Foreign Direct Investment (FDI) in Nepal’s Civil Aviation Sector

Flying is not only a luxurious mode of transportation, but it is also one of the most trustworthy. In fact, in developing Asia, state-owned enterprises dominate the airline industry. Due to poor management and corruption, state-owned enterprises, on the other hand, have been unable to provide good services. As a result of foreign investment, services in today’s competitive market are reliable and affordable. The Nepalese public, on the other hand, prefers airlines other than Nepal Airlines. The Nepal Aviation Industry has been facing challenges.

1. Investment Board of Nepal

Obtaining permission from the Nepal Investment Promotion Board is the first step in attracting foreign investment in domestic airlines, international airlines, ground handling, and maintenance, repair, and overhaul (MRO) in aviation in Nepal.

Foreign investors can invest up to 80% of their funds in international airlines, 49% in domestic airlines, and 95% in aviation maintenance, repair, and overhaul (MRO).

There is a “National flag carrier” in civil aviation for the transportation of passengers and cargo, which has a separate registration number for each nation, which is why it is always formed as a sui generis market.

The key distinction between civil aviation and other industries is that airlines are dominated by state ownership; before allowing foreign investment, the state considers state interests and dignity. Because of the size of the required investment and the presence of brand extensions, the state has more pervasive controls on entry, capacity, and tariffs in this industry than in others.

The presence of an international regime with specific international organizations and institutions; significant growth in the civil aviation sector of Nepal since early 2006. Nepal implemented a new airline policy as part of its Air Policy 2006.

 The government then authorized the privatization of the airport development sector. The FDI policy of the civil aviation sector is divided into five subcategories:

2. Airports are a different mode of transportation.

BOOT (build, own, operate, transfer) is a public-private partnership (PPP) project model in which a private organization conducts a large development project under contract to a public-sector partner, with the construction of the Airport allowing for limited operation.

The Indian government has attracted foreign investment in the airports of Delhi, Hyderabad, Mumbai, Bengaluru, and Kochi, and this privatization has unquestionably resulted in higher service standards, as these airports have only served to improve passenger experience.

3. Airline Transportation Services

• Domestic Scheduled Passenger Airlines
• International Airlines

1. Domestic Scheduled Passenger Airlines

FDI is permitted up to 49 percent in scheduled air transport services and domestic airline services. Foreign airlines may also invest up to 49 percent of their paid-up capital in Nepali airline companies that operate scheduled and non-scheduled air transport services. Such an investment would be subject to certain conditions, such as.

 (I) it would be invested with the Investment Board of Nepal’s approval; (ii) the 49 percent FDI limit would apply.

(iii) The investments must adhere to relevant regulations as well as other applicable rules and regulations,

 (iv) the Chairman and at least two-thirds of the Board of Directors are Nepali citizens, and Nepali nationals hold substantial ownership and control, and so on.

2. International Airlines

Foreign direct investment in international airlines is permitted up to 80%. Allowing FDI in the scheduled airline sector is another appealing investment opportunity, as passenger traffic is growing at a healthy rate. India is a prime example of this. Airlines such as Jet Airways, Air Asia India, and Vistara have already benefited from FDI.

Foreigners own and control International Airlines because it is the result of foreign investment.

Domestic and international airlines that wish to collaborate must first sign a Joint Venture Agreement before reaching an agreement. When it comes to domestic airlines, an important question arises when considering JV airlines with non-airline shareholders:

Who would fully be in charge of the airline? Although each foreign airline is only a minority shareholder in such cases, the local majority shareholders are unlikely to have the knowledge and capability to manage and control the airline, which is a highly sophisticated business. Rather, such foreign carriers are likely to have de facto control of the aforementioned airline.

4. Shareholders’ Agreement

Because 100% foreign investment is prohibited in airlines, a shareholders agreement must be signed between a Nepali and a foreigner. The structure of the BOD (Board of Directors) and how profits are to be distributed must all be clearly outlined in such an agreement. The Shareholders’ Agreement must demonstrate that Nepali airlines can make decisions independently of foreign airline shareholders. Additionally, in their share agreement, they have the right to determine their own network, fare structure, and other flight-related matters.

5. Ground Handling and Maintenance, Repair, Overhaul (MRO) flying training institutions in aviation receive foreign direct investment (FDI).

Ground Handling Services in Maintenance, Repair, Overhaul (MRO) in aviation, flying training institutions, and technical training institutions can receive up to 95 percent FDI.

Because the majority of Nepali airlines use MRO services in other countries such as Sri Lanka, Singapore, and the UAE for aircraft maintenance, ground handling, and MRO services are uncharted territory. Nepal suffers as a result of its complex taxation system. The MRO industry is projected to be  Rs. 50 million, opening up yet another avenue for foreign investment. Ground transportation is also dominated by foreign companies. As a result, ground handling has the potential to attract significant foreign direct investment.

Conclusion:

Corporate Lawyer Nepal has been providing legal assistance with domestic and international FDI of ground handling and maintenance, repair, and overhaul (MRO) flying training institutions in aviation.

Our firm, has extensive experience with the Civil Aviation Authority (CAAN). Ms. Alpana Bhandari, Founding Partner of the Prime Legal Consultants and Research Center, is a law graduate of American University’s Washington College of Law who has been hired to draft Shareholder’s Agreements and has extensive experience and Mr. Narayan Prasad Giri a member of the firm has years of experience working in the areas of aviation.

If you need a lawyer to draft a Joint Venture Agreement for an airline, please contact us at info@corporatelawyernepal.com or +977- 9849517735.