Legal Framework of Private Equity and Venture Capital Fund in Nepal

This article briefly explains the legal framework of private equity and venture capital (“PEVC”) fund in Nepal.

a. Governing Laws

The primary governing laws of PEVC fund are as follows:

  1. Foreign Investment and Technology Transfer Act, 2019 (“Foreign Investment Act”); and
  2. Specialized Investment Fund Rules, 2019 (“Specialized Investment Fund Rules”).

b. Definition of Fund

Under the Specialized Investment Fund Rules, PEVC has been defined as follows:

Private Equity Fund
Venture Capital Fund
A fund injecting initial equity, or other instruments related to equity, or making investments as per the desire of partners of a company.
A fund whose securities are at the initial phase of operation and not listed with stock exchange market, or a fund making equity investments as a form of capital in the business related to innovative knowledge, skills, or competency or new goods, services, technology, or intellectual property.

c. Foreign Investment Approval

The Foreign Investment Act has recognized investment in PEVC as a “foreign investment”. The Act allows an institutional foreign investor to establish the venture capital fund for the purpose of investing equity in any industry through incorporation of company pursuant to the Companies Act, 2006 and obtaining approval of Securities Board of Nepal. Further, such institutional foreign investor establishing a venture capital must be registered in Securities Board of Nepal for the purpose of trading in securities.

d. Qualification of Fund Manager

The qualification of fund manager are as follows:

e. Minimum Provision under Constitution of PEVC

Under the Specialized Investment Fund Rules, the constitution of PEVC must include the following information:

  1. Name of a fund;
  2. Types of the fund;
  3. Size of and period of the fund;
  4. Details of investors making commitments to invest at least ten percent money for the promotion of the fund;
  5. Provision regarding the operation of fund, records keeping and audit;
  6. Details regarding targeted areas of the fund and investment procedures;
  7. Provision regarding projected profits to be accrued in the investments;
  8. Provision regarding repatriation of investments;
  9. Provision regarding dispute resolution procedure;
  10. Provision regarding hurdle rates;
  11. Provision regarding fund management fees;
  12. Provision regarding fund’s winding up; and
  13. Other particulars to be prescribed by the Securities Board of Nepal from time to time.

f. Minimum Standards to Register Funds:

For Individuals who can be taxed on the Basis of Procedure related to Digital Service Tax in Nepal, registration should be completed within 30 Days of exceeding the Transaction Threshold. The procedures to obtain permanent account number for non-resident person are set out below:
Fund Capital at least NPR 15,00,00,000 Holding at least 2 % shares of fund Unit holder’s number shall not exceed two hundred
Close-ended nature Provide cash dividend only to unit holders Unit holders shall purchase units up to NPR 50,00,000.

g. Eligible Investors of PEVC Fund

Under the Specialized Investment Fund Rules, the following entity or individual can make investments in a fund after calculating investment risks and profits:

  • Bank or financial institution;
  • Insurance Companies;
  • Funds such as pension fund, welfare fund, provident fund, citizen investment fund as recognized by the prevailing law;
  • Bilateral or multilateral international corporate investors;
  • A body corporate with an objective of making investments established in Nepal pursuant to the prevailing law;
  • Nepali citizen or non-resident Nepali; and
  • Other entities or individual as prescribed by the Securities Board of Nepal from time to time.

h. Duties of Fund Manager

A fund manager must provide the following information and particulars to the Securities Board of Nepal:

  • A copy of amendment made to the Memorandum of Association and Articles of Association within 15 days, if amended;
  • A copy of information along with particulars of new board of directors or chief executive officer pursuant to schedule-9, if appointed, within 15 days in doing so;
  • A copy of information regarding black listing of promoters, board of directors, chief executive officer by the Credit Information Bureau at once;
  • Other notice, information and details as prescribed by the Securities Board of Nepal from time to time within a period as indicated by the Securities Board of Nepal; and
  • If any notice, information or particulars has been demanded, the fund manager must provide the same with seven days from such request.

i. Period of PEVC Fund

The period of PEVC fund shall be for 5 years to 15 years. Such period shall be mentioned in an investment agreement.

Disclaimer: This article is for informational purposes only and shall not be construed as legal advice, advertisement, personal communication, solicitation or inducement of any sort from the firm or any of its members. The firm shall not be liable for consequences arising out of any action undertaken by any person relying on the information provided herein. The copyright of the contents of this article is vested with Imperial Law Associates.

Frequently Asked Questions

The Foreign Investment Act, 2019 and the Specialized Investment Fund Rules, 2019 primarily govern private equity and venture capital funds in Nepal.

A private equity fund invests initial equity or related instruments as per the partners’ desires in a company.

A venture capital fund invests in early-phase securities or businesses related to innovative knowledge, new technology, goods, or services.

Foreign investors must incorporate a company under the Companies Act, 2006, obtain approval from the Securities Board of Nepal, and register for trading in securities.

Fund managers must be corporate bodies, have objectives outlined in their Memorandum and Articles of Association, maintain a paid-up capital of at least NPR 20,000,000, and meet other specified criteria.

The constitution must include the fund’s name, types, size, duration, investor details, operation provisions, projected profits, dispute resolution, and other required particulars.

Eligible investors include banks, financial institutions, insurance companies, pension funds, multilateral international investors, Nepali citizens, non-resident Nepalis, and other entities recognized by law.

Fund managers must provide amendments to company documents, details of new board members, information on blacklisted individuals, and other prescribed notices to the Securities Board of Nepal.

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