(“SEBI”). Onshore companies in India can typically raise debt from foreign lenders through a separate route, referred to as External Commercial Borrowings (“ECB”). The ECB route permits permits borrowings from certain types of foreign lenders such as overseas banks, financial institutions and other lenders (subject to conditions). The ECB guidelines also lay down rules for lenders and borrowers of ECBs, such as eligible lenders, eligible borrowers, minimum average maturity, permitted end-use of ECB proceeds and other restrictions. Importantly, offshore PEVC funds, outside of the ECB framework, are permitted to invest in debt instruments (such as nonconvertible debentures) if they are registered with the Indian securities regulator (albeit subject to certain limits, such as investment limits and country-wide aggregate corporate bond limits).

# **D. Investment exit**

# <u>IPO restrictions</u>

The IPO regulation does not envisage any difference in treatment between domestic and offshore promoters.

# <u>Stock trading restrictions</u>

Active stock trading is forbidden to foreign investors. Foreign investors are allowed to buy or sell large blocks of shares through private placements (subject to FDI approvals required for any foreign investment in Nepal), but are not allowed to trade stocks actively. In practice, this is unlikely to represent a major issue for PE/VC funds, since they are usually not involved in daily trading of the shares they own in listed companies. A broader side-effect, however, is that the Nepalese stock exchange does not benefit from the additional liquidity generated by foreign investors (especially foreign institutional investors).

# <u>Tax considerations</u>

The tax treatment of foreign investors – whether foreign investor in a local PEVC fund; or an offshore PEVC fund investing in Nepal -- differs depending on the existence of a Double Taxation Avoidance Agreement (DTAA) between Nepal and the foreign investor’s country of residence. If a DTAA exists, the provisions of the each DTAA discipline the tax treatment of investors from the corresponding foreign country. Nepal currently has DTAAs with the following countries: Norway, Thailand, Sri Lanka, Mauritius, Austria, Pakistan, China, the Republic of Korea, Qatar and India. Nepal is also a party to the SAARC Limited Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in Tax Matters with Bangladesh; Bhutan; India; Maldives; Pakistan; and Sri Lanka. Some DTAAs establish that foreign investors are taxed exclusively in their country of residence – a significant advantage for offshore investors whose tax residence does not tax capital gains. Other DTAAs provide for foreign investors to be also taxed at source (in the country where income is generated), but at preferential rates compared to local investors. _(See Box 3 below on DTA between Mauritius and Nepal.)_ If no DTAA exists, both foreign investors in a local PEVC fund and offshore PEVC funds investing in Nepal are subject to a tax rate of 25% on gains arising from the sale of investments in Nepal. Thus offshore natural person investors investing in a local fund are subject to higher tax (25%) on gains from sale of investment than domestic natural person investors. Tax from gains on the sale of investment is collected generally as (i) 15% on a withholding basis and (ii) the remaining 10% to be deposited by the non-resident investors with the relevant tax office.

24