepal Rastra Bank (NRB, Nepal’s central bank) will issue bonds that foreign investors could purchase, but generally there are few instruments available for foreign portfolio investment.

The Nepal Stock Exchange (NEPSE) is the only stock exchange in Nepal, with more than 220 companies listed. Foreign investors are not allowed to trade stock. Stock trading is available only for citizens of Nepal. The Nepal Stock Exchange Board regulates NEPSE but the Board does little to encourage and facilitate portfolio investment.

A liquidity crunch hit the banking system in late 2016. Upon the completion of the September 2015-February 2016 crisis at the Nepal-India border, banks experienced a surge in credit demand, in part to fund earthquake reconstruction activities. In January 2017, the International Monetary Fund (IMF) recommended a tighter monetary policy to the GON. The NRB has noted that banks have other options for attracting deposits, and has publicly suggested that banks increase interest rates to attract more deposits (and thus loanable funds).

Post is not aware of any policies designed to facilitate the free flow of financial resources into the product and factor markets

Nepal moved to full convertibility for current account transactions when it accepted Article VIII obligations of IMF’s Articles of Agreement in May 1994. The GON and NRB refrain from imposing restrictions on payments and transfers for current international transactions. Foreign investors can access credit locally, but the investor must be incorporated in Nepal under the Companies Act of 2006 and listed on the stock exchange.

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.

**Money and Banking System**

The NRB has promoted mergers in the financial sector and published merger bylaws in 2011 to help better regulate the banking sector. Since 2011, a total of 78 BFIs have merged into 30 local institutions (as of July 2015). As of January 2016, there were 30 commercial banks, 73 development banks, and 48 finance companies registered with the NRB. This total does not include micro finance financial institutions, savings and credit cooperatives, non-government organizations (NGOs), and other institutions, which may function as BFIs. There are no legal provisions to defend against hostile takeovers, but there have been no reports of hostile takeovers in the banking system.

Nepal’s banking sector is relatively healthy, although there are a number of issues. The sector is relatively fragmented and bank supervision by the NRB remains weak, allegedly due to politically-influenced bank supervision and reviews. The GON has encouraged consolidation of commercial banks – there are currently 30 commercial banks, down from 78 five years ago. The GON hopes to strengthen the banking system by reducing the number of smaller banks. Rural areas continue to be underbanked, as most banks situate their branches in the Kathmandu Valley and the large cities of the Terai (southern Nepal). Some banks are owned by prominent business houses, which could create conflicts of interest. There are also a large number of cooperative banks that are governed not by the NRB but rather by the Ministry of Cooperatives and Poverty Alleviation. These cooperatives compete with banks for customers.

In January 2017, Parliament approved the Bank and Financial Institutions (BAFI) Act. The long-pending legislation, first introduced in 2013, is designed to strengthen corporate governance by setting term limits for Chief Executive Officers and board members of banks and financial institutions. The bill also aims to reduce potential conflicts of interest by prohibiting business owners from serving on the board of a bank from which their business has taken loans.

As of January 2017, 1.64 percent of the total asset base was estimated to be non-performing. Nepal’s bank assets totaled about $26.22 billion as of January 2017, and deposits equaled $20.79 billion.

Nepal Rastra Bank (NRB) regulates the national banking system and also functions as the government’s central bank. As a regulator, NRB controls foreign exchange; supervises, monitors, and governs operations of banking and non-banking financial institutions; determines interest rates for commercial loans and deposits; and also determines exchange rates of foreign currencies. As the government’s bank, NRB maintains all government income and expenditure accounts, issues Nepali bills and treasury notes, as well as loans to the government, and determines monetary policy.

Existing banking laws do not allow retail branch operation by any foreign banks, so foreign banks need to set up a local bank. For example, Standard Chartered has formed Standard Chartered Nepal. All commercial banks have correspondent banking arrangements with foreign commercial banks, which they use for transfers and payments.

Foreigners who are legal residents of Nepal with proper work permits and business visas are allowed to open bank accounts.

**Foreign Exchange and Remittances**

*Foreign Exchange*

The Foreign Investment and Technology Transfer Act of 1992 (FITTA) states that foreign investors can 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 income. Repatriation facilities (such as opening bank accounts or obtaining permission for remittance of foreign exchange) are available based on the recommendation of the Department of Industry, which normally provides approval of the original investment.

Despite these official policies, repatriation 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.

Several foreign companies have reported that the Government of Nepal insists on signing contracts using Nepal rupees (NPR) and not major world currencies, such as the U.S. dollar.

Nepal’s currency has been pegged to the Indian rupee (INR) since 1993 at a rate of 1.6 NPR to 1 INR. In recent years, the dollar has strengthened significantly against the NPR.

*Remittance Policies*

There have been no recent changes to investment remittance policies. If the Foreign Investment bill is approved in 2017, there will likely be improvements to what has been a long and cumbersome process for foreign investors to remit funds from Nepal.

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, or expatriate salaries, 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. However, final remittance approval is granted by the NRB foreign exchange department, a process that is often opaque and time-consuming.

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 serious discrepancies between the government’s stated policy of repatriation and its implementation.

**Sovereign Wealth Funds**

There are no sovereign wealth funds in Nepal.

							7. State-Owned Enterprises					

There are 37 state-owned enterprises (SOEs) in Nepal, including Nepal Telecom, Nepal Airlines Corporation, and the Nepal Electricity Authority. Since 1993, Nepal has initiated numerous market policy and regulatory reforms in an effort to open eligible government-controlled sectors to domestic and foreign private investment. These efforts have had mixed results. The majority of private investment has been made in manufacturing and tourism – sectors where there is either little government interest or the existing state-owned enterprises perform poorly. Most government-controlled sectors are not open for foreign investment.

The government maintains a list of SOEs on the Ministry of Finance’s website (http://mof.gov.np/en/archive-documents/soe-information–yellow-book-29.html ). Information on the SOEs’ annual performance can be found on this website.

Corporate governance of SOEs remains a challenge, and executive positions have reportedly been filled by people connected to politically appointed government ministers. Board seats are generally allocated to senior government officials, and the SOEs are often required to consult with government officials before making any major business decisions. A 2011 executive order mandates a competitive and merit-based selection process, but has encountered resistance within some ministries. Third-party market analysts consider most Nepali SOEs to be poorly managed and characterized by excessive government control and political interference. The court system appears to favor SOEs over private entities. According to local economic analysts, SOEs are sometimes given preference for government tenders, although official policy states that SOEs and private companies are to compete under the same terms and conditions.

Private enterprises do not have the same access to finance as SOEs. Private enterprises mostly rely on commercial banks and financial institutions for business and project financing. SOEs also have access to financing from state-owned banks, development banks, and other state-owned investment vehicles. Similar concessions or facilities are not granted to any private enterprises.

The Ministry of Finance publishes an annual “yellow book” which includes a list of SOEs in Nepal and relevant financial information.

SOEs receive non-market based advantages, given their proximity to government officials, although these advantages can be hard to quantify. Local courts typically side with SOEs in disputes. Some SOEs, such as the Nepal Electricity Authority or the Nepal Oil Corporation have monopolies that prevent foreign competitors from entering the market.

Corporate governance of SOEs is poor, and executive positions are usually filled by individuals reportedly connected to politically appointed government ministers. Board seats are generally allocated to senior government officials, and the SOEs are often required to consult with government officials before making major business decisions. 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.

The World Bank in Nepal assesses corporate governance benchmarks (both law and practice) against the OECD Principles of Corporate Governance, focusing on companies listed on the stock market. Awareness of the importance of corporate governance is growing. The NRB has introduced higher corporate governance standards for banks and other financial institutions. Under the OECD Principles of Corporate Governance, the World Bank recommended in 2011 that the GON strengthen capital market institutions and overhaul the Office of the Company Registrar (OCR). Although some reforms have been initiated many have not been finalized and no reforms have been instituted at the OCR.

**Privatization Program**

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.

Economic reforms, deregulation, privatization of businesses and industries under government control, and liberalized policies toward FDI were initiated in the early 1990s. Sectors such as telecommunications, civil aviation, coal imports, print and electronic media, insurance, and hydropower generation were opened for private investment, both domestic and foreign.

The first privatization of a state-owned corporation was conducted in October 1992 through a Cabinet decision (executive order). The Privatization Act was passed fourteen months later in January 1994. A total of 23 state-owned corporations have been privatized, liquidated, or dissolved. The process, however, has been static since 2003. While foreign companies can participate in the privatization of SOEs, the government has not restarted privatization efforts. As of 2016, Nepal has 37 SOEs.

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.

Economic reforms, deregulation, privatization of businesses and industries under government control, and liberalized policies toward FDI were initiated in the early 1990s. Sectors such as telecommunications, civil aviation, coal imports, print and electronic media, insurance, and hydropower generation were opened for private investment, both domestic and foreign.

The first privatization of a state-owned corporation was conducted in October 1992 through a cabinet decision (executive order). The Privatization Act was passed fourteen months later in January 1994. A total of 23 state-owned corporations have been privatized, liquidated, or dissolved. The process, however, has been static since 2003. While foreign companies can participate in the privatization of state-owned enterprises, the government has not restarted privatization efforts. As of 2016, Nepal has 37 state-owned enterprises.

Foreign investors can participate in privatization program of state-owned enterprises.

The last company to be (partially) privatized was Nepal Telecom in 2008. Since then, no SOEs have been privatized. In the past, privatization was initiated with a public bidding process that was transparent and non-discriminatory. However, procedural delays, resistance from trade unions, and a lack of will within the GON have created obstacles in the privatization process. The Corporate Coordination and Privatization Division, Ministry of Finance, is responsible for management of the privatization program (http://www.mof.gov.np/en/ ).

							8. Responsible Business Conduct					

General awareness of expectations of or standards for responsible business conduct (RBC) remains very low in Nepal. Government rules, policies, and standards related to RBC are mostly limited to environmental issues. Social and governance issue largely remain unattended or very poorly promoted or enforced by the government.

Government laws, policies, and rules concerning RBC, including environmental and social standards, are in place. However, the government agencies and officials responsible for enforcing them have been criticized for failing to fulfill their responsibilities. The government has not drafted a national action plan for RBC and does not factor RBC policies into procurement decisions. Workers’ organizations and unions are the most vocal entities promoting or monitoring RBC.

Other than the Department of Labor, which works with workers’ organizations and unions, other government agencies do not encourage foreign and domestic enterprises to follow generally accepted RBC principles.

Post is not aware of any cases of private sector impact on human rights.

The GON’s efforts to develop and enforce laws for environmental protection, consumer protection, labor rights, and human rights have been sporadic and lacking in efficacy. Ministries or concerned departments occasionally initiate special campaigns to enforce laws and regulations protecting these rights, but this is not standard practice. Government agencies often do not enforce these laws, and minor penalties provide little deterrence.

Yes, various government agencies monitor business entities’ compliance with different standards and codes. For instance the Office of the Company Registrar looks after governance issues, the Inland Revenue Department monitors accounting, and the Department of Labor monitors executive compensation standards.

There are no independent NGOs or investment funds focusing on promoting or monitoring RBC.

GON does not encourage adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are virtually no extractive industries in Nepal, and the country does not participate in the Extractive Industries Transparency Initiative.

							9. Corruption					

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.

The Commission for the Investigation of Abuse and Authority (CIAA) is the constitutional body for corruption control. The 2015 constitution empowers the CIAA to conduct “investigations of any abuse of authority committed through corruption by any person holding public office.” CIAA arrests and investigations tend to focus on lower level government bureaucrats. According to the 2016 Corruption Perception Index released by Transparency International (TI), Nepal ranked 131st among 167 countries, placing it in the range of “highly corrupt” countries.

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 Nepal should take the time to become familiar with the relevant anticorruption laws of both Nepal 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 in international business, for example to secure a contract, should bring this to the attention of appropriate U.S. agencies, as noted below.

Anti-corruption laws extend to family members of officials and to political parties.

There are no laws or regulations that are specifically designed to counter conflict-of-interest in awarding contracts or government procurement. GON officials are aware that there should be no conflict of interest when contracts are awarded, but how this is implemented is left to the discretion of the concerned government agency.

The Government of Nepal does not require companies to establish codes of conduct.

Post is not aware of private companies that use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials; however this does not mean that no companies use such programs.

Nepal is a signatory to the UN Anticorruption Convention. It is not a member of the OEDC Anti-Bribery Convention. NGOs involved in investigating corruption do not receive special protections.

Corruption is rampant in Nepal. In the words of a World Bank official, corruption in Nepal is “endemic, institutionalized, and driven from the top.” Corruption takes many forms but is pervasive in the awarding of licenses, government procurement, and customs.

*Resources to Report Corruption*

Mr. Shridhar SapkotaSecretary, Commission for the Investigation of Abuse of AuthorityCIAA Headquarter, P.O. Box No. 9996, Tangal, Kathmandu, NepalPhone: +9771-4440151, 4429688, 4432708Fax: +9771-4440128, 4440104Email: mailto:akhtiyar@ntc.net.np

International nongovernmental organization:

Mr. Bharat Bahadur ThapaPresident, Transparency International Nepal (TIN)P.O. Box 11486, Chakhkhu Bakhkhu Marga, New Baneshwor, KathmanduPhone: +977 1 4475112, 4475262Fax: + 977 1 4475112Email: mailto:trans@tinepal.org

Local nongovernmental organization:

Prof. Dr. Srikrishna ShresthaPresident , Pro PublicP.O. Box: 14307, Gautambuddha Marg, AnnamnagarPhone: +977-01-4268681, 4265023; Fax: +977-01-4268022Email: mailto:propublic@wlink.com.np

							10. Political and Security Environment					

In September 2015, Nepal adopted a new constitution – a key step in Nepal’s post-conflict, democratic transition. In the Terai region (the southern plains bordering India), ethnic and caste groups protested elements of the constitution. The dissatisfaction led to widespread strikes across the Terai and blockages along the India-Nepal border that halted cross-border trade and transit. The disruptions across the Terai lasted from August 2015 until February 2016. Some protests resulted in violent clashes with security personnel, and about 50 protesters and police were killed. In March 2017, five protesters were killed during a political rally in Saptari District. Political parties in the Terai continue to advocate for the rights of Madhesis, a historically marginalized group that comprises the majority of Terai residents. These parties continue to call for constitutional amendments that would address Madhesi concerns, including proportional representation and a redrawing of provincial boundaries. Local elections – the first to be held in 20 years – have been scheduled for May 14, 2017. Protests are likely leading up to the election and could continue afterward, particularly in parts of the Terai. The possibility of violent clashes cannot be discounted.

Criminal violence, sometimes conducted under the guise of political activism, remains a problem, though a declining one. Bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide. Americans and other Westerners are generally not targets of violence.

Business owners, especially those in the Terai, have been the target of extortion and kidnapping by political party activists and criminal groups aligned with them. To extort ransom, armed groups have targeted business entrepreneurs and local government employees, but generally not foreigners. Most of these criminal acts took place in the Central and Eastern Terai regions, and have decreased significantly in recent 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://step.state.gov/step, or by personal appearance at the Consular Section, located at the U.S. Embassy Kathmandu. The Consular Section can provide updated information on travel and security, and can be reached through the Embassy switchboard at (977) (1) 423-4500, by fax at (977) (1) 400-7281, by email at mailto:consktm@state.gov, or online at https://np.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).

In the last ten years, there have been frequent calls for strikes, particularly in the Terai (southern Nepal). Occasionally, protesters have vandalized or damaged factories and other businesses. Demonstrations have on occasion turned violent, although these activities generally are not directed at U.S. citizens. Over the past year, Biplav, a splinter Maoist group, has threatened or attempted to extort “donations” from NGOs working in Nepal.

Local elections are scheduled for May 2017 and protests or demonstrations are possible in the weeks before and after the election. Provincial and central elections are likely to take place in the Fall or Winter of 2017, again raising the possibility of protests. Additionally, political parties in the Terai continue to advocate for changes in Nepal’s constitution and it is possible that there will be new calls for strikes and protests in this region in 2017.

							11. Labor Policies and Practices					

In the past, politicized unions have staged frequent strikes, often unrelated to working conditions. Under Nepali law, it is difficult to dismiss employees.

According to the 2010-2011 Nepal Living Standards Survey, the country’s literacy rate was 56.6 percent, with the 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 non-Nepali workers is not, with the exception of India, 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 GON has submitted an amendment to the Labor Act to Parliament, but it is unclear when this legislation will be approved by Parliament. Nepal’s enforcement of regulations to monitor labor abuses and health and safety standards in low-wage assembly operations is weak. Operations in small towns and rural areas are rarely monitored. International labor rights are recognized within domestic law. There were no new labor-related laws enacted in the past year.

By law, labor unions in Nepal are independent of the government and employer. In practice, however, all labor unions are affiliated with political parties, and have significant influence with the government. 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, though this law is often ignored. Laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affect the nation’s economic interests; in practice, this is rarely done.

Total union participation is estimated at about 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 its organizing tactics have led in the past to violent clashes with other trade unions in the past. The ANTUF and its splinter group, the ANTUF-R, are aggressive in their defense of members and frequently engage in disputes with management. A U.S. company in Nepal was shut down twice in 2013 and 2014 by workers associated with the CPN-M-affiliated ANTUF-R.

Labor union agitation is often conducted in violation of valid contracts and existing laws, and unions are rarely held accountable for their actions. Unions, particularly the ANTUF-R, have targeted joint ventures involving foreign investment and hotels.

The most recent Human Rights Report can be found at: www.state.gov/j/drl/rls/hrrpt/index.htm. The Department of Labor’s 2014 Findings on the Worst Forms of Child Labor is available at: http://www.dol.gov/ilab/reports/child-labor/nepal.htm 

Nepal’s labor force is characterized by a shortage of skilled workers and an abundance of political party-affiliated unions. Thousands of Nepalis depart each year to work in foreign countries, primarily Qatar, the UAE, Saudi Arabia, and Malaysia. Thousands more also seek employment in India, which shares an open border with Nepal. As a result, there is a shortage of skilled and unskilled labors. The agricultural and construction sectors struggle to find enough workers, and many companies import labor from India.

Labor Law encourages the hiring of Nepali citizens wherever possible. While it is possible for foreign companies to hire expatriates, this can be a long and cumbersome process.

Labor laws differentiate between layoffs and firing. In some cases, Nepal’s labor laws have forced companies to retain employees, even after a business has closed. Workers at state-owned enterprises often receive generous severance packages if they are laid off. Unemployment insurance does not exist. As a result of burdensome labor laws that make it difficult to fire an employee, many private enterprises hire workers on a contract basis for jobs that are not temporary in nature. In some commercial banks and other businesses, security guards, drivers, and administrative staff jobs are filled by contract workers.

The Special Economic Zone (SEZ) Act approved in August 2016 prohibits workers from striking in any SEZ. There is only one SEZ under development but the GON hopes to eventually have as many as 15.

Collective bargaining is only applied in fixing workers’ salaries. Trade unions, employers, and government representatives actively engage in this practice.

The Department of Labor has a dispute resolution mechanism that addresses disputes in businesses and state-owned enterprises.

Strikes are a common feature in Nepal, although they have become less frequent and effective in recent years. Political parties frequently call for national strikes that are observed only in particular regions or that only last for a few hours. With three sets of elections planned in 2017 and ongoing disagreement over a proposed constitutional amendment, it is likely that political parties will call for more strikes in 2017.

The GON does not fully meet the minimum standards for the elimination of trafficking, though it is making significant efforts to do so. The definition of human trafficking under Nepal’s Human Trafficking and Transportation (Control) Act (HTTCA) does not match the definition of human trafficking under international law, nor has the GON acceded to the 2000 UN TIP Protocol. Children in Nepal are engaged in child labor, including in the production of bricks and in agriculture. The Labor Inspectorate’s budget, the number of labor inspectors, and relevant resources and training are all insufficient for effective enforcement of Nepal’s labor laws, including those related to child labor.

The Industrial Enterprise Act approved in October 2016 includes a “no work, no pay” provision that has been a top objective of the Nepali private sector for many years. The Special Economic Zone (SEZ) Act approved in August 2016 prohibits workers from striking in any SEZ in Nepal. Nepal’s Labor Act is the subject of an amendment bill in Parliament, which could be approved in 2017.

							12. 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. There is an OPIC agreement between Nepal and the United States that was signed in 1963. OPIC has yet to fund a project in Nepal.

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. There is an OPIC agreement between Nepal and the United States that was signed in 1963. OPIC has yet to fund a project in Nepal.

							13. Foreign Direct Investment and Foreign Portfolio Investment Statistics					

*Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy*

*Note: Central Bureau of Statistics data is gathered by Nepali fiscal year (July 15-July 14). Therefore the 2016 data covers the period July 15, 2015 – July 14, 2016.**Note: IMF estimate for Nepal’s 2016 GDP is $21,154 million.*** Source: Department of Industry*Table 3: Sources and Destination of FDI.*

*Table 4: Sources of Portfolio Investment*

Data are unavailable for Nepal.

							14. Contact for More Information					

Kevin PriceEconomic and Commercial OfficerU.S. Embassy Kathmandu, Maharajgunj+977 1-423-4000PriceKC@state.gov

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### On This Page

                    -  Executive Summary 
                    -  1. Openness To, and Restrictions Upon, Foreign Investment   
                    -  2. Bilateral Investment Agreements and Taxation Treaties   
                    -  3. Legal Regime   
                    -  4. Industrial Policies   
                    -  5. Protection of Property Rights   
                    -  6. Financial Sector   
                    -  7. State-Owned Enterprises   
                    -  8. Responsible Business Conduct   
                    -  9. Corruption   
                    -  10. Political and Security Environment   
                    -  11. Labor Policies and Practices   
                    -  12. OPIC and Other Investment Insurance Programs   
                    -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                    -  14. Contact for More Information   

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