Nepali citizens, firms and corporate bodies can directly borrow up to USD 1 Million from abroad with approval from the Nepal Rastra Bank
Nepal Rastra Bank (“NRB”), the central bank, issued a notice on 12 March 2020 (“Amendment”) amending point no. b (ii) of its earlier notice included in its Unified Circulars, 2020 (2076) (“Unified Circulars”), Notice No. 1: Foreign Direct Investment: Equity, Loan, Interest and Dividend) (“Notice”). Notice provided extensive documentary requirements for loan investment approval under its point no. b (i), whereas it loosened the requirements for loan investment approval from relatives residing abroad, other personnel, non-residential Nepalese, organisations and corporate bodies under point no. b (ii).
The Amendment allows Nepali citizens, firms and corporate bodies to obtain loans up to USD 1,000,000 or INR 100,000,000 (from India), from one’s relatives residing abroad, other personnel, non-residential Nepalese, organisations and corporate bodies, with prior approval of NRB. The purpose of such loan shall be to conduct one’s business or expand one’s business. Earlier, the limit was USD 500,000 or INR 50,000,000 in case of India. The amendment notice changed the interest rate from Nil to Nil or a maximum of 1year LIBOR +0.5% and repayment timeline from 5 years to 3 years. Restriction on obtaining such loan in the real estate sector and securities or in any such sector prohibited by the prevailing laws of Nepal is continued as per the previous Notice.
This Amendment may seem contradictory to the newly implemented Foreign Investment and Technology Transfer Agreement, 2019 (“FITTA 2019”), however, to clarify the Amendment, Notice and laws must be read in whole.
It is noteworthy that the earlier legislation relating to foreign investment and technology transfer, FITTA 1992, recognised any loan investment from abroad as foreign investment and hence, the approval of the concerned authorities i.e. Department of Industries was required under the concerned legislation. When the definition of “foreign investment” in FITTA 2019 excluded investment in the form of loans and only provided for loan investment from foreign financial institutions, there was a misunderstanding that the Nepalease entities may no longer borrow from any other party than the financial institution, which is not the case here. Earlier, there was a practice of obtaining loans from the foreing equity investor or the parent company abroad by obtaining an approval as per FITTA 1992 and a corresponding remittance approval from the NRB but now the loan can be directly obtained with approval of the NRB, as per these notices.
Section 11 of FITTA 2019 provides that loans may be borrowed by issuing securities in the capital market of foreign country by obtaining prior approval of NRB and Securities Board. While the Amendment seems to prohibit loan investment for securities transactions (share market related investments), it must be understood that Amendment is only with regards to loan from foreign investors within the limit of USD 1,000,000 or INR 100,000,000 in case of India. One can still obtain NRB approval for loan investment in securities above these limits pursuant to point (b)(i) of the Notice. So, NRB is not restricting foreign loan investment for securities transactions in totality. NRB putting up this restriction or limitation does not seem to be in contradiction with FITTA 2019 either; for many reasons; one being that Section 11 of FITTA 2019 itself provides for further approval from NRB and NRB can frame its own rules for loans and remittance of foreign exchange as it is its scope and rights granted by the Foreign Exchange Regulation Act 1962.
Same follows for the loan investment from financial institutions as per section 12 of FITTA 2019, whereby approval of the Securities Board is replaced by recommendation from Ministry of Industries, Commerce and Supplies. NRB just waived the requirement of recommendation of the Ministry for loan up to the limit prescribed in the Amendment. However, recalling point no.6 under (ii) of the Amendment which prohibits loan in the sectors prohibited by the prevailing laws, NRB might call for the recommendation of the Ministry or other concerned stating that interested party’s sector is not in prohibited list and therefore loan approval may be granted.
Further, section 16(3) of FITTA 2019 states that rules regarding foreign loan investment shall be as prescribed. So, as is the scope and right of NRB, it has the rules in place which do not contradict with the FITTA 2019. Pursuant to which, NRB may require recommendation of DOI for foreign loan investment in permitted areas beyond the limit prescribed in Amendment even if FITTA 2019 does not specifically prescribe its approval or recommendation as a requirement.