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Legal issues relating to Foreign investment in Nepal’s energy sector

Learn about the legal framework, investment modalities, and sectoral policies affecting foreign investment in Nepal's energy sector. Gain insights on hot topics and investment trends in this informative session. Presented by Anjan Neupane, Partner/Advocate at Neupane Law Associates.

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Legal issues relating to Foreign investment in Nepal’s energy sector

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  1. ` Legal issues relating to Foreign investment in Nepal’s energy sector Anjan Neupane Partner/Advocate Neupane Law Associates

  2. SPEAKER AND TOPICS

  3. Speaker • Anjan Neupane, Partner/Advocate, Neupane Law Associates • LLB (Hons) First Class, University of Aberdeen, UK • Email: anjan@neupanelegal.com; Phone: +977-1-4101631 • Anjan specializes in business law and dispute resolution. He advises clients on M&A transactions, overseas financing, and arbitration matters. He has advised clients in the acquisition, development and financing of various energy sector projects in hydropower. Experience in many hydropower projects. working on behalf of investors and BFIs. Advisor to foreign BFIs such as IFC, FMO, CEXIM, China Development Bank, Bank of China, ICICI Bank, etc. • Assisted by Anish Bastola (LLM, Central European University) and SijanGuragain(LLM, The George Washington University)

  4. Topics • Introduction and trends • Investor types and requirements • Legal framework overview • Foreign investment modalities • Foreign investment procedures • Sectoral policies affecting foreign investment • Investment agreements • Hot topics (change in control tax, free shares, and new draft Electricity Act)

  5. INTRODUCTION AND INVESTMENT TRENDS

  6. Global FDI Trends: UNCTAD • Global FDI has been declining since 2015. Global FDI flows declined by 45% between 2015 and 2018 • 2015: $2 trillion • 2018: $1.3 trillion • However, FDI for developing countries remained stable • USA ranks no. 1 for FDI inflows, China no. 2, India is no. 10 • Impact of ”trade war” between USA and China and slowdown in the Indian economy

  7. Foreign investment for Nepal • Nepal needs USD 25 billion investment to generate 10GW in 10 years • Nepalese banks only has capacity to invest USD 1.7 billion USD • Development Finance Institutions can finance USD 2 billion • Domestic equity USD 2 billion • Foreign investors and banks: USD 17.8 billion? • Source: DFID/Dolma Fund 2019

  8. Foreign investment for promoters • Equity finance to develop projects • Exit option to sell project • Access to foreign loan finance • Technical know how

  9. Examples of Energy Projects Note: Other projects in development stage in JV and full equity model.

  10. Trends in Energy Sector • Indian investors invested in Nepal heavily after 2005/06 (Essar, GMR, Bhilwara, Rajaratna, Patel etc.) • Chinese investment is growing compared to Indian investment • Aggression of Chinese investors • INR 1.5 lakh cr loan exposure of distressed Indian power sector • Majority of Indian investors looking to sell and potential buyers are Chinese • Major Indian investment has not resulted in many operational projects

  11. Market Assessment • Is Nepal attractive to foreign investors?

  12. Procedure in other jurisdictions

  13. Market assessment • Overall attractiveness for foreign investment is low. • “Red-tape” procedures. • Large projects have been politicized. No transparency. Government’s fault or investors fault? Examples: • Buddhigandaki (awarded contract without bidding) • West Seti (Three Gorges) • Tamakoshi III (SN Power) • Terai Fast Track (L&T) • Dangote (existing) • Reliance Cement • PPP – Private Party’s Problem approach?

  14. Investment Trends • No major foreign investment announced recently in the Energy Sector. DOI reports no new energy sector FDI approved in FY 18/19 • Reputation of Nepal as difficult place to do business • Lack of success of Indian investors • Corruption and good governance issues hindering companies from USA and EU. But limited interest shown by investment funds and DFIs. • Lack of “investment ready” projects with strong local partner. • Chinese interest also decreasing?

  15. UNCTAD Report 2003 • Investment Policy Review Nepal 2003 • https://unctad.org/en/Docs/iteipcmisc20031_en.pdf • Relax entry restrictions • Confine entry screening to negative list • Ease visa procedures • Abolish dual screening of investment, loans and technology transfers • Intrude less in dispute resolution clauses between the parties • Improve investment protection provisions in law

  16. Future? • Will the trade war decrease Chinese investment in Nepal? • What is the impact of solar projects on hydropower? • Will Nepal be able to export power to India or Bangladesh? • Investment in Nepal decreased by 25% (according to NRB as per actual inflow) and 56% (according to DOI as per approved amounts) in FY18/19 compared to FY17/18, will it increase? • Will Nepal implement in regulations automatic approval route provided in Foreign Investment and Technology Transfer Act 2019?

  17. Investor type AND Requirements

  18. Investor type • Individual investors • Not suitable for in sectors requiring large investment • Emerging country corporates (i.e. India, China, SE Asia) • Developed country corporates (USA, EU and Japan) • Investment funds (private equity and venture capital funds)

  19. Investor comparison Emerging market investors Developed market investors Less aggressive Strict due diligence requirements (market, partner, project, legal) Requires high degree of certainty (PPA, PDA) Strict about corruption and compliance • Relatively aggressive • Able and wiling to take risks • Do not require extensive due diligence • Lax about corruption and compliance

  20. Investor comparison Investment funds Corporates Usually requires majority stake More management involvement Long term investment Specialists in power and infrastructure sectors • Invests in minority stake only • Less management involvement • Seeks exit after 5/7 years • Also invests in other sectors

  21. Requirements • Due diligence should be approved • Technical • Financial • Legal • Practical • Harmony with local partners (if JV) • Requirements depends from investor to investor as per their risk appetite • Expected return • Valuation

  22. Legal framework overview

  23. Laws Overview

  24. Types of Laws • Foreign Investment Regulatory Laws • Energy Sector Regulatory Laws • Industry and Environment Regulatory Laws • Land Laws • Corporate, Commercial and Banking Laws • Tax Laws • International laws (investment and tax treaties) • Laws in Nepal are changing rapidly many are undergoing amendment and revisions

  25. Acts by type

  26. Expected changes to laws • Draft has been prepared by Ministry of Energy, Water Resources and Irrigation to amend Electricity Act 1992 • Environment Protection Bill 2019 is currently under discussion in the Federal Parliament of Nepal • Forest Bill 2019 is currently under discussion in the Federal Parliament of Nepal • Land Act Amendment Bill 2019 has been passed by the Federal Parliament and will come into force after authentication of the President. • Industrial Enterprise Bill 2019 is currently under discussion in the Federal Parliament of Nepal • Company Act 2006 Amendment Bill Draft has been prepared by the Nepal Law Commission • Banking and Financial Institutions Act amendment Bill 2019 is currently under discussion in the Federal Parliament of Nepal

  27. Foreign investment modalities

  28. Equity Investment Modalities • Equity Joint Venture (New Company) • New Company + New Project • New Company + Transfer of Existing Project • Share Purchase (Existing Company) • Full acquisition • Partial acquisition • Share Subscription (Existing Company) • With joint venture

  29. Other Investment Modalities • Foreign debt financing • Loan from foreign BFIs • Single • Foreign Syndicate • Foreign + Local Syndicate • Foreign guarantee backed local loan • Technology transfer • Franchising, licensing, marketing, O&M, management, marketing etc. • Equipment leasing • Newly introduced in FITTA 2019

  30. Branch and liaison offices • Branch office of foreign company • Needs to be registered if business and transaction carried out for a period of over 30 days from a location within Nepal • Liaison office of foreign company • Needs to be registered to undertake liaison activities on a “regular” basis or if representative appointed in Nepal. • Cannot carry out income producing activities. • Suitable to prospective investors, exporters to and from Nepal. • Branch and liaison are not currently classed as foreign investment and are outside the FDI framework

  31. EPCF? • “Engineering, procurement, construction and financing” • Not recognized as investment by FITTA 2019 • Falls under “construction contract” • The ”F” in EPCF • Not classed as “equity” or “debt” investment • Is it supplier/vendor credit financing in construction projects? • Views from participants?

  32. Equity models compared

  33. Agreements

  34. Foreign investment PROCEDURES

  35. New joint venture

  36. What is investment?

  37. What is foreign investment?

  38. Who approves investment?

  39. Another provision (PPPIA) Does “implementation” include new foreign investment? Share purchase? Subscription?

  40. So who approves? Current practice: Currently all projects above 6 billion total investment are being sent to IBN by DOI. Minimum investment: NPR 5 crs per investor. It is not clear if it is per company or per project.

  41. New joint venture continued

  42. When to obtain NRB Approval?

  43. Acquiring new survey license

  44. Financial capacity review Financial capacity required. NPR 10 lakh per MW net worth certified by CA

  45. Technical capacity Technical capacity needs to be proven

  46. Basis of grant “First come with “all procedures and requirements”: first serve”

  47. Share purchase/subscription

  48. License transfer to NewCo (EA s.4)

  49. License transfer and M&A (ERCA)

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