Foreign Investment in Nepali Energy: Ownership, Royalties, Incentives and Local Shares

Nepal’s energy sector is one of the few in which a foreign investor faces no sectoral ownership restriction. The Schedule to the Foreign Investment and Technology Transfer Act 2075 (2019) closes nine categories to foreign investment: primary agriculture, cottage and small industries, personal services, arms and atomic energy, real estate and retail, travel and tourism services, mass media, and most consultancy. Electricity is not among them.

Most published accounts stop at that openness. The terms that decide a foreign investor’s return sit in three other places: a royalty schedule that penalises export, a tax concession with a moving deadline, and a single sentence in the 1992 Act about what happens at the end.

Approvals and capital

Approval under section 17 of FITTA runs on a monetary threshold. The Department of Industry approves foreign investment up to NPR 6 billion, and the Investment Board approves anything above it. A decision is due within seven days of receipt, with written reasons if the application is refused. The investment must arrive in convertible foreign currency through the banking system, with an Indian rupee route available to Indian investors and a self-declaration to Nepal Rastra Bank on the source of funds. Registration, approval, visa and environmental clearance services are meant to be delivered through a single stop service centre.

Getting money out is section 20. Profits, dividends, lease rent and damages may be repatriated after tax, and the approving body must decide within fifteen days. Nepal Rastra Bank’s rules add a condition that is easy to trip over. Repatriation is not permitted from an entity blacklisted by the Credit Information Bureau of Nepal.

For a project above NPR 6 billion, which covers most hydropower of scale, the Board route brings a project development agreement into the picture alongside the Department of Electricity Development’s generation licence. Two negotiations, two instruments, and no statutory rule about which prevails if they diverge.

Royalty rates

Section 11 of the Electricity Act 2049 sets a flat royalty: NPR 100 per installed kilowatt per year plus 2 per cent of the average tariff per unit for up to fifteen years from the start of commercial generation, then NPR 1,000 per kilowatt plus 10 per cent. The section has no capacity bands and draws no distinction between domestic and export sales.

The Hydropower Development Policy 2058 sets out something different:

Project	First 15 years	After 15 years
Domestic, up to 1 MW	No royalty	No royalty
Domestic, 1–10 MW	NPR 100/kW + 1.75%	NPR 1,000/kW + 10%
Domestic, 10–100 MW	NPR 150/kW + 1.85%	NPR 1,200/kW + 10%
Domestic, above 100 MW	NPR 200/kW + 2.00%	NPR 1,500/kW + 10%
Export, run-of-river	NPR 400/kW + 7.5%	NPR 1,800/kW + 12%
Export, storage	NPR 500/kW + 10%	NPR 2,000/kW + 15%

The export differential is the point. On the policy schedule, an export-oriented run-of-river project pays roughly four times the capacity royalty and four times the energy royalty of a comparable domestic project in its first fifteen years. The same policy lets the Government buy up to 10 per cent of an export project’s output for domestic consumption, and shortens the licence for export projects from thirty-five years to thirty.

The policy framework prices export as a privilege rather than as the demand-side answer to Nepal’s offtake problem. That was defensible in 2001, when domestic supply was short. It reads oddly in 2026, with 16,425 MW of licensed capacity waiting for a buyer and roughly a thousand megawatts spilled each monsoon.

One caution on which schedule binds. The Act is flat, the policy is tiered, and policy cannot override a statute. We could not establish which appears in current licence documents. Anyone modelling royalty should read the licence rather than either instrument.

Tax and customs

Section 12(7) of the Electricity Act lets plant, equipment and materials not produced in Nepal be imported at 1 per cent customs duty, with no import licence fee and no sales tax. Locally produced equivalents attract normal rates. The subsections that once carried the income tax concessions have been deleted from the Act.

The income tax position now sits in the Income Tax Act 2058. It grants full income tax exemption for ten years, and a fifty per cent exemption for a further five, to a licensed person commencing commercial generation, transmission or distribution of hydro, solar, wind or biomass electricity by a stated deadline in the Bikram Sambat calendar. Successive Finance Acts have moved that deadline. We quote the concession from a secondary reproduction rather than the Inland Revenue Department’s own text, and it is flagged. Read the current deadline off the Economic Act for the relevant year before putting it in a model.

The 50% ownership line

Section 10 of the Electricity Act deals with what the investor owns at the end.

Where foreign investment exceeds fifty per cent, the structures become the property of the Government of Nepal after expiry of the term specified in the licence. Where foreign investment is fifty per cent or less, the assets may continue with the licensee under a renewed arrangement with the Government.

Set that alongside the licence term, thirty-five years for a domestic project and thirty for an export project, and against the Hydropower Development Policy’s blunter formulation, which requires transfer to the Government in good running condition at expiry with no compensation. A hydropower asset whose civil life runs well beyond its licence has a terminal value that depends entirely on which side of the fifty per cent line the shareholding sits.

It is the most consequential and least discussed provision in Nepali energy investment. No ownership cap, no restriction on entry: what it does is attach a different exit to the same project depending on a shareholding percentage. The joint venture split with a Nepali partner is therefore a valuation decision as much as a governance one.

Local shares and transfers

Two Electricity Regulatory Commission directives sit over any change in a licensee’s ownership. The 2078 directive requires the Commission’s prior approval before an electricity company issues shares to the public. The 2077 directive governs mergers, acquisitions and share transfers by licensees. The Electricity Act separately requires Departmental approval for transfer of a licence.

A foreign investor should assume its Nepali shareholding cannot be reorganised quietly. Three consents may be engaged, at three institutions, for what is commercially one transaction.

One obligation is missing from this page. Hydropower companies are commonly required to offer shares to residents of the project-affected area, which is a large part of why the sector is so heavily retail-owned. That requirement appears in licence conditions and sector practice rather than in the Electricity Act, and we could not verify the percentage or the instrument imposing it. The gap is recorded in the flags and it is a real one. A foreign sponsor modelling dilution needs the number, and the number is not in the statute.

Sources

1. Foreign Investment and Technology Transfer Act, 2075 (2019)

   Government of Nepal, published by the Department of Industry · 2019 — in force, as amended · Tier 1 — Primary legal instrument

   Supports: The Schedule of restricted sectors and the absence of energy from it; section 11 on raising loans and issuing securities abroad with NRB and SEBON approval; section 12 on project loans from foreign financial institutions; section 15 seven-day decision; section 16 on convertible currency; section 17 approval thresholds; section 20 repatriation within 15 days; section 23 single stop service centre.

   Accessed 26 August 2026

2. Electricity Act, 2049 (1992) — English text

   Government of Nepal, published by the Department of Electricity Development · 1992 — in force · Tier 1 — Primary legal instrument

   Supports: Section 10 on ownership of structures at licence expiry and the 50% foreign investment line; section 11 royalty; section 12(7) customs concession and the deletion of sections 12(1) to 12(6).

   Accessed 26 August 2026

3. Hydropower Development Policy, 2058 (2001) — English text

   Government of Nepal, published by the Department of Electricity Development · 2001 — policy, not statute · Tier 2 — Official publication

   Supports: Paragraph 6.13.1 royalty table by capacity band and by domestic or export orientation; paragraph 6.11.2 government right to purchase up to 10% of an export project's output for domestic use; paragraph 6.12.11(2) licence terms; paragraph 6.5.1 transfer to the Government at expiry without compensation.

   Accessed 26 August 2026

4. Directive on prior approval and regulation of public issue of shares by electricity companies, 2078

   Electricity Regulatory Commission · Posted to the Commission's website 15 February 2026 · Tier 1 — Primary legal instrument

   Supports: The requirement of prior Commission approval for a public share issue by an electricity company.

   Accessed 26 August 2026

5. Income Tax Act 2058 (2002), section 11 [unofficial reproduction, nepallaws.com]

   Government of Nepal; text reproduced by Nepal Laws · 2002, as amended · Tier 6 — Professional or news source

   Supports: That section 11 provides full income tax exemption for ten years and 50% for a further five to a licensed person commencing commercial generation, transmission or distribution of hydro, solar, wind or biomass electricity by a stated Bikram Sambat deadline. Secondary reproduction; not verified against the Inland Revenue Department text.

   Accessed 26 August 2026

6. Foreign Investment and Foreign Loan Management Bylaw

   Nepal Rastra Bank · Consolidated English text published by the Bank · Tier 1 — Primary legal instrument

   Supports: Prior approval for foreign borrowing, the Schedule 10 sector list including energy, and the requirement that a foreign investor not be blacklisted by the Credit Information Bureau before repatriation is permitted.

   Accessed 26 August 2026