Over the past decade, private equity and venture capital (PEVC) have gained steady momentum in Nepal, prompting calls for regulatory reforms to expand alternative financing options. By 2023, PEVC firms had invested a total of $101 million (NEPA, 2024), across sectors such as renewable energy, information technology, agriculture and transportation.

The High-Level Economic Reform Advisory Commission has recommended further regulatory facilitation to attract more foreign investment in PEVC. This includes amending regulations governing specialized investment funds (SIFs) and introducing a Limited Liability Partnership (LLP) Act to enable such entities to register as LLP firms.

“The conventional financial system can no longer meet the diverse and growing demand for investment-oriented instruments. As seen internationally, developing a broader range of financing options can stimulate investment, expand opportunities for savers and bolster capital formation,” the commission, led by Former Finance Secretary Rameshore Khanal, said in its report, “To achieve this, Nepal needs streamlined legal frameworks, institutional support and sound regulation to manage the risks inherent in alternative finance.”

Alternative financing has evolved in the international arena to include crowdfunding models like peer-to-peer lending and equity crowdfunding, alongside a range of derivative instruments. In Nepal, however, these markets remain underdeveloped. “Expanding these tools could open new funding avenues for individuals and businesses underserved by traditional finance, while a derivatives market could offer new mechanisms for risk management and investment,” the report added. Apart from injecting capital, PEVC brings critical managerial and technical expertise, offering vital support to early-stage start-ups and companies facing operational hurdles. By strengthening risk management, promoting entrepreneurship and strengthening institutional practices, PEVC plays a broader role in driving production, employment and overall economic growth.

The Khanal commission has recommended amending investment laws governing the Employees Provident Fund, Citizens Investment Trust and Social Security Fund to allow these institutions to allocate a portion of their portfolios to private equity and venture capital. It has also called for regulatory reforms to enable banks to invest a share of their capital in such firms.

The commission has further proposed facilitating easier exit routes for PEVC firms by allowing them to sell shares once the investment period ends. "For this, there should be a coordinating mechanism between the Securities Board of Nepal (SEBON), Nepal Stock Exchange and the Office of the Company Registrar," the commission stated.

Another key recommendation is to ensure that foreign-invested private equity and venture capital are taxed in accordance with Nepal’s bilateral tax agreements. Shabda Gyawali, Investment Director at Dolma Impact Fund, told New Business Age that Nepal has signed double taxation avoidance agreements with 11 countries. The commission has urged the government to honor these agreements for attracting more foreign investment.

The Khanal Commission has outlined set of reforms aimed at strengthening private equity, venture capital and alternative finance in Nepal. Among its key recommendations is extending the lock-in period for securities owned by PEVC firms from the current one year to two years after public issuance and distribution. This is expected to promote stability and investor confidence in the market. To encourage greater participation, the commission has proposed halving the existing fund management, registration and issuance fees for PEVC firms. It has also recommended amending the Foreign Investment and Technology Transfer Act (FITTA) to formally recognize investments made through SIFs from abroad as foreign investment, thereby opening the door to new sources of capital.

Citing examples from neighboring India, Gyawali explained that foreign PEVC funds there are regulated through two main channels. "One is through the Securities and Exchange Board of India (SEBI) for foreign investor capital, and the other is through local regulations for domestic private equity and venture capital," he said. "They also have an automatic route for investment." However, he pointed out that Nepal lacks a pass-through vehicle for local equity funds. "Tax should be levied on those who actually receive the benefit," he said. "We currently have a system of double taxation at the fund level."

In a bid to diversify financing options, the commission has recommended amending the Bank and Financial Institutions Act (BAFIA) to allow institutions to engage in peer-to-peer (P2P) lending. Similarly, it has urged changes to the Securities Act to permit equity crowdfunding. Once these legal amendments are made, licensing policies and regulatory frameworks would be developed to ensure smooth operation and oversight. Recognizing the need for more sophisticated financial tools, the commission has advised the SEBON to take the lead in developing the necessary infrastructure for a derivatives market. To further support early-stage businesses, the commission has emphasized the importance of establishing legal and regulatory arrangements for angel financing. It has proposed the registration of potential angel investors and recommended applying a lower, 10% income tax rate on returns from such high-risk investments, recognizing the crucial role that these investors play in nurturing start-ups.

Gyawali argued that the government has already delayed much-needed "Reform 2.0”. “The Khanal commission’s recommendations may not be perfect, but they are worth considering,” he said. "With recent cuts in aid from the US and Nepal’s upcoming graduation from Least Developed Country (LDC) status, we could see an even sharper decline in grant funding." "If we are to achieve the development goals we have envisioned, we must attract foreign investment and strengthen the local private sector, " Gyawali added.

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