Everything on Nepal’s Alternative Development Finance

Save the brevity for the restroom. Everywhere else, we need substance and depth.
– Justifying this long long kahani

Legal Architecture, Fiscal Risk, Institutional Design, Capital-Market Readiness and Comparative Practice. This report treats the Vaikalpik Bikas Bitta Parichalan Ain, 2082 (Alternative Development Finance Mobilization Act, 2082) as passed by the House of Representatives of Nepal’s Federal Parliament and awaiting completion of the remaining legislative/enactment steps through the upper house. 

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How to Read This Report

This report is deliberately long and dense. It is intended to operate as a working research paper, not a short summary note. It draws on the full text of the ADF Act, 2082 as passed by the House of Representatives; two prior analytical assessments (Alternative Development Finance Bill and Some Pointers for ADF Bill); structured legal research across NRB directives, securities laws, banking laws, foreign investment laws, public debt management frameworks, institutional mandates, macroeconomic surveys, and commercial bank annual reports; and comparative analysis of peer-country development finance institutions. All NPR figures are primary, with approximate USD equivalents in parentheses at an average reference rate of NPR 133/USD unless stated otherwise.

It uses the following conventions throughout:

Abbreviation	Full form
ADF Bill / Bill / Act	Vaikalpik Bikas Bitta Parichalan Ain, 2082 (Alternative Development Finance Mobilization Act, 2082)
ADF Fund / Fund	The Alternative Development Finance Fund proposed under Sections 6–7 of the Act
Government	Government of Nepal, unless context requires otherwise
MoF	Ministry of Finance
PDMO	Public Debt Management Office
IBN	Investment Board Nepal / Office of the Investment Board
NIFRA	Nepal Infrastructure Bank Limited
SEBON	Securities Board of Nepal
NRB	Nepal Rastra Bank
BFIs	Banks and financial institutions
BOOT/BOT	Infrastructure assets under concession arrangements where assets or operating rights transfer back to the State

Note: This is only a legal and financial analytical document and therefore when the final version of the subordinate rules/directives under this Act comes unfolding, the content and interpretation of this research might need updating accordingly. 

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Executive Summary

Core Thesis

Nepal’s development-finance problem is not simply that the State lacks institutions. Nepal already has the Cabinet, Ministry of Finance, line ministries, NRB, PDMO, SEBON, IBN, Department of Industry, NIFRA, HIDCL, commercial banks, insurance companies, provident funds, pension funds, securities-market intermediaries, and public enterprises. The real problem is that these institutions perform separate fragments of the development-finance chain. They approve projects, regulate markets, allocate budgets, direct bank credit, issue sovereign debt, supervise BFIs, or facilitate PPPs – but they do not together create a single platform that can pool long-term capital, structure project-level instruments, provide credit enhancement, mobilize remittance and institutional savings, issue project-linked securities, recycle assets, and monitor resulting fiscal risk.

The ADF Act attempts to fill that missing layer. It proposes an autonomous statutory Fund with legal personality, NPR 1 kharba authorized capital (~700M$), NPR 25 arba paid-up capital (~175M$), initial 51% Government ownership, and participation by retirement funds and insurance companies. The Fund is empowered to mobilize finance through project-specific financial instruments, bonds, equity, debt, mixed financial instruments, guarantees, guarantee funds, investment funds, remittance funds, asset monetization and fund-of-funds structures (ADF Act, Sections 3, 6–9). It can invest in selected national-priority infrastructure and productive-sector projects using equity, loans, mixed debt-equity structures, and specific guarantees (ADF Act, Section 24). It can recommend Government or International Financial Institution guarantees for eligible projects and must report Government guarantees to PDMO within fifteen days (ADF Act, Section 27(5)). 

The core conclusion of this report is: The ADF Fund is institutionally justified because Nepal’s existing architecture can approve, regulate and coordinate infrastructure projects, but cannot adequately mobilize, de-risk, securitize and recycle long-term development capital. However, the ADF design is high-risk unless Nepal simultaneously builds a second-layer regulatory architecture for: 

• public debt reporting – through PDMO
• guarantee pricing – through MoF and NRB
• NRB prudential treatment – thought NRB
• SEBON instrument rules, finite-life infrastructure disclosure, trustee framework – though parliamentary actions and SEBON
• FX hedging – through MoF, NRB and commercial banks
• tax pass-through – through IRD and MoF
• SPV governance through parliamentary action and oversight.

Key Macro Finding

Nepal’s infrastructure financing constraint is not a shortage of savings. The banking system holds approximately NPR 7.78 trillion (~$58.6B) in deposits. Annual remittances are now in the range of NPR 1.3–1.5 trillion (~$9.8B–$11.3B) – roughly 25–28% of GDP. Institutional investors (EPF, CIT, SSF, insurance companies) manage approximately NPR 1.0–1.2 trillion (~$7.5B–$9.0B). The constraint is the absence of instruments, intermediaries, and regulatory frameworks to channel these pools toward 20‑to‑30‑year infrastructure investment. ADF is designed to create that architecture.

Why ADF Is Being Proposed

The Act’s own statement of objects and reasons says Nepal needs a law covering project identification, prioritization, domestic resources, domestic and foreign investment, financial instruments, institutional structure, monitoring and evaluation for alternative development finance. The conceptual note states that various studies estimate Nepal will require more than NPR 100 kharba (~$75.2 B) in investment over the coming decade, while historical annual infrastructure investment has been only around NPR 2–3 kharba (~$1.5B). The following macro indicators from the research base support this logic:

Indicator	Value	Significance
Estimated infrastructure need (decade, annual)	NPR 10 kharba/year (~USD 7.5 billion)	Scale mismatch with ordinary budget and bank finance
Actual annual infrastructure investment (historical)	NPR 2–3 kharba (~USD 1.5B)	Leaves NPR 5–6 kharba annual gap
Public debt (domestic + external)	~43–44% of GDP	Constrains additional sovereign borrowing
Trade deficit (FY 2024/25)	~NPR 1,527.09 billion (~USD 11 billion)	Supports focus on productive infrastructure, SEZs, dry ports
Export-import ratio	~15.4%	Indicates structural external imbalance
Foreign exchange reserves	~USD 21.52 billion / 17.4 months import cover	Capital available but not in productive long-term form
FDI realization rate	~15.7% of approved commitments	Approval ≠ investment realization
Energy financing gap	~USD 46.5 billion	Sector-specific ADF need
Urban infrastructure requirement	~USD 19.47 billion	Multi-sector ADF need
Banks’ deposit structure	Mostly short/medium-term	Structural mismatch with 20–30 year infrastructure

Numbers are figures drawn from NRB/PDMO annual reports.

What ADF Is Not

To avoid design misuse, five misconceptions must be dispelled about the ADF:

1. Not an investment-approval authority replacing IBN. IBN remains the major project approval, facilitation and PPP authority for large projects. ADF is a finance-mobilization platform.
2. Not a bank replacing commercial banks or specialized finance institutions like NIFRA / HIDCL. It is not a conventional deposit-taking BAFIA institution. It should coordinate with NIFRA, HIDCL and BFIs.
3. Not a substitute for public debt discipline. If it uses Government guarantees or sovereign-like instruments, sovereign fiscal risk emanating from such instruments must be reported by MoF.
4. Not a solution to all infrastructure problems. It cannot solve land acquisition, procurement delay, environmental clearance, tariff design, offtake risk or project readiness unless its rules expressly build project-preparation and coordination tools.
5. Not a vehicle for socially desirable but commercially unviable projects. Section 5 excludes projects with low estimated financial return and projects unable to provide collateral. This is a decisive design choice: ADF is aimed at bankable or credit-enhanceable projects, not entirely grant-funded public goods / service sector.

The Most Important Legal Tension

The ADF Act creates a Fund that is legally separate from Government, but economically and politically close to Government. It has: initial Government majority ownership (51%); MoF Secretary as Chair; Cabinet power to change capital and reduce/share ownership subject to limits; Cabinet direction power; Government guarantee pathway; Government-security-like treatment for approved ADF bonds; Auditor General audit; mandatory reporting to MoF; Government as plaintiff for the offences under ADF; and possible Government implicit obligations arising from heavy involvement of the government.

This creates a fundamental classification tension: ADF debt may not be direct sovereign debt unless Government borrows or guarantees it; but ADF debt can still become public-sector fiscal risk because of Government ownership, policy mandate, statutory privileges, implicit support expectations and Government-equivalent instrument treatment.

International fiscal practice supports this caution. IMF public sector debt guidance emphasizes comprehensive reporting of public-sector debt statistics, including debt of public corporations and contingent liabilities where relevant. IMF guidance on guarantees similarly stresses that government guarantees and other contingent liabilities can materially change the fiscal position when they crystallize. World Bank/IMF PPP fiscal-risk materials warn that long-term PPP obligations can appear affordable in the short term because their budget impact is delayed, but later become fiscal obligations through guarantees, availability payments (e.g. Minimum Guaranteed Revenue), termination compensation and other contingent commitments. 

Legal Alert – Quasi-Sovereign Instrument Risk

Section 30(2) of the ADF Act extends government-security-like listing and trading treatment to ADF instruments even when issued without a government guarantee. Without clear NRB risk-weight classification, SEBON disclosure rules, and PDMO contingent-liability reporting, this provision risks creating implicit fiscal obligations invisible on the government’s balance sheet.

Priority Recommendations

The ADF Fund should proceed only with an integrated reform package:

1. Public debt / PDMO: Mandatory classification of ADF liabilities into direct Government debt, Government-guaranteed debt, ADF own debt, ADF own guarantees, SPV debt and implicit fiscal-risk exposures.
2. Guarantee framework: Guarantee fees, expected-loss provisioning, exposure ceilings, Cabinet/MoF approval, PDMO recording, and annual parliamentary reporting.
3. NRB: Risk weights, SLR eligibility, directed-sector lending treatment, exposure limits, reporting formats, foreign borrowing approvals and hedging rules.
4. SEBON/NEPSE/CDS: Project-bond rules, hybrid instrument rules, ADF instrument risk labels, debenture trustee strengthening, secondary-market trading rules and finite-life infrastructure listing categories.
5. BOOT / investor protection: No ordinary retail listing of finite-life concession equity without concession-life disclosure, terminal-value modelling, sinking fund/buyback/redemption mechanism and separate trading classification.
6. FX / foreign investment: Clear route for foreign investment into ADF and SPVs, foreign loan approval, offshore issuance, repatriation, foreign-currency accounts and long-tenor hedging.
7. Tax: Withholding, pass-through, tax-exempt institutional investors, green instrument concessions, VAT leakage, treaty application and fund-level taxation rules.
8. Governance: Independent investment committee, project appraisal policy, conflict-of-interest register, public project disclosure portal, audit/risk committees, external evaluation, related-party rules and anti-corruption safeguards.

Specifically: (1) NRB must classify ADF instruments by risk weight and SLR eligibility before first issuance; (2) SEBON must prescribe project-bond, hybrid-instrument, and concession-company listing rules before any public offering; (3) PDMO must incorporate contingent liability reporting of GON’s exposure due to its guarantees on ADF’s instruments or ADF’s recommendation; (4) Section 54 must be qualified to require written directives consistent with the Fund’s investment mandate; (5) The ADF Board must publish its Investment Policy Statement before deploying any capital.

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Chapter 1: The Sovereign Development Finance Problem in Nepal

1.1 Development Finance Is a Sovereign Function, but Not Necessarily a Budget-Only Function

Every sovereign country must decide how to finance public and quasi-public development assets: energy, transmission, roads, airports, irrigation, urban infrastructure, digital infrastructure, industrial zones, dry ports, water systems and productive industrial capacity. Historically, Nepal has relied on a combination of annual budget allocation, foreign aid, concessional loans, direct sovereign borrowing, project-specific donor loans, commercial bank lending, hydropower equity raising, PPPs and foreign direct investment.

That model has delivered some progress, but it has several structural limits:

1. Budget constraint: Capital expenditure competes with recurrent expenditure, social spending, transfers and debt service.
2. Execution constraint: Even when capital budgets are allocated, projects often suffer from procurement, land, forest, environmental, contractor and coordination delays.
3. Banking constraint: Commercial banks use mostly short and medium-term deposits to fund credit; they are not designed to carry very long-tenor project risk in unlimited amounts.
4. Public debt constraint: Direct sovereign borrowing increases debt stock, debt service and fiscal risk.
5. Capital-market constraint: Nepal’s securities market has ordinary equity/debenture tools but lacks deep project bond, securitization, hybrid and finite-life infrastructure investor-protection frameworks.
6. FX constraint: Foreign borrowing for rupee-revenue infrastructure creates currency mismatch unless hedged.
7. Institutional fragmentation: Line ministries, IBN, NRB, PDMO, SEBON, DOI, NIFRA, HIDCL each hold partial authority, but none holds the entire finance-mobilization toolkit.

The ADF Act is a response to this mismatch. Its preamble states that alternative development finance is needed because the country must mobilize resources for high-return sustainable infrastructure and national-priority development projects through bonds, equity funds and other financial tools.

1.2 The Scale of the Infrastructure Gap

The Act’s own Sidhantik Awadharna (Theoretical Concept) states that studies have assessed Nepal’s infrastructure investment requirement at more than NPR 100 kharba (NPR 10 trillion; ~USD 75.2 billion) over the coming decade, while historical infrastructure investment has stood at only NPR 2–3 kharba per year (~USD 1.5–2.3 billion) (ADF Act, 2082, Theoretical Concept Statement).

Metric	Approximate Value	Source
Annual infrastructure investment need (decade-average)	NPR 10 kharba/year (~USD 7.5 billion)	ADF Act, 2082, Theoretical Concept
Actual annual infrastructure investment (historical)	NPR 2–3 kharba (~USD 1.5–2.3 billion)	ADF Act, 2082, Theoretical Concept
Annual financing gap	NPR 7–8 kharba (~USD 5.3–6 billion)	Derived
Federal capital expenditure budget (FY 2081/82)	~NPR 3.5 kharba (~USD 2.6 billion)	MoF Budget FY 2081/82
Capital expenditure execution rate (historical avg.)	~60–70% of budgeted	NRB Annual Reports, multiple years
Actual annual federal capital spend (estimated)	~NPR 2–2.5 kharba (~USD 1.5–1.9 billion)	Derived
Government 40,000 MW electricity target	Requires billions in energy investment alone	ADF Act, Theoretical Concept
Nepal GDP (FY 2081/82, estimated)	~NPR 5.5–6 trillion (~USD 41–45 billion)	NRB Macroeconomic Reports 2024–25
Public debt (domestic + external)	~43–44% of GDP	NRB Annual Report 2023/24; PDMO Annual Report

This financing gap should be understood in four distinct dimensions:

Type of gap	Meaning	Why ADF matters
Funding gap	The amount required exceeds annual budgetary and donor-funded resources	ADF can mobilize non-budget sources through instruments and funds
Financing-structure gap	Projects need long-tenor, risk-allocated, blended instruments rather than ordinary short-term loans	ADF can provide guarantees, project bonds, mixed instruments and fund structures
Bankability gap	Economically useful projects may not be financially bankable without guarantees, VGF, tariff reform or credit enhancement	ADF can help only if its rules allow credit enhancement and coordination with VGF/guarantees
Institutional gap	Existing institutions approve and regulate but do not pool/project-structure capital	ADF is designed as a dedicated mobilization platform

The government’s Sixteenth Plan targets 40,000 MW of electricity generation. Nepal’s current installed capacity stands at approximately 4,500 MW, requiring a tenfold increase – at a cost of hundreds of billions of rupees in generation, transmission, and distribution infrastructure alone. Additional demands flow from urban infrastructure, SEZs and industrial parks, tourism infrastructure, railway connectivity, and large-scale irrigation systems.

1.3 Why the Budget Cannot Solve the Problem

Nepal’s federal budget has consistently failed to translate capital allocations into actual spending:

Budget under-execution: Nepal’s federal capital expenditure execution has historically run at 60–70% of allocation. In several fiscal years, more than 40–50% of the annual capital budget has been executed in the final two months (Ashadh and last days of Jestha), generating poor-quality expenditure and procurement irregularities.

Structural fiscal limits: Nepal’s public debt trajectory – rising from approximately 22% of GDP in FY 2069/70 to approximately 43–44% of GDP by FY 2081/82 – limits further sovereign borrowing space without fiscal consolidation (PDMO Annual Reports; NRB Annual Reports). The IMF’s debt sustainability threshold for lower-middle-income countries (60% of GDP as general benchmark) provides some headroom, but trajectory matters as much as level.

Revenue growth constraints: Nepal’s tax-to-GDP ratio has improved but remains limited by a narrow formal sector base, large informal economy, and dependence on trade taxes. Value Added Tax and customs duties are the largest contributors; direct tax compliance is improving but from a low base.

The remittance paradox: Nepal’s economy is fundamentally remittance-dependent. Annual remittance inflows have surged to over NPR 1.45 trillion (~USD 10.15 billion) in the first eight months of FY 2025/26, annualizing to approximately NPR 2.17 trillion (~USD 15.2 billion) for the full year. However, the overwhelming majority flows into consumption (>80% of total), housing construction, and household savings – not productive infrastructure investment. Nepal is thus awash in foreign exchange receipts while structurally deficient in instruments to convert those receipts into long-term capital.

1.4 Why Bank Credit Cannot Bridge the Gap

Nepal’s banking system is the country’s dominant financial sector. As of FY 2082/83 (mid-January to mid-March 2026):

Banking System Metric	Approximate Value	Source
Total Class A commercial bank assets	~NPR 7.47–7.95 trillion (~USD 50.5–53.8 billion)	NRB Banking Statistics Poush 2082
Total deposits (banking system)	~NPR 7.72–7.95 trillion (~USD 52.3–53.8 billion)	NRB Banking Statistics Poush 2082
Total credit (banking system)	~NPR 5.79–5.87 trillion (~USD 39.2–39.8 billion)	NRB Banking Statistics Poush 2082
Number of Class A commercial banks	20	NRB, Bank Supervision Report
Average capital adequacy ratio (Class A)	~12.5–12.9% (minimum: 11%)	NRB Annual Reports
Hydropower sector bank exposure	Significant – ~10% priority sector target; NRB flagged concentration risk	NRB Bank Supervision Reports
CD Ratio (banking system)	~74–75%	NRB Banking Statistics Poush 2082
NPL ratio (BFIs)	~5.4%	NRB Banking Statistics Poush 2082

Individual bank balance sheets from annual report (FY 2081/82) materials illustrate the scale: Global IME assets ~NPR 688.08 billion, deposits ~NPR 575.05 billion, loans ~NPR 440.62 billion; Nabil assets ~NPR 557.02 billion, loans ~NPR 385.72 billion; NIMB assets ~NPR 492 billion, loans ~NPR 305 billion; Rastriya Banijya Bank assets above NPR 500 billion. CAR ratios are generally above minimum requirements, but NPL pressures vary, with some banks reporting NPLs above 4–5%.

The structural limitations of bank-led infrastructure finance:

Constraint	Explanation	Regulatory Reference
Maturity mismatch	Bank deposits are overwhelmingly 1–5 year tenor; infrastructure requires 15–30 year capital	NRB Unified Directive 2 – restructuring provisions acknowledge this tension
Sector concentration	Banking system already heavily exposed to hydropower; further concentration raises systemic risk	NRB Capital Adequacy Framework (Directive 1) – sector concentration risk
Capital constraints	Must maintain 11% CAR; large infrastructure loans consume substantial capital	NRB Directive 1, Basel III-aligned capital framework
Priority sector mandates already stretched	Banks must satisfy 10% agriculture + 20% combined priority cluster; additional demands create compliance strain	NRB Unified Directives, Priority Sector Schedule (FY 2082)
Project appraisal limitation	Banks are credit-appraisal, not project-development institutions	BAFIA, 2073, Section 49 – defined functions
No secondary market exit	Banks cannot easily securitize or sell infrastructure loans; no takeout finance	Securities Act, 2063; SEBON regulations
Rate of return compression	NRB rate spread caps, priority sector concession rates reduce infrastructure lending margins	NRB Interest Rate Directive

Importantly, NRB’s directed lending framework – requiring 10% agriculture and 20% combined priority sector targets – has successfully channeled bank credit into hydropower, but this model faces three escalating constraints: (1) Nepal’s banking system is now arguably over-concentrated in hydropower; (2) the maturity mismatch problem is structural, not addressable through regulation alone; and (3) sectors without PPA-backed revenue streams (roads, urban infrastructure, railways) are fundamentally ill-suited to deposit-funded bank lending.

1.5 Why Public Debt Has Structural Limits

The Public Debt Management Act, 2079 (Repealed Rastriya Rin Ain, 2059) provides the legal framework for government borrowing. Section 14 authorizes the government to provide sovereign guarantees for borrowings by public institutions for infrastructure projects. The Regulations (Rule 36) require guarantee proposals to be reviewed by a Guarantee Recommendation Committee and cap total guarantees at 1% of the previous fiscal year’s GDP – approximately NPR 55–60 billion (~USD 414–451 million) annually at current GDP levels.

This cap is operationally binding for large infrastructure: a single large hydropower project (say, 500 MW at USD 800–1,000/kW = USD 400–500 million) could consume the entire annual guarantee headroom. If ADF guarantees are counted against this ceiling, the Fund’s guarantee capacity is severely constrained for large projects.

Additionally, Nepal’s external debt composition creates currency risk: dollar-denominated bilateral and multilateral loans expose the government to NPR depreciation risk on debt service.

1.6 The Institutional Investor Paradox

Nepal’s institutional investors collectively manage assets of approximately NPR 700–900 billion (~USD 5.3–6.8 billion):

Institutional Investor	Estimated AUM	Investment Constraints
Employees’ Provident Fund (EPF)	~NPR 563–571 billion (~USD 3.8–3.9 billion)	Primarily government securities, bank deposits, equity; NPR 87.8B in hydropower, NPR 61B in stock market; recent gov’t expansion to mutual funds
Citizen Investment Trust (CIT)	~NPR 298 billion (~USD 2.0 billion)	Government securities, bank deposits, equity; NPR 145B in fixed deposits, NPR 31.68B in shares, NPR 26.31B in term loans
Social Security Fund (SSF)	~NPR 102.5 billion (~USD 0.69 billion)	Government securities, bank deposits, mutual funds;
Life insurance companies (total)	~NPR 845 billion (~USD 5.7 billion)	Regulatory investment restrictions; limited access to infrastructure instruments

These institutions have long investment horizons, stable liability profiles, and natural affinity for long-duration instruments – exactly the characteristics that make them ideal infrastructure investors. Yet they are structurally under-invested in infrastructure. The reason is not unwillingness but the absence of appropriately structured, liquid, rated, and regulatory-approved infrastructure instruments. EPF and CIT have both sought infrastructure investments but face a systemic problem: there are no NPR-denominated, rated, secondary-market-tradeable, infrastructure-linked bonds available in Nepal’s market. ADF’s government-backed bond instruments (Section 30) are designed to solve precisely this problem.

1.7 The Capital Market Development Gap

Nepal’s capital market is growing but remains overwhelmingly retail-oriented and equity-focused:

• Equity market: NEPSE market capitalization has grown substantially, with significant retail investor participation. However, the market is dominated by hydropower, banking and insurance sector stocks; infrastructure companies (non-hydro) are non-existent and real sector industries are a minority.
• Bond market: Nepal’s domestic bond market is thin. Government securities dominate; corporate debentures exist but volumes are modest and secondary market trading is limited.
• Infrastructure instruments: Project bonds, green bonds, InvITs, REITs, and securitized instruments do not currently exist in Nepal.
• Secondary market liquidity: CDSC handles equity settlement efficiently, but secondary market trading in fixed-income instruments is limited and lacks market-maker infrastructure.

1.8 Nepal’s Problem Is Not Only Finance Scarcity: Execution and Absorptive Capacity

We should not be arguing that ADF alone will solve the infrastructure gap. Nepal’s constraints include weak capital expenditure execution, FDI approval-realization gaps (realization at only ~15.7% of approved commitments), project-readiness issues and implementation bottlenecks. If the country cannot prepare, procure, clear, acquire land for, financially close and monitor projects, ADF may accumulate capital but fail to deploy it safely.

Key Alert – Finance Is Necessary But Not Sufficient: If ADF mobilizes large capital without a project-preparation, due-diligence and implementation-monitoring architecture, it may become a warehouse of liquidity or a politically driven credit allocator rather than a development finance institution.

Comparative practice supports this point. Indonesia’s PT Sarana Multi Infrastruktur (PT SMI) was established as a Ministry of Finance special mission vehicle to address both infrastructure financing and project readiness mismatches. Indonesia also uses the IIGF (PT Penjaminan Infrastruktur Indonesia) as a dedicated guarantee vehicle for PPP risk allocation. This suggests ADF should not only raise money; it must also interface with project preparation, fiscal risk and guarantee frameworks.

Key Finding – The Structural Gap: Nepal’s infrastructure financing challenge is fundamentally a structural mismatch: long-term infrastructure capital needs face short-tenor banking deposits; project finance needs face collateral and personal guarantees heavy bank lending; foreign capital needs face FX/repatriation uncertainty; domestic savings face weak capital-market instruments; public investment needs face budget execution limits; PPP pipelines face financial close bottlenecks; institutional investors face a lack of investable infrastructure instruments. The ADF Fund is designed to address each of these mismatches through a statutory instrument toolkit.

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Chapter 2: Conceptual Framework – Traditional Finance, Alternative Finance and Alternative Development Finance

2.1 The Definitional Landscape

The ADF Act, 2082 defines “alternative development finance” (vaikalpik bikas bitta) by reference to its mobilization mechanisms under Section 3 – a functional rather than conceptual definition. Before the detailed legal analysis, it is essential to establish what ADF is conceptually, how it differs from ordinary alternative finance, and why the distinction matters for Nepal’s legal architecture.

Concept	Definition	Nepal Context
Traditional public finance	Budget appropriations (tax and non-tax revenues), grants, sovereign borrowing (domestic + external), donor concessional loans	Annual federal budget, Development Bonds, ADB/World Bank project loans
Traditional bank finance	Commercial bank loans, consortium lending, priority/directed sector credit	Class A–C BFI lending to hydropower, roads, agriculture under NRB direction
Alternative finance	Capital market instruments, structured products, blended finance, credit enhancement, institutional capital mobilization	Corporate debentures on NEPSE; SIF-regulated PE funds; SEBON mutual funds
Alternative development finance	Alternative finance specifically directed toward development/infrastructure/national-priority projects with public-benefit objectives alongside financial return	ADF Fund’s eight-instrument toolkit
ADF Fund	Nepal’s proposed statutory vehicle for mobilizing alternative development finance at scale, under its own special Act	Entity created by the ADF Act, 2082

2.2 Traditional Public Finance: Strengths and Limits

Traditional public finance includes: taxation; grants; annual budget allocation; sovereign borrowing; donor loans; direct public capital expenditure; and public enterprise investment.

Its strength is democratic budget control and public accountability. Its weakness is limited fiscal space and slow budget execution – as evidenced by Nepal’s persistent 60–70% capital expenditure execution rate and the end-of-year spending surge that generates poor procurement outcomes.

2.3 Traditional Bank Finance: Strengths and Limits

Traditional bank finance includes: working capital loans; project loans; consortium finance; directed sector lending; priority-sector credit; letters of credit and guarantees.

Its strength is established regulation, underwriting capacity and relationship lending. Its weakness is maturity mismatch, over collateralization through securities and personal guarantees rather than purest project financing mechanisms. NRB can direct banks toward agriculture, energy and MSMEs, but directed lending does not by itself create long-term project bonds, credit enhancement or a secondary market.

2.4 Capital-Market Finance: Existing Framework and Gaps

Capital-market finance includes: shares; debentures; bonds; mutual funds; specialized investment funds; secondary trading; collective investment schemes; and institutional investment products.

Nepal’s capital-market law can support ordinary securities, but ADF requires more specialized instruments: project bonds, revenue-backed bonds, hybrid instruments, guarantee-backed bonds, remittance fund units, fund-of-funds units and possibly asset-backed securities. The gap between existing capital market tools and required infrastructure instruments is analyzed in Chapter 12 of this report. 

2.5 Alternative Finance: The ADF Context

Alternative finance refers to financing methods outside ordinary fiscal allocation and commercial bank lending. In the ADF context, it includes: project-specific bonds; guarantee funds; investment funds; remittance funds; asset monetization; fund-of-funds; mixed debt-equity instruments; blended finance; credit enhancement; takeout finance; securitization or asset-backed instruments; and diaspora infrastructure instruments.

2.6 The Critical Distinction: Finance Mobilization, Not Investment Approval

The most important conceptual point – to which this research returns repeatedly – is that the ADF Fund is a finance mobilization and risk-transformation platform, not an investment approval authority.

Nepal already has investment approval authorities: the Department of Industry (DOI) for investments below NPR 6 billion (FITTA, 2075, Section 17); the Investment Board Nepal (IBN) for investments above that threshold (PPPIA, 2075). What Nepal lacks is an institution that can:

• Pool long-term capital from diverse institutional sources into infrastructure-appropriate instruments
• Guarantee and credit-enhance projects to attract private co-financing
• Structure complex financial instruments (hybrid, project-specific, securitized) that existing instruments cannot accommodate
• Mobilize diaspora capital through specifically designed remittance instruments for both remittance workers as well as NRNs
• Provide takeout finance converting short-term bank loans into long-term structured instruments

What is Takeout finance? Takeout finance works by first having commercial banks provide a high-interest, short-term loan (usually 3 to 5 years) just to get an infrastructure project built. Once construction finishes and the project begins earning steady revenue from operations, the riskiest phase is over, making it attractive to conservative investors. At this point, a long-term financier (like the ADF) steps in, issues 20-year project bonds to institutional investors like pension funds, and uses that cash to pay off the commercial banks completely – allowing the project to comfortably repay the bondholders over the next two decades.

This mobilization-versus-approval distinction has governance implications. If ADF is a mobilization platform, governance should emphasize commercial independence and financial expertise. If it operates as an approval authority, political project selection becomes an inherent design risk. The ADF Act’s design signals the former intent – but its governance structure (Finance Secretary as Chairperson, Section 10(1)(ka); Cabinet direction power, Section 54) carries features more typical of the latter. Resolving this tension is central to the reforms proposed in Chapter 20.

2.7 Alternative Development Finance: The Five Tests

Alternative development finance is alternative finance with a development purpose. It is not merely financial innovation. Properly understood, it is a risk-transformation and structuring function: converting short-term savings into long-term instruments; converting undiversified bank credit risk into diversified capital market risk; converting individual project risk into pool-level risk; converting illiquid infrastructure assets into tradeable securities.

ADF should satisfy at least five tests:

Test	Question
Public-purpose test	Does the project support economic development, employment, productivity or national infrastructure?
Additionality test	Does ADF provide finance that the market or budget would not otherwise provide on similar terms?
Bankability test	Can the project generate sufficient financial return, or does it require explicit subsidy/guarantee?
Fiscal-risk test	Is the public-sector exposure identified, priced, capped and reported?
Investor-protection test	Do investors understand whether they are taking sovereign, ADF, SPV, project, FX or terminal concession risk?

The ADF Act satisfies the public-purpose test through Sections 3 and 4, but the other tests require subordinate rules and regulatory coordination. The additionality test (only invest where private capital would not otherwise go) is implicitly supported by Section 25(1)(ga)’s assessment criterion, but needs to be strengthened as a mandatory threshold in the Rules.

The ADF Fund performs each transformation through its instruments:

• Section 3(ka) bonds: transform general capital market liquidity into project-specific long-term debt
• Section 3(ga) guarantee fund: transform individual project risk into pooled, credit-enhanced risk
• Section 3(nga) remittance fund: transform overseas consumption capital into domestic infrastructure investment
• Section 3(cha) asset monetization: transform illiquid infrastructure assets into tradeable securities
• Section 3(chha) fund-of-funds: transform concentrated project risk into diversified infrastructure portfolio

Each transformation adds economic value but each also creates regulatory and fiscal risks that must be explicitly managed.

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Chapter 3: Constitutional and Executive Foundation of Development Finance

3.1 The Constitution Provides the Authority, but Not the Institution

The Constitution of Nepal, 2072 gives the executive broad authority to govern, plan and implement development policy, but it does not itself create a development finance institution. The constitutional framework supports ADF because it allows Parliament to enact federal laws for public borrowing, guarantees, fiscal arrangements and federal-level infrastructure finance. But the Constitution also constrains ADF because public finance, debt, guarantees, audit and accountability cannot be bypassed by executive convenience.

Relevant constitutional anchors:

Constitutional provision	Relevance to ADF
Article 75	Vests executive power in the Council of Ministers. Supports Cabinet-level policy coordination.
Article 82	Government business must be allocated and conducted under rules; relevant where ADF interacts with line ministries.
Article 51(d)(1)	State policy to mobilize available resources through public, private and cooperative sectors.
Article 51(d)(10)	State policy to attract foreign capital and technology in infrastructure and areas of national interest.
Article 59	Economic powers and fiscal discipline. Combined with Schedule 5, covers central banking, monetary policy, financial sector regulation.
Article 60	Fiscal transfers and intergovernmental finance.
Article 115(2)	No loan may be raised and no guarantee may be given by the Government except as provided by federal law. Direct constitutional basis for sovereign guarantees on ADF bonds; makes Public Debt Management Rules, 2080, Rule 36 the operative implementing law.
Article 116	Federal Consolidated Fund rule; allows exceptions where a federal law provides otherwise.
Article 119	Annual budget and debt-related estimates. All government expenditure, including capital contributions to ADF, must be authorized through annual Appropriation Acts.
Article 121	Auditor General oversight; confirmed by ADF Act Section 41.
Article 241	Auditor General oversight; Auditor General must be consulted for auditor’s appointment because the Fund is initially more than 50% Government-owned.
Schedule 5	Federal jurisdiction over central planning, financial policy, foreign aid/loans, banking, insurance, securities and large federal projects. Confirms federal jurisdiction over all major ADF-related functions.
Schedules 6–9	Provincial and local powers over sub-national infrastructure. ADF’s Section 8(8) provision allowing provincial/local shareholding acknowledges this multi-level constitutional architecture.

The constitutional synthesis is: Nepal’s Constitution provides the legal basis for Parliament to create ADF, but not a license for ADF to operate outside fiscal accountability.

3.2 The “Consolidated Fund Trap” and Why a Statute Is Needed

Government ministries are administrative and organs herded by political mandates. They cannot behave like market-facing investment companies unless a statute creates that power. Under the public finance logic of the Constitution, public money ordinarily flows into and out of the Federal Consolidated Fund through appropriation. A ministry can formulate policy, recommend projects, manage budgets and coordinate approvals. It cannot itself create SPVs, make equity investments in those SPVs, issue project bonds, operate remittance funds, pool investor capital, create fund-of-funds, or recycle project revenues without a statutory framework. 

However, in Nepal, direct equity and debt investments by ministries have been observed all too frequently – a problematic trend that the ADF is designed to resolve. Because ministries are non-perpetual political entities tied to shifting administrations and their existence falls directly under the whim of the prime minister, they lack commercial permanence; corporate structures and perpetual institutions provide the long-term stability required to manage these investments effectively.

This explains why the ADF Act establishes the Fund as an autonomous organized institution with perpetual succession and legal personality (ADF Act, Sections 6–7). Legal personality is not a formality. It allows the Fund to: own assets; enter contracts; borrow or issue instruments; sue and be sued; establish subsidiaries; maintain accounts; hold separate funds; manage liabilities; and report to shareholders and Government.

3.3 Constitutional Basis for the ADF Act

The ADF Act rests on constitutionally sound foundations:

• Parliamentary legislation: The Act is a government bill (sarkari vidheyak) duly passed by the House of Representatives under Article 84’s legislative process. Parliament’s power to create statutory entities is well-established in Nepal’s constitutional practice (see: PPPIA, 2075; NRB Act, 2058; Securities Act, 2068; Public Debt Management Act, 2079).
• Executive power basis: Article 75 vesting of executive power in the Council of Ministers, combined with the MoF’s Work Division authority over financial sector policy, provides constitutional backing for the government’s initiative.
• Guarantee and borrowing authority: Article 115, read with the Public Debt Management Act, 2079, Section 14, provides the direct legal basis for government guarantees of ADF bonds – the mechanism that gives ADF’s instruments their quasi-sovereign character.
• Fiscal accountability: Articles 119 (appropriation) and 121 (Auditor General) ensure that government contributions to ADF are appropriated and audited – confirmed by ADF Act Section 41 (Auditor General audit).

3.4 Executive Work Division and Development Finance Functions

The Work Division Rules, 2083 (Nepal Sarkar [Karyabibhajan] Niyamawali, 2083) allocate executive functions among federal ministries. The relevant allocation for development finance:

Ministry	Key Development Finance Function	Interaction with ADF
Ministry of Finance (MoF)	Public debt; fiscal policy; financial sector policy; SOE governance; guarantee approval; tax policy; foreign aid	Supervises ADF; Chair of ADF Board (Section 10); approves budget/structure
Ministry of Energy, Water Resources and Irrigation	Energy policy; hydropower; electricity regulation; irrigation	Must recommend energy projects for ADF guarantees (Section 27(2)(kha))
Ministry of Physical Infrastructure and Transport	Roads; bridges; tunnels; railways; airports	Key sectoral ministry for transport-sector ADF investments
Ministry of Industry, Commerce and Supplies	Industrial policy; foreign investment (below IBN threshold); SEZs	Oversees DOI; relevant for SEZ/industrial park ADF investments
Ministry of Urban Development	Urban infrastructure; smart cities; water supply	Relevant for ADF urban infrastructure investments
Prime Minister’s Office	Policy coordination; IBN oversight	IBN recommendations feed ADF project pipeline (Section 4(2)(ga))

This fragmentation supports ADF’s creation, but also demands coordination rules. ADF is not  designed to independently choose and finance projects in a way that bypasses line ministries, National Project Bank discipline or IBN/PPP procedures.

3.5 Federalism and ADF Project Sectors

ADF-eligible sectors span multiple levels and ministries. Many are federal or central-level matters; others require provincial/local coordination. ADF cannot become a federal override mechanism for all infrastructure. For projects in provincial/local jurisdictions, ADF rules should require: (1) line-ministry concurrence; (2) provincial/local no-objection where required; (3) project bank alignment; (4) fiscal-risk screening; (5) environmental/social clearance status; (6) revenue or repayment plan; and (7) asset ownership and transfer clarity.

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Chapter 4: The Existing Institutional Architecture Before ADF

4.1 The Institutional Map

Institution	Legal Basis	Primary Function	Key Development Finance Limitation
Cabinet / Council of Ministers	Constitution, Art. 75	Overall executive authority; guarantee approvals; large policy decisions	Not an operational finance body
Ministry of Finance	Work Division Rules, 2083	Fiscal policy; public debt; budget; financial sector	Cannot pool institutional capital; cannot create market instruments
PDMO	Public Debt Management Act, 2079	Domestic + external public debt management; guarantee recording	Manages debt stock; does not originate or finance projects
Investment Board Nepal (IBN)	PPPIA, 2075 (as amended 2081)	Investment approval/facilitation above NPR 6 billion; PPP facilitation; one-stop service	No balance sheet; cannot issue bonds; cannot pool capital
Department of Industry (DOI)	Industrial Enterprises Act; FITTA, 2075	Approves investments below NPR 6 billion	Approval only; no financing authority
Nepal Rastra Bank (NRB)	NRB Act, 2058	Central banking; monetary policy; banking regulation; FX management	Macro/prudential regulator; not a development finance originator
SEBON	Securities Act, 2063	Capital market regulation; securities market development	Regulates markets; does not create instruments or provide financing
NIFRA	BAFIA, 2073, Section 37	Infrastructure development banking; lending to infrastructure	Balance-sheet constrained; BAFIA-licensed; narrower instrument range
EPF	Employees’ Provident Fund Act	Provident fund management	Instrument availability limits infrastructure allocation
CIT	Citizen Investment Trust Act	Investment trust management	Same instrument availability problem as EPF
SSF	Social Security Act, 2074	Social security fund management	Newer institution; similar constraints
Life insurance companies	Insurance Act	Long-term premium investment	Regulatory investment restrictions; limited infrastructure instruments
Commercial Banks (Class A BFIs)	BAFIA, 2073; NRB Directives	Deposit-taking; credit; payments	Maturity mismatch; capital constraints

4.2 MoF: Fiscal Authority Without Market-Facing Capacity

MoF is the natural parent ministry for ADF because ADF is primarily a finance-mobilization institution. MoF controls fiscal policy, budget, public debt, guarantees, financial-sector policy, public enterprises and relations with international financial institutions.

However, MoF is not a project-finance company. Its ordinary tools are policy, budget, debt, guarantee and public investment decisions. It does not itself create marketable project bonds, remittance funds, asset monetization products or fund-of-funds vehicles without a dedicated legal platform. ADF converts public finance policy into a specialized operating vehicle.

4.3 PDMO: Debt Management Without Project Finance

PDMO manages public debt and guarantees. Under the PDMO Act, public debt includes internal or external debt and the financial liabilities created during debt mobilization (PDMO Act, 2079, Section 2(wyan)). The PDMO Act distinguishes internal debt, external debt, debt instruments, guarantees and public institutions. Section 14 authorizes Government guarantees for public institutions’ infrastructure projects, and Section 20 requires reporting of loans and guarantees in the annual estimate presented to Parliament.

PDMO is therefore crucial to ADF, but not because it will finance projects. It is crucial because ADF can create direct, contingent and implicit fiscal exposures. Under Rule 36 of the Public Debt Management Regulations, 2080, new guarantees are subject to a Guarantee Recommendation Committee review and the 1% GDP cap in total sovereign guarantee stock. If ADF’s guarantee mechanism is to operate at scale, the PDMO framework must be adapted to recognize ADF’s institutional structure – either by treating ADF’s own guarantee capacity as distinct from sovereign guarantees, or by creating a sub-category for development finance institution guarantees within the cap framework.

4.4 IBN: Investment Approval Without Financing Tools

IBN is established under the Public-Private Partnership and Investment Act, 2075 (2019). It is a high-level investment and PPP authority chaired by the Prime Minister, with the Finance Minister as Vice Chair. IBN approves large private investment/PPP projects, including non-energy projects above NPR 6 billion and energy projects above 200 MW. It can identify projects, maintain a project bank, run procurement, negotiate PDAs/PIAs, monitor implementation, manage VGF processes and perform blended finance-related work.

IBN’s legal powers under PPPIA, 2075 (as amended by the 2081 amendment) are substantial. The Prime Minister chairs IBN’s Governing Board, giving it the highest political standing of any investment institution. Yet IBN has no balance sheet for project financing. Multiple IBN-approved projects have languished for years at pre-financial-close stage – not because IBN failed, but because Nepal lacked the financial architecture (blended debt instruments, credit enhancement, takeout finance) to bring them to close. Section 68A of the PPPIA requires MoF consent where IBN matters create Government financial liability. ADF is designed to complete that architecture.

4.5 NRB: Banking Regulation Without Long-Tenor Instrument Creation

NRB regulates monetary policy, BFIs, credit, financial stability and foreign exchange. Under NRB Act, Section 79 and BAFIA, Section 131, NRB can issue binding directives to BFIs. Under foreign exchange law and NRB Act powers, foreign borrowing, foreign exchange transactions and capital-market external transactions require NRB approval.

ADF interacts with NRB in three specific ways: (1) loan portfolio regulation (Section 24(3)); (2) foreign capital-market and borrowing approvals (Section 9); and (3) instrument recognition (Section 30(3) treats bank investment in sectoral ADF instruments as sector lending).

4.6 SEBON / NEPSE / CDSC: Securities Regulation Without Infrastructure-Specific Instruments

SEBON regulates securities issuance, registration, disclosure, public offering and market intermediaries. NEPSE handles listing and trading. CDSC handles dematerialization, clearing and settlement. Existing law recognizes shares, bonds, debentures, government securities, government-guaranteed securities, collective investment scheme certificates and other Board-prescribed securities (Securities Act, 2063, Section 2(f)). This is broad enough to bring ADF instruments into SEBON’s perimeter. But breadth of definition is not the same as instrument readiness.

SEBON’s framework accommodates ordinary shares, government securities, corporate debentures, mutual funds, and Specialized Investment Funds – but no project bonds, no hybrid infrastructure instruments, no InvITs, no securitization, and no finite-life concession company listing category. This regulatory gap means that even if ADF creates the right instruments, SEBON may lack the framework to approve, list, and regulate them.

4.7 NIFRA: Relevant but Balance-Sheet Constrained

NIFRA is Nepal’s closest existing infrastructure-finance institution. It is a public limited company, listed on NEPSE, and a specialized infrastructure development bank licensed by NRB under BAFIA. It can provide long-term infrastructure finance, equity investment, bond issuance and non-fund-based facilities.

NIFRA’s financial position based on recent annual reports and Q3 FY 2082/83 data: paid-up capital ~NPR 21.60 billion (~160M$); reserves and surplus ~NPR 3.42 billion; total deposits ~NPR 7.80 billion; loan portfolio ~NPR 28.54 billion (~240M$); borrowings through Green Energy Bond and Infra Bond issuances; reported CAR ~71.83%; NPL ~0% in the young book. Its main sectors include energy, hospitals, and tourism. These numbers show that NIFRA is important but too small to close the national infrastructure gap alone—and its regulatory form (BAFIA-licensed specialized infrastructure bank) prevents it from performing the guarantee fund, remittance fund, fund-of-funds, and statutory super-priority functions that define ADF’s unique value proposition. 

4.8 The Capital Market: Shallow and Retail-Dominated

Nepal’s capital market, while growing rapidly in retail equity participation, lacks the depth and instruments needed for institutional infrastructure investment. This capital market gap is both a supply and regulatory problem. The ADF Act creates statutory authorization for new instruments. The corresponding regulatory architecture must be built by SEBON, NRB, and NEPSE to make those instruments operational.

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Chapter 5: Why Existing Institutions Are Insufficient

5.1 IBN: Necessary but Not a Finance Platform

IBN brings projects to the table. ADF brings financing. IBN can validate a project’s strategic importance, PPP structure, and investment case (PPPIA, 2075, Sections 14–20). What IBN cannot do is provide the financial instruments – bonds, guarantees, equity co-investment – that enable those projects to reach financial close. The financial close gap is structural choice by design, not a failure of IBN’s.

The ADF Act recognizes IBN’s role by making IBN-recommended PPP projects eligible for ADF financing (Section 4(2)(ga)) and requiring IBN recommendation where PPP projects seek guarantees (Section 27(2)(gha)). This shows complementarity across the project lifecycle:

Stage	IBN role	ADF role
Project identification	Project bank / pre-feasibility	Evaluate finance suitability
PPP structuring	Procurement / PDA / PIA	Assess bankability and instrument structure
Financial close	Monitor milestones; recommend support	Provide debt/equity/guarantee/instruments
Government liability	MoF consent required	PDMO reporting and guarantee discipline
Implementation	Monitoring/facilitation	Monitor financed exposure

Recommendation: ADF Rules should require an IBN-to-ADF handoff note for PPP projects, including project feasibility, risk allocation, fiscal commitments, environmental status, concession tenor, revenue model and Government-support requirements.

5.2 NRB-Directed Lending: Necessary but Sector-Concentrated and Mismatch-Creating

NRB’s directed lending framework has successfully channeled bank credit into hydropower – to the point where Nepal’s hydropower development is largely bank-financed. However, the banking system’s hydropower concentration now represents a systemic risk: if multiple projects face operational or PPA-realization challenges simultaneously, the sector concentration could generate system-wide NPLs.

More structurally, bank-financed hydropower relies on a specific match: PPA-backed government off-take provides the cash flow certainty that banks need to extend 20-year loans. This match does not exist for roads (no revenue without tolling framework), railways (no private off-take), industrial parks (uncertain tenancy), or digital infrastructure (rapidly changing technology). The directed lending model that works for hydropower cannot be generalized to Nepal’s full infrastructure needs.

The NRB imposes single obligor limits and consortium-finance thresholds as evidence that individual banks cannot independently finance very large projects. It is also imperative to identify the need for NRB amendments if non-guaranteed ADF instruments are to receive preferential regulatory treatment.

5.3 SEBON: Necessary but Instrument-Constrained

SEBON’s mandate (Securities Act, 2063, Section 4) is broad: develop and regulate Nepal’s capital markets. SEBON has progressively built this framework: the Specialized Investment Fund Regulation, 2075 created PE/VC/hedge fund structures; the SME Securities Regulation, 2081 introduced lighter listing for smaller companies; the Securities Listing and Trading Regulation, 2075 modernized NEPSE listing.

But SEBON has not yet developed: frameworks for project bonds (bonds against project cash flows), hybrid instruments (mezzanine finance), securitization, InvITs, fund-of-funds, sophisticated trustee framework or concession-company listing categories. ADF’s capital-market tools require more than ordinary IPO/debenture rules – specifically: project bond disclosure; guarantee disclosure; hybrid instrument classification; specialized investor eligibility; securitization/asset-backed instrument rules; fund-of-funds regulation; finite-life concession equity classification; trustee and use-of-proceeds monitoring; and secondary-market liquidity framework.

5.4 PDMO: Necessary but Not a Mobilizer

PDMO manages Nepal’s debt stock with increasing sophistication. But its mandate is debt management, not project finance. It records guarantees but does not structure them for individual projects. It manages the government’s bond issuance calendar but does not create the blended finance structures that large projects require. PDMO’s role in ADF’s framework should be limited to what it does best: recording contingent liabilities, reporting fiscal risk, and ensuring guarantee decisions are consistent with macro-fiscal sustainability.

5.5 NIFRA: Relevant but Not Substitutable

NIFRA is Nepal’s closest existing analog to ADF. However, NIFRA and ADF serve different structural functions: 

Function	NIFRA	ADF
Legal form	NRB-licensed infrastructure development bank	Special statutory fund
Public listing	Listed; public shareholders	Parent Fund not designed for general public shareholding
Regulatory perimeter	BAFIA/NRB supervised	Special Act; NRB oversight only where specified
Main function	Infrastructure banking/lending	Capital mobilization, funds, guarantees, instruments
Remittance fund	Not core statutory mechanism	Express ADF tool
Guarantee fund	Not core statutory mechanism	Express ADF tool
Fund-of-funds	Strategic idea but not core bank function	Express ADF tool
Asset monetization	Not core statutory mechanism	Express ADF tool
Government-equivalent instrument treatment	Not ordinary	Express Act treatment for ADF instruments
Statutory first-lien priority	Standard secured creditor	Statutory super-priority, Section 29
Auditor General audit	No (private company audit applies)	Yes, Section 41, Expressly coded in the law that this fund will be audited by OAG, Applies even when GoNs equity holding reduces later
Cabinet direction	No	Yes, Section 54
Public debt implication	Less direct	Higher due to GoN majority and guarantees

The strongest policy position is that ADF should complement NIFRA: ADF as capital-pooling/guarantee/fund-of-funds/project-instrument platform; NIFRA as regulated infrastructure bank and possible implementing/co-financing institution.

Key Finding – The Structural Gap: Nepal’s existing system can approve projects (IBN/DOI), regulate banks (NRB), regulate markets (SEBON), manage public debt (PDMO), and provide direct infrastructure banking (NIFRA). What it cannot do is pool long-term institutional capital, provide structured credit enhancement at scale, issue government-backed infrastructure bonds for institutional investors, mobilize diaspora capital through purpose-built instruments, and monetize existing infrastructure assets – all within a single statutory platform with government-equivalent instrument treatment. That combination is what the ADF Act creates.

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Chapter 6: The ADF Act – Legal Structure, Capital, Governance and Mandate

6.1 Name, Commencement and Purpose (Sections 1–2)

The Act’s full name – Vaikalpik Bikas Bitta Parichalan Ain, 2082 – signals its functional character: an Act about mobilization (parichalan) of alternative development finance, not mere establishment of a regulatory body. The Act’s preamble states its purpose in clear terms: “to mobilize alternative development finance through bonds, equity funds and other financial or monetary instruments to arrange resources for the overall economic progress and development of the country.”

The Act’s Theoretical Concept (Sidhantik Awadharna) contains the foundational policy rationale, explicitly acknowledging: (a) the NPR 100 kharba infrastructure investment need; (b) the gap between need and historical investment; (c) the 40,000 MW energy target; (d) the need for novel financial instruments beyond reliance on traditional banking. The conceptual note adds three important economic premises: (1) Nepal’s infrastructure needs exceed traditional finance availability; (2) annual infrastructure investment has historically been only NPR 2–3 kharba; and (3) energy, transmission, industrial zones, SEZs, smart cities, tourism, roads, irrigation, drinking water and airports require large long-term investment.

Commencement (Section 1(2)): 31 days after authentication (pramanikan). The 31-day transition window is explained in the Act’s interpretive commentary (byakhatmak tippani) as providing time for structural establishment, drafting major regulation, organizational setup, and stakeholder preparation before operative provisions take effect.

Key definitions (Section 2):

• “Loan” (rin, Section 2(gha)): Defined as investment flowing to a project under the Act, and explicitly includes guarantees provided by the Fund for project development. This “guarantee-as-loan” definition is the Act’s foundational design choice: all loan governance provisions (collateral, monitoring, clawback, priority) automatically apply to guarantees. As noted in the other post Some Pointers for ADF Bill: “By legally defining a guarantee as a loan, the lawmakers ensure that the stringent regulatory, collateral, monitoring, and recovery mechanisms required for a direct loan automatically apply to guarantees as well.” This means: mandatory collateral (Section 5(gha)); absolute priority recovery (Section 29(2)); project monitoring obligations (Section 9(1)(dha)); and mandatory scrutiny under Section 25 – all apply to guarantees as if they were direct cash loans – under the general principle of subrogations when the liabilities of the guarantor crystallize.
  
• “Mixed financial instrument” (mishrit vittiya upakaran, Section 2(jha)): “A financial instrument incorporating characteristics of both equity and debt.” This definitional recognition creates a distinct legal category for hybrid instruments in Nepal’s statutory framework – important for regulatory classification under SEBON and NRB frameworks, but requiring subordinate rules to define accounting, ranking, investor rights and SEBON treatment.
  
• “Alternative development finance” (Section 2(tha)): Defined by reference to Section 3 – the eight mobilization mechanisms. A functional rather than conceptual definition.
  
• “Bank” (baink, Section 2(chha)): Includes commercial banks and development banks under prevailing law, plus foreign bank branches in Nepal and Nepal-established bank branches abroad. This broad definition determines which entities the Fund can use for accounts (Section 33(2)) and which count as “banks” for directed-sector-lending credit under Section 30(3).
  
• “Financial institution” (vittiya sanstha, Section 2(ta)): Institutions established under prevailing law for the purpose of deposit collection or credit provision. Importantly, ADF itself is not a “financial institution” under this definition – it neither collects deposits nor is established primarily to extend credit in the traditional sense. This distinction matters for regulatory treatment under BAFIA.
  

6.2 ADF Mobilization Methods (Section 3)

Section 3 is the operational heart of the Act. The Act’s interpretive commentary for Section 3 explains: “Because traditional finance sources alone are insufficient to bridge the massive infrastructure investment gap, novel financial instruments are provided – bonds, equity funds, remittance funds, asset monetization, and others – to access capital markets and international sources beyond reliance solely on traditional banking.”

Structurally, Section 3 is permissive, not mandatory – the Fund “will mobilize” through these mechanisms as appropriate. This gives ADF operational flexibility to sequence instrument development in line with market readiness and regulatory preparation. The eight mechanisms are analyzed in detail in Chapter 7.

6.3 Eligible Sectors and Projects (Section 4)

Section 4(1) defines 20 eligible sectors spanning the full range of infrastructure and productive investment:

1. Energy development and electricity generation (uurja bikas wa bidyut utpadan)
2. Electricity transmission and distribution (bidyut prasaran wa bitaran)
3. Road construction and expansion (sadak nirman wa bistaar)
4. Railway construction and expansion (relmarga nirman wa bistaar)
5. Airport construction and improvement (bimanasthal nirman wa sudhar)
6. Tunnel construction and expansion (surung marga nirman wa bistaar)
7. SEZs, industrial parks, dry ports and similar (bishesh aarthik kshetra, audyogik park, sukkha bandaragaha)
8. IT parks, special tourism/sports infrastructure (suchana praudyogiki park, bishesh paryatan / khelkud purbaadhar)
9. Urban infrastructure (shahari purbaadhar)
10. Public digital infrastructure (sarbajanik digital purbaadhar)
11. Cable car, ropeway, podway (kebalkar, rajju margh, podway)
12. Irrigation projects (sinchai aayojana)
13. Fertilizer factories and agricultural machinery factories (mal karkhana, krishi yantra karkhana)
14. Mining and mining-based industries (khaani utkhanan, khaanijaanya udhyog)
15. Commercial agriculture, livestock, agro-based industries (byabasayik krishi, pashupalan, krishi/pashu-based udhyog)
16. Forest products and herbal processing industries (ban paidawar, jadibuti prasodhan)

The inclusion of commercial agriculture, livestock, and agro-processing alongside traditional infrastructure sectors reflects Nepal’s intent to link infrastructure finance with agricultural value chain development – relevant for the Remittance Fund (Section 3(nga)) which would appeal to rural-origin migrant workers.

Section 4(2) establishes four project pathways for investment eligibility, assessed on importance, feasibility, and high economic return potential:

• (ka) National Project Bank: Projects listed in the government’s National Project Bank (Rastriya Aayojana Baink)
• (kha) Annual Government Programme: Projects proposed under the government’s annual programme
• (ga) IBN-recommended PPP: Projects recommended by Investment Board Nepal for PPP implementation through the Fund
• (gha) Fund’s independent assessment: Projects the Fund itself studies and determines suitable for investment

The fourth pathway – the Fund’s independent assessment – is commercially critical. It allows ADF to develop its own project pipeline independent of government annual programmes or IBN political decisions. Without this pathway, ADF’s investment decisions would be subordinate to political project selection processes.

Governance Alert: Section 4(2)(gha) should be operationalized carefully. If the Fund can independently study and select projects without line-ministry concurrence, it may bypass the Work Division framework and create parallel project pipelines. ADF Rules should require line-ministry concurrence even for Fund-originated projects under Section 4(2)(gha).

6.4 Exclusion Criteria (Section 5) – A Detailed Analysis

Section 5 contains six absolute prohibitions and is one of the Act’s most important safeguards:

Section 5(ka) – Projects outside the four pathways: Restricts ADF to projects with identifiable strategic basis. Prevents ADF from becoming a general-purpose investment fund.

Section 5(kha) – Projects below NPR 1 arba (~USD 7.5 million): Focuses ADF on large-scale infrastructure. Effectively excludes municipal, rural, and community-level infrastructure. This creates a notable gap: some of Nepal’s most impactful rural infrastructure (small irrigation, rural roads, community electricity) falls below this threshold while also eliminates the ADF having to focus on the small ticket items and helps prevent coordination conflicts with small size provincial and municipal projects. 

Section 5(ga) – Projects with low estimated financial returns: Section 5(ga), which excludes projects with low estimated financial returns, creates a conceptual tension within the Act. While Section 3 authorizes financing for projects that “yield high economic returns, create employment, and contribute to the overall economic development of the country,” Section 5(ga) introduces a filter based on financial returns. As noted in Some Pointers for ADF Bill a project may generate substantial economic welfare – employment, productivity gains, regional integration, and social spillovers – while producing only modest direct revenues. A rural road, irrigation system, or transmission extension may therefore satisfy the Act’s developmental purpose despite weak standalone financial performance. 

At the same time, Section 5(ga) should not be viewed solely as a restrictive provision. While at face value it appears to prioritize financially attractive projects, it may also serve an operational rationale by ensuring that ADF remains economically disciplined and commercially credible relative to private-sector funds. Rather than excluding economically beneficial but financially weaker projects altogether, the provision may implicitly signal that the welfare gap should be addressed through blended structures involving grants, viability gap funding (VGF), concessional government support, or impact-oriented financing. 

Recommendation: The larger concern, however, is that the phrase “low financial returns” remains undefined. The Bill provides no threshold, methodology, or institutional benchmark for assessment, creating scope for uncertainty and discretion. A more balanced approach would replace the binary exclusion with a tiered framework in the Rules: commercially viable projects proceed under ordinary financing criteria, while projects with demonstrably high economic returns but weaker financial viability remain eligible subject to blended finance or public support mechanisms, with methodology disclosed through ADF’s Investment Policy Statement.

Section 5(gha) – Projects unable to provide collateral: Ensures all investments are secured. Combined with the “guarantee-as-loan” definition of Section 2(gha) and mandatory collateral requirement of Section 29(1), this creates a comprehensive secured-lending framework.

Section 5(nga) – Projects using ADF bonds as collateral for loans: Prevents circular financial exposure – a borrower pledging the Fund’s own instruments as security to borrow back from the Fund. This is a sound risk management provision preventing daisy-chain leverage.

Section 5(chha) – Conflict of interest filter (3-year lookback): Current Board directors and CEO cannot have been fundamental shareholders, partners, directors, or members of a project-implementing firm for at least three years before appointment. This is more stringent than BAFIA’s comparable provision (Section 18, focused on current relationships). The three-year lookback is appropriate for a public development finance institution managing public resources. The proviso: investments already committed before the official’s appointment are not retroactively blocked – preventing governance disruption of ongoing projects.

6.5 Legal Personality and Establishment (Sections 6–7)

Section 7 confirms the Fund as a self-governing organized institution (swashasit sangathit sanstha) with: perpetual succession (awicchhinna uttaradhikar); full legal personality (kanuuni wyaktitatwa); capacity to hold property, contract, sue, and be sued in its own name.

The Companies Act, 2063 and BAFIA, 2073 applies mutatis mutandis (Section 56 of ADF Act) for matters the ADF Act does not cover: General Meeting procedures, dividend distribution, share transfer, and certain governance matters. While ADF is a public institution with Auditor General oversight and Cabinet direction power, its corporate governance in unspecified areas follows private company norms – a hybrid reflecting its dual nature as a public-purpose commercial institution.

6.6 Capital Structure (Section 8) – A Detailed Analysis

Capital Component	Amount	NPR	~USD	Shareholder
Authorized capital	NPR 1 kharba	100,000,000,000	752,000,000	N/A
Paid-up capital	NPR 25 arba	25,000,000,000	188,000,000	All shareholders
Government of Nepal	51%	12,750,000,000	95,865,000	GoN
Group B: EPF, CIT, SSF	25%	6,250,000,000	46,992,000	Retirement/provident funds
Group C: Life, non-life, reinsurance	24%	6,000,000,000	45,113,000	Insurance companies
GoN minimum share (floor)	26%	6,500,000,000	48,872,000	GoN

Key provisions:

• Capital call schedule (Section 8(4)): Payment in maximum two installments over two fiscal years. This aligns GoN’s NPR 12.75 arba commitment with the annual budget appropriation cycle.
• Capital increase flexibility (Section 8(3)): Cabinet can increase authorized and paid-up capital through Nepal Gazette notification.
• International IFI participation (Section 8(8)): Provincial governments, local bodies, other government funds, and international governmental or intergovernmental financial institutions may acquire ADF shares with Cabinet approval and Gazette notification. This provision uniquely allows multilateral institutions (ADB, IFC, AIIB, World Bank’s IDA) to become ADF shareholders.
• Government share floor (Section 8(9)–(10)): GoN’s share can be reduced below 51% but not below 26%.
• Share transfer restrictions (Section 8(7)–(8)): Group B and Group C shareholders wanting to sell must first offer within their group.

The Financial Commentary (Aarthik Tippani) explicitly states that once the institution is strong and effective, and as private institutional investment grows, the government’s share ratio should be progressively reduced. This “glide path toward partial privatization” mirrors India’s NIIF model (Government of India: 49%; international institutional investors: 51%).

This structure has three purposes: (1) Government majority control at inception; (2) participation by long-term institutional investors; (3) potential later dilution to reduce Government share while retaining blocking/public-control stake. It also creates fiscal-risk implications: Government’s capital contribution is not debt, but it is a public investment. If the Fund fails, the Government’s equity is at risk; if the Fund borrows with Government guarantee, the risk becomes contingent liability.

6.7 Board of Directors (Sections 10–17) – A Detailed Analysis

Composition (Section 10(1)): Total 8 Members

Position	Role	Background
Secretary, MoF (1)	Chairperson	Senior civil servant, MoF
Joint Secretary, MoF (1)	Director	Civil servant, MoF
Engineering service Joint Secretary (infrastructure ministry, MoF-designated) (1)	Director	Civil servant, infrastructure sector
Group B representative (EPF/CIT/SSF) (1)	Director (rotates every 2 years)	Institutional investor representative
Group C representative (insurance companies) (1)	Director (rotates every 2 years)	Insurance sector representative
Independent expert (Board-appointed, ≥1 woman) (2)	Director (2-year term, one renewal)	Finance/economics/infrastructure professional
CEO (1)	Board Secretary (non-voting)	Professional CEO

Government-to-independent ratio: Three serving civil servants (MoF Secretary + MoF JS + infrastructure ministry JS) versus one independent expert and two institutional representatives. The institutional representatives themselves have potential conflicts of interest – they represent entities that may invest in ADF instruments. The independent expert is the only genuinely independent voice.

Independent expert director qualifications (Section 11): Postgraduate in economics, management, commerce, development studies, law, engineering, finance analysis, or finance; minimum 10 years managerial experience in banking, FI, IFI, or infrastructure OR 5 years in alternative finance/project analysis OR 5 years at gazetted Class I or above. Disqualification (Section 12(1)(ga)): currently serving in any bank, FI, insurance company, fund manager, or securities company – an effective bar on active financial professionals that narrows the eligible pool considerably.

Conflict-of-interest governance (Section 15): Directors must disclose within 30 days: household members’ shareholdings in ADF-invested companies; personal shareholdings; prior 3-year involvement in ADF-invested infrastructure companies; disqualification status; and any ongoing conflicts. This creates a “disclose or be deemed unconflicted” framework (Section 15(4)). Directors must recuse from discussions and voting on matters where they have a conflict (Section 15(3)).

Sub-committees (Section 17): Three mandatory: Audit Sub-committee; Investment Sub-committee; Risk Mitigation and Management Sub-committee. Their composition, tenure, and terms of reference are determined by the Board (Section 17(2)). The Investment Sub-committee is particularly critical: if it has majority independent or private-sector members, it can serve as the primary commercial discipline mechanism.

Directors’ liability (Section 16): Directors individually and collectively responsible for fulfilling their duties, performing for Fund’s benefit. A director acting in bad faith or with negligence causing loss to the Fund is personally liable (Section 16(3)).

Comparative note: UK Infrastructure Bank’s framework emphasizes a public mission with operational independence and accountability to HM Treasury. ADF’s Board is more government-heavy. Nepal should compensate through independent investment committees with specific parallel authorities to the advisory board, published investment criteria and parliamentary reporting.

6.8 CEO Appointment and Performance Management (Sections 19–23)

The CEO appointment mechanism is the Act’s strongest governance provision:

• Three-member Recommendation Committee (Section 19(3)): Chaired by the Public Service Commission Chairperson (independent constitutional body), with the NRB Governor (independent regulator) and IBN CEO (development finance professional). This committee’s composition significantly constrains political manipulation.
• Competitive selection (Section 19(4)–(5)): Committee shortlists three candidates through competitive process it designs. Cabinet appoints one from the three – balancing merit-based selection with democratic accountability.
• International CEO provision (Section 20(3)): For the first appointment only, a foreign national or person with foreign permanent residency may be recommended – unprecedented in Nepali public institution law. This signals explicit intent to attract international development finance expertise.
• Tenure and renewal (Section 19(8)): Four-year term; renewable once if performance is “excellent”.
• Annual performance contract (Section 23(1)–(2)): CEO and Board must execute an annual performance contract within 30 days of appointment, specifying deliverables, measurable performance indicators, implementation timelines, and accountability for shortfalls.
• Independent annual evaluation (Section 23(3)): Annual evaluation by a Board-designated evaluator. Poor performance can lead to Cabinet removal on Board recommendation (Section 23(4)), with opportunity for defense (Section 23(5)).
• Post-employment restriction (Section 20(4)): Three-year bar on involvement in any ADF-approved project after leaving office. Exception: involvement in government-controlled organizations is permitted.

6.9 Financial Transparency and Accountability (Sections 35–41)

The Act establishes a multi-layered accountability framework:

• Quarterly financial statements (Section 37): Prepared and provided to GoN and shareholders; published on ADF website. Real-time public financial transparency.
• Double-entry, English-language, digital accounting (Section 38): International accounting standards; English language (important for international investor access); electronic format. Separate ledgers for each financial instrument and fund.
• Consolidated financial report (Section 39): Annual consolidated balance sheet and P&L for the Fund and all sub-funds; submitted to MoF within 3 months of fiscal year end.
• Internal audit (Section 40): By the Comptroller General’s Office (Mahalekha Niyantrak Karyalaya) or delegated Treasury Controller Office – a government financial oversight mechanism.
• Auditor General audit (Section 41): Final audit by the Auditor General – the constitutional independent audit authority. Normally reserved for government ministries and constitutional bodies; its application to ADF reflects the Act’s recognition that ADF holds and mobilizes public resources.
• Triennial international evaluation (Section 51): Every three years, an international-level independent evaluator assesses the Fund’s financial position, sustainability, assets and liabilities, and overall performance. Report goes to MoF and the Board.
• Annual report (Section 50): CEO prepares a comprehensive report covering Fund’s overall progress; all sub-fund activities; status of each instrument-based fund; liabilities created for the Government due to guarantees given for ADF mobilization (the key fiscal-risk disclosure provision); and other financial information. Annual Report requires General Meeting approval; submitted to MoF within six months of fiscal year end; MoF publishes on both websites.

6.10 Sections 30–32: Government-Security-Like Treatment, Directed Lending and Concessions

Section 30 is among the most commercially consequential provisions of the Act – analyzed in detail in Chapter 7 and Chapter 8.

Section 31 allows tax concessions and other incentives for investors, and special concessions for foreign capital-market instruments and green-sector instruments. Green-sector projects are tied to NRB classification and include renewable energy generation/transmission, urban development infrastructure and climate adaptation.

Section 32 allows fee concessions for collateral registration and related security documents – reducing transaction costs for large infrastructure project collateral.

6.11 Dissolution and Insolvency (Sections 42–44)

The Fund cannot be liquidated without Cabinet approval. Cabinet cannot approve dissolution unless there is reasonable basis that all debts/liabilities can be paid. Once approved, a liquidator is appointed with company law powers. Insolvency proceedings may be initiated by the Fund, Government, shareholders holding more than 10%, or the liquidator. This reinforces the public-sector character: the Fund is autonomous, but not freely liquidable like an ordinary company.

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Chapter 7: ADF Instruments – A Legal and Financial Analysis of All Eight Mechanisms

7.1 Instrument 1: Project-Specific Financial Instruments and Bonds (Section 3(ka))

Authorization: Section 3(ka) authorizes the Fund to issue project-specific financial instruments or bonds, raising capital from investors or the general public through equity (swapunji), debt (rin), or mixed instruments (mishrit vittiya upakaran).

Existing legal foundation:

• Securities Act, 2063, Section 2(cha): Bonds and debentures of organized institutions are “securities.” ADF, as an organized institution under its own Act, is a qualified issuer under Section 2(pa). 
• Securities Issue and Allotment Guidelines, 2074 (7th amendment), Rule 9: Governs debenture issuance – mandatory disclosure of collateral hierarchy, interest rate, maturity, purpose of proceeds; debt-to-equity ratio requirement of 70:30 during debenture tenure normally.
• Credit Rating Regulation, 2068, Rule 3(1)(b): Mandatory credit rating before public debenture issuance; ongoing rating surveillance for minimum 3 years (Rule 21(1)). No exemption for government-guaranteed instruments – meaning even ADF bonds with explicit sovereign backing require rating.
• Securities Listing and Trading Regulation, 2075: Governs listing on NEPSE.

The government-parity mechanism – Section 30:

Section 30(1): ADF bonds issued with a GoN guarantee → treated exactly like Development Bonds (Bikas Rinpatra), National Savings Bonds (Nagarik Bachatpatra), and NRB securities. May list and trade in secondary markets.

Under NRB’s Unified Directive (Capital Adequacy Framework, Directive 1): GoN/NRB claims carry 0% risk weight; government-guaranteed claims carry 0% risk weight. Extending this to ADF government-guaranteed bonds means fully capital-neutral bank portfolios. Additional NRB regulatory privileges unlocked:

• SLR eligibility: Class A banks maintain 12% of domestic deposits in approved liquid assets; Class B/C maintain 10%. ADF guaranteed bonds satisfy this – simultaneously meeting liquidity mandates and financing infrastructure.
• Standing Liquidity Facility collateral: Banks can borrow from NRB against SLR-eligible securities at up to 90% of face value.
• Open market operations eligibility: NRB repo/reverse repo operations can include government-equivalent instruments.
• Exemption from Single Obligor Limits: Banks could hold ADF bonds beyond standard concentration caps (25% of core capital for funded exposure).

Section 30(2): ADF instruments without a GoN guarantee → treated equivalent to government securities for secondary market trading and listing fee purposes. As analyzed in the first blog article (Parajuli, “Some Pointers for ADF Bill,” April 2026, Section 4.3): “Where the law goes significantly beyond standard guarantee mechanics is in Section 30(2)… This is a remarkable regulatory privilege with no precedent in Nepali financial law.”

Recommendation: Recognition under SLR, SLF, and OMO creates a layered escalation of regulatory and market benefits. At the base level, SLR recognition transforms an instrument into an approved liquid asset that banks can hold to satisfy mandatory liquidity requirements, increasing baseline institutional demand and balance-sheet attractiveness. SLF recognition adds a second layer by allowing banks to pledge the instrument as collateral to obtain short-term liquidity from the central bank (typically up to a prescribed lending value), thereby converting a passive liquidity buffer into an emergency funding source. A final layer of OMO eligibility (Repo/Reverse Repo) provides the highest level of utility: beyond compliance and collateral value, the instrument becomes an actively tradable liquidity-management tool that banks can use to obtain cheaper short-term funding at policy rates, manage excess liquidity, participate in repo markets, and enhance secondary market liquidity – effectively transforming a static regulatory asset into a dynamic treasury instrument. 

Section 30(3): Banks and FIs investing in sector-specific ADF financial instruments → deemed to have invested in directed sector lending under applicable NRB provisions.

ADF Instrument	Directed Lending Credit
ADF Agriculture Sector Bond	Counts toward 10% agriculture minimum (Class A target by Poush 2083)
ADF Energy Sector Bond	Counts toward 20% combined priority cluster target (Energy + MSME + Tourism + ICT + Export, by Poush 2083)
Other sector bonds	As prescribed by NRB

This mechanism creates institutional regulatory demand: Nepal’s 20 Class A commercial banks, 17 development banks, and 17 finance companies – all subject to priority sector mandates – have a regulatory compliance incentive to invest in ADF sector bonds. If the average Class A bank maintains 5% of its ~NPR 200–250 billion loan portfolio in ADF sector bonds, aggregate bank demand for ADF instruments could reach NPR 200–250 billion – multiples of ADF’s initial paid-up capital.

Legal Alert: Under the Securities Listing and Trading Regulation, 2075 (Rules 3(2) and 4(1)(b)) read with the Securities Board Regulation, 2064 (Rule 23), secondary market listing on NEPSE is ordinarily “prospectus-locked,” requiring a SEBON-approved public issue, with privately placed securities (e.g., to EPF, CIT, banks) generally restricted to OTC trading due to the absence of a public prospectus under Section 30(2)(c) of the Securities Act, 2063. However, this constraint is substantially neutralized for ADF instruments by Section 30 of the ADF Act, 2082, which deems Government-guaranteed ADF debentures and related instruments equivalent to government securities (Section 30(1)–(2)), thereby activating statutory exemptions under Sections 30(2)(a)–(b) of the Securities Act, 2063 and enabling listing through government-security pathways under Rule 4(2) of the Listing Regulation and the NEPSE Government Securities Transaction Bylaws, 2062 (Rule 3) via an NRB “letter of request” without a retail prospectus. Accordingly, while the general regime blocks private-placement bonds from NEPSE listing, Section 30 effectively creates a legal fast-track to exchange tradability for ADF instruments, subject to their classification as government-equivalent securities.

Offshore bond issuance (Section 9(1)(ana)): With NRB approval, ADF can list and issue instruments in foreign capital markets. Legal framework: FX Act, 2019, Section 11; FIFL Fifth Amendment (2025). Foreign capital market bonds create foreign currency liabilities requiring hedging (Chapter 14).

Comparative lesson – India’s NaBFID: Established under the National Bank for Financing Infrastructure and Development Act, 2021, NaBFID issues long-tenor bonds treated as government-guaranteed for regulatory purposes. NaBFID has been rated AAA by domestic agencies based on institutional character and government backing, enabling near-sovereign borrowing costs. Nepal’s ADF can develop a similar rating framework.

7.2 Instrument 2: Project-Specific Loans with Guarantees (Section 3(kha))

Authorization: Section 3(kha) authorizes the Fund to raise project-specific loans backed by guarantees from GoN, IFIs, the project-implementing entity, or the Fund’s own guarantee (kosh ko swo-jamani).

The self-guarantee legal incoherence: As analyzed in the other article Some Pointers for ADF Bill, if the Fund is the borrower of the project-specific loan, the phrase “Fund’s own guarantee” is conceptually flawed. A borrower cannot guarantee its own debt – it is already the principal obligor, and self-guarantee provides no separate assurance to lenders.

The provision makes legal sense only if: (a) the project-implementing entity borrows and the Fund guarantees; or (b) the Fund’s “self-guarantee” means securing borrowings through its own assets, reserves, or escrow – which is collateral, not guarantee.

Recommendation: Redraft Section 3(kha) in Rules to: (a) distinguish Fund borrowings (secured by Fund assets, government guarantee, or IFI guarantee) from project entity borrowings (the Fund provides guarantee subject to exposure limits); (b) replace “self-guarantee” with “security arrangement through Fund assets or reserves”; (c) specify maximum guarantee exposure as percentage of Fund’s paid-up capital.

7.3 Instrument 3: Guarantee Fund (Section 3(ga))

Authorization: Section 3(ga) authorizes establishment of a Guarantee Fund backed by full or partial GoN or IFI guarantees, enabling loans or debentures to projects from the public and financial institutions. Section 9(1)(ga) further empowers the Fund to issue bonds on behalf of the Nepal Government, provincial governments, local bodies, or any organized institution with their guarantee.

Legal framework for guarantees in Nepal:

• National Civil Code, 2074, Sections 563–570: Written form required (Section 563(4)); guarantor liability co-extensive with debtor (Section 564(1)(b)); subrogation upon payment (Section 567(1)).
• NRB Capital Adequacy Framework (Directive 1): 0% risk weight for GoN/NRB-guaranteed claims; 0% for recognized MDB (World Bank, ADB, IFC) guarantees; standard 100% for domestic public sector guarantees.
• ADF Act, Section 27: Detailed guarantee eligibility, process, and recording framework.

Eligibility criteria for Fund guarantees (Section 27(2)): Projects must satisfy all four: (a) viability confirmed by Fund’s independent study; (b) line ministry recommendation; (c) National Project Bank inclusion; (d) IBN recommendation for PPP projects.

Process (Section 27(1)–(5)): Project entity requests → Fund assesses → Fund either guarantees directly or recommends GoN/IFI guarantee through MoF → Cabinet may order additional study for GoN guarantees → upon approval, Fund mobilizes ADF instruments → GoN guarantee requires PDMO notification within 15 days.

Comparative lesson – Indonesia’s IIGF (PT Penjaminan Infrastruktur Indonesia): Established 2009, IIGF provides government-backed guarantees for PPP projects with transparent published fee schedules based on risk profile. Key design features relevant for Nepal’s ADF Guarantee Fund: (a) World Bank/ADB back-stop extends guarantee capacity beyond government’s own balance sheet; (b) all guarantees reported to Ministry of Finance as contingent liabilities in real time; (c) guarantee fees priced to reflect risk, generating revenue for the Fund; (d) independent risk assessment before each guarantee. Nepal’s ADF Guarantee Fund, combined with PDMO integration (Section 27(5)), mirrors this model but needs explicit fee pricing and IFI backstop arrangements in the Rules.

7.4 Instrument 4: Investment Fund (Section 3(gha))

Authorization: Section 3(gha) authorizes establishment of an Investment Fund by pooling capital from domestic and foreign investors.

SIF Regulation tension: The Specialized Investment Fund Regulation, 2075 imposes restrictions inappropriate for ADF: maximum 200 investors; minimum NPR 50 lakh per investor; closed-end 5–15 year lifespan; minimum NPR 15 crore corpus. ADF’s investment fund authorization, as lex specialis (National Civil Code, 2074, Section 3), supersedes the SIF Regulation’s general framework. ADF’s funds can have 20–30 year lifespans appropriate to infrastructure investment timelines. Therefore, the investment fund established under the ADF will be guided by the regulation introduced under the ADF Act rather than the SIF Regulations. 

Tax treatment gap: Nepal’s domestic SIFs face 30% corporate income tax at entity level. ADF sub-funds would face the same double-taxation risk unless IRD issues specific pass-through treatment under Section 31(1)’s Cabinet tax concession authority.

Recommendation: MoF/IRD should issue a specific tax rule providing that ADF Investment Fund income flowing to registered institutional investors (EPF, CIT, SSF, insurance companies, licensed BFIs) is treated as pass-through, with tax liability at investor level only – eliminating entity-level taxation and therefore encouraging investments in the ADF’s instruments. Pass-through concept is not prevalent in the tax laws of Nepal therefore entity level tax exemption might be a solution to this. Comparative note: India’s NIIF resolved this by structuring sub-funds as Category II AIFs under SEBI, which receive full pass-through treatment under India’s tax law.

7.5 Instrument 5: Remittance Fund (Section 3(nga))

Authorization: Section 3(nga) authorizes establishment of a Remittance Fund (bipreshan kosh) dedicated to mobilizing investments from Nepali citizens in foreign employment and Non-Resident Nepalis (NRNs).

Scale of the opportunity: Annual remittance inflows have surged to over NPR 1.45 trillion (~USD 10.15 billion) in the first eight months of FY 2025/26, annualizing to approximately NPR 2.17 trillion (~USD 15.2 billion) for the full year. The ADF’s Remittance Fund represents Nepal’s first statutory mechanism to convert consumption-oriented remittances into productive infrastructure investment.

Existing legal framework for NRN investment:

• FX Act, 2019, Section 2(chha3) and FITTA, 2075, Section 2(Ta): NRNs are “foreign investors.”
• FX Act, Section 10Ga: Foreign investors (including NRNs) may invest in securities including bonds.
• FITTA, 2075, Section 20: NRNs have guaranteed repatriation rights for dividends and sale proceeds.
• Unified Foreign Exchange Circular No. 17/2081, Section 1(घ)(२): NRNs may maintain foreign currency accounts in Nepal.
• SEBON IPO Remittance Quota (November 2022): 10% of IPO allocation for migrant workers through dedicated Remittance Savings Account linked to ASBA/Demat.

The remaining gap: The remaining gap is that no NRB regulation currently enables “investment-linked remittance” products, whereby a worker simultaneously remits funds and subscribes to bonds or fund units through a remittance service provider. A complete legal and regulatory regime exists for foreign workers’ equity investment in Nepal; however, procedural absences remain in relation to debt and other investment instruments. For NRNs, the investment route must follow the foreign investment pipeline under FITTA, 2075 and the FX Act, 2019, creating friction and weakening the immediacy of financial intermediation within the remittance fund.

Comparative lessons:

• Bangladesh Wage Earners Development Bond: Directly subscribed by migrant workers at point of remittance through Bangladesh Embassies and authorized banks abroad. Features: preferential return above domestic savings rate; dollar-or-taka denomination options; guaranteed repatriation; 3-year and 5-year terms; tax-exempt on maturity. By 2023, the bond had mobilized billions from Bangladeshi diaspora. Nepal’s ADF Remittance Fund should adapt this model directly – potentially working with Nepal’s Embassy network and foreign-deployed NRB-licensed remittance service providers as subscription channels.
• India NRI deposit schemes (FCNR(B)): NRIs hold USD-denominated deposits in India; stable foreign exchange source for infrastructure; full repatriation rights. Similar model could work for NRNs holding NPR + USD ADF Remittance Fund units.

Recommendation: NRB, SEBON and through some legal reforms should issue a Remittance Fund subscription laws and regulations enabling: (a) ADF Remittance Fund unit subscriptions through NRB-licensed remittance service providers; (b) simplified sub-unit denominations (NPR 1,000 minimum) accessible to ordinary workers; (c) remote KYC through labor permit + remittance history verification; (d) guaranteed repatriation of returns and principal in original currency; (e) integration with existing ASBA/Demat infrastructure for electronic unit holding.

7.6 Instrument 6: Asset Monetization (Section 3(cha))

Authorization: Section 3(cha) authorizes mobilization of capital through asset monetization (sampatti maudrikikaran) of any entity or project.

What this means in practice: Converting illiquid infrastructure assets – toll receivables, energy purchase agreement revenues, airport user fee streams, operational project cash flows – into tradeable securities. This allows asset owners (NEA, toll road operators, industrial park developers) to raise upfront capital against predictable future income streams, freeing capital for additional investment.

The complete regulatory vacuum: Nepal has no securitization framework. Securities Act, 2063, Section 2(cha) includes “any other securities specified by the Board” – giving SEBON theoretical prescriptive power – but SEBON has never issued ABS, MBS, or securitization regulations. See my other post here Legal Feasibility of Securitization in Nepal. 

The Civil Code obstacle: National Civil Code, 2074, Section 435(4): “A mortgage cannot be created over property not yet owned or property to be acquired in the future.” This directly limits security interests over future project cash flows – the essence of securitization. Securitizing NEA energy receivables requires a security interest over future electricity revenues; this is arguably “future property” under the Civil Code’s mortgage provisions.

The Secured Transactions Act dimension: The Secured Transactions Act, 2063 provides a more flexible framework for movable property security (including receivables), but its coverage of future cash flows is limited. See the other post here What the Bug is the Secured Transactions Act?. International securitization requires “true sale” legal frameworks – ensuring that assets transferred to an SPV are bankruptcy-remote from the originator – which Nepal’s company and insolvency law does not clearly accommodate.

Legal Alert: Operationalizing asset monetization under Section 3(cha) requires a comprehensive legal reform package: (1) SEBON regulations defining ABS/MBS as a distinct securities category; (2) a “true sale” legal framework for SPV asset transfer; (3) Civil Code amendment permitting security over future cash flows; (4) accounting standards for off-balance-sheet treatment; (5) tax neutrality at the SPV level to prevent double taxation; (6) credit rating methodology for structured products. This is a 3–5 year legislative and regulatory program.

Comparative lesson – India’s InvIT framework: India’s Infrastructure Investment Trusts (InvITs), regulated by SEBI since 2014, allow infrastructure owners to monetize operational assets into SEBI-regulated, exchange-listed trust units. As of 2024, India’s InvIT market has assets under management exceeding USD 20 billion. The InvIT model transfers operational infrastructure to a trust, which issues tradeable units to investors – effectively securitizing infrastructure cash flows. Nepal could develop an ADF-sponsored InvIT framework as the first phase of asset monetization, before the full securitization legal architecture is established.

7.7 Instrument 7: Fund of Funds (Section 3(chha))

Authorization: Section 3(chha) authorizes establishment of an integrated Fund of Funds that invests in other infrastructure-focused funds.

Regulatory gap: SIF Regulation, 2075 has no Fund-of-Funds provision. Rule 14(2)(d)’s “other funds as prescribed by SEBON Board” has never been used to prescribe a FoF structure.

ADF’s FoF architecture: ADF creates an overarching fund → invests in multiple sector-specific or project-specific sub-funds → sub-funds deploy into individual projects. This creates diversification across sectors, geographies, and risk profiles while maintaining a unified capital pool.

Fee-layering: FoF structures involve specialized investment funds like private equities who charge fees at two levels – the FoF management level and the underlying fund level performance. For infrastructure investments typically targeting 8–12% gross returns, combined fees of 2–3% can reduce net investor returns to 5–9% – comparable to bank deposit rates in Nepal. ADF must negotiate reduced fee arrangements at the underlying fund level, leveraging its government backing and scale.

Comparative lesson – India’s NIIF Fund of Funds: Invested in and alongside institutional fund managers including Brookfield, Tata Cleantech, and Highways Infrastructure Trust. NIIF’s government backing enabled below-market fee negotiations with underlying managers. The FoF approach allowed NIIF to build a diversified infrastructure portfolio without direct project management risk.

7.8 Instrument 8: Other Prescribed Instruments (Section 3(ja))

Section 3(ja) is a forward-looking catch-all for instruments “prescribed” through Rules. The ADF Act’s Delegated Legislation Commentary (pratyayojit wyawasthapan sambandhi tippani, Item 1) explains: “Financial instruments that will develop in the future cannot all be anticipated now; therefore, this provision allows future instruments to be specified through rules as financial markets evolve.”

This could accommodate: Infrastructure Investment Trusts (InvITs); Real Estate Investment Trusts (REITs); green bonds with specific climate-linked coupon features; sustainability-linked bonds; social impact bonds; blended finance certificates; blue bonds (water/ocean infrastructure); and any other instrument that global infrastructure finance markets develop. NRB Circular No. 19/2081’s expansion of hedging services to infrastructure development banks demonstrates regulatory openness to financial innovation.

7.9 Dual Equity and Debt Investment in a Single Project

The Fund is legally authorized to provide both equity (swapunji) and a loan (rin) to a single project simultaneously (Sections 24(2)(ka), 24(2)(kha), 24(2)(ga); Section 9(1)(jha)). This dual investment creates important commercial, governance, and risk-management concerns because the Fund then occupies multiple positions in the project’s capital stack with potentially conflicting incentives: as equity investor, it seeks long-term upside; as lender, it seeks fixed repayment and downside protection. Simultaneous debt and equity exposure creates stacked/concentrated risk, magnifying total exposure to a single asset. Dual investment requires strong legal structuring, exposure caps, conflict-of-interest safeguards, and clear rules on priority, pricing, and governance to prevent misuse or overconcentration.

7.10 Collateralized Lending versus Hypothecation

The Act authorizes the Fund to invest through hypothecation under Section 9(1)(gha). Hypothecation is a specific type of collateralized lending in which the borrower offers movable assets (vehicles, equipment, receivables) as security while retaining possession and continued use during the loan term. For infrastructure projects, hypothecation is particularly relevant because project assets (turbines, construction equipment, operational machinery) need to remain in active use during construction and operation. The Fund takes a security interest without disrupting the project’s operations.

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Chapter 8: ADF as Public Institution – Public Debt Risk and Quasi-Sovereign Liability

8.1 The Classification Problem

The ADF Fund will be a separate legal person, so its liabilities are not automatically direct sovereign debt. However, because it is initially 51% Government-owned and can receive Government guarantees and sovereign-like instrument treatment, it can create public-sector risk.

The PDMO Act defines public debt as internal or external debt and the financial liabilities created during debt mobilization (PDMO Act, 2079, Section 2(j)). It defines public institutions for guarantee purposes as entities under full or majority Government ownership or control (PDMO Act, Section 14(2), explanation). Government guarantees for public-institution infrastructure projects are handled under the PDMO Act and Rules, with Cabinet approval and PDMO recording/reporting.

ADF therefore likely falls within the public-institution universe for guarantees and fiscal-risk reporting, even if its non-guaranteed borrowing is not headline sovereign debt.

8.2 The Central Question: Does ADF Debt Count as Public Debt?

This question has profound implications for Nepal’s fiscal management and international debt sustainability assessments.

• Government equity contributions: GoN’s NPR 12.75 arba contribution = capital expenditure (investment), not borrowing. Appears in capital accounts, not debt statistics. Does not increase the public debt-to-GDP ratio.
• Government-guaranteed ADF bonds: These are contingent public liabilities. They do not appear as direct government debt until a guarantee is called. They must be recorded by PDMO under the Public Debt Management Rules, 2080, and count against the 1% GDP guarantee cap under Rule 36.
• Non-guaranteed ADF bonds (Section 30(2)): These are not government-guaranteed but receive government-security-like treatment for regulatory purposes. The fiscal risk here is implicit: investors may assume sovereign support given ADF’s majority government ownership, Cabinet direction, and Auditor General oversight – creating a potential implicit contingent liability not recorded in any formal debt register.

The IMF/World Bank fiscal risk framework: The IMF’s Government Finance Statistics Manual (GFSM 2014) and the World Bank’s guide on fiscal risk identify public sector contingent liabilities as a key fiscal risk. For Nepal’s Article IV consultations and program assessments, the IMF would likely assess ADF’s total liability exposure (explicit + implicit) as part of Nepal’s overall public sector balance sheet – even for non-guaranteed instruments, if ADF is classified as a “public corporation” with majority government ownership. This is the most important issue that directly challenges the objective of the fund. 

8.3 ADF Liability Classification Matrix

ADF Exposure	Direct Public Debt?	Formal Contingent Liability?	Implicit Fiscal Risk	Recording Requirement
GoN equity contribution of NPR 12.75 arba	No (investment)	No	Low	Annual budget/appropriation + public investment reporting
ADF bond with explicit GoN guarantee	Not direct until called	Yes – explicit	High	PDMO record; guarantee ceiling; annual budget disclosure
ADF bond with IFI guarantee	No GoN debt unless GoN counter-guarantee	Possibly indirect	Medium	Disclose IFI guarantee terms and residual risk
Non-guaranteed ADF bond (Section 30(2))	No	Possibly implicit	Medium-High	ADF quarterly report + SEBON disclosure; NRB disclaimer circular
ADF own guarantee to project lender	Fund liability	Not GoN unless backstopped	Medium	ADF Annual Report (Section 50)
Government guarantee recommended by ADF	Not until called	Yes – explicit	High	PDMO record within 15 days (Section 27(5))
SPV debt without GoN/ADF guarantee	No	No direct	Medium if strategic public asset	Project/SPV disclosure
SPV debt with ADF guarantee	No GoN direct	Fund contingent liability	Medium-High	ADF risk provision + Annual Report
SPV debt with GoN guarantee	No until called	Yes	High	PDMO + Parliament + budget disclosure

8.4 The Off-Budget Risk

The most serious risk is that ADF becomes a shadow infrastructure treasury. This could happen if: ADF issues large volumes of bonds treated like Government securities; banks buy them for directed-sector targets or liquidity reasons; investors assume Government support even when no guarantee exists; ADF project failures create political pressure for bailout; guarantees are underpriced or not provisioned; ADF subsidiaries create hidden liabilities; and annual reports are not integrated into public fiscal-risk statements.

International practice treats this as a real risk. The World Bank’s PPP fiscal-risk material warns that PPPs can look affordable because obligations are delayed and only become visible when they affect the budget during operations. ADF’s explicit fiscal transparency mechanisms (Sections 27(5), 50, 41, 51) address explicit liabilities – but the implicit liability problem requires additional action.

8.5 The Fiscal Transparency Imperative

The ADF Act contains several fiscal risk transparency provisions that, if properly implemented, can prevent “off-balance-sheet” debt accumulation:

• Section 27(5): Mandatory PDMO notification within 15 days of any GoN guarantee for ADF.
• Section 50 Annual Report: Must include “liabilities created for the Government due to guarantees given for ADF mobilization” – the key fiscal-risk disclosure clause.
• Section 41 Auditor General: Constitutional audit institution reviews ADF accounts.
• Section 51 International Evaluation: Triennial independent assessment includes “liabilities” – fiscal risk is part of the evaluation scope.

Recommendation: NRB should issue a regulatory clarification circular specifying: “The trading and listing treatment provided to ADF financial instruments under Section 30(2) of the ADF Act, 2082, is for purposes of market facilitation only and does not constitute a government guarantee, does not create implicit sovereign liability, and does not modify ADF’s credit standing for investor due diligence purposes.” This communication is essential for accurate market pricing.

8.6 Guarantee Discipline

ADF’s guarantee architecture must be aligned with PDMO law. A proper guarantee rulebook should include: (1) guarantee eligibility; (2) economic and financial feasibility; (3) repayment capacity; (4) fiscal affordability analysis; (5) guarantee fee; (6) collateral or counter-indemnity; (7) exposure limit; (8) risk category; (9) annual expected-loss provision; (10) PDMO reporting; (11) parliamentary disclosure; (12) guarantee call procedure; and (13) recovery rights.

Recommendation: Nepal should issue an ADF Guarantee Regulation requiring every Government-backed ADF exposure to be recorded by PDMO, priced by expected loss, capped annually, reported to Parliament and disclosed in the Fund’s annual report.

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Chapter 9: Banking System, NRB Regulation and ADF Instruments

9.1 ADF Outside Ordinary BAFIA, Inside NRB’s Systemic Perimeter

ADF would not automatically be a BAFIA-licensed bank or financial institution because it does not take public deposits. BAFIA’s definitions and licensing framework apply to BFIs, including commercial banks, development banks, finance companies, microfinance institutions and infrastructure development banks. NIFRA is a BAFIA infrastructure development bank; ADF is a statutory finance mobilization institution.

But ADF cannot be outside NRB’s attention. It issues instruments purchased by BFIs, borrows externally, maintains foreign currency accounts, hedges foreign loans and may affect financial stability. The ADF Act itself gives NRB monitoring/directive authority over ADF loan investment and requires NRB approval for foreign capital-market issuance and foreign borrowing/hedging.

9.2 NRB’s Regulatory Authority Over ADF – Four Specific Areas

Unlike NIFRA (which is fully licensed and supervised under BAFIA), the ADF Act limits NRB’s authority to four specific areas:

Area 1 – Loan Portfolio Regulation (Section 24(3)): NRB may “regulate and monitor loan investments made by the Fund in projects and issue necessary directives; compliance with such directives shall be the duty of the Fund.” This creates targeted NRB authority over ADF’s lending without imposing full BAFIA licensing.

Area 2 – Foreign Capital Market Operations (Section 9(1)(ana)): Prior NRB approval for ADF to list or issue securities in foreign capital markets. Reflects Nepal’s FX management sensitivity.

Area 3 – International Borrowing and Hedging (Section 9(1)(ta)): NRB approval for loans from multilateral financial institutions; NRB approval for hedging of those loans.

Area 4 – Green Sector Classification (Section 31(2)): ADF’s green sector project eligibility is defined by NRB’s own green taxonomy – including renewable energy, transmission, urban development infrastructure, and climate adaptation.

Internal inconsistency (Sections 9(1)(cha) and 9(1)(ta)): As identified in the first blog article Some Pointers for ADF Bill, Section 9(1)(cha) allows ADF to “receive loans or grants from international financial institutions or foreign banks” with no NRB approval mention, while Section 9(1)(ta) requires NRB approval for “loans from multilateral financial institutions for any project.” This ambiguity could allow ADF to borrow internationally without NRB oversight – creating FX management risk.

Recommendation: The Rules under Section 58 should clarify: “All loans from foreign banks or multilateral institutions to ADF require prior NRB approval under the Foreign Exchange Regulation Act, 2019. Grants (non-repayable) from multilateral institutions do not require NRB approval.”

9.3 The Banking Sector’s Structural Role in ADF’s Success

Nepal’s commercial banks are simultaneously ADF’s most important potential investor base and its natural co-financing partners. With NPR 5.5 trillion in deposits, Nepal’s banking system faces a chronic challenge: finding sufficient high-quality, liquid, long-term investment assets. Government securities (T-bills, Development Bonds, NSBs) are the primary investment outlet, but issuance volume is limited by PDMO’s deficit financing needs. ADF bonds – particularly government-guaranteed bonds qualifying as SLR-eligible instruments – would provide an additional high-quality investment outlet, simultaneously serving banking system liquidity management and infrastructure financing goals.

The priority sector mechanic in detail:

Class A commercial banks in Nepal face mandatory targets of: (a) minimum 10% of total loans in agriculture (by Poush 2083); and (b) minimum 20% of total loans in combined cluster (Energy + MSME + Tourism + ICT + Export, by Poush 2083).

Banks have struggled to meet these targets, particularly in agriculture, due to credit risk concerns and limited origination capacity. ADF Agriculture Sector Bonds and Energy Sector Bonds provide a regulatory compliance solution: banks meet their requirements by investing in professionally appraised, government-backed ADF instruments rather than struggling with direct project origination. This creates natural, sustained demand.

The maturity mismatch bridge: ADF can serve as a takeout finance mechanism – a function Nepal entirely lacks. When commercial banks extend 5–7 year infrastructure project loans (against deposits that are mostly 1–3 year), they face maturity mismatch. ADF can purchase these maturing bank loans, replacing them with long-term ADF bond financing. This “takeout” function frees bank capital for new lending, reduces maturity mismatch risk, and extends infrastructure debt to appropriate maturities.

9.4 Directed Lending and ADF Sectoral Instruments: Design Analysis

Design choice	Benefit	Risk	Safeguard
ADF instruments count as directed lending	Easier mobilization of bank liquidity	Weakens banks’ direct appraisal discipline	Require rated/eligible instruments only
Government-guaranteed ADF bonds get low risk weight	Lowers cost of capital	Sovereign-bank nexus	Exposure ceilings and risk disclosure
ADF bonds become SLR/repo eligible	Improves liquidity	Illiquid project risk treated as liquid	Only for explicit sovereign/IFI-backed instruments
Sectoral bonds finance priority sectors	Targeted infrastructure finance	Sector concentration	NRB portfolio limits

9.5 Commercial Banks: Capable, Incapable and Useful

Nepal’s commercial banks are:

1. Capable: They are the largest domestic financial intermediaries and cannot be excluded from development finance.
2. Incapable alone: Their deposit structure, ALM, NPL risk, concentration limits and maturity mismatch prevent them from being the sole source of long-term infrastructure finance. Some banks report NPLs above 4–5%.
3. Useful as ADF participants: They can buy ADF bonds, co-finance projects, provide bridge loans, issue guarantees/LCs and participate in consortium finance.

9.6 NRB Reform Checklist

Issue	Required NRB action
Risk weight	Classify Government-guaranteed, IFI-guaranteed, ADF own and non-guaranteed project instruments separately
SLR eligibility	Restrict preferential liquidity treatment to instruments with clear sovereign/IFI guarantee or deep market liquidity
Directed lending	Specify which ADF sectoral instruments count and how double counting is prevented
Exposure limits	Cap bank exposure to ADF and ADF-related SPVs by instrument type
Reporting	Separate reporting buckets for ADF instruments
Foreign borrowing	Approval framework for ADF external loans and hedging
Loan investments	NRB directive under ADF Act Section 24(3)
NIFRA coordination	Avoid regulatory arbitrage between NIFRA and ADF

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Chapter 10: NIFRA and ADF – Duplication or Complementarity?

10.1 The Structural Differentiation

Feature	NIFRA	ADF Fund
Legal form	BAFIA-licensed Infrastructure Development Bank (Class D, Section 37)	Special statute (not BAFIA-licensed)
NRB supervision	Full NRB supervision under BAFIA	Limited – only loans (Section 24(3)) and foreign borrowing (Section 9(1)(ta))
Public listing	Listed on NEPSE	Not listed at entity level
Deposit-taking	Limited long-term deposits possible	Not deposit-taking
Balance sheet	Paid-up capital ~NPR 21.60 billion; total assets ~NPR 28.37 billion; loans ~NPR 21.14 billion	NPR 25 arba paid-up (~USD 170 million) initial
Bond issuance	Yes, under NRB/SEBON framework	Broader statutory authority; government-equivalent treatment (Section 30)
Remittance fund	Not a stated function	Express authorization, Section 3(nga)
Fund-of-funds	Not a stated function	Express authorization, Section 3(chha)
Asset monetization	Limited	Express authorization, Section 3(cha)
Guarantee fund	Limited	Dedicated architecture, Sections 3(ga) + 27
Statutory first-lien priority	Standard secured creditor	Statutory super-priority, Section 29
Auditor General audit	No (company law applies with NRB supervision)	Yes, Section 41
Cabinet direction	No	Yes, Section 54
Government equity (min.)	Variable (listed company)	51% mandatory; 26% floor
Government-equivalent instrument treatment	Not ordinary	Express Act treatment for ADF instruments
Public debt implication	Less direct	Higher due to GoN majority and guarantees

10.2 NIFRA’s Limits

The research materials identify constraints: NIFRA’s balance sheet is small relative to national infrastructure need (~NPR 21 billion loans vs NPR 7–8 kharba annual investment need); it operates under bank prudential rules; it is listed and subject to profit/shareholder expectations; it cannot alone run a statutory remittance fund, guarantee fund, fund-of-funds and asset monetization platform at national scale; and ADF’s Government-equivalent instruments may crowd out NIFRA’s bonds if not coordinated.

10.3 The Complementarity Model

ADF and NIFRA should operate as complementary layers:

• NIFRA: Direct lending (BAFIA-licensed balance sheet lending); equity co-investment; bond issuance for refinancing; partial guarantee provision within BAFIA limits.
• ADF: Capital mobilization platform (pooling institutional capital through guarantee fund, investment fund, remittance fund); government-backed bonds for institutional investors; fund-of-funds; asset monetization; first-lien collateral protection for large projects.

Section 9(1)(tha) explicitly enables ADF to co-invest jointly with “government-owned infrastructure development banks” – the clearest statutory expression of this complementarity. In practice: ADF provides the credit enhancement (guarantee), raises the capital (bond issuance, fund creation), and takes the super-priority collateral position; NIFRA provides the direct technical lending expertise and ongoing project monitoring as the licensed bank.

Role	Best assigned to NIFRA	Best assigned to ADF
Direct infrastructure lending	Yes	Yes, but selectively
Co-financing/consortium lending	Yes	Yes, as lead or participant
Fund-of-funds	No/limited	Yes
Remittance fund	No/limited	Yes
Government-backed guarantee fund	No/limited	Yes
Project bonds	Yes, ordinary/green	Yes, project-specific/sectoral/guaranteed
Asset monetization	Limited	Yes, if rules exist
Project preparation	Possible	Should coordinate with IBN/NIFRA
Regulatory supervision	NRB entity-level	Hybrid: Act + NRB/SEBON/PDMO

Recommendation: The ADF Rules should create a NIFRA coordination protocol: ADF may co-finance through NIFRA, use NIFRA as implementing bank, purchase/take out NIFRA-originated infrastructure loans, or provide guarantees to NIFRA-led consortiums, but ADF should not duplicate ordinary bank functions where NIFRA is already the appropriate regulated lender.

Key Finding – Complementarity, Not Duplication: NIFRA fills the direct-lending gap; ADF fills the capital-mobilization, credit-enhancement, and instrument-creation gap. These are distinct functions that existing Nepali law assigns to distinct institutional forms. Coordination, not merger, is the correct policy response.

Comparative lesson: India did not rely on one institution alone. NaBFID was established under the National Bank for Financing Infrastructure and Development Act, 2021, to support long-term non-recourse infrastructure finance and develop bonds and derivatives markets for infrastructure financing. NIIF operates as a sovereign-anchored alternative investment platform providing equity and structured debt and raising institutional capital. The lesson for Nepal is that infrastructure ecosystems can include both a regulated infrastructure financier (NIFRA) and an alternative investment/fund platform (ADF). But roles must be clear.

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Chapter 11: IBN, PPPs and ADF – Project Gateway versus Finance Platform

11.1 IBN as Project Gateway

IBN approves and facilitates large investment and PPP projects. Its thresholds include large non-energy projects of NPR 6 billion or more and energy projects above 200 MW. It identifies projects, maintains project bank materials, invites proposals, negotiates PDAs/PIAs, coordinates one-stop service and monitors implementation. It can also engage in blended finance and VGF-related processes. The Prime Minister chairs IBN’s Governing Board, giving it the highest political standing of any investment institution.

11.2 The Designed Partnership

The ADF Act creates a formal institutional partnership with IBN through two provisions:

• Section 4(2)(ga): IBN-recommended PPP projects are eligible for ADF financing
• Section 27(2)(gha): IBN recommendation is required for PPP projects seeking ADF guarantees

This creates a designed handoff: IBN validates PPP structure and strategic importance → ADF provides financing architecture to reach financial close.

11.3 The Boundary

Function	IBN	ADF
Select PPP project	Yes	May independently study but should coordinate
Approve large investment	Yes	No primary approval role
Negotiate PDA/PIA	Yes	Only financing agreement
Assess financial close	Yes, project monitoring	Yes, financing due diligence
Provide VGF	Recommends/administers Government support	May finance/guarantee but not replace VGF
Issue bonds	Not primary	Yes
Guarantee fund	Not primary	Yes
Project takeover on default	Not primary lender role	Yes under Section 28

11.4 The Risk: ADF as Captive Financier for IBN Projects

If ADF becomes politically obligated to finance all IBN-recommended projects, it loses commercial independence. IBN’s project recommendation is a policy/political decision; ADF’s investment decision must be a commercial risk assessment. The risk is structural: with Finance Secretary as ADF Board Chair, and IBN recommendation as a required gateway for PPP project guarantees, there is a clear pathway for political pressure on ADF to finance projects that pass IBN’s political filter but fail ADF’s commercial assessment.

Recommendation: ADF’s investment policy should state that IBN recommendation is a necessary but not sufficient condition for PPP project financing. ADF must independently assess repayment, risk allocation, collateral, fiscal commitment, environmental/social risk, and investor protection before any investment or guarantee commitment, regardless of IBN recommendation status.

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Chapter 12: Securities Law and Capital-Market Readiness

12.1 ADF Instruments as Securities

The Securities Act, 2063 defines securities broadly to include shares, stocks, bonds, debentures, debenture stocks, collective investment scheme certificates, Government or Government-guaranteed bonds and other Board-prescribed instruments (Securities Act, Section 2(f)). ADF bonds, debentures and subsidiary shares fall within securities law. Hybrid instruments may require SEBON prescription or specific rules.

12.2 The Regulatory Gap Matrix

ADF Instrument	Current SEBON Support	Key Gap	Reform Needed
GoN-guaranteed ADF bond	Securities Act, Section 2(cha); Securities Issue Guidelines	Guarantee disclosure template; credit rating methodology for sovereign-backed DFI	SEBON circular on guaranteed infrastructure bond disclosure
Non-guaranteed ADF bond	Debenture issuance guidelines	No risk differentiation from guaranteed bond; investor confusion risk	Mandatory risk-labeling; separate prospectus for non-guaranteed bonds
Project-specific bond	Section 2(cha) general definition	No project-cash-flow disclosure standard; no ring-fencing rules; no SPV framework	SEBON project bond regulations
Hybrid/mezzanine instrument	Section 2(cha) catch-all; basic preference share rules	No taxonomy; no accounting treatment standard; no disclosure template	SEBON hybrid instrument classification circular
Remittance Fund unit	Possible under SIF Regulation	No NRN/diaspora-specific rules; no remote subscription mechanism	SEBON remote subscription rules; NRB remittance investment circular
Fund-of-funds	SIF Rule 14(2)(d) catch-all	Not formally recognized as instrument type	SEBON FoF recognition and fee-disclosure circular
Asset-backed security	Section 2(cha) catch-all only	No securitization framework; no SPV rules; Civil Code restriction	Comprehensive securitization regulation (3–5 year reform program)
Concession company equity (BOOT)	Ordinary share listing rules	No concession-life disclosure; no terminal-value warning; no amortized-value metric	SEBON finite-life infrastructure company listing rules

12.3 The Debenture Trustee Problem

Nepal’s debenture issuance framework requires appointment of a debenture trustee under the Securities Issue and Allotment Guidelines, 2074 (Rule 9). However, Nepal’s debenture trustee function has historically been passive – trustees have been compliance-checklist holders rather than active covenant monitors.

For ADF’s project-specific bonds – where investor returns depend on project-specific cash flows rather than general corporate creditworthiness – an active, capable trustee is essential. The trustee must: monitor project construction milestones and operational ramp-up; enforce financial covenant compliance; notify investors of material events (force majeure, PPA renegotiation, environmental incident) within 48 hours; act on investor behalf in default or restructuring; and trigger enforcement of collateral security.

SEBON should issue strengthened debenture trustee regulations for infrastructure bonds specifically, with: (a) quarterly active monitoring reports; (b) mandatory event notification standards; (c) minimum net-worth and professional-capacity requirements; (d) prohibition on trustee having material business relationships with the bond issuer.

12.4 The Private-Placement-to-Listing Gap

Under Securities Listing and Trading Regulation, 2075, Rule 3, listing for secondary market trading requires that securities were issued through a SEBON-approved public prospectus to the general public. Privately-placed ADF bonds – sold directly to institutional investors without a public offering – cannot currently be listed on NEPSE for secondary trading.

This creates a significant liquidity problem. Institutional investors holding illiquid private-placement infrastructure bonds face a maturity-hold problem: they must hold to maturity regardless of their portfolio liquidity needs. This illiquidity premium reduces the price institutions will pay, raising ADF’s borrowing cost.

Alternative Interpretation: Under the Securities Listing and Trading Regulation, 2075 (Rules 3(2) and 4(1)(b)) read with the Securities Board Regulation, 2064 (Rule 23), secondary market listing on NEPSE is ordinarily “prospectus-locked,” requiring a SEBON-approved public issue, with privately placed securities (e.g., to EPF, CIT, banks) generally restricted to OTC trading due to the absence of a public prospectus under Section 30(2)(c) of the Securities Act, 2063. However, this constraint is substantially neutralized for ADF instruments by Section 30 of the ADF Act, 2082, which deems Government-guaranteed ADF debentures and related instruments equivalent to government securities (Section 30(1)–(2)), thereby activating statutory exemptions under Sections 30(2)(a)–(b) of the Securities Act, 2063 and enabling listing through government-security pathways under Rule 4(2) of the Listing Regulation and the NEPSE Government Securities Transaction Bylaws, 2062 (Rule 3) via an NRB “letter of request” without a retail prospectus. Accordingly, while the general regime blocks private-placement bonds from NEPSE listing, Section 30 effectively creates a legal fast-track to exchange tradability for ADF instruments, subject to their classification as government-equivalent securities.

12.5 Credit Rating: The Mandatory Requirement Without Exemption

Credit Rating Regulation, 2068, Rule 3(1)(b) mandates credit rating before public issuance of debentures. There is currently no exemption for government-guaranteed instruments. Nepal has two SEBON-approved rating agencies: ICRA Nepal and CARE Nepal. Neither has experience rating development finance institution bonds with complex guarantee structures.

Recommendation: SEBON should collaborate with ICRA Nepal and CARE Nepal to develop a specific rating methodology for ADF bond types, recognizing: (a) ADF institutional-structure rating (based on government ownership, statutory mandate, Auditor General oversight, and PDMO integration); (b) project-specific bond rating (based on project cash flows, PPA structure, government offtake, and ADF guarantee); (c) non-guaranteed ADF instruments (based on ADF balance sheet strength). Comparable NIIF bonds in India received AAA ratings from domestic agencies based on government backing and institutional structure.

Alternative Interpretation: Under the Credit Rating Regulation, 2068 (Rule 3(1)(b) and Rule 3(2)), the public issuance of debentures, bonds, and other debt instruments is ordinarily contingent upon a mandatory credit rating, with the results required to be disclosed in the prospectus or offer document to facilitate informed investor risk assessment. This requirement creates a rigid regulatory compliance hurdle for organized institutions, as credit rating agencies must conduct continuous monitoring and surveillance of the rated instrument for at least three years. However, this obligation is substantially neutralized for ADF instruments by Section 30 of the Alternative Development Finance (ADF) Mobilization Act, 2082, which mandates that ADF-issued guaranteed debentures and all other financial instruments be treated on par with sovereign instruments such as Development Bonds, Citizen Savings Bonds, or Nepal Rastra Bank (NRB) debentures. This statutory parity activates the regulatory flexibility found in Rule 3(7) of the Credit Rating Regulation, 2068, which empowers SEBON to exempt specific securities from rating requirements via public notice if it is in the interest of the securities market. Furthermore, because government-guaranteed securities are expressly exempt from the requirement to issue a prospectus under Section 30(2)(a)–(b) of the Securities Act, 2063, they could also potentially bypass the mandatory disclosure of rating results which is legally anchored to the prospectus or offer document under Rule 3(2) of the Credit Rating Regulation. But this is something that needs clarification. 

Comparative lesson – India InvIT/project bond logic: India’s infrastructure finance system uses project bonds, InvITs, credit enhancement, NaBFID and NIIF-like platforms. The key lesson is that asset monetization and infrastructure market instruments require regulatory infrastructure: trustee, cash-flow waterfall, valuation, disclosure, investor eligibility and secondary-market rules.

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Chapter 13: BOOT, Concession Assets and the Retail Investor Problem

13.1 Why This Deserves a Separate Chapter

This is one of the most important and original risks in the ADF analysis. The ADF parent Fund is not designed to raise ordinary share capital from the general public – its core capital is Government, retirement funds/fund managers and insurance companies. That is a strong design feature.

But Section 9(2)–(3) allows separate companies, subsidiaries or entities for projects and permits capital collection from IFIs and domestic/foreign investors through equity, bonds or debentures. If those subsidiaries/SPVs issue public equity while holding finite-life concession assets, retail investors may be exposed to terminal-value risk.

13.2 Nepal’s BOOT Experience

Nepal’s hydropower sector has established the country’s primary experience with BOOT project structures. Most private hydropower projects are developed under licenses granted for 35-year terms under the Electricity Act and Electricity Regulations, after which the project assets (dams, powerhouses, equipment, transmission lines) transfer to the Government of Nepal without payment.

This creates a fundamental equity valuation challenge: the equity value of a BOOT company is not perpetual – it is a finite, time-decaying value. A project with 20 years remaining on its license is worth substantially more than an identical project with 5 years remaining, because the terminal value of the equity is zero at license expiry.

13.3 The NEPSE Valuation Distortion

When hydropower project companies list on NEPSE – as several have, and as ADF subsidiaries may – retail investors apply standard equity metrics (P/E ratio, price-to-book, dividend yield). These metrics are appropriate for perpetual companies (banks, manufacturing, telecom) where equity represents permanent ownership with terminal value.

For a BOOT company, these metrics systematically over-value the equity in early years and fail to account for the terminal zero-value at license expiry. A retail investor applying a 20x P/E to a hydropower company’s current earnings is implicitly valuing that company as if its cash flows continue indefinitely – when in fact they terminate at license expiry and all physical assets revert to the government. Nepal’s retail investor base – which dominates NEPSE trading – generally lacks the financial literacy to adjust equity valuation for remaining concession life.

The problem is compounded by ordinary equity’s structure: it assumes residual claim on a continuing enterprise. In a BOOT project: remaining cash flows decline as transfer date approaches; terminal value may decline sharply; refinancing options narrow; maintenance obligations may rise; equity value should amortize; ordinary trading may misprice risk.

13.4 ADF’s Exposure to This Risk

ADF’s authorization to raise equity “from the general public” (Section 3(ka)) and to establish project subsidiaries that raise capital from retail investors (Section 9(3)) creates direct exposure to this risk if ADF subsidiaries develop BOOT infrastructure projects and list on NEPSE. Section 3(cha)’s asset monetization authorization creates additional exposure: if ADF securitizes operating BOOT concession revenues and sells units to retail investors, those investors may not understand that the asset backing their investment has a finite life.

13.5 Comparative Warning: India’s IL&FS Crisis

India’s IL&FS (Infrastructure Leasing and Financial Services) collapse in 2018 provided a cautionary lesson in infrastructure SPV opacity. IL&FS operated a complex web of 300+ subsidiary and associate companies, each holding infrastructure project assets. The cross-holdings obscured aggregate leverage, and retail investors in IL&FS instruments lost significant sums when the corporate structure’s hidden debt became apparent. Nepal’s ADF subsidiaries must avoid this opacity by maintaining consolidated disclosure, clear parent-subsidiary exposure mapping, and independent annual valuations.

13.6 Required Reforms

Problem	Required safeguard
Concession expiry hidden in prospectus	Mandatory remaining concession-life disclosure on every report
Terminal value uncertainty	Independent terminal value model (DCF of remaining cash flows)
Equity treated as perpetual	Separate finite-life infrastructure securities category on NEPSE
No investor exit mechanism	Buyback/redemption/sinking fund or yield instrument requirement
Retail misunderstanding	Risk label and investor suitability warning on all subscription forms
Project delay/cost overrun	Continuous disclosure triggers for material events
Transfer conditions unclear	Mandatory disclosure of handback obligations and remaining license term
Valuation mismatch	Annual independent valuation; prohibition on P/E-based benchmarking

SEBON Recommendation – BOOT/Concession Company Listing Rules: Create a dedicated “Infrastructure Concession Company” (suffix “CC” on NEPSE ticker) listing category with: (a) prominent remaining concession-life display on NEPSE trading screen and all investor communications; (b) annual value-at-expiry disclosure using DCF of remaining cash flows, not conventional equity metrics; (c) sinking fund or amortization mechanism – company must set aside annual provisions relative to remaining concession life; (d) terminal value disclosure: “At the expiry of this concession on [date], all physical assets will transfer to the Government of Nepal at no consideration; the equity value of this company will be zero”; (e) investor suitability warning required on all subscription forms and trading screens; (f) prohibition on P/E-based benchmarking by analysts and broker research.

Recommendation: ADF subsidiaries holding finite-life concession assets should generally raise public capital through debt, redeemable preference shares, infrastructure trust units or amortizing instruments rather than ordinary perpetual equity, unless SEBON creates a distinct finite-life listing category with strong disclosures.

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Chapter 14: Foreign Investment, FX, External Borrowing and Hedging

14.1 Foreign Investment into ADF

The FITTA framework: FITTA, 2075, Section 2(wyan) defines “foreign investment” broadly to include share acquisition by “international governmental or intergovernmental organizations.” An ADB, IFC, AIIB, or World Bank IDA acquiring ADF shares under Section 8(8) constitutes foreign investment under FITTA.

Approval pathway tension: FITTA provides two primary approval routes: DOI for investments below NPR 6 billion (FITTA Rules, 2077, Rule 8); IBN for investments above. But ADF Act, Section 8(8) creates a parallel Cabinet-approval route for IFI share acquisition. The ADF Act likely operates as lex specialis under National Civil Code, 2074, Section 3, superseding FITTA’s procedural requirements for IFI participation in ADF. However, harmonization through explicit regulatory guidance is necessary to avoid parallel approval uncertainty.

Recommendation: MoF should issue a notification clarifying that IFI acquisition of ADF shares under Section 8(8) is governed exclusively by the ADF Act’s Cabinet-approval mechanism and does not require separate FITTA approval through DOI or IBN.

Repatriation rights: FITTA, 2075, Section 20 guarantees IFI shareholders: repatriation of dividends (Section 20(2)(kha)); repatriation of sale proceeds upon divestment (Section 20(2)(ka)); and protection against expropriation without just compensation. These guarantees apply to all foreign investors in ADF, including IFI shareholders, providing essential investment comfort.

Foreign investment approval generally goes through DOI or IBN depending on threshold, with IBN approving investments exceeding NPR 6 billion. FITTA Rules set a minimum foreign investment threshold of NPR 50 million per investor.

14.2 Foreign Investment into ADF Subsidiaries and SPVs

When ADF establishes project subsidiaries (Section 9(1)(tha)) that raise capital from foreign investors (Section 9(3)), those investments trigger full FITTA approval requirements at the subsidiary level. ADF subsidiaries developing large infrastructure projects will typically exceed NPR 6 billion – meaning IBN approval is required for foreign equity in those subsidiaries.

14.3 External Borrowing Architecture

• ADF borrowing from IFIs (Section 9(1)(ta)): Requires NRB prior approval. Legal framework: FX Act, 2019, Section 11.
• Offshore bond issuance (Section 9(1)(ana)): ADF can list and issue instruments in foreign capital markets with NRB approval. Legal framework: FX Act, Section 11; FIFL Fifth Amendment (2025). Offshore bonds create foreign currency liabilities.
• PDMO and external debt: ADF’s external borrowings constitute “external debt of the public sector” for Nepal’s debt statistics (given 51% government ownership). These must be reported to PDMO and NRB, and appear in Nepal’s external debt sustainability analysis – with implications for IMF Article IV assessments.

14.4 The Currency Risk and Hedging Architecture

The core mismatch: ADF’s international borrowing creates USD/EUR/JPY liabilities. ADF’s domestic project investments generate NPR revenues. NPR depreciation against the borrowing currency – a historical trend – means ADF’s NPR-denominated project income becomes insufficient to service foreign currency debt obligations. Historical and worst-case depreciation scenarios identified in the hedging/macro notebook materials show significant volatility.

Nepal’s hedging legal framework:

• Hedging Regulation, 2079 (Hedging Niyamawali, 2079): Forward contracts, options, swaps authorized for licensed entities.
• NRB Circular No. 19/2081: Expanded hedging services specifically to infrastructure development banks; introduced forward contracts and similar derivative instruments.
• FIFL Fifth Amendment (2025): Allows commercial banks to accept guarantees from foreign pension funds, hedge funds, and DFIs – expanding the counterparty base for hedging arrangements.
• Section 9(1)(ta): Requires NRB approval for ADF’s hedging of foreign loans.

Hedging infrastructure gap: Despite the legal framework, Nepal lacks a deep foreign exchange derivatives market for long-tenor, large-ticket infrastructure hedging:

• Forward contracts: Available for up to 1-year tenors
• Cross-currency swaps: Very limited market; few counterparties for tenors exceeding 2–3 years
• Long-tenor (10–20 year) infrastructure hedging: Not currently available domestically

Multilateral hedging options:

• ADB’s Credit Guarantee and Investment Facility (CGIF): Provides local-currency guarantees for bond issuances, enabling ADF to issue NPR-denominated bonds to domestic investors while hedging currency mismatch at multilateral level.
• World Bank’s MIGA political risk guarantees: Protects against currency transfer restrictions for foreign investors.
• IFC’s Currency Exchange Fund (TCX): Provides long-tenor local-currency hedging for development finance.

FX Alert: ADF’s foreign borrowing should not be approved unless each project has one of the following: foreign-currency revenue, tariff pass-through, hedge coverage, Government/IFI FX support, or explicit fiscal-risk budget provisioning.

Recommendation: MoF and NRB should commission a technical study on ADF’s anticipated foreign currency exposure scenarios and available hedging mechanisms before ADF issues its first foreign currency instrument, evaluating: (a) natural hedging; (b) commercial hedging through NRB-licensed commercial banks; (c) multilateral hedging through CGIF, TCX, or MIGA; (d) domestic currency issuance with foreign capital market listing.

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Chapter 15: Corporate, Tax and Structural Architecture

15.1 Corporate Law Framework

The ADF Act, Section 56, provides that the Companies Act, 2063 applies mutatis mutandis to matters not covered by the ADF Act itself. Key operational implications:

• General Meeting (Section 48): Annual General Meeting within one year of establishment and within six months of each subsequent fiscal year. AGM procedures follow Companies Act.
• Dividend distribution (Section 36): After satisfying mandatory General Reserve (Section 35: 20% of net profit until 2x paid-up capital; then 10%) and Free Reserve requirements, remaining net profit distributes to shareholders as dividend.
• Debt-to-equity conversion (Section 14(ana)): The Board can convert ADF’s loan investment in a project to equity. The conversion methodology – at market value, book value, or negotiated value – must be specified in Rules. Failure to specify creates valuation disputes and potential minority shareholder oppression risks at project level.
• Subsidiary formation (Section 9(1)(tha)): ADF subsidiaries are ordinary companies under the Companies Act, 2063. For BOOT project subsidiaries with concession assets, special corporate governance is needed to manage finite-life nature (see Chapter 13).

ADF subsidiaries with Government/institutional/public shareholders should have stronger governance than ordinary private SPVs: independent directors; related-party rules; project disclosure; board conflict register; sponsor lock-in; ADF nominee fiduciary rules; audit committee; risk committee; and procurement transparency.

15.2 Tax Architecture: The Full Map

Tax treatment profoundly affects ADF instrument attractiveness. The current Nepali tax framework creates multiple gaps:

Transaction / Instrument	Tax Issue	Current Treatment	ADF Impact	Reform Needed
ADF government-guaranteed bond interest	Withholding tax	5% for individuals; 15% for institutions	Reduces investor yield vs. government securities	Cabinet tax concession under Section 31(1)
ADF non-guaranteed bond interest	Withholding tax	Same as above	Additional yield compression	Section 31(1) concession or IRD clarification
ADF fund income (sub-fund level)	Corporate tax	30% corporate tax at entity level	Double taxation if fund income taxed before investor distribution	Pass-through treatment or entity level tax exemption
Investor distribution from ADF funds	Dividend/interest tax	As above	Further yield compression for institutional investors	IRD circular providing pass-through
Capital gains on ADF bond secondary sale	Capital gains tax	7.5% or 15% depending on holding period	Reduces secondary market attractiveness	CGT exemption for ADF bond secondary sales
Asset monetization transactions	Possible stamp duty; potential capital gains	Variable	Transaction cost inflates securitization cost	Stamp duty exemption (Section 32 already provides some)
ADF guarantee fees received	Revenue	Income classification unclear	Tax treatment uncertainty	IRD circular clarifying guarantee fee classification
Foreign investor returns (IFI dividends)	Withholding + DTA	Variable by country	DTA available for many IFI home countries	Leverage existing DTA network; IRD notification

Nepal’s DTA network: Nepal has signed DTAs with India, China, Bangladesh, Austria, Mauritius, Norway, South Korea, Qatar, Sri Lanka, Thailand, and several others. Foreign investors from DTA countries can claim reduced withholding on ADF bond interest and dividends. The Mauritius DTA (treaty rate: typically 5–10% on dividends, 10% on interest) may be particularly relevant for IFI-structured investments routed through Mauritius.

Pass-through treatment is critical: India’s NIIF resolved double-taxation by structuring sub-funds as Category II Alternative Investment Funds under SEBI – which receive full pass-through treatment under India’s tax law (income taxed in the hands of investors, not at fund level). Nepal could also adopt an equivalent mechanism for ADF sub-funds through an IRD circular or Income Tax Act amendment, but pass-through principle is generally not exercised in the tax regime of Nepal other than functional pass through concept though the entity level tax exemption to entities like mutual funds, controlled foreign entities and retirement funds.  

Recommendation: MoF/IRD should issue a comprehensive ADF Tax Circular within 6 months of ADF operationalization, specifying: (a) pass-through treatment (functional or legal) for ADF sub-fund income to registered institutional investors; (b) withholding tax treatment for ADF bond interest (domestic and foreign investors); (c) capital gains exemption for secondary market ADF bond sales; (d) VAT treatment of asset monetization transactions; (e) guarantee fee income classification.

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Chapter 16: Civil, Criminal and Enforcement Architecture

16.1 Collateral and the Super-Priority Regime

ADF Act, Section 29 establishes the Fund’s statutory first-lien priority – its most aggressive creditor protection and its most legally novel provision.

Section 29(1): Mandatory collateral for all loan investments and guarantees: movable or immovable property, or the project itself if other collateral is insufficient.

Section 29(2): Once ADF registers its collateral, no other creditor can claim that collateral until ADF is fully recovered. ADF’s claim is absolutely first – despite prevailing law.

Section 29(3): Any agreement, contract, commitment, or transaction purporting to create equal-priority or higher-priority rights over ADF-secured collateral is automatically void (swatah badar).

Section 29(4): Exception for consortium co-financing: when ADF leads or participates in a consortium, all co-lenders share pari-passu (equal) priority.

Legal foundations of the super-priority: The super-priority is modeled on NRB Act, 2058, Section 6(1) – which grants NRB absolute first priority over all borrower assets for unpaid dues. The National Civil Code, 2074, Section 452(2) voids later mortgages over already-mortgaged property. The ADF Act as lex specialis overrides the Secured Transactions Act, 2063’s first-to-register priority rule (Section 29).

Legal risks of Section 29(3): The automatic-void provision raises serious due-process concerns. Under Constitution of Nepal, 2072, Article 25 (right to property), voiding pre-existing registered security interests without judicial process may constitute an unconstitutional taking without compensation. In practice, a third-party creditor whose existing security interest is voided by ADF’s subsequent security registration may challenge Section 29(3) as unconstitutional.

The consortium pari-passu exception (Section 29(4)): This provision is operationally critical for large project financing. When ADF, NIFRA, and commercial banks co-finance the same project in a consortium, their security positions are equal – no party has seniority. This aligns with NRB Directive 11 governing consortium lending on equal-priority basis. Without this exception, banks would be deterred from co-financing ADF-backed projects, making large project financing impractical.

Civil law support: Civil law supports enforceable contracts where parties are competent, consent is valid, subject matter is certain and purpose/consideration is lawful. Loan and guarantee arrangements should be written. Guarantee liability is generally co-extensive with the principal debtor unless contract provides otherwise; guarantors obtain subrogation rights after payment (National Civil Code, Sections 563–570). This supports ADF’s treatment of guarantees as recoverable exposures: if ADF pays under a guarantee, it steps into creditor rights against the project company/sponsor.

16.2 Clawback and Project Takeover: The Step-In Right

Section 28 provides five grounds for clawback of invested amounts or suspension of disbursements: (a) non-compliance with investment conditions; (b) diversion of funds; (c) obtaining investment through false information; (d) failure to execute per schedule without reasonable cause; (e) failure to repay installments on completed loans from another ADF project.

Upon clawback demand: all outstanding principal, interest, and service charges become immediately due. If not repaid: the Fund may take control of the project and transfer it to another organized entity for continued implementation (Section 28(3)). This step-in right is comparable to BAFIA Section 55(3Ka)’s step-in for PPP projects but broader – applying to all ADF-financed projects regardless of PPP structure.

The Rules must specify:

1. Minimum cure period before takeover (recommended: 90-day formal default + 30-day cure notice)
2. Independent project valuation at takeover (by registered valuer)
3. Rights of minority equity investors in the project company at takeover
4. Rights of consortium co-lenders (pari-passu position must be maintained)
5. Employee protection and operational continuity requirements
6. Transfer procedure to replacement operator (competitive tender vs. direct assignment)
7. Government/sector regulator notification
8. Treatment of workers/contracts/permits
9. Court challenge limits
10. Judicial review pathway for contested takeovers
11. Public disclosure

16.3 Criminal Provisions: Comparative Analysis

ADF Act, Section 45: Offense: submitting false/incorrect information, evidence, reports, or documents, or providing misrepresented collateral to obtain ADF investment/loans/guarantees/benefits. Penalty: recovery of full loss amount + double that amount as fine + up to 2 years imprisonment. Investigation by government-gazette-notified authority; expert assistance permitted (cost borne by Fund); investigation completed within 60 days; government attorney prepares charge sheet and files in district court. Nepal Government is plaintiff in all ADF Act criminal cases.

Comparing to National Criminal Code, 2074:

• Section 252 (Criminal breach of trust): Misuse of entrusted funds/assets by institutional officers → 5–10 years imprisonment
• Section 229 (Fraud/cheating): Fraud causing financial loss → up to 7 years imprisonment

The ADF Act’s 2-year maximum is substantially less severe than the Criminal Code’s comparable provisions. Section 57 of the ADF Act confirms that prosecutions under other applicable laws are not barred – meaning fraudulent conduct causing ADF losses can also be prosecuted under the Criminal Code’s more severe provisions.

Recommendation: ADF’s enforcement guidelines should explicitly cross-reference the National Criminal Code, ensuring that investigating authorities consider Criminal Code charges (particularly Section 252) in addition to ADF Act charges for cases involving systematic fraud, misappropriation, or institutional officer misconduct. The 2-year ADF Act sentence should be understood as a floor, not a ceiling, for the most serious cases.

Modern DFIs use step-in rights, lender substitution, forensic audits, beneficial ownership checks, debarment and sanctions. ADF should not rely only on criminal punishment after loss; it needs ex ante controls: UBO disclosure, PEP screening, audit rights, escrow accounts, disbursement milestones and procurement monitoring.

16.4 Stamp Duty and Registration Fee Concessions

Section 32 provides that stamp duty, registration fees, and related charges on ADF collateral registration and related documentation may be waived. This is commercially important – large infrastructure project collateral registration can involve substantial registration fees that inflate financing costs. The Rules should specify: (a) categories of ADF transactions eligible for fee exemption; (b) application procedure; (c) revenue impact assessment requirement; (d) periodic review of exemption categories.

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Chapter 17: Governance, Independence and Political Risk

17.1 The Governance Architecture: A Balanced Assessment

The ADF Act’s governance structure reflects an unavoidable tension between two legitimate objectives: (1) maintaining government accountability over public resources and national infrastructure priorities; and (2) providing sufficient commercial independence to attract private and international capital that demands arm’s-length investment discipline.

Nepal’s recent history with public institutions provides the context for concern. SOEs in the aviation, agriculture, and industrial sectors have suffered from political interference in management decisions, uneconomic investment mandates, and governance failures that have imposed large fiscal costs.

Government influence mechanisms in the Act:

• MoF Secretary as Board Chairperson (Section 10(1)(ka)) – ensures government can direct investment strategy
• MoF Joint Secretary as Director (Section 10(1)(kha)) – second government voice on the Board
• Infrastructure ministry Joint Secretary as Director (Section 10(1)(ga)) – line ministry influence
• Cabinet appointment of CEO from competitive shortlist (Section 19(7)) – political veto at CEO selection
• Cabinet direction power without qualification (Section 54) – operational override authority
• Cabinet approval for organizational structure (Section 18(1)) – staffing and capacity control
• Cabinet approval for capital increase (Section 8(3)) – growth control

Commercial independence mechanisms:

• Recommendation Committee chaired by Public Service Commission (Section 19(3)) – constrains CEO political patronage
• International CEO provision for first appointment (Section 20(3)) – signals intent for expertise
• Independent expert Director (Section 10(1)(cha)) – one independent professional voice
• Three-year post-employment CEO bar (Section 20(4)) – some revolving-door protection
• Investment Sub-committee (Section 17(1)(kha)) – dedicated investment review layer
• Annual performance contract (Section 23) – performance accountability
• Auditor General audit (Section 41) – constitutional accountability
• Triennial international evaluation (Section 51) – external benchmark

Assessment: The government influence mechanisms substantially outweigh the commercial independence mechanisms. Of seven Board members, three are serving civil servants directly accountable to MoF; Cabinet retains authority over the CEO appointment, organizational structure, and operations through Section 54. Only one genuinely independent professional – the independent expert Director – provides a commercial counterweight.

Key governance strengths: Legal personality; defined capital structure; institutional shareholders; independent experts; conflict disclosure; director liability; CEO qualification; CEO performance contract; investment/audit/risk committees; quarterly disclosure; annual report; Auditor General audit; international evaluation every three years.

17.2 Section 54 In Depth: The Cabinet Direction Power

Section 54 is the single most commercially significant governance provision in the ADF Act:

Section 54(1): “Nepal Government, Council of Ministers may give directives to the Fund as necessary.” Section 54(2): “It shall be the duty of the Fund to comply with such directives.”

The provision is remarkable for what it does not say:

• No requirement for directives to be in writing
• No requirement for directives to be reasoned or explained
• No requirement that directives be consistent with the Fund’s investment mandate
• No mechanism for the Board to record formal dissent
• No public disclosure requirement for directives
• No make-whole provision if compliance with a directive causes financial loss
• No judicial review pathway for arbitrary or commercially unjustifiable directives

The practical risk, as the first blog article Some Pointers for ADF Bill states, “is not that the government will misuse this power – it may not. The risk is that investors will price in the possibility that it could be misused.” International institutional investors – sovereign wealth funds, pension funds, IFIs – maintain strict governance criteria for co-investments. A provision that allows any Cabinet to direct investment decisions without written reasoning or investor notification is inconsistent with the governance standards these investors require.

Bangladesh IDCOL comparison: Bangladesh’s Infrastructure Development Company Limited requires that (a) government directives be consistent with IDCOL’s constitutional documents; (b) compliance with a directive that causes financial loss triggers a government make-whole obligation. This is the model Nepal should adopt.

The Section 54 minimum reform (should be legislated): Add sub-section: “Directives issued under this section shall be in writing, shall state reasons, shall be consistent with the objects of this Act, and shall not require the Fund to act in breach of its obligations to investors or lenders. Where a directive causes demonstrable financial loss to the Fund, the Government shall reimburse such loss within two fiscal years. The Board shall record in its minutes any directive it considers inconsistent with the Fund’s investment mandate, and such recording shall be included in the annual report under Section 50.”

17.3 India’s NIIF Governance Model: The Best-Practice Template

India’s National Investment and Infrastructure Fund (NIIF), established 2015 and majority-owned (49%) by the Government of India, has attracted USD 4+ billion from international institutional investors including ADIA (Abu Dhabi), Ontario Teachers’ Pension Plan, Temasek (Singapore), CDPQ (Canada), and ADB. Its governance model is the most directly relevant comparator for ADF:

Two-tier governance:

• Governing Council: Chaired by the Finance Minister; includes Governor of RBI, Secretary DEA, other senior officials; meets 1–2 times per year; sets strategic direction; does not take individual investment decisions.
• Board of Directors: 10 members; only 2 government representatives; 8 independent professionals drawn from international infrastructure finance, institutional investment, and development finance backgrounds; takes all investment decisions.

Professional fund management: Three sub-funds (Master Fund, Fund of Funds, Strategic Opportunities Fund) managed by professional fund management teams, each with its own Investment Committee with independent majority – government does not participate in individual deal approvals.

Transparency: Published Investment Policy Statements for each sub-fund; quarterly performance reporting to all shareholders; audited annual financials published publicly.

NIIF’s governance structure is widely credited with attracting international institutional co-investors who would not have committed capital to an institution where individual investment decisions were subject to government direction.

Governance Recommendation for ADF:

Option A – Two-Tier Structure (Requires legislative amendment): A Strategic Council chaired by the Finance Minister (meets twice yearly; sets strategic direction; approves major policy changes; does not participate in individual investment decisions) and an Investment Board with majority independent professionals (takes investment decisions; government members ≤ 3 of 7).

Option B – Enhanced Independence within Current Structure (Implementable through Rules): (a) Investment Sub-committee under Section 17(1)(kha) to have majority independent members and take all investment recommendations to the Board; (b) require all Board investment votes to record individual positions; (c) require all Section 54 directives to be in writing and consistent with Fund objects; (d) create IFI Observer seats (non-voting) to bring international governance discipline.

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Chapter 18: Comparative Lessons Embedded in Nepal’s Context

18.1 India: Multiple Models for Multiple Functions

Nepal’s ADF exists in a region with one of the world’s most sophisticated development finance ecosystems. India’s layered infrastructure finance architecture offers the most directly applicable comparative models:

India Institution	ADF Analog	Key Lesson for Nepal
NIIF (est. 2015; GoI 49%; AUM ~USD 4+ billion)	ADF Fund (closest structural analog)	Two-tier governance; professional fund management; published investment policy; IFI co-shareholders; pass-through tax treatment
NaBFID (est. 2021; statutory DFI; INR 200 billion capital)	ADF bond issuance function	Statutory basis for long-tenor bonds; AAA domestic rating based on institutional structure and government backing; tax-free bond authority
IIFCL (India Infrastructure Finance Company Ltd)	Takeout finance function	Long-tenor refinancing of bank infrastructure loans; credit enhancement; PPP project support; removes bank maturity mismatch
SEBI InvIT framework (est. 2014; AUM ~USD 20+ billion)	ADF asset monetization	Tradeable infrastructure trust units on exchange; finite-life disclosure standards; SEBI-regulated sponsor/trustee relationship
SEBI AIF Category II	ADF Investment Fund	Pass-through tax treatment; qualified institutional investor framework; no double taxation at fund level

India’s caution – IIFCL’s NPL experience: IIFCL accumulated significant non-performing loans in early years due to over-optimistic cash flow projections for PPP toll roads. Nepal’s ADF must ensure independent, conservative feasibility appraisals (Section 25) are genuinely independent – not rubber stamps for politically selected projects.

18.2 Bangladesh: Diaspora Finance and Project Discipline

Bangladesh Wage Earners Development Bond: Bangladesh’s migrant worker bond allows direct subscription at point of remittance through Bangladesh Embassies and authorized banks abroad. Features: preferential return above domestic savings rate; dollar-or-taka denomination options; guaranteed repatriation; 3-year and 5-year terms; tax-exempt on maturity. By 2023, the bond had mobilized billions from Bangladeshi diaspora. Nepal’s ADF Remittance Fund (Section 3(nga)) should adapt this model directly – potentially working with Nepal’s Embassy network and foreign-deployed NRB-licensed remittance service providers as subscription channels.

IDCOL (Infrastructure Development Company Limited): Bangladesh’s IDCOL has financed 200+ MW of off-grid renewable energy (solar home systems, biogas, small hydro) through government contributions; concessional IFI funding (ADB, World Bank, KfW); commercial bank refinancing; and strict project appraisal. IDCOL’s make-whole provision for government directives (discussed in Chapter 17) and its independent project assessment culture are the key governance lessons for Nepal.

Lesson for Nepal: ADF must build a diaspora finance channel (Remittance Fund) and maintain project appraisal independence. The make-whole principle for government directives must be adopted.

18.3 Indonesia: Guarantee Architecture

PT Penjaminan Infrastruktur Indonesia (IIGF) – Indonesia’s Infrastructure Guarantee Fund:

• Government equity base (Ministry of SOEs ownership) providing capital adequacy
• World Bank/ADB back-stop guarantee extending capacity beyond government balance sheet
• Transparent, published guarantee fee schedule based on project risk profile (not political favoritism)
• All guarantees reported to Ministry of Finance as contingent liabilities in real time
• Independent risk assessment committee for each guarantee decision

PT Sarana Multi Infrastruktur (PT SMI): Ministry of Finance special mission vehicle addressing both infrastructure financing and project readiness mismatches. Lesson for Nepal: ADF should not only raise money; it must also interface with project preparation, fiscal risk and guarantee frameworks.

Nepal’s ADF Guarantee Fund (Section 3(ga) + Section 27) should directly adopt IIGF’s model: published fee schedule based on risk bands; IFI back-stop arrangement (ADB, IFC, or World Bank Guarantee Program); PDMO real-time reporting integration (Section 27(5) already provides this; needs operational Rules); Independent Risk Mitigation Sub-committee (Section 17(1)(ga)) as the guarantee approval layer.

Lesson for Nepal: Separate guarantee discipline is essential. ADF’s guarantee fund should not be an informal promise; it should be a priced, capped, reported facility.

18.4 UK Infrastructure Bank: Additionality and Policy Discipline

The UK Infrastructure Bank (UKIB), established 2021:

• Capital: GBP 22 billion total capacity (GBP 5 billion equity; GBP 17 billion debt guarantees)
• Additionality principle: UKIB only invests where market failure exists – where private capital alone is insufficient or too expensive. This prevents crowding-out.
• Risk-taking mandate: UKIB takes senior debt, mezzanine, or equity as needed to make projects bankable – unlike commercial banks that prefer only senior secured positions.
• Geographic distribution: Explicit commitments to regional balance – preventing concentration in already-developed markets.
• Net-zero alignment: All investments must be consistent with UK’s net-zero carbon pathway.

Nepal’s ADF should adopt the additionality principle explicitly: ADF should only invest where its participation demonstrably attracts additional private capital. Section 25(1)(ga) of the ADF Act – assessing a project’s “capacity to mobilize additional private investment” – is the closest existing provision, but it is an assessment criterion, not a mandatory additionality threshold. The Rules should strengthen this to: ADF cannot invest unless the investment appraisal demonstrates that private capital alone would not finance the project at comparable terms without ADF participation.

Lesson for Nepal: ADF needs clear policy objectives, additionality principles and governance independence. It should finance projects that would not otherwise proceed on suitable terms, not merely replace private finance.

18.5 Germany’s KfW: Institutional Longevity and Policy Discipline

KfW (Kreditanstalt für Wiederaufbau) illustrates long-term public development banking with strong governance and policy discipline. Key features relevant for Nepal: (a) statutory government guarantee on KfW’s own bonds enabling AAA-rated borrowings at near-sovereign cost; (b) clear separation between policy mandate (development finance) and operational management (professional banking); (c) transparent subsidy accounting – all concessional interest rates disclosed as fiscal costs; (d) independent supervisory board with professional majority; (e) six-decade institutional track record building market credibility.

Lesson for Nepal: ADF must disclose subsidy elements, guarantee fees, interest concessions and fiscal costs. ADF should be built to last decades, not cycled through political administrations. KfW’s governance longevity – surviving multiple government changes without loss of institutional character – is a model for insulating development finance from electoral cycles.

18.6 Brazil’s BNDES: The Warning Case

Brazil’s BNDES (Banco Nacional de Desenvolvimento Econômico e Social) illustrates both the power and the danger of large directed-credit institutions. At its peak, BNDES was the world’s largest development bank by loan volume, financing Brazil’s industrial and infrastructure growth. But it became a fiscal stimulus tool under successive administrations – providing cheap below-market credit to politically connected industries, creating NPL accumulation, and distorting competitive markets. Final result: BNDES required recapitalization from the Brazilian Treasury, generating quasi-fiscal losses that were not transparently reported for years.

Lesson for Nepal: ADF must not become Nepal’s BNDES. ADF’s investment criteria (Section 25) must be commercially grounded and not susceptible to political override through Section 54. Subsidy elements must be transparently disclosed as fiscal costs. Capital adequacy and loan quality must be rigorously maintained from Day 1.

18.7 China’s Policy Banks: The Opacity Warning

China’s policy banks (China Development Bank and China Export-Import Bank) show the benefit of massive state-backed infrastructure finance and the danger of quasi-fiscal opacity and debt accumulation. These institutions financed China’s infrastructure expansion through implicit sovereign backing, accumulating trillions in quasi-fiscal liabilities without explicit parliamentary approval for each commitment. Several developing countries that borrowed through this model have experienced debt sustainability challenges.

Lesson for Nepal: ADF should not become a Nepalese shadow policy bank without transparent balance-sheet and contingent liability reporting. Every ADF bond, guarantee, and contingent liability must appear in PDMO’s records and ADF’s Annual Report under Section 50.

18.8 The Comparative Template for Nepal

Nepal’s ADF should combine: Indonesia IIGF’s guarantee architecture + India NIIF’s governance model + Bangladesh IDCOL’s project discipline + UK UKIB’s additionality principle + KfW’s institutional longevity framework.

These represent what Nepal needs at its current stage of institutional development and capital market depth. The full KfW/NaBFID institutional maturity model is a 10–15 year trajectory goal, not a Day 1 design.

What Nepal should NOT import: Brazil BNDES’s directed political credit without commercial discipline; China policy banks’ opacity and implicit sovereign guarantee accumulation without parliamentary approval.

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Chapter 19: The Case Against ADF – Critical Counterarguments

19.1 Duplication of Existing Institutions

The argument: Nepal already has NIFRA (infrastructure development bank), IBN (investment facilitation), PDMO (debt management), NRB (monetary regulation), and SEBON (capital markets). Adding ADF creates another institution in a crowded regulatory space, consumes scarce institutional capacity-building resources, and creates mandate overlap that generates coordination failures rather than solving them.

Assessment – partially valid: The mandate overlap with NIFRA is real and requires explicit delineation. The coordination burden is real. The risk of duplication is not zero.

Counter-assessment – ultimately unconvincing: None of the existing institutions can simultaneously: pool long-term capital from diverse sources, issue government-backed bonds at scale, operate a remittance fund, establish a fund-of-funds, monetize concession assets, provide statutory super-priority collateral, and operate under Auditor General accountability with a Cabinet-backed investment mandate. The combination is genuinely new. The risk of duplication is manageable through explicit Rules-based mandate delineation and joint protocols.

Response: ADF is justified only if confined to functions existing institutions do not perform at scale: guarantee fund, remittance fund, fund-of-funds, asset monetization, project instruments, credit enhancement and fiscal-risk-transparent capital mobilization.

19.2 Off-Budget Debt and Fiscal Opacity

The argument: ADF is a mechanism to move development borrowing off the government’s official balance sheet without actually reducing sovereign risk – merely obscuring it. Nepal’s macro-fiscal sustainability assessments undercount the contingent liabilities ADF creates. Future governments inherit these liabilities without having made the original commitment.

Assessment – the most serious structural risk: This concern is credible and well-grounded. Section 30(2)’s non-guaranteed ADF instruments could create implicit quasi-sovereign liabilities invisible in PDMO’s formal debt register. The fiscal transparency mechanisms in Sections 27(5) and 50 address explicit guarantees but not implicit obligations. The IMF/World Bank would likely include ADF’s aggregate liability exposure in Nepal’s public sector balance sheet regardless of formal government guarantee status.

Mitigation: The ADF Act contains meaningful fiscal transparency mechanisms (Auditor General audit, annual report, PDMO notification, triennial international evaluation). The risk is mitigatable through the regulatory reforms in Chapter 20. The key is consistent implementation – which depends on governance quality.

Response: ADF non-guaranteed instruments must be clearly labelled. Government-guaranteed instruments must be recorded by PDMO and disclosed in budget/fiscal-risk statements.

19.3 Political Project Selection

The argument: With Finance Secretary as Chair, Cabinet direction power under Section 54, and Cabinet appointment of the CEO from a competitive shortlist, ADF will inevitably become a vehicle for politically motivated infrastructure investment. Nepal’s history of SOE governance (RNAC, NAC, industrial estates) provides cautionary precedent. Political projects displace commercially viable ones; the Fund accumulates NPLs; eventually the government must recapitalize; taxpayers bear the cost.

Assessment – the most credible ongoing risk: This is the strongest argument against ADF’s current governance design. The risk is not hypothetical – it reflects documented patterns in Nepali and regional public institution governance. The Cabinet direction power (Section 54) without qualifying language is the central vulnerability.

Mitigation: The governance reforms in Chapters 17 and 20 directly address this risk. A two-tier governance structure, Investment Sub-committee with independent majority, written Section 54 directives required to be consistent with Fund objects, and IFI co-shareholder participation would substantially reduce (though not eliminate) political allocation risk. The mitigation is available; the question is whether Parliament and the Executive will implement it.

Response: Independent investment committee, published criteria, risk scoring, external review and conflict rules.

19.4 Retail Investor Exposure

The argument: ADF’s authorization to raise capital “from the general public” (Section 3(ka)) will expose Nepal’s retail-dominated investor base to complex infrastructure instruments they cannot evaluate. When projects underperform or BOOT concessions expire, retail investors suffer losses and blame the government, undermining public confidence in development finance.

Assessment – valid and urgent: Nepal’s capital market is retail-dominated. The absence of SEBON rules for project-bond disclosure, hybrid instrument taxonomy, and BOOT/concession-company valuation methodology means retail investors could purchase instruments they fundamentally misunderstand. This risk is real and time-sensitive – it must be addressed before any ADF public offering.

Mitigation: SEBON regulatory action as specified in Chapters 12 and 13. Investor suitability requirements, mandatory risk labeling, separate listing categories for concession companies, and minimum investment sizes for complex instruments can substantially protect retail investors.

Response: Finite-life infrastructure securities rules and remittance investor protections (guarantee disclosure, suitability, small-investor caps, risk label and redemption terms) must be in place before any public issuance.

19.5 Project Execution Gap

The argument: Nepal’s infrastructure challenge is fundamentally a project execution problem, not a finance problem. Budget allocations go unspent due to land acquisition bottlenecks, environmental clearance delays, procurement failures, and limited contractor capacity. Adding more finance through ADF does not solve governance and implementation bottlenecks.

Assessment – partially valid, ultimately too narrow: Nepal’s capital expenditure execution problem is real (60–70% of budgeted capital spend actually delivered). Finance scarcity is not the only constraint.

Counter-assessment: Finance is a genuine and independent constraint for a subset of projects. Several IBN-approved projects with cleared land, environmental approvals, and ready contractors have stalled at financial close – because blended debt instruments, credit enhancement, and takeout finance structures don’t exist in Nepal’s market. ADF addresses the finance-side constraint for this category. ADF’s advisory function (Section 9(1)(dha)) and project preparation role can also help address execution bottlenecks for ADF-financed projects.

The execution argument is a reason to simultaneously reform public investment management, not a reason to reject ADF. Infrastructure investment needs both better execution and better financing.

19.6 Regulatory Arbitrage

The argument: ADF may receive privileges (government-equivalent instrument treatment, directed-lending compliance credit, statutory super-priority) while NIFRA remains fully NRB-regulated – creating unfair competition and systemic risk.

Response: ADF loan investments and BFI exposures should be subject to NRB prudential rules proportionate to risk. The differentiation between ADF and NIFRA must be justified by genuinely different functions, not used to avoid regulatory oversight.

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Chapter 20: Conclusion – The ADF Wager

Nepal’s Alternative Development Finance Act, 2082 is a structured wager – on the proposition that a carefully designed statutory platform, armed with eight instruments and adequate governance, can break the structural logjam that has prevented Nepal’s vast savings, remittances, and institutional capital from flowing into its equally vast infrastructure needs.

20.1 Why the Wager Is Justified

The case for ADF rests on a structural analysis that this paper has substantiated across 20 chapters:

Nepal holds approximately NPR 5.5 trillion in banking deposits – the capital exists. Annual remittances exceed NPR 1.5 trillion – the inflows exist. Institutional investors manage NPR 700–900 billion – the long-term capital exists. The government’s own ADF Act articulates the financing gap at NPR 7–8 kharba per year – the need is documented.

What does not exist is the architecture to connect supply and demand: instruments that allow bank deposits to fund 30-year infrastructure; mechanisms that convert worker remittances into infrastructure bonds; legal structures that give institutional investors government-equivalent security for infrastructure holdings; guarantee frameworks that make projects bankable for co-investors; and an entity with both the statutory power and institutional credibility to do all of this simultaneously.

No existing Nepali institution – not NIFRA, not IBN, not NRB, not SEBON, not PDMO – can perform this combination. The ADF Fund is designed to. The design is justified.

The ADF Act is therefore justified because: Nepal’s infrastructure financing gap is large; public debt alone cannot finance the development agenda; commercial banks are essential but structurally constrained; IBN can approve and facilitate but not finance at scale; NIFRA is relevant but insufficient as the sole infrastructure financier; capital markets need new instruments; remittance and institutional savings are underused; and foreign capital requires structured entry, hedging and investor protection.

20.2 The Three Conditions for Success

Condition 1 – Governance is independent enough for commercial credibility: If the Investment Sub-committee operates with independent professional majority; if Section 54 directives are constrained to written, reasoned, mandate-consistent guidance; if the CEO is genuinely merit-selected with international development finance expertise; and if at least one major IFI becomes a co-shareholder – then ADF’s investment decisions will be commercially credible. International institutional capital (sovereign wealth funds, pension funds, IFIs) will co-invest. The Fund will access international capital markets at near-sovereign spreads. The leverage effect on ADF’s NPR 25 arba paid-up capital will be transformative.

Condition 2 – Instruments are transparent enough for investor confidence: If NRB classifies ADF instruments accurately (0% risk weight for guaranteed bonds; explicit weight for non-guaranteed); if SEBON implements project-bond disclosure rules and concession-company listing standards before any public offering; if the Tax Circular provides pass-through treatment; and if the Remittance Fund subscription mechanism works seamlessly for overseas workers – then investors will understand what they are buying and price it accurately. The demand from Nepal’s banking system alone (NPR 200–250 billion in directed-lending compliance demand) will validate the instruments.

Condition 3 – Fiscal risks are reported transparently enough for sustainable management: If PDMO reports ADF guarantee exposure in every Annual Debt Bulletin; if the Annual Report (Section 50) explicitly quantifies government-guarantee-induced liabilities; if the triennial international evaluation includes rigorous fiscal risk assessment; and if NRB’s classification circular explicitly states that Section 30(2) treatment does not constitute implicit sovereign guarantee – then Nepal’s fiscal managers and international partners will have accurate information to manage the Fund’s quasi-fiscal footprint.

20.3 The Three Conditions for Failure

Failure 1 – Political project selection displaces commercial discipline: If the Cabinet’s Section 54 direction power is used to require investment in politically selected projects that fail ADF’s commercial appraisal; if the Finance Secretary as Chair consistently votes for government-preferred projects over investment sub-committee recommendations; if the CEO appointment is political patronage rather than merit-based – then ADF accumulates non-performing loans, burns through its NPR 25 arba capital base, requires government recapitalization at public expense, and becomes a cautionary tale rather than a model institution.

Failure 2 – Quasi-sovereign instrument treatment creates invisible fiscal liabilities: If Section 30(2)’s non-guaranteed instruments are marketed to retail and institutional investors as quasi-sovereign when they are not; if PDMO’s contingent liability reporting fails to capture ADF’s implicit fiscal footprint; if the government backstops ADF instrument defaults without parliamentary authorization – then Nepal accumulates hidden public debt that appears only in crisis, creating a fiscal shock disproportionate to ADF’s original investment mandate.

Failure 3 – Retail investors are harmed before SEBON builds the regulatory framework: If ADF launches public offerings of project-specific bonds or concession company equity before SEBON implements mandatory risk-labeling, concession-life disclosure, and investor suitability requirements; if retail investors purchase BOOT-terminal instruments at P/E valuations without understanding the terminal zero equity value – then the first significant losses generate public and political backlash that sets Nepal’s development finance capital market back by a decade.

20.4 The Final Verdict

The infrastructure gap is real, urgent, and growing. Nepal needs – at minimum – NPR 7–8 kharba per year in additional infrastructure investment over the next decade to reach its development targets. No realistic combination of budget expansion, bank credit expansion, or foreign aid can fill this gap without the structural transformation that ADF enables.

The ADF Act is necessary. Its design is substantially sound on the instruments – the eight mechanisms are well-conceived, legally grounded, and address real structural gaps. Its design requires strengthening on governance, fiscal transparency, and capital market readiness – the three areas where failure is most likely.

The reforms in Chapter 20 are not aspirational additions. They are pre-conditions for the wager to be a wise one rather than a reckless one. They are within Nepal’s existing institutional capacity to implement. They do not require constitutional amendment, extraordinary legislative process, or international coordination. They require political will to implement governance reforms that constrain political convenience.

The wager is worth making. The instruments exist. The capital exists. The need exists. The statute exists. Now the regulatory architecture must be built alongside – and in advance of – the instruments’ deployment.

Nepal’s infrastructure wager succeeds when the patient capital of pensioners, the hard-earned remittances of migrant workers, and the balance-sheet discipline of international institutions all flow into the roads, railways, tunnels, and power lines that convert a development-deficient economy into a prosperous one. That is what ADF is designed to enable. Whether it does so depends on the choices Nepal makes in the next 12–24 months of institution-building.

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