One of the resolutions among the many passed by the recently concluded conference of non-resident Nepalis (NRNs) was to explore collective investment opportunities and modalities for NRNs. Surely, what better time than to look for more money when local liquidity in the formal sector has dried up? If there is US$ 3 billion entering Nepal each year from remittance, and we can channel 10 percent of this money into investible funds, we are talking about US$ 300 million each year, which means enough money to fund a 150 MW hydro project every year.
However, when we try to examine the remittances and the voices that are raised for collective investment vehicles, it will be important to distinguish between “Bipalis” (bidhesiyeka Nepalis or Nepalis working abroad) and NRNs who probably can have another identity based on their country of domicile. When we talk about collective investments, it means examining how we can attract funds of Bipalis that comprise the bulk of the US$ 3 billion in remittance each year. For NRNs, there already exists vehicles that they are using for investment, and Sanima Bank and Sanima Hydropower are some of the existing success stories. It becomes very important, therefore, to understand whether the people advocating collective investments actually represent the NRN community or Bipalis.
Another fundamental that we need to understand is that Nepali laws do not recognize anything apart from mutual funds as collective investments, and there exists no laws regarding venture funds, private equity funds and other collective funds. Therefore, just having these funds coming in for mutual funds may be futile in the context of the money just having to be invested in public companies. Therefore, if we are to attract investments, then we also need to have different sets of regulatory mechanisms to allow different structures of funds. Perhaps, a Financial Services Commission as an overarching body to regulate such funds needs to be conceptualized and started. The current Securities Board can be upgraded to this entity like in India; or like in many other countries, a separate legal entity needs to be formed through a definitive act.
When we are talking about raising money from Bipalis, who are in a position to save a maximum Rs 500 to Rs 1,000 per month, we need to find mechanisms that will allow lowering the cost of administrating these collections. Research indicates that to collect every Rs 1,000, Rs 70 is spent in administration as we still do not allow movement of money online and through communication wires. If we are to tap the money of Bipalis, then we will have to ensure that we open up our laws relating to transfer of money online and through mobile networks. The central bank is doing its best to push this, but we need our lawmakers to understand that this is as important as fighting for the prime minister’s chair.
The other major impediment is the tax regime. In Nepal, collective investments have not come about as investing as an individual attracts only a 10 percent capital gains tax, while organized entities are taxed the usual 25 percent. To attract investments, we need to ensure that collective investments have a lower tax rate that will then only encourage people to move from individual investments to collective investments. Further, we also need to ensure that we have avoidance of double taxation agreements with most of the source countries of remittance so the money is not taxed twice. The major concern people raise is about exchange risks. When you have practically no interest on your forex accounts in the home countries, and in Nepal the deposit interest exceeds fluctuation risks, it is an indication of time to invest. Nepali currency will not delink from the Indian rupee in the near future, perhaps it will become a member of a larger South Asian monetary union. With the past decade seeing a practically low level of exchange fluctuation, this should be one risk one should take.
There could be perhaps two starting points for garnering money from Bipalis. First, the vehicle for investment has to be sponsored by a bank, or banks can come out with special accounts targeted at this segment. The Unity scam has scared a lot of Bipalis, and they would perhaps trust A class banks; and if Nepal Rastra Bank can step in to provide more comfort, that would be icing on the cake. Second, we need to allow stock splits where Rs 100 shares, mandated by our strange company law, are brought down to Rs 1 so that a blue chip share as of now will not cross the Rs 100 mark, which means for Rs 1,000, one can buy at least 10 shares of the best companies. This would, along with the central depository scheme (CDS), provide a good flow of money into our stock market.
We don’t need to do too many things to get money home, but the few things we need to do have to be done now, or else we will continue to discuss these problems at another conference.