Highlights of the Hedging Regulations, 2075

1. Introduction of Hedging Regulations 2075

Hedging refers to the strategic management of foreign currency exchange rate risk to stabilize the exchange rate of Foreign Currency for repatriating Investment returns. This is often done through agreements that fix the exchange rate of the foreign currency deposited in a bank at the time of making the investment. An Entity or Project prescribing to Hedging Arrangements are require to obtain regular approval for Foreign Investment prior to applying for such arrangements.

2. Authentication of Hedging Regulations in Nepal

The Hedging Regulations 2075 has prescribed the following criteria for authentication to the following projects in relation with Foreign Loan Investment:

(a) Producing hydroelectric power with a capacity exceeding 100 megawatts

(b) Erecting electric transmission lines spanning over 30 kilometers with a capacity of 220 kilovolts or higher

(c) Building railway, metro, or monorail systems extending beyond 10 kilometers in length

(d) Establishing expressways surpassing 50 kilometers in length

(e) Implementing additional projects as determined by the decision-making body of the Council of Ministers, Government of Nepal.

3. Procedure for Obtaining Hedging Facilities in Nepal

Step 1: Application to be Submitted to the Respective Bank

For initiating the process of obtaining hedging Facility in Nepal, the relevant project must submit a Formal Application to the designated Bank.

Step 2: Examination of the Application

Upon receipt of the application, the bank will undertake a thorough examination to ensure that all necessary details and documents have been accurately provided as per the requirements. The bank will issue a written notice to the applicant, granting a maximum of 15 days to furnish the requisite details, documents, or clarifications, if inconsistencies have been discovered. 

Upon receiving the requested information within the stipulated timeframe, the bank will further assess the application. If, based on the details or documents received, it is determined that a hedging facility cannot be provided, the bank will notify the applicant of this decision within 7 days.

Step 3: Approval for Hedging

Following a comprehensive examination of the application and if deemed reasonable to provide the requested hedging facility, the bank will grant approval under specified conditions.

4. Particulars Required for Application for Hedging Arrangements

The Particular Documents to be submitted for Hedging Facilities in Nepal are:

  1. License Obtained for the Project
  2. Agreement of Project Investment
  3. A Documents certifying the approval for Foreign Investment and acquisition of Foreign Loan
  4. Memorandum of Association
  5. Article of Association
  6. Issued Notice for the Hedging Facility by the Concerned Ministry

5.1. Provisions concerning Foreign Exchange Rate

The Hedging Regulations has laid down that foreign currency deposited in a bank account is converted to Nepalese Rupees at the prevailing exchange rate on the day of deposit. Once converted, the exchange rate is locked by the bank for the duration of the hedging period.

5.2. Finalize Foreign Exchange Rate

Upon depositing foreign currency in the bank account, the bank converts it to Nepalese Rupees at the prevailing exchange rate for that day. This rate is then locked by the bank without any alteration for the duration of the hedging period.

5.3. Deposit Foreign Currency

An application must be submitted to the bank by the approved project to deposit foreign currency received in the form of foreign loans. Upon receiving the application, the bank provides a bank account to the applicant. The investor is then required to deposit the foreign currency into this account within the timeline specified by the bank.

6. Hedging Facility: Rules and Regulations

The hedging facility is provided for a maximum period of five years, depending on the nature of the project. Investors are offered a hedging solution certificate by the bank, which allows them to hedge against exchange rate fluctuations. The bank also offers a hedging fund to manage foreign currency deposits and hedging costs.

6.1. Hedging Charge

The bank determines the hedging fee based on the foreign exchange rate risk. This fee may vary for each project. Upon determination, the concerned project must submit the hedging fees to the bank. Upon receipt of the fees, the bank issues a hedging solution certificate to the project.

6.2. Renewal of Hedging Facilities

Projects intending to renew their hedging solution certificate must submit an application for renewal to the bank at least 30 days before the certificate’s expiry. If the application is reasonable, the bank may renew the certificate for a maximum period of five years, depending on the project’s nature.

6.3. Currency for Hedging Facility

The hedging facility is provided only for foreign currencies specified by the bank through public notice. Investors can hedge against fluctuations in these specified currencies.

7. Establishment of a Hedging Fund

The bank establishes a hedging fund to manage foreign currency deposits and hedging costs. This fund is maintained and managed by the bank, and any returns from investments are deposited back into the fund in the same currency received. The bank determines the limit of the fund.

8. Conclusion

The Hedging Regulations 2075 in Nepal aim to manage foreign currency exchange rate risks for entities involved in large-scale projects through hedging arrangements. Entities engaged in projects such as hydroelectric power production, electric transmission lines, railway systems, expressways, and others outlined by the Council of Ministers must obtain approval for foreign investment before applying for hedging facilities. The hedging facility, provided for a maximum of five years, comes with a hedging fee determined by the bank.

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