Venture Capital Registration Procedure in Nepal

Introduction

Venture capital (VC) is an emerging financing model in Nepal that promotes entrepreneurship, innovation, and economic development. It involves investment in startups and early-stage businesses with high growth potential in exchange for equity. Venture capital firms provide both funding and strategic guidance to help businesses scale.

In Nepal, the venture capital ecosystem is governed primarily by the Securities Act, 2063 (2006), the Securities Registration and Issue Regulations, 2073 (2016), and the Securities Board of Nepal (SEBON) Venture Capital Fund Regulations, 2075 (2018).

Venture capital companies are required to register with the Securities Board of Nepal (SEBON) and operate under its regulatory framework. This ensures transparency, investor protection, and proper fund management.

This article provides a comprehensive explanation of the venture capital registration procedure in Nepal, outlining the required documents, regulatory provisions, and step-by-step process for registration and operation. Medha Law and Partners Is a leading law firm in Nepal.

Legal Framework for Venture Capital in Nepal

The establishment and operation of venture capital firms in Nepal are regulated under the following laws:

• Securities Act, 2063 (2006) – Governs securities transactions and authorizes SEBON to regulate venture funds.

• Venture Capital Fund Regulations, 2075 (2018) – Specifies registration requirements, fund structure, investment limits, and reporting obligations.

• Company Act, 2063 (2006) – Provides procedures for incorporation of the venture capital management company.

• Foreign Investment and Technology Transfer Act (FITTA), 2019 – Regulates foreign investors participating in venture capital funds.

• Income Tax Act, 2058 (2002) – Governs taxation applicable to venture capital income and distributions.

These laws collectively establish the foundation for the creation, registration, and regulation of venture capital firms and funds in Nepal.

Structure of Venture Capital in Nepal

Under Nepalese law, a venture capital setup consists of:

1. Venture Capital Management Company (VCMC) – A company established under the Company Act that manages and operates the fund.

2. Venture Capital Fund (VCF) – A pooled investment vehicle managed by the VCMC, registered under SEBON regulations.

3. Investors or Limited Partners (LPs) – Individuals or institutions contributing to the fund.

4. Portfolio Companies – Startups or enterprises receiving investment.

The management company acts as a General Partner (GP), handling fund administration, while investors are passive participants.

Types of Venture Capital Entities

According to SEBON regulations, venture capital entities can be categorized as:

• Domestic Venture Capital Firms – Fully owned and funded by Nepali investors.

• Foreign Venture Capital Firms – Foreign investors investing under FITTA approval.

• Hybrid Venture Funds – Funds involving both domestic and foreign partners.

The type determines the approval authority, required capital, and compliance obligations.

Step 1: Incorporation of Venture Capital Management Company

The first step is to establish a Venture Capital Management Company (VCMC) under the Company Act, 2063. This company will manage one or more venture funds.

Documents required:

• Application to the Office of the Company Registrar (OCR).

• Memorandum of Association (MoA) and Articles of Association (AoA).

• Citizenship copies of promoters/directors.

• Office address proof.

• Capital deposit proof (minimum NPR 50 million, as per SEBON regulations).

• Power of attorney (if applicable).

Once the company is incorporated, it receives a Certificate of Incorporation, enabling it to apply to SEBON for venture capital registration.

Step 2: Application to SEBON for Venture Capital Registration

The VCMC must submit an application to SEBON under Rule 3 of the Venture Capital Fund Regulations, 2075 for registration.

Documents required:

• Application form as prescribed by SEBON.

• Certificate of incorporation of VCMC.

• Company MoA and AoA.

• Business plan and fund management strategy.

• Details of promoters, directors, and fund managers.

• Evidence of paid-up capital and bank statement.

• Draft venture capital fund trust deed.

• Operational manual outlining investment policy, risk management, and governance.

• Fee payment receipt.

Step 3: Review and Evaluation by SEBON

After receiving the application, SEBON reviews all documents to ensure compliance with legal requirements.

Evaluation focuses on:

• Financial capacity of the promoters.

• Experience of fund managers.

• Governance and risk control systems.

• Compliance with SEBON guidelines and company law.

SEBON may request clarification, additional documentation, or modifications to the fund structure before approval.

Step 4: Approval and Issuance of Venture Capital License

If satisfied, SEBON grants Venture Capital Fund Registration Approval. The license allows the VCMC to manage venture capital funds in Nepal.

The license specifies:

• Name and address of the management company.

• Authorized fund size.

• Duration of validity.

• Reporting and compliance obligations.

The firm must display the license at its registered office and mention it in official communications.

Step 5: Registration of Venture Capital Fund

After obtaining SEBON approval, the VCMC registers the Venture Capital Fund (VCF) by submitting:

• Fund trust deed.

• List of investors (Limited Partners).

• Details of fund objectives, investment sectors, and portfolio structure.

• Custodian and auditor details.

The fund must maintain a separate legal identity and operate under SEBON’s supervision.

Step 6: Fundraising and Investor Subscription

Once registered, the VCF can raise capital from investors.

Rules for fundraising:

• Minimum fund size: NPR 150 million.

• Investors can include individuals, financial institutions, or corporations.

• Each investor’s contribution and rights must be defined in the Fund Trust Deed.

• Public advertisement for fundraising requires SEBON’s prior approval.

Funds are typically raised through private placements.

Step 7: Investment Approval and Execution

The VCMC invests the pooled funds in eligible companies. Under SEBON regulations, investments are limited to:

• Private companies incorporated in Nepal.

• Early-stage startups and SMEs.

• Innovative enterprises with high growth potential.

• Sectors approved by SEBON, such as technology, manufacturing, renewable energy, and agriculture.

Each investment must follow the Investment Policy approved during fund registration.

Step 8: Reporting and Compliance Obligations

Venture capital firms must submit regular reports to SEBON, including:

• Quarterly financial statements.

• Annual audited accounts.

• Portfolio performance reports.

• Investor updates and fund utilization reports.

They must also comply with:

• Anti-Money Laundering (AML) and Know Your Customer (KYC) standards.

• Tax filings under the Income Tax Act, 2058.

• Annual renewal of SEBON license.

Step 9: Exit Mechanisms and Fund Termination

Exit from investments may occur through:

• Sale of shares to strategic investors.

• Public listing through IPO.

• Buyback by founders or third parties.

At the end of the fund’s tenure, assets are liquidated and proceeds are distributed to investors as per the Fund Trust Deed.

Fund termination must be reported to SEBON with audited closure accounts.

Documents Required for Venture Capital Registration in Nepal

• Application to SEBON.

• Incorporation certificate of VCMC.

• MoA and AoA of the company.

• Details of directors and promoters.

• Fund management plan.

• Investment policy and governance framework.

• Fund trust deed.

• Custodian and auditor details.

• Bank statement showing paid-up capital.

• SEBON application fee receipt.

Key Regulatory Bodies for Venture Capital in Nepal

1. Securities Board of Nepal (SEBON) – Main regulatory body overseeing registration, licensing, and supervision.

2. Office of the Company Registrar (OCR) – Registers venture capital management companies.

3. Nepal Rastra Bank (NRB) – Approves foreign investment inflows and repatriation of profits.

4. Inland Revenue Department (IRD) – Regulates taxation of venture income and investor returns.

5. Investment Board Nepal (IBN) – Approves large-scale foreign venture investments exceeding the prescribed limit.

Taxation of Venture Capital Funds in Nepal

Under the Income Tax Act, 2058, venture capital firms are taxed on their profits, while investors are taxed on distributions.

• Venture capital funds may enjoy capital gains tax exemptions on long-term investments.

• Dividends distributed to investors are subject to withholding tax.

• Foreign investors must comply with double taxation avoidance agreements (DTAAs) where applicable.

Foreign Venture Capital Registration under FITTA, 2019

Foreign venture capital firms must obtain prior approval under the Foreign Investment and Technology Transfer Act (FITTA), 2019.

Documents required:

• Application to the Department of Industry (DoI).

• Investment proposal and fund plan.

• Incorporation documents of foreign firm.

• Details of capital inflow and ownership structure.

• Technology transfer or management agreement.

Approval from the Nepal Rastra Bank is required for fund remittance and profit repatriation.

Benefits of Venture Capital Registration in Nepal

• Legal recognition under SEBON regulations.

• Eligibility to raise funds from institutional investors.

• Access to tax benefits and government incentives.

• Enhanced investor confidence and transparency.

• Ability to invest in diverse high-growth startups.

Penalties for Non-Compliance

Operating without SEBON registration violates the Securities Act, 2063, leading to:

• Revocation of fund activities.

• Monetary penalties.

• Blacklisting of management company.

• Criminal prosecution for unauthorized securities operation.

Frequently Asked Questions (FAQs)

Q1: Which authority registers venture capital firms in Nepal?
A1: The Securities Board of Nepal (SEBON) is responsible for registering and regulating venture capital firms under the Venture Capital Fund Regulations, 2075.

Q2: What is the minimum capital requirement for venture capital companies?
A2: A venture capital management company must have a minimum paid-up capital of NPR 50 million, as specified by SEBON.

Q3: Can foreign investors participate in venture capital funds in Nepal?
A3: Yes. Foreign investors can invest through FITTA approval and SEBON registration, subject to compliance with NRB regulations on capital inflows.

Q4: What are the permitted sectors for venture capital investment?
A4: SEBON allows investment in sectors like technology, fintech, agriculture, manufacturing, renewable energy, and startups with innovation potential.

Q5: What is the validity period of a venture capital license?
A5: The SEBON-issued venture capital license remains valid until revoked, subject to annual compliance and renewal filings.

Q6: How are venture capital profits taxed in Nepal?
A6: Profits earned by venture capital firms are taxed under the Income Tax Act, while investor distributions are subject to withholding tax at applicable rates.