Finance Minister Shankar Prasad Koirala approved the draft of the guidelines on Monday.
The guidelines aim to lure global institutions having high credit rating to invest in infrastructure development projects by integrating fund collected in local currency from small and big investors. [break]
In the budget for fiscal year 2013/14, the government had announced to encourage capital mobilization through international institutions with high credit rating for long term investment in infrastructure projects and other development activities by raising resources scattered within the country and abroad.
Ram Saran Pudasaini, spokesperson at the Ministry of Finance (MoF), said the guidelines allow international financial institutions with high credit rating to raise fund by issuing bonds in local currency. The guidelines, however, make it mandatory for such institutions to invest amount thus raised for the development of hydropower, agriculture, road, tourism and other infrastructure projects in the country.
Interesting financial institutions will have to apply at the MoF clearly stating potential sectors of investment, details of main investors, amount of bond, maturity period, interest rate, spread rate and timeline of investment process. After analyzing the applications, the MoF will then forward the application to the cabinet for approval. Once the application is approved by the cabinet, they can issue bond.
"The guidelines have paved the way for development of bond market which is almost non-functional in Nepal," said Pudasaini.
The process of raising money in local currency will be followed in line with the existing Securities Act.
The guidelines also incorporate provisions on bond issuance, interest rate to be offered by issuing agencies, payment of principle and interest, protection of interest of investors, tax liability, repatriation of income in foreign currency, and short-term financial provisioning in the course of mobilization of fund and investment through local currency.
Officials expect the issuance of bond in local currency will promote capital formation for mega projects, minimize risk for investors and facilitate mobilization of investment for priority sectors.
Similarly, such bonds will also minimize the government´s dependence on foreign loan for resource mobilization, make secure financial instrument for institutional investors available for long-term credit, support development of capital market, and help in managing liquidity in the financial system.
The MoF had prepared the draft after holding consultation with line bodies such as Nepal Rastra Bank, the Securities Board of Nepal, Nepal Stock Exchange and different experts.
Nabaraj Bhandari, joint secretary and chief of Economic Policy Analysis Division at MoF, said the local currency bond will enable multi-lateral financial institutions such as the World Bank and the Asian Development Bank to raise fund from domestic market and end the practice of sourcing funds from abroad.
"Once the local currency bonds are issued, we will not have to face resource crunch to invest in big development projects and face risk of additional burden in financial provisioning for foreign credit due to currency fluctuation," he added.
Amid fluctuation of bank interest rate for deposits and uncertainty of return in other sectors, officials hope small domestic investors and non-resident Nepalis as well as domestic institutional investors such as banks, financial institutions, insurance companies, Employees Provident Fund, Citizen Investment Trust might be attracted toward local currency bonds.
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