Insights into Nepal's Policy Reforms for Foreign Direct Investment

Foreign investors researching private vs public company in Nepal often focus only on structure. That is a mistake.

The real decision is strategic.

Your choice affects foreign direct investment (FDI) approval, regulatory burden, capital raising options, governance control, tax exposure, and long-term exit planning.

Nepal has introduced several policy reforms to attract foreign capital. These include amendments under the Foreign Investment and Technology Transfer Act 2019 (FITTA), improvements in the Companies Act 2006, and digital filing through the Office of Company Registrar (OCR).

This guide breaks down the differences clearly. It is written specifically for foreign companies evaluating Nepal as a market entry destination.

If you are considering manufacturing, IT outsourcing, infrastructure, trade, or professional services, this article will help you decide which structure aligns with your strategy.

Why Nepal Is Reforming Its FDI Framework

Nepal has been gradually modernizing its investment regime to improve ease of doing business.

Key reforms include:

• Streamlined FDI approval processes under FITTA 2019
• Clearer repatriation rules through Nepal Rastra Bank (NRB)
• Online company registration with the OCR
• Sectoral incentives in hydropower, IT, tourism, and manufacturing
• Updated industrial classifications under the Industrial Enterprises Act 2020

The Government of Nepal has prioritized foreign capital inflows in infrastructure, energy, digital services, and export-oriented manufacturing.

But structure matters.

The choice between a private limited company and a public limited company significantly changes your compliance and governance obligations.

Private vs Public Company in Nepal: Legal Definitions and Core Differences

Understanding the statutory definitions is the starting point.

Private Limited Company (Pvt. Ltd.)

Defined under the Companies Act 2006, a private company:

• Limits share transferability
• Restricts the number of shareholders (maximum 101)
• Cannot invite the public to subscribe for shares
• Requires minimum 1 director
• Is the most common structure for foreign investors

Public Limited Company (Ltd.)

A public company:

• Can offer shares to the public
• Requires minimum 7 shareholders
• Requires minimum 3 directors
• Must comply with stricter governance standards
• Is eligible for listing on Nepal Stock Exchange (NEPSE)

For most foreign companies entering Nepal, the private limited company is the preferred vehicle.

But that is not always the correct answer.

Let’s compare them in depth.

Private vs Public Company in Nepal: Strategic Comparison for Foreign Investors

Original Insight for Foreign Investors

If your goal is:

1. Controlled FDI entry
2. 100% foreign ownership
3. Dividend repatriation flexibility
4. Lower compliance costs

→ A private limited company is usually optimal.

If your goal is:

1. Raising local capital
2. Large infrastructure project financing
3. Public participation
4. Eventual IPO

→ A public limited company may be strategic.

How Nepal’s FDI Policy Reforms Affect Company Structure

Under FITTA 2019:

• Foreign investors may hold up to 100% equity in many sectors
• Minimum FDI threshold applies (currently NPR 20 million in most sectors)
• Repatriation of dividends is permitted through NRB approval
• Technology transfer agreements are formally recognized

Most FDI projects are incorporated as private limited companies.

Why?

Because:

• Public listing is not required for most sectors
• Governance complexity increases significantly for public companies
• Capital markets in Nepal are still developing

Unless your business requires broad public participation, the private structure reduces regulatory friction.

Governance and Compliance Differences

Private Limited Company Compliance

• Annual General Meeting (AGM)
• Annual filing with OCR
• Tax filing under the Income Tax Act 2002
• PAN registration with Inland Revenue Department
• Social Security Fund compliance for employees

Public Limited Company Compliance

• All private company requirements
• Additional disclosure standards
• Prospectus approval (if issuing shares)
• Securities Board compliance
• NEPSE listing rules (if listed)

Compliance cost and administrative time increase significantly with a public entity.

Foreign subsidiaries rarely benefit from that additional complexity unless capital markets are part of the strategy.

Capital Raising: When Public Structure Makes Sense

There are limited but powerful scenarios where a public company is justified:

• Hydropower projects requiring domestic investment
• Infrastructure requiring multi-party financing
• Large-scale manufacturing plants
• Public-private partnership structures

Nepal’s hydropower sector often uses public limited company structures to mobilize domestic investment.

For service-sector FDI, however, private companies dominate.

Taxation: Does Structure Change Tax Burden?

Corporate income tax in Nepal generally applies equally to private and public companies.

Standard corporate tax rate:

• 25% (general sector)

Certain sectors such as hydropower and manufacturing may qualify for reduced or phased rates under the Industrial Enterprises Act.

Dividend tax applies at source.

The structure itself does not automatically change the base corporate tax rate. But compliance and reporting obligations differ.

Share Transfer and Control

Private Company

• Share transfers restricted
• Board approval often required
• Better suited for joint ventures
• Easier to maintain strategic control

Public Company

• Shares freely transferable
• Public participation dilutes control
• Mandatory disclosure standards

Foreign investors who want to maintain operational and financial control almost always prefer private limited companies.

Investor Protection and Legal Certainty

Nepal’s Companies Act provides:

• Limited liability protection
• Separate legal personality
• Defined shareholder rights
• Director fiduciary duties

Additionally, FITTA ensures:

• Non-discrimination between domestic and foreign investors
• Right to repatriate dividends
• Protection against nationalization (with compensation)

From a legal certainty perspective, both private and public companies offer similar base protection.

The difference lies in operational burden and capital strategy.

Sector-Specific Considerations

Certain sectors influence structure decisions:

1. Hydropower and Energy

Often structured as public companies to attract retail investors.

2. IT and Outsourcing

Usually private limited companies with 100% foreign ownership.

3. Manufacturing

Depends on scale. Large export-driven plants may consider public participation.

4. Banking and Financial Services

Require regulatory approvals and often operate as public entities.

Foreign companies should align structure with sector regulations.

Timeline and Incorporation Process

Incorporation involves:

1. Name reservation with OCR
2. Drafting Memorandum and Articles
3. FDI approval under FITTA
4. Registration with OCR
5. PAN registration
6. Bank account opening
7. NRB reporting

Private company registration is generally faster.

Public companies require additional documentation.

Common Mistakes Foreign Investors Make

• Choosing public structure without capital strategy
• Underestimating compliance burden
• Ignoring dividend repatriation process
• Not aligning shareholding with exit plan
• Failing to structure governance clearly

These mistakes delay projects and increase costs.

Decision Framework: Which Structure Should You Choose?

Ask yourself:

• Are you raising capital from the Nepali public?
• Do you plan to list on NEPSE?
• Is your project capital-intensive and public-facing?
• Do you require broad shareholder participation?

If the answer is no to most of these, a private limited company is usually the smarter entry structure.

Private vs Public Company in Nepal for Long-Term Exit Planning

Exit strategy matters.

Private Company Exit Options:

• Share transfer
• Strategic sale
• Buyback
• Conversion to public

Public Company Exit Options:

• IPO
• Secondary market share sale
• Institutional investor participation

Many foreign investors start as private and convert later if necessary.

That flexibility is valuable.

Why Most Foreign Subsidiaries in Nepal Use Private Limited Companies

Based on incorporation trends at the OCR, the majority of FDI entries are private limited entities.

Reasons include:

• Control retention
• Lower governance complexity
• Faster approvals
• Simplified compliance
• Reduced disclosure obligations

Unless capital markets are part of your growth model, private structure offers efficiency.

FAQ: Private vs Public Company in Nepal

1. Can a foreign investor own 100% of a private company in Nepal?

Yes. FITTA 2019 allows 100% foreign ownership in most sectors, subject to minimum investment thresholds and sectoral restrictions.

2. Is a public company mandatory for large projects?

Not always. Only sectors requiring public capital or regulatory mandate require public structure.

3. Can a private company convert into a public company?

Yes. The Companies Act allows conversion, subject to compliance and regulatory approval.

4. Does a public company pay lower tax?

No. Corporate income tax rates are generally the same, unless sector-specific incentives apply.

5. Is listing on NEPSE compulsory for public companies?

No. A company can be public without listing, but listing adds regulatory obligations.

Conclusion: Choosing the Right Structure for FDI Success

The debate around private vs public company in Nepal is not about which is better. It is about which aligns with your strategic goals.

For most foreign companies entering Nepal:

• A private limited company provides control, flexibility, and lower compliance burden.
• A public limited company makes sense when capital markets participation is essential.

Nepal’s FDI reforms under FITTA 2019 and the Industrial Enterprises Act 2020 have improved clarity and investor protection.

But structure remains a critical early decision.

If you are planning market entry into Nepal, structuring correctly from day one reduces risk, speeds approval, and protects long-term returns.

For foreign companies serious about Nepal, expert structuring advice is not optional. It is strategic risk management.