Foreign Investment Threshold Reduced

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Foreign Investment Threshold Reduced

Stakeholders say the country does not need foreign investment for small businesses


The threshold for foreign direct investment (FDI) has been a topic for discussion for the past many years. Both the political leaders, government officials and private sector have called for increasing FDI in the country. The government has brought a separate policy for FDI and organised investment summits to showcase the country’s investment potentials and attract FDI in the country. Today, FDIs can be seen in various sectors of the economy.

Although there are few opportunities for investment in Nepal, hydropower and tourism are the two potential sectors that can get FDI into the country. The government too has prioritised tourism, IT industry and manufacturing industry for FDI and making efforts to bring foreign investment in sectors like tourism, IT and manufacturing.

There is no doubt Nepal needs significant investments to set up new industries and expand the capacity of existing ones. Nepal has identified FDI as one of the tools to address investment shortfalls and technology transfer, among others. However, the country has been failing to draw substantial investment from countries other than China and India whose interests in Nepal are mostly based on security considerations. As a result, Nepal’s heavy reliance on investment from India and China frequently puts the nation in a precarious geopolitical situation.

Recently, the government took a new step to attract more foreign investment in the country. A cabinet meeting held on October 14 has decided to reduce the minimum threshold for FDI. While introducing the budget for the current fiscal year, Minister for Finance Janardan Sharma had said that the government was preparing to lower the minimum barrier for FDI with a focus on small businesses. The cabinet accordingly decided to reduce the minimum threshold for FDI from Rs 50 million rupees to Rs 20 million rupees

The government had set a minimum threshold at Rs 50 million three years ago. However, some sectors, specifically the information technology (IT) sector, had expressed their objection to the policy. Amid this scenario, the government has decided to lower the minimum investment requirement, citing the need to attract FDI in small businesses as well.

Current Status of FDI
According to the Department of Industry (DoI), Nepal has received FDI of Rs 419 billion so far. Data shows as many as 55 countries have invested in different sectors of the country. Of the total FDI, the highest investment is from India. Indian investors have made an investment of more than Rs Rs 79.14 billion in Nepal. Similarly, total FDI from China stands at Rs 75.77 million. Besides these two countries, FDI from other countries is very low.

Data provided by the DoI shows about 60.5% of total FDI is in the industrial sector, while 39.4% is in the service sector. Under the industrial sector, 30.8% of the total foreign investment is in the hydropower sector and 29.5 percent is in the production sector. The government has so far approved 5,537 FDIs. Of the total FDIs, 322 are big industries, 603 are medium industries and 4,608 are in small industries.

Investment from China in small business is growing significantly in recent years. In the last fiscal year alone, 231 Chinese businesses have been registered with the DoI. The Chinese investment in small businesses is mostly in the hospitality sector. An increasing number of Chinese are investing in small hotels and restaurants.

According to the Foreign Investment and Technology Transfer Regulations (FITTA), investors must bring their investment within a year of the registration of their companies in Nepal. As per the regulation, investors bringing FDI of the minimum threshold must bring 50% of their investment within a year. Likewise, those who have received approval for investment of Rs 20 million must bring at least Rs 1 million within a year. Similarly, FDIs with investment approval of Rs 250 million will have to bring 15% of their total investment within a year, while those with investment approval of Rs 1 billion must bring 10% of the committed amount within a year. Companies that have received investment approval of more than Rs 1 billion will have to bring 5% of the committed investment within a year of the registration of their company in Nepal.

Possible impact of reduction in minimum FDI threshold
As shown by the Economic Research Department of the Nepal Rastra Bank (NRB), FDI is an important source of financing for many countries including Nepal as it facilitates the transfer of financial resources, technology, other intangible assets including technological know-how, managerial and organisational skills and access to foreign markets which help to increase production and productivity in the host economy.

Considering the trade deficit of the country, there is no alternative for Nepal other than bringing FDIs. However, stakeholders believe that the government is focused more on bringing small investments rather than creating an environment for big investments.

“We need big investments for the development of the country's economy. However, the government is failing to work as per the core concept of FDI,” Economist Achyut Wagle said. He added that the government's plan to bring in FDI, in order to improve the country's economy, has remained in discussions only.

Wagle further said the recent government decision to reduce the minimum threshold for FDI is not a rational one. He blamed the government for failing to create an environment for FDI. Such steps are not going to improve the country's economy, he added. “Looking at the history of FDI in Nepal, the country has received big FDIs only twice so far. The first was in the 1990s when companies like Dabur and Unilever brought their investments to Nepal. The second was after the 2015 earthquakes when companies like Axiata and Hongshi came to Nepal,” Wagle added.

He termed the government’s decision to reduce the minimum FDI threshold to Rs 20 million ‘shameful’. “This is another example of the government's failure to work as per their word. Even though they said they are working to attract FDIs, so far they have failed and they are still failing to make the right decision,” he said, adding that the decision may increase the number of company registration but will not have any significant impact on the country's economy.

Many stakeholders are also raising questions over the unfulfilled FDI commitments. Foreign investors are making commitments, but are not bringing funds after registering their companies in Nepal. However, Ram Chandra Tiwari, director general of DoI, said the trend of making commitment and not bringing investment is gradually declining. “The government decided to lower the minimum FDI threshold to Rs 20 million in order to encourage small investors from foreign countries.

However, stakeholders slam the government for not monitoring whether FDI commitment is realising and making policy randomly. “We don’t need small investments in any sector. Rather, we need to attract big investments that can really be a game changer for Nepal. We are not understanding the decisions of policy makers,” Rajendra Malla, president of Nepal Chamber of Commerce (NCC), said. He added that the government should set different thresholds for different sectors of investment.

“First the government should be clear on which sector it needs FDI,” he said. “There were many foreign companies in the past. But they earned money and left without contributing a single rupee to the state coffers. Unfortunately, the government is not monitoring such companies.”

Stakeholders like Malla suggested to the government to make a concrete plan for FDI rather than taking random decisions. “We all agree that the country needs investment in big industries. FDI is not something that can be decided on a whim. The government has to act as per the needs of the economy,” he said, urging the government to create an enabling environment for FDI.

“At a time when domestic investors are facing problems to sustain their business, how can a foreign investor sustain their business here?” Malla questioned. He blamed the government for taking the decision to lower the minimum FDI threshold without having proper discussion with the private sector.

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