Some Pointers for ADF Bill

1. The Fund's Financial Toolkit: Eight Methods of Capital Mobilization

Section 3 of the Alternative Development Finance Mobilization Bill, 2082 authorizes the Fund to mobilize alternative development finance to support projects that yield high economic returns, generate employment opportunities, increase production, and contribute to the overall economic development of Nepal. To achieve this, the law outlines eight specific methods, detailed from Section 3(ka) through Section 3(ja). Before examining each method, however, it is essential to understand a foundational design choice embedded in the Bill’s definitions that shapes how every instrument operates.

1.1 The Loan & Guarantee-as-Loan Design

According to Section 2(gha) of the Bill, the term “Loan” is defined as the investment provided to a project under the Act, and it explicitly states that the term includes the guarantee provided by the Fund for project development. This contains some definitional detail. In development finance, a guarantee acts as a contingent liability – the Fund takes on the credit risk of the project and must pay the debt if the project defaults. 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 protects the Fund’s assets and public money from being exposed to unsecured risks.

The implications of categorizing “guarantee-as-a-loan” design cascade throughout the Bill:

Mandatory Collateral: Section 5(gha) prohibits the Fund from investing in any project unable to provide collateral for the loan or guarantee. Section 27(1) mandates that whenever the Fund provides a loan or guarantee, it must secure movable or immovable property, or the proposed project itself, as collateral.

Absolute Priority on Recovery: Section 29(2) gives the Fund first-lien priority over all collateral for any loan or guaranteed amount. No other lender can claim that collateral until the Fund is fully recovered. Any secondary agreement violating this priority is automatically void under Section 29(3).

Project Monitoring: Section 9(1)(dha) obligates the Fund to continuously monitor any project to which it has provided a loan or a guarantee, ensuring adherence to financial and developmental commitments.

Mandatory Scrutiny: Because a guarantee is treated as a loan, the project requesting it must undergo the same stringent feasibility and risk assessment protocols as a project asking for direct cash. The Fund cannot issue guarantees without completing the studies required under Section 25.

Why This Matters By bundling guarantees into the legal definition of a loan, the Bill implements a safe mode in development finance: institutions issuing guarantees with lighter due diligence than direct lending, accumulating contingent liabilities that only become visible upon default. The ADF's design forces guarantee exposure to be treated with the same rigour as loan disbursement from the outset.

1.2 The Eight Mobilization Methods

Method 1: Issuing Financial Instruments and Bonds – Section 3(ka)
The Fund can raise capital directly from targeted investors or the general public by issuing project-specific financial instruments. This can be done through equity, debt/loans, or blended financial instruments that combine both equity and debt characteristics. This is the Fund’s primary capital-raising mechanism and forms the basis for project-specific bonds, debentures, and hybrid instruments.

Method 2: Raising Project-Specific Loans with Guarantees – Section 3(kha)
Capital can be raised by taking specific loans for particular projects. To secure these loans, the Fund can utilize guarantees provided by the Government of Nepal, international financial institutions, the entity implementing the project, or the Fund’s own internal guarantee.

Drafting Issue: The Self-Guarantee Ambiguity Section 3(kha) is legally and structurally ambiguous because it does not clearly identify whether the "project-specific loan" is to be raised by the Fund itself or by the project-implementing entity/SPV, and this uncertainty creates problems under either interpretation. If the Fund itself raises the loan, the phrase "kosh ko swo-jamani" (self-guarantee of the Fund) is conceptually flawed - a borrower cannot ordinarily guarantee its own debt. Being the principal obligor, the Fund is already directly liable for repayment, and a self-guarantee provides no separate legal or financial assurance to lenders. In such circumstances, the provision should instead refer to the Fund securing its borrowings through assets, reserves, collateral, escrow arrangements, or other credit enhancement mechanisms. Alternatively, if the project implementing entity raises the loan, then a guarantee by the Fund may be legally valid. However, where the Fund already has equity or debt exposure in the SPV, providing an additional guarantee creates stacked financial risk - the Fund simultaneously assumes investor risk, creditor risk, and contingent guarantee liability in relation to the same project. Recommendation: Redraft Section 3(kha) to clearly distinguish between (i) borrowings undertaken by the Fund for onward lending, supported through third-party guarantees or Fund assets/security arrangements, and (ii) borrowings undertaken by project entities, for which the Fund may provide guarantees subject to defined exposure limits and risk management safeguards.

Method 3: Establishing a Guarantee Fund – Section 3(ga)
The Fund can establish a dedicated Guarantee Fund. It can also obtain full or partial guarantees from the GoN or international financial institutions. Using the backing of this guarantee fund or guarantees from GoN / international financial institutions, the institution can then acquire loans or issue debentures to the general public and other financial institutions. This creates a credit enhancement layer that de-risks the Fund’s own borrowings.

Method 4: Establishing an Investment Fund – Section 3(gha)
The Fund can establish a standalone Investment Fund by pooling capital specifically collected from domestic and foreign investors. This structure allows the Fund to aggregate capital from multiple institutional sources – pension funds, insurance companies, sovereign wealth funds, development finance institutions – into a single vehicle dedicated to infrastructure investment.

Method 5: Establishing a Remittance Fund – Section 3(nga)
To capture diaspora capital, the Fund is authorized to establish a Remittance Fund (bipreshan kosh / remit fund). This fund is dedicated to collecting and mobilizing investments from Nepali citizens engaged in foreign employment as well as Non-Resident Nepalis (NRNs). Given that Nepal’s annual remittance inflows consistently exceed Rs. 1 trillion, this provision attempts to convert a portion of consumption-oriented remittances into productive infrastructure investment.

Method 6: Asset Monetization – Section 3(cha)
Capital can be mobilized by monetizing the existing physical or financial assets of any entity or project (maudrikikaran). This involves converting illiquid assets – such as toll revenues, project receivables, or operational cash flows – into tradable securities, turning locked-up value into liquid capital for further infrastructure investment.

Method 7: Fund of Funds – Section 3(chha)
The Fund can establish an integrated Fund of Funds. This overarching fund is designed to inject capital into various other smaller, pre-existing funds that are established to invest in infrastructure projects. This structure enables diversification across multiple sub-funds, sectors, and risk profiles while maintaining a unified capital pool.

Method 8: Other Prescribed Financial Instruments – Section (ja)
To ensure the Fund remains adaptable to future market conditions, it is given the flexibility to establish new funds or issue other modern financial instruments as prescribed by subsequent rules and regulations. This open-ended provision allows the regulatory framework to evolve alongside global financial innovation without requiring legislative amendment.

The Explanatory Notes' Rationale The Bill's explanatory notes highlight that these eight methods were formulated because traditional financing sources are insufficient to bridge the massive infrastructure investment gap. By leveraging capital markets, remittance, international guarantees, and asset monetization, these provisions allow the Fund to bypass reliance solely on the traditional banking system and access diverse pools of domestic and international capital.

2. The Investment Decision Pipeline

The Bill establishes a rigorous, multi-tiered screening system for project investments. Based on the provisions in Sections 4 and 5, every project must pass through three sequential phases before reaching the Board for final approval. The following flowchart and narrative walkthrough illustrate how the pipeline operates.

2.1 Visual: ADF Investment Decision Flowchart

2.2 Narrative Walkthrough

Phase 1: Sectoral Eligibility Gate

Before analysing financial viability, the Fund must verify whether the project fits within the specific economic sectors authorized by Section 4(1). These sixteen sectors span the full range of physical and digital infrastructure: energy development and electricity generation, transmission and distribution, road construction, railway construction, airports, tunnels, special economic zones and industrial parks, IT parks and specialized tourism/sports infrastructure, urban infrastructure, public digital infrastructure, cable car/ropeway systems, irrigation, mining, agriculture and forestry related. Projects outside these sectors are legally barred outright.

Phase 2: Negative Screening and Absolute Restrictions

Even if a project falls into an allowed sector, it must pass a strict negative screening process. Section 5 acts as an absolute filter to protect public funds from high-risk, low-value, or legally compromised investments. Six specific restrictions apply:
• The Size Restriction: The Fund is prohibited from investing in projects with estimated costs below Rs. 1 Arba (~ 70Mil USD). This ensures the Fund focuses on large-scale infrastructure rather than dispersing resources across smaller projects.
• The Financial Return Restriction: If estimated financial returns are low, the project is rejected. The Fund only supports projects yielding high economic returns.
• The Collateral Restriction: If the project cannot secure collateral for the loan or guarantee requested, it is rejected. Unsecured financing is legally barred.
• The Circular Financing Restriction: If a developer attempts to use the Fund’s own bonds or debentures as collateral to seek a loan, the project is rejected. This prevents a circular financial exposure.
• The Legal Entity Restriction: The Fund cannot finance individuals. Only registered legal entities, firms, or companies are eligible.
• The Conflict-of-Interest Restriction: Projects proposed by firms, companies, or institutions where the incumbent CEO or Board Director was a fundamental shareholder, partner, director, or member within three years prior to appointment are rejected. This restriction does not apply retroactively to investments already mobilized before the official’s appointment.

Design Issue: Financial Returns vs. Economic Returns - Section 5(ga) The Bill's stated purpose in Section 3 is to mobilize finance for projects that yield high economic returns, create employment, and contribute to Nepal's overall economic development. Section 3 frames the Fund's mandate not purely in terms of financial return but in terms of economic development, which is a broader concept that includes economic rates of return, not just financial rates of return. Employment generation and economic contribution may not always go hand in hand with financial profitability. A road built into a remote region may generate tens of thousands of livelihood opportunities and catalyze significant economic activity, yet its direct revenue potential may be modest. Section 5(ga), which filters out projects on financial return grounds alone, may therefore narrow the Fund's mandate beyond what the legislation intends. Furthermore, the phrase "low financial returns" is not defined anywhere in the Bill. There is no quantified threshold, no reference benchmark, and no indication of who makes this assessment or through what methodology. Recommendation: Replace the binary exclusion in Section 5(ga) with a tiered framework that distinguishes between financial returns and economic returns. Projects with low financial returns but demonstrably high economic returns, assessed against published benchmarks, could remain eligible subject to additional conditions such as co-financing from public sources or viability gap support.

Phase 3: Strategic Pathway Validation

Once a project clears sectoral and negative screening, it must be validated for strategic importance. The law mandates that the project must hold significant value, high feasibility, and high economic return, and it must enter through one of four specific institutional pathways defined in Section 4(2):
Pathway A (National Planning): The project is officially included in the National Project Bank.
Pathway B (Government Agenda): The project is proposed for implementation under the GoN’s annual programmes.
Pathway C (Public-Private Partnership): The project has been officially recommended by the Investment Board Nepal for implementation via the Fund under a PPP model.
Pathway D (Independent Assessment): The ADF Fund has conducted its own independent study and determined the project is suitable for investment.
Projects that do not fit any pathway are rejected per Section 5(ka), which bars investment in any project outside the Section 4(2) pathways.

Final Gate: Board of Directors Approval

Under the Bill’s governance structure, every eligible project must receive formal approval from the Board of Directors before capital is deployed. This requirement is non-negotiable and applies regardless of the project’s size, pathway, or the CEO’s assessment.
Section 14(cha): The Board has the overarching legal duty to approve investments in projects qualifying under Section 4(2).
Section 22(kha): The CEO’s role is explicitly limited to preparing and submitting the investment proposal to the Board for approval. The CEO cannot unilaterally approve project funding.
This separation of powers between executive assessment and fiduciary approval ensures that no project receives funding unless it meets the collective scrutiny of the Board, which includes the Finance Ministry Secretary, joint secretaries from infrastructure ministries, institutional shareholder representatives, and an independent industry expert.

3. Investment Structuring: Equity, Debt, Guarantees, and Collateral

Once a project is approved by the Board, the Fund deploys capital through a flexible structuring framework. The Bill allows multiple forms of investment in a single project, establishes a detailed guarantee mechanism, and creates a collateral regime with statutory super-priority.

3.1 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. The law provides specific provisions enabling blended finance structures:
Section 22(2)(ka): The Fund may invest by purchasing shares (equity flow).
Section 22(2)(kha): The Fund may invest through loan flow.
Section 22(2)(ga): The Fund may invest in both equity and loan combined.
Section 9(1)(jha): Mandates that one of the Fund’s legal duties is to mobilize loans, equity, or both within a project.

Dual Investment: Commercially Valid but Risk-Layered There is no inherent commercial contradiction in a fund investing in both debt and equity in the same project - this is common structured finance and project finance practice. However, it 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 an equity investor, the Fund benefits from long-term upside, residual profits, and higher risk-taking for greater returns. As a lender, it seeks fixed repayment, downside protection, and conservative risk management. Holding both positions may create tension where the Fund must decide whether to act like a risk-seeking sponsor or a risk-averse creditor, particularly during distress or restructuring. Additionally, simultaneous debt and equity exposure creates stacked/concentrated risk - the Fund is exposed to the same project through multiple channels (equity loss, loan default, and potentially guarantee obligations), magnifying total exposure to a single asset. Accordingly, while dual investment is commercially valid and often strategically useful in blended finance, it requires strong legal structuring, exposure caps, conflict-of-interest safeguards, and clear rules on priority, pricing, and governance to prevent misuse or overconcentration.

3.2 Collateralized Lending versus Hypothecation

The Bill authorizes the Fund to invest through hypothecation under Section 9(1)(gha). Understanding the distinction is important for how collateral operates in infrastructure project finance:

Collateralized lending is the broad term referring to any loan secured by an asset or security interest provided by the borrower, including mortgages, pledges, liens, charges, and other forms of security.
Hypothecation lending is a specific type of collateralized lending in which the borrower offers movable assets – such as inventory, vehicles, receivables, or equipment – as security while retaining possession and continued use of those assets during the loan term. The secured asset remains under the borrower’s control unless default occurs.

For infrastructure projects, hypothecation is particularly relevant because project assets (turbines, construction equipment, operational machinery) need to remain in active use during the project’s construction and operational phases. The Fund takes a security interest without disrupting the project’s operations.

3.3 The Guarantee Framework: Which Projects Qualify and How

Section 27 of the Bill establishes a specific legal framework governing which projects qualify for a guarantee and the procedural steps required.

Eligibility Criteria – Section 27(2)
To receive a partial or full guarantee directly from the Fund, or for the Fund to recommend a guarantee from the Government or a multilateral institution, the project must satisfy all of the following conditions:
(a) Risk and Return Viability: Based on an independent study conducted by the Fund, the project must be proven eligible for a guarantee specifically in terms of its financial returns and risk analysis.
(b) Sectoral Ministry Recommendation: The project must be officially recommended by the relevant government ministry (e.g., MoEWRI for a hydropower project).
(c) National Priority: The project must be officially included in the National Project Bank.
(d) PPP Specifics: If the project is implemented under a PPP model, it must have an official recommendation from the Investment Board Nepal.
Additionally, the absolute restrictions in Section 5 continue to apply: the project must be valued at over Rs. 1 Arba, must not be implemented by an individual, and must offer sufficient collateral.

The Process
Step 1 – Formal Request (Section 27(1)): The project-implementing entity submits a formal request to the Fund, demonstrating why a guarantee from the Fund, the Government, or an international financial institution is necessary to secure the required investment.
Step 2 – Assessment and Decision: The Fund evaluates the request against Section 27(2) criteria. If eligible, the Fund either provides a guarantee itself or sends a formal recommendation through the Ministry of Finance to the Government or a multilateral institution.
Step 3 – Additional Government Scrutiny (Section 27(4)): If the Fund recommends that the Government provide the guarantee, the Council of Ministers (Cabinet) retains the right to order further independent studies before approving.
Step 4 – Investment Mobilization (Section 27(3)): Once the guarantee is approved, the Fund is authorized to deploy alternative development finance instruments to mobilize capital into the project.

4. Sovereign Treatment and the Section 30

Section 30 of the Bill establishes a regime where the Fund’s financial instruments receive treatment at par with government securities. This provision is arguably the most commercially significant in the entire Bill. To understand why it matters, it is necessary to consider what a standard government guarantee already provides – and what Section 30 adds beyond that.

4.1 What a Government Guarantee Already Provides

Under standard banking and capital market practice, a government guarantee on any instrument inherently unlocks central banking benefits. Under existing NRB directives, claims guaranteed by the Government of Nepal carry a 0% risk weight under the Capital Adequacy Framework (Directive No. 1). Government securities count toward Statutory Liquidity Ratio compliance (Directive No. 13). These benefits flow automatically from the guarantee itself, without needing a special statute. This raises a legitimate question: if the government guarantee already provides these benefits, what is the added value of Section 30?

4.2 Statutory Permanence vs. Regulatory Discretion

Central bank directives and monetary policies can change annually. NRB can reclassify instruments, adjust risk weights, or modify SLR-eligible instrument categories through administrative circulars. By explicitly stating in Section 30(1) that the Fund’s guaranteed debt instruments must be treated exactly like sovereign Development Bonds (bikas rinpatra) and National Savings Bonds (nagarik bachatpatra), the Bill strips away future regulatory ambiguity. It provides permanent, perpetual legal assurance to institutional investors that these instruments will always enjoy sovereign-level treatment. This statutory permanence – enshrined in primary legislation rather than delegated regulation – is a mandatory requirement to attract the kind of long-term, risk-averse institutional capital (pension funds, insurance companies) that infrastructure finance requires.

4.3 Extension to Non-Guaranteed Instruments

Where the law goes significantly beyond standard guarantee mechanics is in Section 30(2). While a government guarantee naturally brings market benefits to the specific bond it covers, Section 30(2) explicitly extends the same secondary market trading treatment and government-level fee structures to the Fund’s other financial instruments that do not carry a government guarantee. This means even if the Fund issues an independent financial instrument without direct government backing, the securities market must treat its listing and trading process as favourably as sovereign debt. This is a remarkable regulatory privilege with no precedent in Nepali financial law.

The Net Effect of Section 30 Section 28 transforms the Fund's instruments from mere investment options into regulatory necessities for Nepal's banking sector. The combination of (a) statutory permanence of sovereign-level treatment, (b) extension of trading privileges to non-guaranteed instruments, and (c) directed sector lending compliance credit under Section 30(3) creates a three-layered demand architecture that no other non-sovereign issuer in Nepal currently possesses.Section 5(ga), which filters out projects on financial return grounds alone, may therefore narrow the Fund's mandate beyond what the legislation intends. Furthermore, the phrase "low financial returns" is not defined anywhere in the Bill. There is no quantified threshold, no reference benchmark, and no indication of who makes this assessment or through what methodology. Recommendation: Replace the binary exclusion in Section 5(ga) with a tiered framework that distinguishes between financial returns and economic returns. Projects with low financial returns but demonstrably high economic returns, assessed against published benchmarks, could remain eligible subject to additional conditions such as co-financing from public sources or viability gap support.

5. Regulatory Architecture: NRB Oversight and the Governance Question

While the Fund operates as an autonomous entity under its own statute, it is not free from regulatory oversight. The Bill carefully delineates the areas where the Fund is subordinate to the Nepal Rastra Bank’s instructions. At the same time, the Fund’s governance structure raises questions about operational independence that matter critically for investor confidence.

5.1 Four Areas of NRB Subordination

Area 1: Loan Portfolio Regulation and Monitoring
Section 24(3): The NRB has ultimate authority to legally regulate and monitor any loan investments made by the Fund into projects. The NRB may issue operational directives to the Fund based on its monitoring, and the law explicitly states: “it shall be the duty of the Fund to comply with such directives”. This requires that despite being a specialized development fund, its credit creation and lending practices do not disrupt broader macroeconomic and financial stability.

Area 2: Foreign Capital Market Operations
Section 9(1)(ana): If the Fund wishes to issue securities instruments or be listed in any foreign capital market, it must legally obtain prior approval from the NRB. This reflects Nepal’s longstanding regulatory sensitivity around foreign exchange management and external financial exposure.

Area 3: International Borrowing and Hedging
Section 9(1)(ta): Whenever the Fund takes a loan from an international financial institution for any project, it requires explicit NRB approval. Additionally, any hedging mechanisms deployed to protect these foreign loans against currency fluctuation risks must also be approved by the NRB.

Area 4: Green Sector Classification
Section 31(2), Explanation: When the Fund deploys specialized financial instruments and offers concessions for priority sectors, it relies on NRB’s classifications rather than creating its own. The law defines a “Green Sector Project” as one classified as such by the Nepal Rastra Bank, subordinating the Fund’s green finance mandate to the central bank’s taxonomy.

Drafting Issue: Inconsistency Between Section 9(1)(cha) and Section 9(1)(ta) Two provisions within Section 9(1) deal with the Fund's ability to borrow from international sources, and read together, they create a question of internal consistency. Section 9(1)(cha) states: "to receive loans or grants from international financial institutions or foreign banks" - with no mention of NRB approval. Section 9(1)(ta) states: "with the approval of Nepal Rastra Bank, to take loans from multilateral financial institutions for any project..." The question is whether Section 9(1)(cha) creates a parallel borrowing channel that operates independently of NRB oversight. If so, the absence of any regulatory check on the Fund's foreign borrowings could create foreign exchange management risks, given Nepal's sensitivity around external debt and the NRB's statutory mandate to manage foreign exchange. Multilateral institutions require clarity on whether regulatory approvals have been obtained. A provision that is internally unclear about the approval requirement may complicate the Fund's ability to negotiate and conclude international financing arrangements smoothly. Recommendation: Consolidate the two provisions into a single sub-section that clearly states: the Fund may borrow from multilateral financial institutions and foreign banks, with the prior approval of Nepal Rastra Bank, in accordance with the Foreign Investment & Technology Transfer Act and Foreign Exchange Regulation Act. If the intention is to distinguish between grants and loans, explicitly state that grants from multilateral institutions do not require prior NRB approval (as they do not create external liability) but that loans in all cases require NRB approval.

5.2 Governance: Board Composition and Investor Confidence

Of the seven named Board positions under Section 10, three are held by serving civil servants: the Finance Ministry Secretary (who also serves as Chairperson), a Finance Ministry Joint Secretary, and a Joint Secretary from the infrastructure-related department designated by the Ministry of Finance. These three individuals are all appointees of the Government, serving in concurrent government roles.

This means that independently of the Government’s 51% shareholding under Section 8(3)(ka), the Government exercises structural influence over the Board through its civil servant members. For an institution whose central purpose is to mobilize private and international capital, this raises a question about investors’ confidence in the operational independence of the Fund’s investment decisions.

Comparative: India's NIIF Governance Model India's National Investment and Infrastructure Fund (NIIF), which is also majority government-owned, operates a two-tier governance structure: a Governing Council chaired by the Finance Minister that provides strategic direction and meets annually, and a Board of Directors where only 2 of 10 members are serving government officials. The remaining seats are held by independent professionals drawn from investment, infrastructure, and policy backgrounds. This structure has been a significant factor in NIIF's ability to attract anchor investments from international institutions including Abu Dhabi Investment Authority, Ontario Teachers' Pension Plan, and several sovereign wealth funds.

Governance Recommendations Option 1 - Two-Tiered Structure: Establish a Governing Council (chaired by the Finance Minister) that sets strategic direction and meets twice annually, and a smaller operational Board of Directors (chaired by the Finance Secretary) with a majority of independent professionals taking day-to-day investment decisions. Option 2 - Expand Independent Representation: Increase the independent director seats to at least four out of seven, with at least one independent director drawn from international infrastructure finance practice. The transitional provision in Section 19(3), which already contemplates international expertise for the CEO role, provides a legislative precedent for this. Option 3 - Observer Seats (No Structural Change Required): Allow international financial institutions to designate a non-voting observer to the Board. Observer seats would not vote but would bring international credibility and technical scrutiny that could strengthen investor confidence without altering the formal governance balance.

5.3 Government Directive Powers: Section 54

Section 54 gives the Government of Nepal, acting through the Cabinet, the power to issue directives to the Fund at any time. The Fund is obligated to comply with any such directive. While this is a standard feature of Nepali public institutions, for an institution whose mandate specifically requires it to build confidence with private and international capital, the scope and nature of the directive power need to be carefully considered.

The practical risk 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, or that a future administration might use it differently from the current one. As drafted, a directive could lead the Fund to invest in a project that does not meet its investment criteria, to adjust the terms of an existing investment for reasons unrelated to project performance, or to prioritize certain projects over others on grounds that may not be commercially transparent. There is no requirement for the directive to be in writing, to be reasoned, or to be disclosed publicly. There is no mechanism for the Board to formally record a contrary view. And there is no compensation provision if a directive causes the Fund financial loss.

Comparative: Bangladesh's IDCOL Model Bangladesh's Infrastructure Development Company Limited (IDCOL), which operates in a similar institutional context to Nepal, includes a provision requiring that any government directive be consistent with the company's memorandum and articles, and that where compliance with a directive causes financial loss, the government makes the company whole. This 'make-whole' provision provides a critical safeguard that balances government oversight with financial accountability.

Section 54 Recommendations Recommendation 1: Add a qualifying sub-section specifying that directives issued under this provision shall be consistent with the objects of the Fund as set out in the Act, and shall not require the Fund to act in a manner that would breach its obligations to investors or lenders, or that is contrary to the Fund's Board-approved investment policy. Recommendation 2: Require that directives be in writing, and that any directive the Fund's Board considers materially inconsistent with the investment mandate be recorded as such in the Board's minutes and reported in the Fund's annual report under Section 50. The obligation to comply would remain, but this creates a transparent record protecting both the Fund and the Government.

6. Design Considerations

6.1 The Green Infrastructure Gap

The Bill recognizes green sector projects in Section 31(2) for special tax incentives and concessions. However, green infrastructure does not appear as a distinct and named investment category in Section 4(1), which is the operative eligibility provision for Fund investments. While the sectors identified in Section 4(1) – energy, urban infrastructure, and others – do encompass many green activities, the absence of an explicit green infrastructure category means that climate adaptation infrastructure, disaster-resilient infrastructure, and nature-based solutions are not explicitly named as eligible investments.

Given Nepal’s acute climate vulnerability and the growing global availability of concessional green capital through instruments such as green bonds, climate funds, and sustainability-linked loans, this gap represents a missed opportunity to position the Fund strategically within international green finance flows.

Green Infrastructure Recommendation Add a sub-clause to Section 4(1) that expressly includes climate adaptation and disaster-resilience infrastructure as eligible investment sectors. This could be drafted broadly enough to include flood management systems, landslide risk reduction infrastructure, climate-resilient design upgrades to existing infrastructure categories, and nature-based solutions such as watershed management and green urban drainage systems.

6.2 Summary of All Recommendations

Section	Issue Identified	Recommendation
3(kha)	Self-guarantee ambiguity; unclear whether Fund or project entity borrows	Redraft to distinguish Fund borrowings (secured by assets) from project entity borrowings (Fund guarantee with exposure limits)
5(ga)	Binary exclusion based on undefined ‘low financial returns’; conflicts with broader economic return mandate	Replace with tiered framework distinguishing financial and economic returns; define assessment methodology
9(1)(cha) vs 9(1)(ta)	Internal inconsistency on NRB approval for international borrowing	Consolidate into single provision; grants exempt, all loans require NRB approval
Section 10	Government-dominated Board (3 of 7 civil servants) may deter private/international investors	Two-tier governance, expand independent directors, or add IFI observer seats
Section 54	Unqualified government directive power with no written form, reasoning, or make-whole provision	Require consistency with Fund objects; written form; Board may record dissent in annual report
4(1)	Green infrastructure not explicitly named as eligible sector despite incentives in Section 29(2)	Add climate adaptation and disaster-resilience infrastructure as named category

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