The Securities Board of Nepal has issued the Specialised Investment Fund Regulation 2019, allowing investment companies to mobilise alternative investment like private equity funds, venture capital funds and hedge funds.

The provision is expected to help promote capital formation by domestic and foreign investors in new businesses, according to the board. Under the provision, firms working as fund managers and having a paid-up capital of Rs20 million are eligible to mobilise these newly introduced funds in the domestic market.

Investment firms like Business Oxygen, Dolma Impact Fund and Safal Partners, among others, have been operating such funds; and a number of online shopping platforms have also been engaged in the business. But there is no separate law to regulate such investments.  

Niraj Giri, spokesperson for the Securities Board, said the board had issued the regulation to streamline fund managers who are already mobilising such funds in the domestic market. “It will also help investors who are willing to take risks for a high rate of return,” Giri said.

The regulation has been issued in the run-up to the Nepal Investment Summit slated for March 29-30, and is expected to attract foreign investors too.

Under the new regulation, firms having a fund size of a minimum of Rs150 million can get permission to mobilise alternative investments. The fund manager needs to maintain a minimum 2 percent stake in the fund.

The Securities Board has set a lock-in period of one year. This means that investors cannot take out their money from the pool for one year. In addition, there should not be more than 200 investors, and each investor needs to purchase stake of at least Rs5 million.

Firms involved in the management of venture capital and private equity raise pools of capital to invest in private companies. Such funds help manage the money of investors who seek private equity stakes in startup businesses and small and medium enterprises.

While venture capital funds finance and mentor newly started businesses, private equity funds offer a large stake in the total pool to invest in established companies. Private equity funds mainly focus on the long-term investment portfolio of companies.

Hedge funds invest in businesses which have a notable degree of risks. Such investments are made in highly liquid assets such as shares, bonds, derivatives, currencies and arbitrage. It is also an insurance like mechanism that helps to mitigate the risk of additional liability arising from fluctuations in foreign exchange rates. Giri said the board would be enforcing a separate guideline for the management of hedge funds.