Nepal Rastra Bank (NRB) is considering allowing foreign investors to convert expenses made prior to the establishment of their companies in Nepal into equity.

The policy reform is being made to facilitate foreign investors who have not been able to register such expenses as investment in their balance sheets.

As per the existing NRB guideline, pre-incorporation expenses of foreign companies should not exceed one percent of the equity and such spending should be made within the country. The expenses incurred outside Nepal, meanwhile, cannot be referred to as investment.

The central bank is considering revising this provision after a team of Investment Board Nepal (IBN) officials led by its CEO Maha Prasad Adhikari asked NRB Governor Chiranjibi Nepal to make necessary changes to the rule.

According to Adhikari, the provision incorporated in NRB’s guideline for foreign investors is not business-friendly. “If foreign investors are not allowed to include their genuine expenses in their books, it will definitely discourage them to invest in Nepal,” said Adhikari.

“During the meeting, NRB officials were very positive on revising the provision. We have also forwarded our request in writing and we hope the central bank will make the required change in the guideline very soon.”

NRB officials said they will soon make the revision to the guideline to address the concern of foreign investors. The revision made to the provision, according to an NRB official, however, will not allow all foreign investors to include the pre-incorporation expenses in their books.

“Most probably, we will provide such a facility to investors who are developing national pride projects, or those who can generate significant number of jobs. Such a facility will also be provided to foreign investors developing projects in sectors prioritised by the government,” said the source.

“Currently, we are doing internal homework. We will soon hold consultations with different government agencies before making the change to the guideline.”

The planned amendment to the guideline is expected to immediately benefit the developer of the much-talked-about West Seti Hydropower Project, which is trying to set up a joint venture (JV) company with Nepal Electricity Authority (NEA). China Three Gorges Corporation (CTGC) and NEA have agreed to form a JV company to develop the 750MW reservoir-type hydropower project.

However, IBN is struggling to conclude the JV deal after CTGC asked to recognise its pre-incorporation expenses as equity in the JV company.

Officials of CTGC are visiting Nepal in the third week of November to strike the JV deal with NEA. According to an IBN official, there is high chance of the deal taking place if NRB revises the guideline and recognises pre-incorporation expenses made by CTGC as equity.

As per the memorandum of understanding signed between the IBN and CTGC in August 2012, the Chinese company will have a 75 percent stake in the JV company, while NEA will hold the rest.