Alternative Development Finance Bill

Nepal’s Federal Parliament is considering what could become the country’s consequential piece of infrastructure finance legislation. The Alternative Development Finance Mobilization Bill, 2081 (वैकल्पिक विकास वित्त परिचालन विधेयक, २०८१), proposes the creation of a dedicated autonomous fund with Rs. 10 kharba in authorized capital and a toolkit of eight distinct financial instruments – from project-specific bonds and guarantee funds to a diaspora remittance fund and asset securitization, designed to bridge the persistent gap between Nepal’s infrastructure investment needs and the resources available through traditional fiscal and banking channels. This analysis examines the Bill provision by provision, mapping each instrument against Nepal’s existing legal and regulatory architecture across banking law, securities regulation, foreign exchange and investment law, and foundational civil and criminal codes, to identify where the Bill fills genuine legal gaps, where it creates powerful new regulatory incentives, and where the absence of subordinate rules and market infrastructure may leave its most ambitious provisions dormant.

1. The Fund: Structure, Capital, Governance and Accountability

1.1 Legal Personality and Institutional Design

The Bill proposes the establishment of an Alternative Development Finance Fund as a self-governing organized institution with perpetual succession and full legal personality (Section 7). The Fund is designed as an autonomous corporate body capable of acquiring property, entering contracts, conducting transactions, and pursuing or defending legal proceedings in its own name. Its headquarters are to be located in the Kathmandu Valley, with the power to establish branch or liaison offices both within Nepal and abroad as needed (Section 6).

This institutional design places the Fund outside the conventional banking and financial institution framework governed by the Bank and Financial Institution Act (BAFIA), 2073. Under BAFIA Section 2(ka jha), a “financial institution” is defined as a corporate body licensed to carry out banking and financial transactions pursuant to Section 49, which fundamentally requires deposit-taking. Since the Fund will not accept public deposits, it does not meet this statutory definition and therefore operates outside BAFIA’s licensing regime. BAFIA Section 32(3)(ka) explicitly exempts institutions established under prevailing law from the prohibition on using financial nomenclature without NRB approval, confirming that the Fund’s activities authorized by its own Act do not constitute unlicensed banking.

Regulatory Classification The Fund occupies a novel regulatory space in Nepal's financial architecture. It is neither a bank, nor a traditional financial institution, nor a securities market intermediary. Its closest existing analogue is the Nepal Infrastructure Development Bank (NIFRA), which is classified as an Infrastructure Development Bank under BAFIA Section 2(ya) and Section 37, but operates under separate NRB directives (Section 107). However, even NIFRA is licensed under BAFIA. The ADF Fund would be the first major financial entity operating entirely under its own special Act, receiving NRB regulatory oversight only to the extent its own legislation prescribes (Section 22(3)). This creates a potential accountability gap: while NRB has broad financial stability mandates under NRB Act Section 4(1)(ga), its enforcement tools under Section 79 are designed for BAFIA-licensed entities. Regionally, India's National Investment and Infrastructure Fund (NIIF) was established as a Category II Alternative Investment Fund under SEBI regulations but with sovereign backing. The ADF Bill takes a different approach - creating the entity by statute rather than under existing securities regulations, which gives it legislative permanence but potentially less regulatory flexibility.

1.2 Capital Structure

The Fund’s capital architecture is defined in Section 8. The authorized capital is set at Rs. 10 kharba (~USD 7.5 billion), divided into one billion ordinary shares at Rs. 100 par value each (Section 8(1)). The paid-up capital is Rs. 25 arba (~ USD 167 millions), divided into 250 million ordinary shares (Section 8(2)).

The shareholding structure is prescribed as follows under Section 8(3):
(a) Nepal Government: Category ‘A’ – a minimum of 51% of shares. The Explanatory Note (aartik tippani) from the bill confirms the Government would invest approximately Rs. 12.75 billion as its initial contribution.
(b) Retirement and Provident Funds: Category ‘B’ – comprising the Employees’ Provident Fund, the Citizen Investment Trust, and the Social Security Fund.
(c) Insurance Companies: Category ‘C’ – including life insurance, non-life insurance, and reinsurance companies.

A critical flexibility provision allows the Government to reduce its shareholding to as low as 26% over time (Section 8(9)), as the Fund matures and private institutional participation grows. Additionally, Section 8(8) opens the door for international governmental or intergovernmental financial institutions to acquire shares, subject to Cabinet approval. Share payments may be made in up to two installments within two fiscal years (Section 8(4)).

Capital Structure and Foreign Participation The 51%-to-26% government shareholding glide path signals a clear intent toward eventual partial privatization, mirroring the structure of India's NIIF where the Government of India holds 49% and the balance is held by institutional investors including Abu Dhabi Investment Authority and other sovereign funds. The question is whether Nepal's domestic institutional investors (provident funds and insurance companies) have the balance-sheet capacity to absorb their share allocation. The Employee Provident Fund's total assets, while substantial, are already committed across multiple investment categories. On foreign participation, FITTA 2075, Section 2(wyan) defines 'foreign investment' to include share investment by international agencies. An IFI acquiring ADF shares would constitute foreign investment, triggering the procedures under FITTA Rules 2077, Rule 8. However, the ADF Bill's own Cabinet-approval mechanism (Section 8(8)) creates a parallel approval route that may supersede or supplement FITTA's standard process. This dual-track needs regulatory clarification. In practice, the ADF Act may operate as lex specialis overriding FITTA procedural requirements, though harmonization through explicit regulatory guidance would be necessary to avoid parallel approval uncertainty. Under FITTA Section 20, foreign shareholders are guaranteed repatriation of dividends (Section 20(2)(kha)) and sale proceeds upon divestment (Section 20(2)(ka)), which provides essential comfort to international institutional investors.

1.3 Governance: Board of Directors

Section 10 establishes a seven-member Board of Directors with the following composition:
(a) Chair: Secretary, Ministry of Finance
(b) Director: Joint Secretary, Ministry of Finance
(c) Two Directors: Joint Secretaries from engineering services of infrastructure development-related ministries, nominated by the Ministry
(d) One Director: Representative of Category ‘B’ shareholders (retirement/provident funds)
(e) One Director: Representative of Category ‘C’ shareholders (insurance companies)
(f) One Director: Independent expert appointed by the Board, with a two-year term renewable once (Section 10(5))

The independent expert director must hold at least a Master’s degree in economics, management, commerce, development studies, law, engineering, finance analysis, or financial science, combined with at least 20 years of managerial experience in banking, financial institutions, international financial institutions, or infrastructure (Section 11(kha)). This qualification threshold is notably high and narrows the eligible pool considerably.

Directors must disclose potential conflicts of interest within 30 days of appointment, including family members’ shareholdings and prior positions in Fund-invested companies (Section 15). A director with a conflicting interest in any agenda item must recuse from discussion and voting on that matter (Section 15(3)). Violations result in the matter being deemed free of conflict (Section 15(4)), creating a “disclose or be deemed unconflicted” presumption.

1.4 Chief Executive Officer

The CEO serves as the full-time chief administrative officer of the Fund (Section 19). The appointment process involves a three-member Recommendation Committee comprising the Chair of the Public Service Commission (coordinator), the Governor of Nepal Rastra Bank, and the CEO of the Investment Board Nepal (Section 19(5)). This committee shortlists three candidates through a competitive process, from which the Cabinet appoints one (Section 19(7)).

The CEO’s tenure is four years, renewable once (Section 19(9)). The Bill includes a notable provision allowing a foreign national to be appointed as CEO for the first time, provided they meet the prescribed qualifications (Section 19(3), proviso). The CEO must execute an annual performance contract with the Board (Section 21), which is independently evaluated each year (Section 21(3)). Poor performance can lead to removal by Cabinet on the Board’s recommendation (Section 21(4)).

A three-year cooling-off period bars the outgoing CEO from involvement in any project that received investment approval during their tenure (Section 19(12)), though this restriction does not apply to government-controlled entities.

Governance Independence The Board's composition is heavily government-dominated: four of seven members are government officials. While the shareholder representatives and independent expert provide some counterbalance, the Chair (Finance Secretary) and the Finance Ministry's Joint Secretary give the executive branch effective control over Fund decisions. This raises concerns about whether the Fund can operate with genuine commercial independence or will be subject to political project selection. India's NIIF addressed this by establishing three separate funds (Master Fund, Fund of Funds, Strategic Opportunities Fund), each managed by independent professional fund managers with their own Investment Committees, keeping the government's role at the supervisory rather than operational level. Bangladesh's BIFFL similarly employs an independent board with majority private-sector representation. The foreign CEO provision (Section 19(3) proviso) is unprecedented in Nepali public finance law and signals an intent to attract international expertise. However, the age requirement (35-62 years, Section 19(4)) and the Nepali citizenship requirement for subsequent appointments may limit the long-term benefit of this provision.

1.5 Sub-committees

Section 17 mandates three sub-committees: an Audit Sub-committee, an Investment Sub-committee, and a Risk Mitigation and Management Sub-committee. Their formation, tenure, and terms of reference are determined by the Board at the time of constitution (Section 17(2)). The Board may also form ad hoc task forces for specific studies or investigations (Section 17(3)).

1.6 Financial Transparency and Accountability

The Bill establishes a multi-layered accountability framework. The Fund must prepare quarterly financial statements and make them available to the Government and shareholders, publishing them on its website (Section 35). Accounts must be maintained in double-entry format per international standards, in English, and in electronic form (Section 36). Each financial instrument must have its own separate ledger (Section 36(3)).

Internal audit is conducted by the Comptroller General’s Office (Section 38(1)), while the final audit is performed by the Auditor General (Section 39, दफा ३९). An additional layer of oversight requires triennial independent evaluation by an international evaluator (Section 49).

The CEO must prepare a comprehensive annual report covering all Fund activities, financial instruments, government guarantee-induced liabilities, and related financial details. This report requires approval by the Fund’s General Meeting and must be submitted to the Ministry within six months of the fiscal year end (Section 48). The Ministry publishes this report on both its own and the Fund’s website.

1.7 Dissolution and Insolvency

The Fund’s dissolution requires prior Cabinet approval (Section 40(1)). Critically, the Cabinet cannot approve dissolution unless satisfied that the Fund can fully settle all its debts and liabilities (Section 40(4)). Once dissolution is approved, the Fund must cease all new alternative development finance mobilization and investment activities (Section 40(5)).

A liquidator is appointed by the Board after Cabinet approval, wielding the powers available under prevailing company law (Section 41). Insolvency proceedings may be initiated by the Fund itself, the Government, shareholders holding more than 10% shares, or the liquidator (Section 42). The priority of claims in insolvency follows the order prescribed under the National Civil Code, 2074, Section 61: (1) bankruptcy proceedings costs, (2) secured creditors to the extent of their security, (3) government taxes and dues, (4) unsecured creditors, (5) other claimants.

2. Eligible Sectors, Project Selection, and Exclusion Criteria

2.1 Defined Investment Sectors

Section 4(1) defines twelve specific infrastructure sectors eligible for alternative development finance investment:
(a) Energy development and electricity generation
(b) Electricity transmission and distribution
(c) Road construction and expansion
(d) Railway construction and expansion
(e) Airport construction and improvement
(f) Tunnel construction and expansion
(g) Special Economic Zones, industrial parks, dry ports, and similar infrastructure
(h) IT parks, special tourism infrastructure, and special sports infrastructure
(i) Urban infrastructure construction
(j) Public digital infrastructure establishment and operation
(k) Cable car, ropeway, and ropebridge construction and operation
(l) Any other project that the Board determines can deliver high economic returns

2.2 Priority Project Criteria

Section 4(2) establishes four categories of nationally prioritized projects eligible for investment, assessed on their importance, feasibility, and potential for high economic returns:

(a) National Project Bank projects – projects listed in the Government’s National Project Bank.
(b) Annual Government Programme projects – projects proposed for implementation under the Government’s annual programme.
(c) PPP projects – projects recommended by the Investment Board Nepal for implementation through public-private partnership through the Fund.
(d) Fund-originated projects – projects that the Fund itself identifies through its own studies and deems suitable for investment.

2.3 Exclusion Criteria

Section 5 explicitly bars alternative development finance investment in the following categories:
(a) Projects outside the four priority categories defined in Section 4(2).
(b) Projects with estimated costs below one billion rupees.
(c) Projects with low estimated financial returns.
(d) Projects that cannot maintain adequate collateral for the Fund’s loans or guarantees.
(e) Projects that use Fund-issued bonds or debentures as collateral to seek loans.
(f) Projects implemented by natural persons.
(g) Projects implemented by firms, companies, or institutions where current Board directors or the CEO were a fundamental shareholder, partner, director, or member for at least three years before their appointment (conflict-of-interest filter). However, this restriction does not apply retroactively to investments already made before the director’s or CEO’s appointment.

Scope and Thresholds The Rs. 1 billion (approximately USD 7 million) minimum project cost threshold is a deliberate design choice to focus the Fund on large-scale infrastructure rather than dispersing resources across smaller projects. This aligns with the Bill's Explanatory Notes, which cite the need for over Rs. 10 trillion in investment over the coming decade. However, this threshold excludes a significant portion of municipal and rural infrastructure that falls below this level, potentially widening the urban-rural investment gap. The open-ended Category (l) - 'any project the Board deems capable of high economic returns' - gives the Board wide discretion. While flexibility is valuable, it introduces the risk of politically motivated project selection. India's NIIF addresses this through independent investment committees with private-sector majority representation for each sub-fund, removing project-level decisions from the government-dominated board. The conflict-of-interest exclusion (Section 5(chha)) is unusually strict - going back three years before appointment. This is more stringent than comparable provisions in BAFIA Section 52, which focuses on current relationships rather than historical ones.

3. The Financial Instruments Toolkit

Section 3 of the Bill is the operative provision that authorizes the mobilization of alternative development finance through eight specific mechanisms, with a ninth catch-all for instruments prescribed by rules. This section constitutes the Bill’s most significant legislative contribution, as it creates a statutory basis for financial instruments that largely lack dedicated regulatory frameworks under existing Nepali law. Each instrument is analyzed below with reference to its Bill provisions, facilitations, existing legal landscape, and remaining gaps.

3.1 Project-Specific Bonds and Debentures

3.1.1 Conceptual Framework

Project-specific bonds are debt instruments issued against the revenues or creditworthiness of a particular infrastructure project rather than the general credit of the issuing entity. They allow the Fund to ringfence project risk, price instruments according to project-specific returns, and attract investors who may be comfortable with particular project profiles but not with a general-purpose infrastructure fund.

3.1.2 Bill Provisions

Section 3(ka) authorizes the Fund to issue financial instruments or bonds specific to a project, either by raising equity, debt, or mixed financial instruments from investors or the general public. Section 9(1)(ga) empowers the Fund to issue bonds on behalf of the Nepal Government, provincial governments, local bodies, or any organized institution with their guarantee. Section 9(1)(chha) further allows issuance of bonds or mixed financial instruments in both domestic and foreign capital markets to raise debt or equity.

The Fund’s bonds are listed on the securities market for secondary trading (Section 9(1)(ja)), and the Fund is explicitly authorized to develop secondary markets for its instruments. With NRB approval, the Fund may list on foreign stock exchanges and issue securities-related instruments abroad (Section 9(1)(ana)).

3.1.3 Regulatory Treatment and Facilitations

While institutionally outside BAFIA, the Fund becomes functionally embedded within NRB’s regulatory and monetary framework through instrument-level recognition rather than entity-level supervision.

Government-parity treatment (Section 28)

Government-parity treatment under Section 28 – where bonds issued by the Fund with an explicit Government of Nepal guarantee are treated at par with sovereign instruments such as development bonds, citizen savings bonds, and Nepal Rastra Bank (NRB) securities – constitutes a structurally transformative provision within Nepal’s financial architecture. Under the NRB Unified Directives, particularly Directive No. 1 (Capital Adequacy Framework), claims on the Government of Nepal and NRB carry a 0% risk weight, including both principal and accrued interest. Extending this treatment to ADF bonds would render them fully capital-neutral assets for banks, eliminating any capital charge and significantly enhancing return on equity (ROE). This effectively places ADF instruments in the same regulatory class as sovereign debt, making them highly attractive from a prudential and portfolio optimization perspective.

Beyond risk-weighting, parity treatment unlocks a suite of high-value regulatory privileges. First, such bonds would qualify as eligible assets for Statutory Liquidity Ratio (SLR) compliance, where Class A banks must maintain 12% and Class B/C institutions 10% of domestic deposits in approved liquid assets – currently dominated by government securities. Inclusion of ADF bonds would allow banks to simultaneously meet liquidity mandates and finance infrastructure. Second, they would become eligible collateral for the Standing Liquidity Facility (SLF), enabling banks to access short-term liquidity from NRB at up to 90% of face value, thereby enhancing their liquidity management flexibility. Third, exposures backed by such securities benefit from exemption from Single Obligor Limits (SOL), meaning banks could hold ADF bonds beyond standard concentration caps (typically 25% of core capital) without regulatory breach.

Finally, parity status integrates ADF bonds into the broader monetary and investment ecosystem. They would be eligible for NRB open market operations (OMO), including repo and reverse repo transactions, and could serve as acceptable instruments under lender-of-last-resort facilities, thereby ensuring secondary market liquidity and policy relevance. Additionally, unlike corporate instruments, these bonds would face no binding investment ceilings linked to core capital and would be exempt from provisions such as the Investment Adjustment Fund, reducing regulatory overhead. Collectively, these features elevate ADF bonds from mere infrastructure financing tools to quasi-sovereign financial instruments, aligning developmental finance with the incentives and constraints of Nepal’s banking system.

Sector lending credit (Section 28(3))

When a bank or financial institution invests in a sector-specific financial instrument issued by the Fund, it is deemed to have invested in directed sector lending. According to the latest NRB regulatory framework, Class A commercial banks must now maintain a minimum of 10% of their total loan portfolio in Agriculture by Poush 2083. Furthermore, the NRB has consolidated several priority sectors into a single cluster; banks are now required to reach a combined minimum target of 20% across Energy, MSME (defined as loans up to NPR 30–50 million), Tourism, ICT, and Export industries by Poush 2083. Consequently, an investment in an ADF Agriculture Bond would directly satisfy the 10% agriculture mandate, and an ADF Energy Bond would count toward the 20% consolidated cluster target, creating powerful regulatory demand for these instruments.

Secondary market listing

Section 28(1) allows Fund-issued bonds and other financial instruments to be listed on the securities market. Under the Securities Listing and Trading Regulation, 2075, Schedule-3 prescribes listing fees for debentures. However, there is a structural issue: Rule 3 of the same regulation requires that any entity listing securities must have issued them to the general public with SEBON-approved prospectus. Privately placed instruments cannot currently be listed for secondary trading (see gap analysis below).

Tax and duty concessions (Section 29-30)

The Government may grant tax exemptions and other concessions to individual and institutional investors in Fund-issued instruments (Section 29(1)). Special exemptions may be provided for instruments issued in foreign capital markets or for green sector projects (Section 29(2)). Stamp duty exemptions are available for collateral registration and related documentation (Section 30).

3.1.4 Existing Legal Framework

Under the Securities Act, 2063, Section 2(cha), bonds and debentures issued by an organized institution are explicitly defined as “securities”. An organized institution established under prevailing law qualifies as an issuer (Section 2(pa)), meaning the ADF Fund, established by its own Act, fully qualifies. The Securities Issue and Allotment Guidelines, 2074, Rule 9 governs debenture issuance, requiring disclosure of collateral hierarchy, interest rate, maturity, and purpose of proceeds. A debt-to-equity ratio of 70:30 is generally required during the debenture’s tenure (Guideline 9(1)(ga)).

Credit rating is mandatory before public issuance of debentures under the Credit Rating Regulation, 2068, Rule 3(1)(b). There is no exemption for government-guaranteed instruments, meaning ADF bonds would require rating regardless of the sovereign guarantee. Ongoing rating surveillance must be maintained for at least three years (Rule 21(1)).

For bonds issued in foreign capital markets, Section 11 of the Foreign Exchange (Regulation) Act, 2019 authorizes Nepali public limited companies or authorized corporate bodies to issue debentures, bonds, or other securities abroad with prior approval from both NRB and SEBON. The FIFL Fifth Amendment (2078) further eases the process by allowing commercial banks to accept guarantees from foreign pension funds, hedge funds, and DFIs.

Sovereign Guarantee The authority for government borrowing and guarantees is clearly established under the Public Debt Management Act 2079. Section 14 of the Act explicitly empowers the Government of Nepal to provide sovereign guarantees for borrowings undertaken by “public institutions,” including government-owned or controlled entities, particularly for approved infrastructure projects. This provides a direct legal basis for extending government guarantees to bonds issued by entities such as the proposed ADF, including in the context of foreign issuance. This framework is further operationalized through the Public Debt Management Regulations 2080, which set out the procedural and fiscal parameters for such guarantees. Rule 36 requires evaluation through a Guarantee Recommendation Committee and incorporates fiscal discipline by capping total guarantees at 1% of the previous fiscal year’s GDP. Together, these provisions establish a coherent and legally grounded regime for sovereign guarantees, ensuring that ADF bond issuances with government backing are aligned with Nepal’s public debt management framework and macro-fiscal safeguards. The Public-Private Partnership and Investment Act, 2075 (as amended in 2081) added Section 68Ka requiring prior Finance Ministry consent for acts creating government financial liabilities, but this addresses process rather than substantive authority. The ADF Bill's own guarantee provisions may need to be read as a lex specialis creating this authority, but the interaction with fiscal management frameworks remains legally untested.

3.2 Equity Investment

3.2.1 Bill Provisions

Section 3(ka) authorizes the Fund to raise equity capital from investors. Section 22(2)(ka) specifies that the Fund may invest in projects through share purchases. The Fund may invest through equity alone, debt alone, or a combination of both (Section 22(2)(ga)). The Board may convert existing debt investments in a project to equity (Section 14(ana)).

The Fund can establish wholly or partially owned subsidiary companies for specific project operations (Section 9(1)(tha), (2)). These subsidiaries may themselves raise capital from international financial institutions, domestic or foreign investors, through equity or bonds (Section 9(3)).

3.2.2 Existing Framework and Analysis

Equity investment in infrastructure projects by specialized funds is recognized under the Specialized Investment Fund (SIF) Regulation, 2075. Rule 14(2) permits Private Equity Funds and Venture Capital Funds, both of which may invest in project equity. However, the SIF framework imposes structural constraints: a maximum of 200 qualified investors (Rule 16(c)), minimum NPR 50 lakh per investor (Rule 16(f)), mandatory closed-end structure with a 5-15 year lifespan (Rule 19), and a minimum corpus of NPR 15 crore (Rule 16(a)). The 5-15 year mandatory lifespan creates a fundamental asset-liability mismatch for infrastructure projects with 20-30 year gestation periods.

Equity and Subsidiaries Equity and Subsidiaries The debt-to-equity conversion power (Section 14(ana)) is a valuable distressed-project tool but may create moral hazard. If project developers know the Fund can convert debt to equity rather than enforce repayment, it could weaken repayment discipline. The Bill does not specify the conversion methodology (market value, book value, or negotiated value), leaving this to rules. The subsidiary creation power is significant. Under the SME Securities Regulation, 2081, ADF subsidiaries could potentially use the lighter SME issuance framework (Rule 15-17, 27-28) to raise capital for mid-sized projects, avoiding the heavier public issuance requirements.

3.3 Mixed/Hybrid Financial Instruments

Section 2(jha) defines a mixed financial instrument as one that combines both equity and debt characteristics. Section 3(ka) authorizes the Fund to mobilize capital through such instruments. These are commonly known as mezzanine finance instruments globally and serve as a bridge between senior debt and pure equity, offering higher returns than bonds but lower risk than equity.

Under the Securities Act, 2063, Section 2(cha), such instruments are accommodated either as “rights certificates to purchase, sell, or exchange securities” or as instruments specified by SEBON. The Securities Issue and Allotment Guidelines, 2074, Rule 10 recognizes preference shares split into redeemable/irredeemable and cumulative/non-cumulative formats, which represents one form of hybrid instrument. However, more sophisticated hybrids such as convertible debentures, mezzanine notes with equity kickers, or profit-participating loans are not explicitly defined in existing regulations.

Hybrid Instrument Regulation Equity and Subsidiaries Nepal's existing securities regulatory framework does not have a developed taxonomy or disclosure regime for hybrid/mixed instruments beyond basic preference shares and convertible debentures. SEBON would need to exercise its power under Securities Act Section 2(cha) to prescribe and regulate new instrument categories. Until this happens, the ADF Bill's authorization to issue mixed instruments exists in a regulatory vacuum, potentially deterring institutional investors who require clear regulatory classification for their investment mandates and accounting treatment.The subsidiary creation power is significant. Under the SME Securities Regulation, 2081, ADF subsidiaries could potentially use the lighter SME issuance framework (Rule 15-17, 27-28) to raise capital for mid-sized projects, avoiding the heavier public issuance requirements.

3.4 Guarantee Fund

3.4.1 Bill Provisions

Section 3(ga) authorizes the establishment of a guarantee fund backed by full or partial guarantees from the Nepal Government or international financial institutions. The Fund may then channel these guarantees to enable the general public or financial institutions to extend loans, bonds, or both to specific projects. Section 25 elaborates the mechanism: a project implementation entity may request the Fund to obtain government or IFI guarantees; the Fund evaluates the request against criteria including feasibility study results, line ministry recommendation, National Project Bank inclusion, and IBN recommendation for PPP projects (Section 25(2)).

The Fund itself may also directly guarantee project obligations (Section 25(2)), and may combine government-backed guarantees with its own guarantee capacity to provide joint guarantees for projects (Section 25(4)). Guarantee records and procedures are prescribed by rules (Section 25(7)).

3.4.2 Existing Framework

Under BAFIA 2073, banks can issue guarantees as a core banking function (Section 49(1)(y) for Class A banks. The NRB Capital Adequacy Framework assigns a 0% risk weight to claims guaranteed by the Nepal Government or NRB, and 0% for claims guaranteed by recognized Multilateral Development Banks including the World Bank and ADB. For domestic guarantees, the standard risk weight is 100% for guarantees by public sector entities.

Counter-guarantees are recognized in the CAF: sovereign counter-guarantees can extend sovereign treatment to indirectly covered claims if they meet operational requirements (CAF Section 3.4(iv)). This provides the regulatory basis for the layered guarantee structure contemplated by the Bill.

Under the National Civil Code, 2074, guarantees are governed by Part 5, Chapter 7 (Sections 563-570). A guarantee must be in writing (Section 563(4)), the guarantor’s liability is co-extensive with the debtor’s (Section 564(1)(b)), and upon payment, the guarantor is subrogated to the creditor’s rights (Section 567(1)).

3.5 Investment Fund

Section 3(gha) authorizes the Fund to pool capital from domestic and foreign investors to create investment funds. Section 9(1)(ta) allows the Fund to establish separate accounts and fund structures for specific project investment purposes.

Under existing regulations, the closest framework is the Specialized Investment Fund Regulation, 2075, which permits Private Equity, Venture Capital, and Hedge Funds (Rule 14(2)). These are restricted to 200 qualified investors, require a minimum NPR 50 lakh ticket, and operate as closed-end vehicles for 5-15 years. The ADF Bill’s investment fund authorization is broader and not subject to these constraints, as it operates under its own legislation.

Investment Fund vs. Existing SIF Framework A tension exists between the ADF Bill's investment fund authorization and SEBON's SIF framework. If the ADF creates an investment fund that pools capital from multiple investors for infrastructure deployment, SEBON may argue regulatory jurisdiction under the Securities Act. However, the ADF Bill's special Act status should prevail under the principle articulated in National Civil Code Section 3: special law overrides general law. A more practical concern is taxation. Under the current framework, onshore SIFs face a 30% corporate income tax at the entity level, unlike mutual funds which enjoy full exemption. The ADF Bill does not address entity-level taxation of its sub-funds, meaning investors could face double taxation (at the fund level and upon distribution). India's NIIF resolved this by structuring funds as Category II AIFs under SEBI regulations, which receive pass-through tax treatment.

3.6 Remittance Fund

Section 3(nga) authorizes the creation of a Remittance Fund targeting investment from Nepalis employed abroad and non-resident Nepalis. This is arguably the Bill’s most novel instrument, attempting to convert Nepal’s massive remittance inflows from consumption to productive investment.

Under the Remittance Bylaws, 2079, the primary function of remittance companies is the inward transfer and payment of foreign currency to designated beneficiaries. The bylaws do not contain any provisions allowing remittance funds to be channeled directly into investment instruments. The FX Act, 2019, Section 2(chha3) includes non-resident Nepalis in the definition of ‘foreign investor,’ and Section 10Ga permits foreign investors (including NRNs) to invest in securities including bonds. NRNs may maintain foreign currency accounts in Nepal (FX Act Section 16(4)).

Under FITTA 2075, Section 20 guarantees NRNs the right to repatriate dividends and sale proceeds on their investments. The FIFL Fifth Amendment allows NRNs to bring foreign currency into Nepal before formal investment approval, streamlining the process.

Remittance-to-Investment Pipeline Nepal’s remittance architecture has begun to incorporate investment linkages, but the pipeline remains partial and indirect. Since November 2022, the Securities Board of Nepal (SEBON) has introduced a 10% remittance quota in IPOs, allowing migrant workers to invest directly in the primary market. This operates through a dedicated Remittance Savings Account, which can be opened remotely upon submission of a valid labor permit and proof of remittance inflow (minimum NPR 50,000 within six months). The account is integrated with ASBA, Demat, and MeroShare, enabling online subscription to IPOs. Funds are blocked at the time of application and only debited upon allotment, allowing a relatively seamless channel from remittance inflow to financial investment - though not strictly at the point of transfer. Investors realize returns through secondary market trading on Nepal Stock Exchange (NEPSE), with proceeds credited back to their accounts; bond-type instruments (e.g., FESBs) similarly channel interest and maturity payments through the banking system under Nepal Rastra Bank oversight. However, a true point-of-remittance investment mechanism remains absent. No NRB regulation currently enables “investment-linked remittance” products whereby a worker can simultaneously remit and subscribe to bonds or fund units via remittance service providers. Remittance flows must still pass through banking channels - typically converted under uniform procedures governed by the Money Changer Bylaw - before being deployed into investment instruments. This creates friction and weakens the immediacy of financial intermediation. Developing a full remittance-to-investment pipeline would require NRB to introduce new regulatory frameworks, including product guidelines, remote KYC protocols for overseas investors, and potentially expanded licensing for remittance companies to distribute financial instruments. Comparatively, countries such as Bangladesh and India have more integrated diaspora investment channels. Instruments like Bangladesh’s Wage Earners Development Bond and India’s NRI deposit schemes allow migrants to directly allocate remitted funds into dedicated savings or bond products, often with preferential returns or repatriation benefits. Nepal’s current system - anchored in the IPO remittance quota and bank-mediated instruments - represents an important first step, but scaling toward a fully integrated, point-of-origin investment channel (potentially including ADF bonds or similar vehicles) remains a key policy frontier.

3.7 Asset Securitization

Section 3(cha) authorizes the monetization of assets of any entity or project. Asset securitization involves converting illiquid assets (such as project cash flows, toll revenues, receivables, or earning assets) into tradable securities, allowing the original asset holder to raise upfront capital against predictable future income streams.

Nepal currently has no comprehensive securitization framework. The Securities Act, 2063 does not explicitly define or authorize asset-backed securities, though the broad definition of ‘securities’ in Section 2(cha) includes ‘any other securities specified by the Board,’ providing SEBON with theoretical prescriptive power. SEBON has never issued guidance on structured finance products, special purpose vehicles for securitization, or asset-backed commercial paper.

The concept is acknowledged in limited contexts: the NRB Act, 2058, Section 88Gha(13) mentions securitization as a tool for managing troubled bank assets under special administration. The Capital Adequacy Framework recognizes that securitization agreements with recourse may be used for funding or credit risk transfer, but only in the context of bank capital relief.

A fundamental obstacle exists in the National Civil Code, 2074: Section 435(4) states that a mortgage cannot be created over property not yet owned or over property to be acquired in the future. This directly limits the ability to create security interests over future project cash flows, which is the essence of securitization. The Secured Transactions Act may provide exceptions, but the general Civil Code restriction is significant.

Complete Absence of Securitization Framework The ADF Bill's authorization of asset securitization is perhaps its most forward-looking provision, but it lands in a complete regulatory vacuum. To implement securitization, the following would be needed at a minimum: (1) SEBON regulations defining asset-backed securities as a distinct instrument class, (2) legal framework for true-sale of assets to a special purpose vehicle (SPV), (3) resolution of the Civil Code restriction on future-asset security interests, (4) accounting standards for off-balance-sheet treatment, (5) credit enhancement and rating methodology guidelines, and (6) tax neutrality provisions to prevent double taxation at the SPV level. India developed its securitization framework over two decades through SEBI's ABS/MBS regulations and RBI's securitization guidelines. Nepal would need a compressed but parallel development process. The ADF Bill provides the legislative impetus but not the regulatory scaffolding.

3.8 Fund of Funds

Section 3(chha) authorizes the creation of an integrated fund that invests in various other infrastructure-focused funds, functioning as a Fund of Funds structure. This allows the ADF to aggregate capital across multiple sector-specific or project-specific funds, diversifying risk while maintaining exposure to the infrastructure asset class.

Under the Specialized Investment Fund Regulation, 2075, there is no provision for a Fund of Funds structure. Rule 14(2) recognizes only Private Equity, Venture Capital, and Hedge Funds, with a residual “other funds as prescribed by the Board” category (Rule 14(2)(d)). SEBON has not prescribed any Fund of Funds category to date.

Fund of Funds: Analysis The Fund of Funds authorization is genuinely new to Nepali financial law. SEBON would need to exercise its discretionary power under SIF Regulation Rule 14(2)(d) to formally recognize this structure, or the ADF Bill's own statutory authority would need to be considered sufficient. The key practical challenge is fee layering: investors in a Fund of Funds pay management fees at both the FoF level and at each underlying fund level, potentially eroding returns. For infrastructure investments with already modest return profiles, this double-layer can be significant. India's NIIF Fund of Funds addresses this by negotiating reduced management fees at the underlying fund level.

3.9 Other Financial Instruments

Section 3(ja) provides a catch-all authorization for the Fund to establish funds or issue financial instruments as prescribed by rules. This open-ended provision allows the regulatory framework to evolve alongside global financial innovation without requiring legislative amendment. However, it also means that the practical scope of the Fund’s toolkit will ultimately be determined by executive rule-making rather than parliamentary legislation.

This provision could accommodate future instruments such as infrastructure investment trusts (InvITs), real estate investment trusts (REITs), green bonds with specific climate-linked features, social impact bonds, blended finance structures, or any other instrument that global infrastructure finance markets may develop. NRB Circular No. 19/2081 already expands hedging services to Infrastructure Development Banks and introduces forwards and similar derivative instruments, signaling regulatory openness to financial innovation.

4. Investment Safeguards and Risk Management

4.1 Mandatory Feasibility Studies

Section 23 requires the Fund to conduct comprehensive studies before investing in any project, covering: (a) overall economic and financial viability, (b) potential for high returns, (c) capacity to mobilize additional private investment, (d) contribution to sustainable development and socio-economic progress, (e) employment generation capacity, and (f) use of state-of-the-art technology (Section 23(1)). A separate risk assessment must be conducted by an independent structure, institution, or group (Section 23(2)). Investment proceeds only in long-term, high-return, minimum-risk projects that pass both evaluations (Section 23(3)).

4.2 Collateral and First-Lien Priority

Section 27 establishes the Fund’s collateral regime. The Fund must take adequate collateral for all loan investments, including the project itself if other collateral is insufficient (Section 27(1), (4)). The Bill’s most aggressive creditor-protection provision is Section 27(2): the Fund holds first-lien priority over all collateral, even if the same collateral is subsequently pledged to another creditor. No other creditor may claim against that collateral until the Fund’s obligations are fully satisfied.

Section 27(3) goes further: any agreement, contract, commitment, or transaction that purports to create a right equal to or prior to the Fund’s lien is automatically void. This overrides the general priority framework under the Secured Transactions Act, 2063, which follows a first-to-register, first-in-priority rule (Section 29).

An exception exists for consortium financing: under Section 27(4), when the Fund leads or participates in co-financing, all lenders share pari-passu (equal) priority on collateral. This aligns with existing NRB Directive 11, which governs consortium lending on a pari-passu basis.

Super-Priority Status: Critical The Fund's statutory first-lien is modeled on the NRB's own priority under NRB Act Section 6(1), which gives NRB first claim on borrower assets. However, applying this to an infrastructure investment fund rather than a central bank is unprecedented in Nepali law. The automatic-void provision (Section 27(3)) has Civil Code precedent - Section 452(2) voids later mortgages over already-mortgaged property, and Section 59(2) voids transactions contravening bankruptcy orders - but never before has it been applied to protect a non-sovereign creditor. This super-priority creates a paradox for consortium financing: banks co-lending with the Fund in a consortium enjoy pari-passu status (Section 27(4)), but if they lend independently to the same borrower, the Fund's statutory lien takes precedence. This may deter parallel independent lending to ADF-backed projects, potentially concentrating all infrastructure credit through the Fund. Under the National Civil Code Section 3, the ADF Bill as special law would override the general Secured Transactions Act priority rules. However, the practical enforceability of voiding pre-existing third-party security interests raises due process concerns that may face constitutional challenge.

4.3 Clawback and Project Takeover

Section 26 provides five grounds for the Fund to demand return of invested amounts or suspend pending disbursements: (a) non-compliance with investment conditions, (b) diversion of funds to non-project purposes, (c) obtaining investment through false information, (d) failure to execute the project per the agreed schedule without reasonable cause, and (e) failure to repay installments on completed-project loans. Upon clawback, all outstanding principal, interest, and service charges become immediately due (Section 26(2)).

If repayment is not forthcoming, the Fund may take control of the project and transfer it to another organized institution for continued implementation (Section 26(3)). This step-in right is comparable to BAFIA Section 55(3Ka), which provides banks with step-in rights for PPP projects, though the ADF Bill’s version is broader in scope, applying to all projects rather than just PPP structures.

Under the National Criminal Code, 2074, fund diversion already constitutes the criminal offense of (criminal breach of trust) under Section 252, punishable by up to 5 years imprisonment when committed by an institutional officer. The ADF Bill’s own criminal provision (Section 43) prescribes a double-the-loss fine plus up to 2 years imprisonment for obtaining Fund investment through false information, which is actually less severe than the Criminal Code’s 5-10 year terms for equivalent offenses.

Section 24 requires projects to meet environmental standards, use environmentally friendly construction materials and technology, maintain institutional governance, and establish risk analysis and cost-benefit evaluation mechanisms before receiving investment (Section 24(1)). During implementation, projects must conduct periodic technical, commercial, and environmental evaluations, manage risk, and coordinate with public, private, and community stakeholders (Section 24(2)).

The Board is empowered to approve and enforce guidelines, standards, and directives for environmental protection, sustainable development, and positive social impact (Section 14(wyan)). While the Bill does not specify particular environmental standards, NRB’s existing Environmental and Social Risk Management (ESRM) Guidelines for Banks and Financial Institutions (2022) provide a reference framework that the Fund could adopt.

ESG Integration The environmental safeguard provisions are high-level and lack the specificity that international investors typically require. International DFIs like IFC apply Performance Standards with detailed requirements on biodiversity, labor, community health, indigenous peoples, and involuntary resettlement. The Bill's framework is closer to a policy statement than an operational standard. The green sector incentive (Section 29(2)) referencing NRB's green classification is a positive signal. Under NRB directives, energy sector lending attracts preferential treatment including capped interest spreads (Base Rate + 1% for reservoir hydropower), interest capitalization during moratorium periods, and reduced provisioning for national priority projects (Directive No. 2: They can be restructured or rescheduled while maintaining a loan loss provision of only 1.10% under NRB). These incentives would flow through to ADF-financed green projects, enhancing their financial viability. However, the Bill does not mandate any independent environmental impact assessment, social audit, or community consultation mechanism. By comparison, NIFRA's unified directive specifically encourages the creation of Special Purpose Vehicles for analyzing sectoral infrastructure projects, which could incorporate ESG screening. However, a true point-of-remittance investment mechanism remains absent. No NRB regulation currently enables “investment-linked remittance” products whereby a worker can simultaneously remit and subscribe to bonds or fund units via remittance service providers. Remittance flows must still pass through banking channels - typically converted under uniform procedures governed by the Money Changer Bylaw - before being deployed into investment instruments. This creates friction and weakens the immediacy of financial intermediation. Developing a full remittance-to-investment pipeline would require NRB to introduce new regulatory frameworks, including product guidelines, remote KYC protocols for overseas investors, and potentially expanded licensing for remittance companies to distribute financial instruments. Comparatively, countries such as Bangladesh and India have more integrated diaspora investment channels. Instruments like Bangladesh’s Wage Earners Development Bond and India’s NRI deposit schemes allow migrants to directly allocate remitted funds into dedicated savings or bond products, often with preferential returns or repatriation benefits. Nepal’s current system - anchored in the IPO remittance quota and bank-mediated instruments - represents an important first step, but scaling toward a fully integrated, point-of-origin investment channel (potentially including ADF bonds or similar vehicles) remains a key policy frontier.

5. Observations

The Alternative Development Finance Mobilization Bill, 2081 represents Nepal’s most ambitious attempt to create a statutory framework for infrastructure financing outside the traditional fiscal and banking channels. By establishing a dedicated autonomous fund with its own capital base, governance structure, and an expansive toolkit of financial instruments, the Bill addresses a genuine need: the persistent gap between infrastructure investment requirements and available fiscal resources.

The Bill’s strengths are considerable. The government-parity treatment of Fund-issued bonds, the sector lending credit mechanism, the guarantee fund architecture, and the remittance fund concept each address specific bottlenecks in Nepal’s infrastructure financing ecosystem. The Bill correctly identifies that the constraint is not a shortage of capital in Nepal – the banking system is highly liquid, insurance and provident funds hold substantial assets, and remittance inflows consistently exceed Rs. 1 trillion annually – but rather the absence of instruments, intermediaries, and regulatory frameworks to channel this capital toward long-term infrastructure.

However, the analysis reveals that the Bill is a necessary but not sufficient condition for achieving its objectives. The legislative authorization to issue bonds, create funds, securitize assets, and mobilize remittances exists at a statutory level, but the regulatory scaffolding required to operationalize these instruments is not yet complete. The Bill will achieve its transformative potential only if it triggers a coordinated regulatory response from NRB, SEBON, and the Ministry of Finance to develop the subordinate rules, directives, and market infrastructure that bring each instrument from legislative concept to operational reality. Without this, the statute risks becoming a well-intentioned but dormant framework.

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Alternative Development Finance Bill

1. The Fund: Structure, Capital, Governance and Accountability