Upaya, a tech-driven Nepali logistics service provider, has been engaging with government agencies for some time, seeking approval to expand its operations to Sri Lanka through technology transfer. However, the Act Restricting Investment Abroad, 1964, has hindered Upaya's efforts. This situation reflects a broader trend, as many Nepali tech companies have been urging the government to allow them to operate abroad, including through the establishment of branch offices. The private sector has also advocated for revisions to the Black Marketing Act, as well as permission to industries to own land beyond the current ceiling and to mortgage such land.

In a significant move to address entrepreneurial and business challenges and to initiate next-generation reforms, the government introduced a series of ordinances in the last week of January. These measures are largely aimed at resolving issues faced by tech entrepreneurs like Rayamajhi.

While it may take a few months for these amendments to be fully implemented, they have the potential to bring transformative benefits to Nepal’s business landscape if executed in line with their intended spirit. The amendments are not transformative in themselves but are designed to streamline processes and untangle legal complexities that have plagued Nepali entrepreneurs. The leaders of the ruling coalition, who were closely involved in the process, have described the government's move as the first step in a series of forthcoming measures.

The timing of these measures is critical, as foreign investment inflows into the country—despite significant annual pledges—have consistently fallen short of expectations. At the same time, Nepali companies are increasingly seeking foreign investment opportunities but face regulatory hurdles. Despite organizing three investment summits over the past eight years, FDI inflows have remained underwhelming, prompting growing calls for structural reforms. These reforms not only aim to boost foreign investment but also to empower domestic industries and investors to expand their global reach.

To create a more investment-friendly environment, the government recently issued an ordinance amending key laws, including: The Foreign Exchange (Regulation) Act, 2019, the Companies Act, 2007, the Special Economic Zones Act, 2016, the Foreign Investment and Technology Transfer Act, 2018, the Public Partnership and Investment Act, 2018 and the Industrial Enterprises Act, 2019.

The urgency behind these reforms is not only driven by economic factors but also by mounting political pressures. The ruling coalition, led by the Nepali Congress (NC) and the Communist Party of Nepal-Unified Marxist Leninist (CPN-UML), has faced increasing scrutiny over its inability to address key issues such as public service delivery and creating a favorable business environment. The frustration among younger voters, the growing exodus of skilled workers, and the declining political support in urban areas have pushed the government to act swiftly. The outcome of the last general election, which saw new parties gaining traction, has also underscored the need for the coalition to show tangible progress or risk losing political relevance in the next election cycle.

The political catalyst for these amendments can be traced back to October 31, 2024, when Prime Minister and UML Chairperson KP Sharma Oli and NC President Sher Bahadur Deuba met to discuss ways to improve the government efficiency. During their talks, they agreed to establish a political mechanism to provide recommendations to the government. Following this agreement, an eight-member committee having four senior leaders from each party was formed. In one of the meetings of the committee, NC General Secretary Gagan Kumar Thapa emphasized that a strong government, led by the country's two major parties, must have the determination to push through essential reforms. Thapa insisted that as many reforms as possible should be implemented without delay and presented a nine-point proposal to the top leadership outlining key areas for improvement.

(Prime Minister KP Sharma Oli (M), Nepali Congress President Sher Bahadur Deuba, senior leaders of ruling parties, with the members of the taskforce that was involved in recommending policy suggestions.)

At that point, PM Oli suggested that NC General Secretary Thapa and UML General Secretary Shankar Pokharel collaborate to identify and outline areas needing reform. This led to the creation of a task force on December 26, 2024, composed of experts to explore potential legal and policy reforms across various sectors. The task force included former Chief Secretary Lila Devi Gadtaula, planner Pratap Poudel, advocates Semanta Dahal, Arun Poudel and Kedar Koirala, as well as former Chief Justice of Gandaki Rajendra Ghimire.

The private sector has largely welcomed the amendments but believes more could have been done. "This is another indicator that the government, for the first time, feels compelled to act on the economy under the pretext of revenue. This is a positive step and can be seen as a starting point," said Anand Bagaria, Managing director of Nimbus Holdings.

With these changes, the current government has demonstrated a serious commitment to next-generation reforms. A commission led by former Finance Secretary Rameshore Khanal has also been working independently. The commission is expected to submit its final report to the government by mid-April 2025.

Advocate Dahal, who was part of the task force responsible for these amendments, acknowledged that these reforms have laid the groundwork for second-generation economic reforms in Nepal.

The government has commenced preparations to draft a range of regulations, procedures, and new laws as part of its second-phase initiatives. In the upcoming phase, efforts will focus on implementing essential legal reforms across key sectors such as education, health, construction, and others. Discussions are currently ongoing to address legal complexities and introduce structural reforms. To facilitate this, a political consensus has been reached to establish a 'Reform Center' within the Office of the Prime Minister and Council of Ministers, alongside the creation of 'Reform Units' at the ministry level to drive these efforts forward.

Progressive amendments

One of the most widely discussed and significant changes is the amendment to the Foreign Exchange (Regulation) Act, 2019. These amendments represent some of the most progressive reforms concerning outward foreign investments, as they expand the definition of such investments.

Previously, only investments made by Nepali citizens abroad using earnings generated during their stay overseas were considered valid. However, under the recent amendments, Nepali companies are now permitted to invest in the shares of limited liability partnerships, firms, investment funds, companies, or similar entities that are incorporated or registered abroad, operate with limited liability, and are not listed on a foreign stock exchange. Such investments are now classified as foreign investments.

Additionally, Nepali companies are allowed to invest in foreign-listed entities, subject to a maximum limit of 20% of the paid-up capital of the foreign entity. Notably, this 20% investment limit does not apply to investments made by Nepali citizens while residing abroad.

The amendment also introduces provisions allowing companies or entities incorporated in Nepal to reinvest earnings from their investments in shares of limited liability partnerships, firms, investment funds, companies, or similar entities that are incorporated or registered abroad, operate with limited liability, and are not listed on a foreign stock exchange.

Furthermore, funds deposited in a bank account abroad by a company or entity incorporated in Nepal are now also classified as foreign investments.

Recognizing Intellectual Contributions

The government has amended the Companies Act, enabling startup companies to issue up to 40% of their shares as sweat equity to individuals who contribute in various ways. Under the previous legal framework, shares could not be issued for ideas or labor contributions, which limited the ability of startups to offer equity to partners or employees who invested their ideas and efforts. Startups, particularly in the information technology sector, had long urged the government to introduce legal provisions allowing the issuance of shares for labor or ideas—a practice common in other countries.

The new provision in the Companies business reputation (goodwill), technical information (know-how sharing), or the transfer of technical knowledge. The Act now stipulates that general enterprises may issue up to 20% of shares as sweat equity, while startups can issue up to 40%.

Although the Companies Act still allows shares to be acquired through contributions of land or other assets, there had previously been no provision to recognize ideas or reputation as forms of share capital. In the absence of legal recognition for such contributions, founders often found themselves in a minority position or even forced to leave their companies. A senior government official explained that this change was introduced because the country had not yet established a conducive environment for startups.

Additionally, a proposal has been made to allow companies to grant share rights in exchange for wages, allowances and other benefits provided to employees—a provision that is not currently included in the law. This amendment aims to address the challenges faced by startup founders, who previously struggled to retain control or equity in their ventures due to the lack of legal recognition for non-financial contributions. The government’s move is seen as a significant step toward fostering a more supportive ecosystem for startups.

Opening doors for IT companies for outward investments

The government has also addressed one of the most pressing demands of Nepal’s IT sector by opening a legal pathway for Nepali IT companies to invest abroad. Now, IT companies based in Nepal can invest in foreign markets, establish branch offices overseas and legally repatriate their earnings back to Nepal.

Gaurav Pandey, Vice President of the Nepal Association for Software and IT Services Companies, said that the IT sector had long advocated for the ability to invest abroad. “This issue has now been resolved. The focus should now shift to implementation, with the central bank tasked with defining limitations and procedures. The IT industry is not heavily capital-intensive, so we don’t require significant amounts of foreign exchange to invest abroad,” Pandey explained.

Companies interested in availing these facilities are required to apply to the Ministry of Communication and Information Technology (MoCIT). The Nepal Rastra Bank (NRB) will provide foreign exchange facilities to eligible companies based on the ministry’s recommendations, after evaluating the applications and assessing the company’s capabilities.

This policy aligns with the principles and priorities that the government set for fiscal year 2024/25 which emphasize IT as a crucial sector for economic transformation. The government aims to achieve IT exports worth Rs 3 trillion and create 500,000 direct jobs within the next decade, as highlighted in the budget speech.

“This was a much-needed move, as the industry has been growing exponentially in recent years,” said advocate Semanta Dahal, who was also part of the government task force.

Pandey feels policymakers have started to give the IT sector the attention it deserves. “After the ordinance was introduced, we engaged with stakeholders and policymakers, and we observed a genuine willingness to support the sector. It feels like there is now a concerted effort to help the Nepali IT industry.”

The domestic IT industry’s rapid growth supports these ambitions. According to a study conducted by IIDS, a think tank, Nepal’s IT industry was valued at $500 million in 2022, and a recent central bank report reveals it has since grown to $800 million. “This indicates we are on track to reach $1 billion mark soon,” Pandey added.

After the ordinances were issued, Prime Minister Oli met with IT and startup entrepreneurs and told them that the government has addressed the concerns of the IT sector. “There were some legal hurdles in the IT sector, which the government has addressed. We aim to make IT a major foreign currency-earning industry for Nepal,” said Oli.

Easing of FDI Rules, Expanding Sectors, Simplifying Repatriation

The amendment to the Foreign Investment and Technology Transfer Act (FITTA), 2018, introduces several significant changes aimed at facilitating foreign direct investment (CDI) and streamlining processes for businesses. One of the key updates is that Nepali companies and industries without foreign investment are now permitted to take loans from foreign financial institutions. Previously, only industries with foreign investment were allowed to secure loans from foreign banks. The updated Act also allows a borrower’s property in Nepal to be used as collateral when a foreign financial institution provides a project loan. Additionally, the Act extends provisions for securing and facilitating foreign investments to cover loans received from abroad.

To encourage investments from non-resident Nepalis (NRNs), the government has simplified the process. When NRNs invest in convertible foreign currencies, they no longer need foreign investment approval. They only need to notify the relevant authorities.

The definition of technology transfer in FITTA has been expanded to include a broader range of services, such as accounting, marketing and market research, auditing, engineering, outsourcing, human resource outsourcing, digital data processing, digital data migration, and design services. FITTA now also permits the transfer of foreign investment amounts free of charge after tax adjustments. The process for repatriating foreign investments or earned funds has been simplified, and the time frame for obtaining approval for repatriation has been shortened.

A new provision has been added to the Act states that foreign investment in an industry registered in a province will only require a certificate of industry registration from the province, eliminating the need for additional recommendations from the provincial government. The Act also opens up foreign investment in agricultural technology and mechanization, though it explicitly prohibits foreign investment in the primary agricultural sector.

Moreover, the Act now explicitly includes a provision for foreign investment in sectors where it is not otherwise permitted, rather than following policy guidelines. Notably, it incorporates a provision allowing up to 80% foreign investment in international airlines, in accordance with the aviation policy. Additionally, provisions have been added to allow up to 49% foreign investment in domestic airlines, up to 95% in aviation training institutions, and up to 95% in maintenance and repair institutions.

Boost to Private Equity Ecosystem

The amendment to FITTA has introduced a significant change by allowing foreign investment in SEBON-licensed Specialized Investment Funds (SIFs), addressing a long-standing obstacle to private equity investment in Nepal. Previously, SIFs—which function as unincorporated schemes similar to mutual funds—existed in a legislative grey area. FITTA initially permitted foreign investment only in shares of companies or industries excluding SIF "units" from its scope. Since SIFs are neither companies nor industries, this gap effectively barred foreign investors from entering Nepal’s private equity market. This lack of clarity was hindering the growth of Nepal’s private equity ecosystem, particularly as many SIFs were actively seeking foreign capital to support local businesses.

The amendment introduces a new Section 9A to FITTA, explicitly allowing foreign investors to purchase SIF units with approval from the Securities Board of Nepal (SEBON). This represents a significant shift, providing the legislative clarity needed to unlock foreign capital for SIFs. Notably, no separate pre-approval from the Department of Industry (DoI) is required.

However, the amendment includes specific conditions to ensure regulatory oversight and targeted growth. First, funds receiving foreign investment must obtain prior approval from the DoI before making downstream investments in portfolio companies. Second, SIFs backed by foreign capital are required to invest a minimum of Rs 20 million in each portfolio company, except for investments in the IT sector, which currently has no minimum threshold. Third, such funds are prohibited from investing in sectors on the negative list, including mass communication, retail and real estate.

Most SIFs in Nepal are currently in the fundraising stage. With this reform, they can now access international investors, unlocking larger pools of capital. For Nepal, this change comes at a critical time, as private equity plays an increasingly vital role in driving innovation, entrepreneurship and economic growth.

Addressing Nepali Private Sector's Concerns

Through these amendments, the government has signaled its commitment to addressing the challenges facing Nepal's private sector. Recognizing the burdens imposed by mandatory Environmental Impact Assessments (EIAs) under the Industrial Enterprises Act, certain provisions have been simplified to streamline business operations and financial management. Industries are no longer required to conduct EIAs when increasing their capital. Additionally, industries relocating from one province to another no longer need approval from the Department of Industries. These changes aim to reduce regulatory hurdles and foster a more business-friendly environment.

The business sector has long advocated for the scrapping of the Black Marketing Act. This time, the government has partially addressed the issue by removing provisions related to profit caps and penalties under the Black Marketing and Certain Other Social Offenses and Punishment Act, 1975. Previously, the law prohibited businesses from earning profits exceeding 20% of the standard market value of goods and services. Violations of this limit were punishable under the Black Marketing Act, which imposed penalties of up to five years of imprisonment, fines, or both. The new ordinance eliminates this restriction.

Private sector representatives have welcomed the move as a positive step toward fostering a free-market economy. While the law was originally intended to regulate government-specified goods, businesses frequently faced challenges due to the misuse of its provisions by authorities. Moreover, it was viewed as a deterrent to foreign investment.

“Foreign investors were told they could invest in Nepal but couldn’t earn more than a certain percentage of profit. This provision discouraged investment and forced domestic investors to operate under constant fear,” said an industrialist. Business leaders have often argued that the regulation was redundant, as other laws already exist to promote competition and safeguard consumer rights. Some have even alleged that the provision was exploited as a tool for “bargaining”

The Department of Revenue Investigation (DRI) has been granted the authority to resolve revenue disputes of up to Rs 3 million without requiring cases to be filed in the Revenue Tribunal. In instances of revenue leakage, settlements can now be reached by paying fines and the owed amounts, eliminating the need to wait for a case decision. Additionally, a fast-track mediation process has been introduced to expedite the resolution of disputes related to government contracts.

Fast tracking decisions

The Good Governance (Management and Operation) Act, 2007, has been amended to include a provision requiring the responsible authority to make decisions on applications within seven days of submission. Previously, the provision stated that decisions should be made within a “reasonable time”.

Due to the lack of a defined timeframe, service seekers often had to wait months for government authorities to make decisions. The private sector is optimistic that this legal provision will significantly improve the delivery of government services.

“There were frequent complaints about delays and unnecessary hold-ups in government work. Now, the government has ensured through legal provisions that such delays will not occur. Such measures were necessary to improve government service delivery,” Chandra Prasad Dhakal, president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said, during an interaction held at the Prime Minister's Office.

The government has also established clear timelines for various processes. Under the amended Industrial and Business Act, decisions on applications submitted to the Department of Industry must be made within 15 days. If no decision is made within this period, the application will be automatically registered.

Push for privatization

In a move signaling a push toward privatization, the government has renamed the Privatization Act as the Public Institution (Government Investment Management) Act. This subtle yet significant change reflects a shift in stance, as the UML government, which has historically criticized the NC for its privatization policies, now acknowledges the need to privatize public institutions. Under the amendment, the Privatization Committee has been empowered to make recommendations to the government regarding privatization.

According to a high-level source, the government is proceeding cautiously with privatization to avoid public backlash. “The coalition government is committed to privatization, as it is the need of the hour,” the source stated. Nepal currently has 10 public enterprises (PEs) in the industrial sector, four in the commercial sector, 11 in services, five in social services and utilities, and nine in the financial sector.

The Oli government’s decision to privatize certain public enterprises marks a significant policy shift after nearly two decades of inaction. This renewed push comes from a coalition government comprising the UML and the NC. While the first wave of reforms in the 1990s was led by the NC-led government, the UML has traditionally been less supportive of privatization.

Of the eight public enterprises identified for privatization, Janakpur Cigarette Factory, Nepal Metal Company, Hetauda Textile Industry, Biratnagar Jute Mill, Butwal Yarn Factory and Gorakhkali Rubber Industry have remained inactive or underperforming for years. Meanwhile, Udayapur Cement Factory and Hetauda Cement Factory, though operational, continue to report losses due to inefficiencies.

According to the Annual Status Review of Public Enterprises, 2024, out of the 44 existing public enterprises, 15 are currently operating at a loss, while three reported no turnover. Public enterprises in the industrial sector collectively incurred a loss of Rs 1.48 billion during the fiscal year. In contrast, public enterprises in the commercial sector performed better, reporting a profit of Rs 11.81 billion, while the service sector earned Rs 2.22 billion. Entities in the public utility sector generated Rs 17.10 billion in profits, and the financial sector earned Rs 18.98 billion.

(This report was originally published in  February 2025  issue of New Business Age Magazine.)