Nepal • NITI PARTNERS

Sameep Khanal Managing Partner [email protected]

A. Overview

1. What is the main legislation and international treaties governing project financing in Nepal?

The following legal instruments primarily govern project financing laws in Nepal. The primary legal framework consists of domestic statutes that regulate contract formation, security interests, foreign investment, and sector-specific obligations.

1. The National Civil Code, 2017: Serves as the foundational law for property rights, validity of contracts, and general principles of debt and security.
2. Public Private Partnership and Investment Act, 2019: Provides the framework for large-scale infrastructure development and regulation of private investment in public projects.
3. Companies Act, 2006: Governs incorporation, corporate governance, and statutory obligations of SPVs used in project finance.
4. Nepal Rastra Bank Act, 2002: Establishes NRB authority over foreign exchange, credit circulars, and capital movement.
5. Banking and Financial Institutions Act, 2017: Regulates lending activities, liquidity requirements, and debt recovery powers.
6. Foreign Investment and Technology Transfer Act, 2019: Regulates foreign equity, investor protection, and repatriation.
7. Secured Transaction Act, 2006: Provides the regime for security interests in movable and intangible assets.
8. NRB Foreign Investment and Foreign Loan Management By-law, 2021: Sets requirements for offshore loans, interest rate caps, and recording foreign debt.
9. Environment Protection Act, 2019: Mandates environmental impact assessments and compliance standards.
10. Insolvency Act, 2006: Governs restructuring, liquidation, and secured creditor priority.

2. Market maturity and major financings

Nepal’s project finance market has reached a notable level of maturity, especially in hydropower and infrastructure projects. Foreign lending structures, security trustees, direct agreements, and multi-lender security arrangements have been implemented in practice.

Regulatory practice has also improved, including reforms in foreign loan procedures and tested insurance-related mechanisms such as assignment of reinsurance proceeds, direct payment structures, and cut-through arrangements.

However, challenges remain, including foreign exchange risk allocation, land acquisition delays, compensation issues, forest clearances, and tree-cutting approvals.

Significant recent project financings

• Third Bridges Improvement and Maintenance Program: USD 150 million World Bank financing approved in March 2025.
• Electricity Distribution and Irrigation Projects: USD 257 million World Bank financing package approved in May 2025.
• Upper Seti Hydropower Project: NPR 42 billion financing led by Kumari Bank.
• Budhigandaki Hydropower Project: NPR 52.5 billion debt financing from Nepali banks and financial institutions.
• Koteshwor Intersection Improvement Project: JPY 34.49 billion JICA ODA loan.

B. Security Interests

3. Common security types

The most commonly used security types in Nepal’s project financing regime are:

• Mortgage: Over immovable property such as land and buildings.
• Hypothecation: Over movable assets such as inventory, raw materials, and working capital assets.
• Pledge: Security interest over movable assets such as share certificates.
• Assignment of rights: Assignment of receivables, contracts, leasehold rights, and instruments.

4. Share pledge

Shares of a company can be pledged as security for lenders. A share pledge may be perfected through possession of the share certificate. Company law also requires recording of the pledge in the shareholder registry book, and certification from the Office of Company Registrar is common practice. For foreign lenders, prior approval from NRB is required.

5. Private sale enforcement

Private sale is recognized as a method of enforcing a share pledge in Nepal. A secured creditor may enforce security through non-judicial means, provided the security interest has been properly perfected. Judicial auction remains an alternative.

6. Security over future assets

Security interests may be established over future assets, rights, and receivables. However, security interests cannot be established over future immovable assets.

7. Enforcement during insolvency

Under the Insolvency Act 2006, secured lenders are generally entitled to enforce their security interests despite insolvency or restructuring proceedings, subject to limited court restrictions or restructuring approvals.

8. Security trustee concept

Security trustee structures are accepted in Nepal and have been tested in hydropower transactions. Nepali banks often act as security agents because enforcement is easier under local banking laws. Parallel debt structures are not yet tested.

C. Incentives and Restrictions

9. Main incentives and exemptions

Project finance incentives in Nepal are mainly fiscal and sector-specific, especially for energy and infrastructure projects. Hydropower and renewable energy projects may receive full income tax exemption for an initial period and partial exemption later.

Reservoir and semi-reservoir hydropower projects above 40 MW may receive enhanced incentives, including 100% income tax exemption for the first 15 years and 50% exemption for an additional 6 years, subject to statutory conditions.

• Income tax exemptions for renewable energy projects.
• Tax incentives for green hydrogen production.
• 20% income tax concession for certain PPP and infrastructure projects.
• VAT exemptions and reduced customs duties for eligible project imports.

10. Foreign investor incentives

Foreign investors receive protections under FITTA, including protection against expropriation, repatriation of capital and returns, foreign currency convertibility, national treatment, business visa access, land use rights, and industrial security.

Investment Board Nepal projects often include direct agreements, step-in rights, cure rights, protection against termination, change in law relief, political risk allocation, and force majeure protection.

11. Foreign loans and shareholder loans

Nepali entities may borrow foreign currency loans from abroad subject to prior NRB approval. Such loans must be approved in advance and recorded with NRB within six months of receipt.

Shareholder loans are permitted but regulated under NRB Bylaws, including exposure limits, benchmark-linked interest caps, and weighted average interest requirements.

12. Foreign investment restrictions

Foreign equity investment is restricted in certain sectors, including primary agriculture, cottage industries, personal service businesses, arms and ammunition, real estate business excluding construction, retail, internal courier services, travel agencies, mass media, consultancy services beyond prescribed thresholds, ride-sharing, and certain aviation-related sectors.

13. Minimum equity requirement

The minimum foreign investment threshold in Nepal is NPR 20 million. This threshold does not apply to equity investments in the information technology sector.

14. Registration and filing requirements

Foreign loan terms must be approved by NRB. The borrower must record the foreign loan amount within six months of foreign currency inflow. Land mortgage deeds must be registered at the Land Revenue Office, and security interests must be filed at the Secured Transaction Registry Office where filing is the mode of perfection.

D. Insurance

15. Foreign law for local insurance policies

Although the Civil Code recognizes party autonomy in governing law, foreign law is rarely applied to Nepali insurance policies in practice. Local insurers usually prefer Nepalese law.

16. Assignment of insurance and reinsurance proceeds

Assignment of insurance and reinsurance proceeds is a standard component of project finance security packages. Reinsurance Assignment Deeds, loss payable clauses, and cut-through provisions are commonly used to enable direct payment to secured accounts.

Nepal Insurance Authority approval is required for direct payment of reinsurance proceeds to lenders or security trustees. NRB approval is also recommended where payments are made offshore or to foreign currency accounts abroad.

17. Insurance complications

Direct payment from reinsurers to lenders or security trustees is not automatically recognized without regulatory approval. Delays may occur if proceeds must be routed through local insurers.

E. Financing of Public-Private Partnership Projects

18. PPP projects in Nepal

PPP is a permitted method of developing projects in Nepal and is governed by the PPPA.

• Arun-3 Hydro Electric Power Project
• Upper Trishuli-1 Hydropower Project
• Upper Marsyangdi-2 Hydropower Project

19. Direct agreements

Direct agreements between public authorities and lenders are permissible under Nepali law and are common in PPP hydropower projects developed with foreign lenders.

20. Host government support

Host government support in Nepal usually does not take the form of sovereign guarantees or debt assumption. Instead, support is provided through concession agreements, particularly for IBN projects.

Government support may include facilitation of permits, licences, approvals, environmental approvals, import permits, communication permits, and regulatory consents.

21. Political risk allocation

Political risk events are generally allocated to the Government of Nepal under PPP agreements, subject to the contractual framework. Relief may include suspension of performance, extension of time, cost recovery, loss of revenue recovery, and termination only as a last resort.

22. Change in law protection

Investors and lenders are usually protected against change in law through concession agreements. Remedies may include extension of time, monetary compensation, tariff or royalty adjustments, tax exemptions, reimbursement, and concession term extension.

23. Force majeure

Force majeure is primarily governed by concession agreements. Relief generally includes suspension of performance, extension of time, mitigation obligations, and termination only after prolonged force majeure and failed mitigation efforts.

24. Environmental and social requirements

Nepal’s environmental and social requirements are spread across environmental, forest, labour, industrial, and concession-related laws. Projects may require an environmental study, IEE, or EIA depending on the project type and scale.

Major hydropower projects may require local benefit sharing plans, resettlement and rehabilitation plans, occupational health and safety plans, employment and skills training plans, community grievance mechanisms, E&S reporting, and local share issuance.

F. Jurisdiction, Waiver of Immunity

25. Foreign law and waiver of immunity

Submission to foreign law and waiver of immunity provisions are enforceable in Nepal. Such provisions are commonly negotiated in concession agreements.

26. Arbitration clauses

Financing documents may include arbitration clauses. For security agreements, local courts are often preferred for faster enforcement, while arbitration is frequently used in concession agreements.

G. Trends and Projections

27. Current trends

Project financing in Nepal continues to be driven mainly by hydropower and core infrastructure. Direct agreements, security trustee arrangements, and BOOT-style concession structures are becoming more common.

Foreign investment and foreign loan administration are becoming more flexible, although lenders are also becoming more selective due to project concentration risk and stalled projects.

28. Expected future developments

Nepal’s project finance market is expected to evolve through storage-based hydropower, hybrid renewable systems, regulatory liberalisation, improved PPA bankability, Swiss Challenge procedures, and Hybrid Annuity Models for roads and bridges.

29. Alternative reference rates after LIBOR

Nepal has transitioned to currency-specific risk-free reference rates for foreign currency loans, including SOFR for USD, SONIA for GBP, SARON for CHF, TONA for JPY, and €STER for EUR.

For legacy contracts, NRB permits these new benchmarks with a Credit Spread Adjustment of up to 50 basis points where applicable.