Table of Contents
The emergence of Private Equity (PE) and Venture Capital (VC) in Nepal has introduced an alternative financing model that provides options beyond traditional bank lending, particularly benefiting startups, innovative enterprises, and growth-stage companies. Business Oxygen Pvt. Ltd., established in 2012, marked the beginning of Nepal's private equity ecosystem as the country's first onshore private equity fund with foreign investment. Today, several onshore and offshore funds (with and without foreign investment) operate in Nepal under the regulatory supervision of the Securities Board of Nepal (SEBON).
Introduction to Private Equity and Venture Capital
Private Equity and Venture Capital represent specialized investment mechanisms that provide equity financing to companies at various stages of development. Unlike traditional debt financing from banks, PE and VC investors take ownership stakes in companies, sharing both risks and rewards. These investment vehicles have become increasingly important in Nepal as public financing resources remain limited and capital markets have not fully developed.
Why PE and VC Matter for Nepal
Private Equity and Venture Capital offer several advantages over traditional financing:
- Access to Capital: Provides funding for businesses that may not qualify for traditional bank loans
- Growth Support: Brings not just capital but also management expertise and industry connections
- Innovation Financing: Supports technology-driven and innovative businesses at early stages
- Economic Development: Promotes entrepreneurship and job creation
- Alternative Investment: Offers institutional investors opportunities beyond traditional securities
Governing Legal Framework
The key laws governing Private Equity and Venture Capital in Nepal include:
| Law | Purpose |
|---|---|
| Specialized Investment Fund Rules, 2075 (2019) | Primary regulation governing establishment and operation of PE, VC, Hedge Funds, and other specialized investment funds |
| Securities Act, 2063 (2007) | Overarching securities legislation under which SEBON operates |
| Foreign Investment and Technology Transfer Act, 2075 (2019) | Governs foreign investment in funds and fund managers |
| Foreign Investment and Technology Transfer Regulations, 2077 (2021) | Detailed procedures for foreign investors |
Two-Step Approval Requirement
Under the Specialized Investment Fund Rules, two mandatory approvals are required to operate a fund in Nepal:
- Fund Manager Registration: The Fund Manager must first obtain a license from SEBON
- Fund Registration: The licensed Fund Manager must then obtain separate approval for each specific fund to be operated
Regulatory Authority
The Securities Board of Nepal (SEBON) is the principal regulatory authority overseeing Private Equity, Venture Capital, and other Specialized Investment Funds in Nepal. SEBON is responsible for:
- Licensing fund managers
- Approving funds
- Monitoring compliance
- Safeguarding investor interests
- Issuing rules, directives, and circulars
- Enforcing regulations
Types of Specialized Investment Funds
The Specialized Investment Fund Rules recognize the following types of funds:
| Fund Type | Definition and Purpose |
|---|---|
| Private Equity Fund | A fund investing in equity or securities convertible into ordinary shares, debt instruments, credit, or any other instruments related to equity, or investing as per the desire of partners of the company. Typically targets unlisted or growth-stage companies. |
| Venture Capital Fund | A fund investing in equity or securities convertible into ordinary shares, debt instruments, credit, or other equity-related instruments for businesses whose securities are at the initial phase of operation, not listed with stock exchange, or in businesses related to innovative knowledge, skills, competency, new goods, services, technology, or intellectual property. |
| Hedge Fund | A fund established to make investments in any sector with high risks, employing various investment strategies. |
| Other Funds | Any other fund as prescribed by SEBON from time to time. |
Registration of Fund Manager
Mandatory Licensing Requirement
Prior to forming or operating any Specialized Investment Fund, the Fund Manager must obtain a Fund Manager License from SEBON pursuant to Rule 3 of the Specialized Investment Fund Rules. Only a SEBON-licensed Fund Manager is permitted to create and operate such funds in Nepal.
Eligibility Criteria for Fund Manager
To qualify as a Fund Manager, the applicant must meet the following requirements:
- Be a body corporate incorporated under prevailing Nepali laws
- Include fund management as one of its objectives in the Memorandum and Articles of Association
- Have a minimum paid-up capital of NPR 20,000,000 (Two Crores)
- Ensure that the company, its directors, and Chief Executive Officer have not been convicted of crimes involving fraud, embezzlement, or moral turpitude
- Ensure that the company, directors, and CEO are not blacklisted by the Credit Information Bureau
- Make necessary arrangements for trading of securities if collecting amounts from general public
Documents Required for Fund Manager Registration
The following documents must be submitted to SEBON for Fund Manager registration:
- Certificate of incorporation (copy of registration certificate)
- Memorandum of Association and Articles of Association
- Audited financial statements of preceding fiscal year prepared per prevailing law and accounting standards (or periodic financial report if fiscal year not completed since incorporation)
- Copy of annual report
- Board resolution approving fund manager registration
- Details regarding any action taken against board of directors or CEO under securities law or prevailing law
- Details of promoters and amounts paid for shares
- Name, full address, and contact number of shareholders holding 5% or more of paid-up capital, and ownership details
- Organizational structure and working procedures
- Details of office location, area, equipment, communication devices, and human resources
- Disclosure of ownership in other companies or corporate bodies, if any
- Other documents as SEBON deems necessary
Registration Process and Timeline
Although SEBON is legally required to issue the registration certificate within 35 days of application submission, the practical process involves:
- Application Submission: Submit application with all required documents and fees to SEBON
- Preliminary Review: SEBON reviews submitted documents
- Letter of Intent (LOI): SEBON issues LOI upon preliminary approval
- Inspection: SEBON inspects the applicant's infrastructure, human resources, and internal policies
- Final Certificate: Registration certificate granted after successful inspection
Government Fees for Fund Manager Registration
| Particulars | Fee (NPR) | Frequency |
|---|---|---|
| Fund Manager Registration Fee | 300,000 | One-time |
| Annual Renewal Fee | 150,000 | Annual |
Duties and Responsibilities of Fund Manager
A licensed Fund Manager must fulfill the following duties:
- Act in the best interest of unit holders as per notices, circulars, directives, or directions issued by SEBON
- Carry out fund-related transactions in a free and fair manner
- Avoid conflicts of interest; if any financial interest exists in an organization to be invested in, pass resolution at AGM of unit holders with full disclosure and notify SEBON within seven days
- Ensure customer identification and maintain necessary documents
- Provide information about risks and profits to unit holders
- Make and implement procedures for investment and fund management
- Make and implement employees' code of conduct
- Ensure investments are made in the interest of unit holders
- Maintain records of accounts, reports, documents, and particulars pertaining to investments
- Provide two-week prior written notice when calling capital from eligible investors
- Prepare financial details per accounting standards within six months following each fiscal year end
- Conduct annual general meetings of unit holders within six months following each fiscal year end
Reporting Obligations of Fund Manager
Fund Managers must provide the following to SEBON:
- Copy of amendments to Memorandum and Articles of Association within 15 days of amendment
- Details of new board of directors or CEO within 15 days of appointment
- Information regarding blacklisting of promoters, directors, or CEO by Credit Information Bureau immediately
- Other notices and information as prescribed by SEBON within indicated period
- Respond to any information request within seven days
Registration of Specialized Investment Fund
Fund Registration Process
Once licensed, the Fund Manager must obtain separate approval from SEBON to establish and operate each specific fund:
- Step 1: Licensed Fund Manager submits application for fund registration to SEBON along with required documents
- Step 2: SEBON conducts necessary inquiry and review
- Step 3: SEBON issues Fund Registration Certificate upon approval
Minimum Requirements for Fund Registration
| Requirement | Specification |
|---|---|
| Minimum Fund Size | NPR 150,000,000 (15 Crores / 150 Million) |
| Fund Manager's Holding | At least 2% of fund units (must be held continuously; exception for bilateral/multilateral agencies) |
| Maximum Unit Holders | 200 unit holders |
| Fund Type | Must be close-ended |
| Dividend Type | Only cash dividends permitted |
| Minimum Investment per Unit Holder | NPR 5,000,000 (50 Lakhs / 5 Million) |
Government Fees for Fund Registration
| Fund Size | Registration Fee (NPR) |
|---|---|
| NPR 100 Million – 500 Million | 500,000 |
| NPR 500 Million – 1 Billion | 700,000 |
| Above NPR 1 Billion | 1,000,000 |
| Application Fee | 50,000 (One-time) |
Mandatory Provisions in Fund Constitution
The fund constitution must include the following provisions:
- Name of the fund
- Types of the fund (private equity, venture capital, hedge fund, or other)
- Size and period of the fund
- Details of investors making commitments to invest at least 10% for fund promotion
- Provisions regarding operation of fund, record keeping, and audit
- Details regarding targeted areas of fund and investment procedures
- Provisions regarding projected profits to be accrued from investments
- Provisions regarding repatriation of investments
- Provisions regarding dispute resolution procedure
- Provisions regarding hurdle rates
- Provisions regarding fund management fees
- Provisions regarding fund's winding up
- Other particulars as prescribed by SEBON from time to time
Eligible Investors
Under the Specialized Investment Fund Rules, the following entities and individuals may invest in specialized investment funds after calculating investment risks and profits:
- Banks and financial institutions
- Insurance companies
- Funds such as pension fund, welfare fund, provident fund, Citizen Investment Fund as recognized by prevailing law
- Bilateral or multilateral international organizations
- Foreign citizens, foreign firms, companies, or organized investors
- Funds registered abroad
- Foreign fund managers
- Any other similar organized entity
- Body corporate with objective of making investments established in Nepal under prevailing law
- Nepali citizens
- Non-Resident Nepalis (NRNs)
- Other entities or individuals as prescribed by SEBON from time to time
Investment Agreement Requirement
The Fund Manager must execute an Investment Agreement with eligible investors (Limited Partners) regarding the investment. The investment agreement shall include:
- Amount and period to be invested
- Projected profit on investments
- Procedures regarding reimbursement
- Provision of hurdle rate
- Details regarding fund management fees
- Expenditure headings of the fund
- Provision regarding issuance of units and phases of capital collection
- Provision regarding settlement of all liabilities and distribution of remaining amounts to unit holders by converting all property into cash following winding up
Fund Duration and Termination
Fund Period
A specialized investment fund's period shall be from 5 to 15 years as specified in the investment agreement.
Grounds for Termination
A fund may be terminated on the following grounds:
- Expiry of the period approved by SEBON
- Cancellation of approval given by SEBON to operate the fund
- SEBON's direction to wind up the fund due to unavoidable circumstances or financial crisis making continued operation impossible
Annual Compliance Obligations
Fund Managers must fulfill the following annual compliance requirements:
| Compliance Requirement | Timeline |
|---|---|
| Submit audited annual report to SEBON (including financial statements and activities) | Within 6 months of fiscal year end |
| Provide summary of financial statements to unit holders | Within 6 months of fiscal year end |
| Conduct Annual General Meeting of unit holders | Within 6 months of fiscal year end |
| Submit AGM report to SEBON | Within 30 days of AGM |
Foreign Fund Managers and Funds
Entry Options for Foreign Investors
Foreign fund managers may operate in Nepal through full or partial ownership, subject to compliance with both foreign investment laws and SEBON regulations.
Requirements for Foreign Fund Managers
- Local Subsidiary: Must establish a subsidiary company in Nepal
- Foreign Investment Approval: Must obtain approval under Foreign Investment and Technology Transfer Act, 2075
- SEBON Registration: Must register and obtain license from SEBON
- Same Documentation: Submit same documents as required for Nepali Fund Managers
- Same Fee Structure: Pay same fees applicable to Nepali Fund Managers
Minimum Investment Threshold
Note: Given that the minimum threshold of foreign investment amount in Nepal is NPR 50,000,000 (Five Crores) pursuant to Foreign Investment and Technology Transfer Regulations, 2077 (2021), which exceeds the NPR 20,000,000 (Two Crores) minimum paid-up capital requirement for fund managers, foreign fund managers will inherently meet the capital requirement.
Foreign Fund Registration
Any foreign registered fund intending to operate in Nepal must submit an application to SEBON for getting the fund registered in Nepal, following the same procedures and requirements applicable to domestic funds.
Key Considerations for Fund Establishment
Structuring Advisory
When establishing a PE or VC fund in Nepal, careful consideration should be given to:
- Choice between onshore (with or without foreign investment) and offshore structures
- Fund size and duration aligned with investment strategy
- Target sectors and investment criteria
- Management fee structures and carried interest provisions
- Capital call and distribution waterfall mechanisms
- Governance and decision-making processes
- Exit strategies and repatriation provisions
Cross-Border Considerations
For funds with foreign investment or foreign fund managers, additional considerations include:
- Foreign investment approval process and timeline
- Repatriation of profits and capital
- Tax treaty benefits and withholding obligations
- Currency conversion and hedging
- Regulatory reporting in multiple jurisdictions
Scope of Investment
Investments shall be made in those companies or businesses as provided for or agreed in the investment agreement. The fund manager enters into investment agreements with eligible investors (Limited Partners) who commit capital to the fund, which is then deployed according to the fund's stated investment strategy and objectives.
Need Legal Assistance?
If you require legal assistance with establishing a private equity fund, venture capital fund, or other specialized investment fund in Nepal, our experienced lawyers can guide you through fund manager registration, fund structuring, drafting fund documents, SEBON compliance, and foreign investment approvals. We also assist with ongoing compliance and exit transactions. Contact us for professional legal services.
Frequently Asked Questions
The primary laws governing PE and VC funds in Nepal include:
- Specialized Investment Fund Rules, 2075 (2019): Main regulation governing establishment and operation of PE, VC, hedge funds, and other specialized investment funds
- Securities Act, 2063 (2007): Overarching securities legislation under which SEBON operates
- Foreign Investment and Technology Transfer Act, 2075 (2019): Governs foreign investment in funds
- Foreign Investment and Technology Transfer Regulations, 2077 (2021): Detailed procedures for foreign investors Two mandatory approvals are required: fund manager registration and separate fund registration with SEBON.
Under the Specialized Investment Fund Rules, a Private Equity Fund is defined as a fund investing in equity or securities convertible into ordinary shares, debt instruments, credit, or any other instruments related to equity, or investing as per the desire of partners of a company. PE funds typically target unlisted or growth-stage companies, providing growth capital and management expertise to help companies scale operations and increase value before exit.
A Venture Capital Fund is defined as a fund investing in equity or securities convertible into ordinary shares, debt instruments, credit, or other equity-related instruments for businesses whose securities are at the initial phase of operation and not listed with stock exchange market, or in businesses related to innovative knowledge, skills, competency, new goods, services, technology, or intellectual property. VC funds focus on early-stage, innovative, and technology-driven businesses.
Fund manager qualifications include:
- Must be a body corporate incorporated under prevailing Nepali laws
- Fund management must be included in objectives of Memorandum and Articles of Association
- Minimum paid-up capital of NPR 20,000,000 (Two Crores)
- Company, directors, and CEO must not have been convicted of crimes involving fraud, embezzlement, or moral turpitude
- Company, directors, and CEO must not be blacklisted by Credit Information Bureau Fund managers must obtain license from SEBON before operating any fund.
The registration process involves:
- Submit application with required documents and fees to SEBON
- SEBON conducts preliminary review
- SEBON issues Letter of Intent (LOI) upon preliminary approval
- SEBON inspects infrastructure, human resources, and internal policies
- Final registration certificate granted after successful inspection Although legally required within 35 days, practical timeline may vary depending on inspection scheduling and any clarifications needed.
Government fees include:
- One-time Registration Fee: NPR 300,000
- Annual Renewal Fee: NPR 150,000 These fees are payable to SEBON. Fund managers must also pay separate fees for each fund registered.
Minimum requirements include:
- Fund Size: At least NPR 150,000,000 (15 Crores)
- Fund Manager Holding: At least 2% of fund units (continuously held; exception for bilateral/multilateral agencies)
- Maximum Unit Holders: 200
- Fund Type: Must be close-ended
- Dividend Type: Only cash dividends permitted
- Minimum Investment: NPR 5,000,000 (50 Lakhs) per unit holder These requirements ensure institutional-grade fund operations and qualified investors.
Fund registration fees based on fund size:
- NPR 100-500 Million: NPR 500,000
- NPR 500 Million - 1 Billion: NPR 700,000
- Above NPR 1 Billion: NPR 1,000,000
- Application Fee: NPR 50,000 (one-time) These fees are separate from fund manager registration fees and must be paid to SEBON for each fund.
Eligible investors include:
- Banks and financial institutions
- Insurance companies
- Pension funds, welfare funds, provident funds, Citizen Investment Fund
- Bilateral or multilateral international organizations
- Foreign citizens, firms, companies, and organized investors
- Funds registered abroad and foreign fund managers
- Nepali companies with investment objectives
- Nepali citizens and Non-Resident Nepalis (NRNs)
- Other entities as prescribed by SEBON All investors must meet minimum investment of NPR 5,000,000.
Mandatory provisions include:
- Name and type of fund (PE, VC, hedge fund, or other)
- Size and period of fund
- Details of investors committing at least 10% for fund promotion
- Fund operation, record keeping, and audit provisions
- Targeted areas and investment procedures
- Projected profits and repatriation provisions
- Dispute resolution procedures
- Hurdle rates and fund management fees
- Winding up provisions
- Other particulars as prescribed by SEBON
Fund duration is between 5 to 15 years as specified in the investment agreement. The fund may be terminated upon:
- Expiry of SEBON-approved period
- Cancellation of SEBON approval
- SEBON direction to wind up due to unavoidable circumstances or financial crisis The specific duration depends on fund strategy, target investments, and expected exit timeline.
Annual compliance requirements include:
- Submit audited annual report to SEBON within 6 months of fiscal year end
- Provide summary of financial statements to unit holders within 6 months
- Conduct Annual General Meeting of unit holders within 6 months of fiscal year end
- Submit AGM report to SEBON within 30 days of AGM
- Report any amendments to MOA/AOA within 15 days
- Report new director/CEO appointments within 15 days
- Report Credit Information Bureau blacklisting immediately
Fund manager duties include:
- Act in best interest of unit holders
- Conduct transactions in free and fair manner
- Avoid conflicts of interest or disclose with unit holder approval
- Ensure customer identification and documentation
- Provide risk and profit information to unit holders
- Implement investment and fund management procedures
- Maintain investment records and accounts
- Provide two-week notice for capital calls
- Prepare financial details within six months of fiscal year end
- Conduct annual general meetings
Foreign fund managers may operate through full or partial ownership by:
- Establishing a local subsidiary company in Nepal
- Obtaining foreign investment approval under FITT Act
- Registering and obtaining license from SEBON
- Submitting same documents as Nepali fund managers
- Paying same fee structure Given minimum foreign investment threshold of NPR 50,000,000, which exceeds the NPR 20,000,000 minimum capital requirement, foreign fund managers inherently meet capital requirements.
Investment agreement must include:
- Amount and period of investment
- Projected profits on investments
- Reimbursement procedures
- Hurdle rate provisions
- Fund management fee details
- Expenditure headings
- Unit issuance and capital call provisions
- Winding up provisions including liability settlement and distribution of remaining amounts to unit holders after converting property to cash The agreement defines the relationship between fund manager and eligible investors (Limited Partners).
