Despite hosting numerous investment summits and promoting itself as a strategic investment destination, Nepal has failed to attract significant Indian investment outside the hydropower sector. Indian multinationals, which were at the forefront of investment in Nepal during the early 1990s, have shown little interest in recent years. With the exception of Dabur Nepal, which recently announced plans to reinvest Rs 9.68 billion in the country, no other Indian multinationals operating in Nepal have shown interest in expanding their existing businesses. This decline in Indian investment has coincided with a noticeable rise in interest from Chinese investors.

Historically, India has been Nepal’s largest source of foreign direct investment (FDI), accounting for 35.01% of the country's total FDI, amounting to Rs 103.5 billion. However, recent investments from India have been limited, particularly in sectors like manufacturing, banking and insurance sectors, where Indian companies once had a strong presence.

Why have Indian investors, traditionally major contributors to Nepal's FDI, lost interest? A new study by the Nepal-India Chamber of Commerce and Industry (NICCI), titled ‘Business Environment in Nepal for Indian Companies’ has tried to uncover the reasons. The study suggests that Indian investors’ interest is waning due to political and policy instability, which has created an unfavorable investment climate and discouraged them from investing in the Himalayan nation.

First Movers

Nepal's first official foreign direct investment (FDI) came from its southern neighbor in 1951/52 with the establishment of the Nepal Commercial Corporation as a joint venture, in which Indian investors held a 67% equity stake. This occurred before Nepal had formal laws governing FDI. Nepal began prioritizing foreign investment during its Sixth Plan (1980/81–1984/85), marking the first time foreign capital and technology were integrated into national policy. To attract such investments, Nepal introduced the Foreign Investment and Technology Transfer Act in 1981, establishing formal regulations for FDI. The framework was further liberalized in the early 1990s with the enactment of the Foreign Investment and Technology Transfer Act (FITTA) in 1992, which was revised in 2019.

Nepal's appeal as an investment destination for Indian investors grew in the late 1980s, with Dabur establishing operations in 1989. This momentum continued in the early 1990s following economic liberalization, with companies like Unilever entering the market in 1993. Over the years, major Indian firms, including ITC, State Bank of India and Punjab National Bank established operations in Nepal.

Political Instability and Investment

The NICCI study has revealed that most Indian investors consider political stability as the key factor influencing their investment decisions. Amid concerns over Nepal’s deteriorating investment climate due to frequent government changes, Indian companies operating in Nepal have highlighted political instability as their primary concern. According to the study, 88% of respondents said that the political environment directly impacts their investment decisions, highlighting political stability as a major consideration for investors in Nepal. The study also found that 50% of Indian companies surveyed cited expansion as the primary reason for entering Nepal, while 17% considered geostrategic factors. Other factors, such as corporate taxation, also influenced their decision-making. Most respondents believe that these motivations remain relevant today and could attract more investments, provided the government addresses key challenges.

However, 21% of the participants have indicated that difficulties primarily stem from legal and administrative constraints, as well as policy inconsistencies. Another 18 % pointed to procedural hassles, while 14% highlighted the lack of infrastructural access and development. "Frequent changes in government policies and an unstable political environment have further impacted the risk perceptions of these companies," the study noted.

Sunil KC, President of the NICCI, said that frequent changes in government have been a major concern for Indian investors in Nepal. “As Nepal and India share close ties, and Indian investors are actively investing in Nepal, the southern neighbor closely monitors Nepal’s political situation. However, frequent government changes and unnecessary bureaucratic hurdles have frustrated Indian investors,” he added.

KC noted that significant Indian investments in Nepal have historically occurred during periods of political stability. Major investments from companies such as Dabur, ITC and Unilever, according to KC, were made when Nepal was relatively politically stable. “Today, Indian investors, though still interested in Nepal, are not investing to their full potential. Instead, they are diverting their investments to other destinations. Had Nepal been politically stable, it could have fully harnessed Indian investment,” he said. The NICCI Chair added that India is set to become the world’s third-largest economy soon, and Nepal needs to recognize that unless it provides a stable environment for investment, it will struggle to flourish and achieve the dream of a prosperous Nepal.

A high-ranking government official, who wished to remain anonymous, said that Indian investors are closely monitoring the current bilateral relations between Nepal and India, which observers describe are far from cordial. India has not fully embraced the new government led by Prime Minister KP Sharma Oli, who has yet to receive an invitation for a formal visit—breaking the historic trend of Nepali prime ministers visiting India soon after their appointment. These developments are being closely observed by the Embassy of India in Nepal, and when briefing investors, these factors are highlighted, potentially putting future investments at risk.

The complexities of Nepal's FDI approval process are evident in the case of Dabur Nepal, a subsidiary of the Indian multinational company Dabur, which established its manufacturing base in Nepal in the early 1990s. The company endured a two-year wait to secure approval from the Office of the Investment Board Nepal (OIBN) for its reinvestment proposal. This significant delay halted Dabur Nepal's plans for expanding its investment in the country. It wasn't until the last week of April 2023 that the company finally reached an agreement with the OIBN to reinvest Rs 9.68 billion in Nepal.

From Peaks to Declines

Despite a promising upward trend in investment during the post-conflict period and the constitution-making process from 2008 to 2015, Indian investment in Nepal began to decline following the formation of governments under the new constitution after 2018. This suggests that while political agreements and stability initially spurred investment, subsequent political and economic uncertainties may have disrupted sustained investment flows.

A comparison of FDI commitments from India and China over the past decade reveals starkly contrasting trends. While both countries have consistently invested in Nepal, China has emerged as the dominant player in terms of FDI commitments. India's FDI commitments to Nepal have been highly volatile. The highest commitment was recorded in 2014/15 at Rs 34.719 billion. However, after this spike, Indian investments saw a sharp decline, with commitments mostly remaining below Rs 6 billion. The lowest commitment was recorded in 2022/23 at a mere Rs 604 million, signaling a significant slowdown in Indian investment interest. Although a modest recovery was observed in 2023/24, with commitment reaching Rs 4.51 billion, it remains far below the 2014/15 peak.

In contrast, China’s FDI commitments have shown a strong upward trajectory since 2015/16, peaking at Rs 46.50 billion in 2017/18 and 2018/19. Despite some fluctuations, China's commitments have consistently outpaced India’s, with significant investments in infrastructure, tourism and energy projects. The lowest Chinese FDI commitment in the last decade was in 2014/15 at Rs 4.37 billion, after which it surged sharply. The latest data for 2023/24 shows a commitment of Rs 22.75 billion, underscoring China's growing economic influence in Nepal.

India Dominates Nepal’s FDI Stock

While China leads in FDI commitments, India remains the largest contributor to Nepal’s FDI stock. As of mid-July 2023, India’s FDI stock in Nepal stood at Rs 103.5 billion, significantly higher than China’s Rs 35.5 billion.

The majority of India’s FDI stock is concentrated in three key sectors: manufacturing (38.4%), energy (34.5%), and financial and insurance services (20.6%). The hospitality sector accounts for 4.2%, while the remaining 2.3% falls under the ‘others’ category.

Interestingly, loans make up 48.81% of total Chinese FDI, compared to just 6.89% in India’s FDI stock.

A closer look at the investments from the two countries reveals a stark contract. India's FDI in Nepal, with total reserves of Rs 43.70 billion, indicates profitable, stable and sustainable investments. These positive reserves suggest that Indian investments have generated sufficient earnings to cover expenses and retain profits, enabling future expansion or reinvestment.

In contrast, China's FDI in Nepal, with total reserves of Rs -10.31 billion, reflects a lack of profitability. This negative reserve indicates that China investments may be incurring losses or failing to generate adequate earnings to sustain operations, potentially requiring additional capital injections.

Indian FDI in the energy sector depends largely on equity investment, with 96.59% of its FDI coming from paid-up capital. In contrast, the manufacturing sector has only 13.73% of its FDI in paid-up capital.

For Chinese FDI, the energy sector depends largely on debt financing, with 58.92% of its FDI coming from loans. Meanwhile, the manufacturing and hospitality sectors show strong equity investment, with 85.41% and 100% of their FDI, respectively, coming from paid-up capital. Emerging sectors like information and communication adopt a mixed strategy, balancing innovation and risk with 62.57% in paid-up capital, 21.57% in reserves and 15.86% in loans.

Protecting Intellectual Property

Nepal has missed out on billions in potential Indian investment due to inadequate intellectual property rights (IPR) laws. A key example is India’s ITC Ltd, which had plans to introduce its premium flour brand, Aashirvaad Aatta, in Nepal. The company was prepared to invest Rs 1.5 billion in Nepal with plans to export flour from the country. However, ITC was unable to enter the market under its brand name because a local company had already registered it in Nepal.

“Multinational companies, especially those from India, are facing major challenges in Nepal as their brand names are often registered locally to capture their brand value,” said KC. The NICCI study highlights that patent and intellectual property rights issues require urgent attention, as the Department of Industries has received numerous complaints about patent infringement.

Citing the Aashirvaad Aatta case, KC said that ITC’s entry could have significantly boosted foreign currency earnings and helped reduce Nepal’s trade deficit. “The government does not seem serious about addressing these issues. We have repeatedly urged authorities to implement an intellectual property policy, but they appear indifferent,” KC added. He warned that while intellectual property right (IPR) issues might seem minor, Nepal is losing billions in foreign investment due to the lack of legal protection.

Another example is Kansai Nerolac Paints, an Indian subsidiary of Japan’s Kansai Paints, which faced production hurdles after entering Nepal in 2014. A local company challenged its brand name, and the Department of Industries barred it from selling its product under the ‘Kansai Nerolac’ brand. The company lost its initial legal battle and had to sell its products under the brand name ‘KNP’. After six years of legal proceedings, the Supreme Court finally ruled in its favor.

In 2019, the government drafted a bill to introduce modern trademark, copyright and intellectual property laws. However, despite multiple changes in government, the draft remains stuck in the law ministry. Once enacted, the bill would replace the outdated Patent, Design and Trademark Act of 1965 and align Nepal’s IPR framework with international standards. This would ensure that trademarks registered in India—like Aashirvaad Aatta—are also recognized and protected in Nepal, preventing similar investment hurdles in the future.

Outbound Remittance Challenges

Nepal's current policy allows foreign employees, including Indian nationals, to remit up to 75% of their earnings to their home countries, requiring them to spend at least 25% within Nepal. While this regulation aims to boost domestic spending, a more nuanced approach could be beneficial. For instance, allowing higher-earning employees to remit up to 80% of their income while limiting remittances to 15% for lower-earning employees may be a more practical and equitable solution.

The NICCI study highlights the challenges foreign corporate officers and employees have been facing regarding outbound remittances. The current requirement to spend 25% of their income in Nepal can be particularly restrictive for high-ranking employees in multinational companies who often earn huge salaries. This blanket policy may inadvertently limit their financial flexibility and reduce job satisfaction. In the banking sector, regulations limit the hiring of foreign nationals based on the level of foreign ownership. Banks with over 50% foreign ownership can employ up to seven foreign nationals, while those with 20-50% ownership can recruit a maximum of five. Banks without foreign investment are not permitted to hire foreign employees at all.

While these restrictions aim to protect domestic employment, they may also hinder business expansion which could ultimately create more jobs for Nepali citizens. For instance, commercial banks with Indian investment face limitations, as only five top positions can be held by foreign nationals. If investors cannot find the necessary expertise locally, they should have the flexibility to recruit from abroad. However, current regulations do not permit this, potentially stalling business growth and job creation.

“A more flexible policy framework is needed,” said KC. “Adjusting remittance allowances based on income brackets and revising hiring restrictions to balance the need for foreign expertise with domestic employment goals could help a lot. Such reforms would enhance Nepal's appeal to foreign investors and professionals while ensuring equitable distribution of the benefits of foreign employment.”

The Potential

Despite these challenges, Nepal offers several advantages that could attract Indian investors. "The corporate tax structure, low trial costs for launching new products and a faster break-even period compared to India serve as pull factors for potential investors," the study noted. The success of companies like Unilever Nepal Limited (UNL) in the Fast-Moving Consumer Goods (FMCG) sector demonstrates the potential for strong market returns in Nepal.

Indian companies operating in Nepal have generally enjoyed favorable business conditions and maintain positive relations with the government. However, there is significant untapped potential for these companies to further boost revenue and job creation if the government implements measures to facilitate and encourage their operations. By prioritizing regulatory ease, policy consistency and an improved business environment, Nepal can attract new investors while supporting the expansion of existing enterprises.

A key factor influencing investor confidence is policy consistency. A notable example is the regulation of contract manufacturing in Nepal. Section 50 of the Industrial Enterprises Act, 2020, restricts both domestic and foreign-invested industries from engaging in contract manufacturing for their primary products, permitting such arrangements only for auxiliary goods and services. Over the years, this provision has undergone multiple revisions, with contract manufacturing being alternately allowed, prohibited and reinstated.

“Such regulatory fluctuations create uncertainty for investors and hinder the long-term growth of industries that rely on clear and consistent policies. Without predictable regulations, companies may hesitate to make long-term investments in Nepal, slowing industrial development and job creation,” KC said. “If contract manufacturing is allowed, Indian investors could revive Nepal’s struggling industries. Our current policies are too rigid.”

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