The Securities Board of Nepal (“SEBON”) has formulated the Specialized Investment Fund Rules, 2075 (2019) (“Rules”) that lays down requirements for the establishment and operation of Specialized Investment Funds (also understood as alternative investment funds). The Rules incorporates funds such as private equity, venture capital, hedge fund or any other fund in Nepal within the ambit of Specialised Investment Funds. The Rules provides that only a registered fund manager is permitted to create and operate such funds in Nepal.
A. For Nepali fund managers and funds on operating specialized investment funds
1. Registration of a fund manager
Prior to creating and operating any specialized investment fund, it is mandatory for such fund manager to obtain a Fund Manager license from SEBON. A company registered in Office of Company’s Registrar with paid-up capital of at least 2 crores (twenty million) rupees and with “fund management” entailed as one of its objectives in the memorandum of association shall be eligible to operate as a fund manager.
For the purpose of establishment and registration of the fund manager, an application is to be submitted to SEBON along with specific set of documents prescribed in the Rules. Following the submission, SEBON shall grant a certificate of registration of fund manager to the applicant within 35 days from such submission.
However, in practice, SEBON primarily grants a Letter of Intent (LOI) upon preliminary review of the documents submitted to them. The final license is granted only upon inspecting the infrastructure, human resource and detailed internal policy of the applicant company.
2. Registration of a Fund
The licensed fund manager shall then be required to obtain further approval from SEBON prior to establishing and operating a specific fund. The fund manager may apply for creation of any of the following specialised funds by submitting an application along with specific documents prescribed under the Rules:
a. Private equity fund :
It is a fund investing in equity or securities convertible into ordinary shares or debt instrument or credit or any other instruments related to equity or investing as per the desire of partners of the company.
b. Venture Capital fund:
It is a fund investing in equity or securities convertible into ordinary shares or debt instrument or credit or any other instruments related to equity for the operation of businesses whose securities are at the initial phase of operation, not listed with stock exchange market or in the business related to innovative knowledge, skills or competency or new goods, services, technology or intellectual property.
c. Hedge Fund:
It is a fund established to make investments in any sector with high risks.
d. Other fund as prescribed by the Board from time to time
2.1. Minimum requirements to be met for the registration of the fund
- The fund’s capital must be at least 15 crores (150 million) rupees.
- The fund manager must hold at least 2% units of the fund and the held units must stand continually (however, this shall not be applicable in the case of investments made by bilateral or multilateral international agencies)
- The unit holders’ number shall not exceed two hundred.
- The fund must be close-ended in nature.
- The fund must provide only cash dividend to the unit holders.
- Each unit holder shall purchase units up to at least fifty lakh rupees.
2.2 Who can invest in the fund?
- Bank or financial institutions
- Insurance companies
- Funds such as pension fund, welfare fund, provident fund, Citizen investment fund as recognized by the prevailing law
- Bilateral or multilateral international organized investor or foreign citizen or foreign firm, company or foreign organized investor or fund registered abroad or foreign fund manager or any other similar organized entity
- A body corporate with an objective of making investments established in Nepal pursuant to the prevailing law
- Nepali citizen or non-resident Nepali
- Other entities or individual as prescribed by SEBON from time to time.
2.3 Scope of investment
- The fund manager shall enter into an investment agreement with eligible investors (Limited Partners) intending to invest in the Fund.
- Investments shall be made in those companies or businesses as provided for or agreed in the investment agreement.
B. For foreign fund managers and funds on operating specialized investment funds
(Note: Given that the minimum threshold of the foreign investment amount in Nepal is five crores (fifty million) rupees pursuant to Foreign Investment and Technology Transfer Regulations, 2077 (2021), the requirement of minimum paid-up capital of a company to be two crores (twenty million) rupees to operate as a fund manager shall not be applicable in case of foreign fund manager applying for registration at SEBON.)
- A foreign fund or fund manager may operate a fund or function as a fund manager in Nepal through its full or partial ownership in such fund or fund manager.
- For any registered foreign fund manager to function as fund manager in Nepal, it must establish a subsidiary company in Nepal and must acquire approval from SEBON for the same.
- When acquiring approval, an application shall be submitted to SEBON along with prescribed fees. Documents to be submitted with the application are the same as required for Nepali fund managers.
- Any foreign registered fund shall submit an application to SEBON for getting the fund registered in Nepal.
Disclaimer: This note shall not be treated as a legal opinion and it is advised to consult a lawyer for legal advice. This note is for general understanding only.
Please note that the copyright for this note vests on Vidhi Legal Concern