A Commentary on Budget Speech 2083/84 from the Perspective of the Private Equity and Venture Capital Industry

The Budget for FY 2083/84, presented by Dr. Swarnim Wagle on 29 May 2026, signals the Government of Nepal’s welcome recognition that long-term economic transformation will require significantly greater mobilisation of private capital. If Nepal is to diversify its economy and develop sectors capable of sustaining higher growth, the role of private equity (PE), venture capital (VC), and other forms of alternative investment capital will become increasingly important.

In this context, several proposals reflected in the Budget deserve serious attention, particularly the proposed introduction of a limited liability partnership (LLP) law to facilitate investments into angel, private equity and venture capital funds. This is a significant policy signal, especially given the growth of Nepal’s PE/VC industry over the past several years. The industry, which initially emerged through offshore Nepal-focused funds and onshore foreign-backed funds, has now developed into a more domestic fund-led market. According to NPEA, between 2012 and 2025, PE/VC funds cumulatively invested at least USD 230 million, with at least USD 54.178 million invested in 2025 alone. Of the total PE/VC investments made in 2025, 96% came from locally raised funds. This upward trend has been particularly visible following the introduction of the Specialized Investment Fund Regulation, 2019.

Although the introduction of the SIF Regulation was a foundational step in recognising funds as regulated schemes, Nepal’s is yet to attract foreign capital in SIFs and its ambition to attract larger pools of capital requires a more comprehensive reform agenda. The next phase of reform should therefore focus on creating a robust legal, tax and regulatory architecture suited to alternative investment vehicles.

Against this backdrop, the Budget’s acknowledgement of the need for an LLP framework is both timely and potentially transformative. A well-designed LLP law could provide the legal flexibility, limited liability protection and contractual certainty required for fund structures, while also supporting Nepal’s broader objective of mobilising long-term private capital.

Why the LLP Proposal Matters

Historically, PE/VC funds in Nepal have often been structured as limited liability companies, with different classes of shares used to replicate, to the extent possible, the economic and governance features of a GP/LP structure. However, the company form has inherent limitations when used as a fund vehicle. These include rigid corporate governance requirements, such as mandatory general meetings and non-delegable board functions; capital maintenance and distribution rules that restrict flexible return of capital and reduction of fund corpus; and a winding-up process that generally requires formal liquidation of the company, which can be lengthy and procedurally burdensome. These features are not well-suited to closed-ended illiquid investment funds.

Nepal currently lacks a modern, dedicated legal vehicle for structuring PE/VC and other alternative investment funds. The existing Partnership Act, 1964 is outdated and was not designed for pooled capital or professionally managed fund structures. Similarly, Nepal’s trust law framework does not provide the level of legal certainty, investor protection, governance flexibility and commercial familiarity typically expected by institutional investors. Under the current SIF framework, a fund is essentially recognised as a regulated pool of capital managed by a licensed fund manager, rather than as a standalone legal vehicle with distinct legal personality, flexible internal governance, limited liability and fund-specific distribution mechanics.

This matters particularly for attracting foreign capital. International investors are accustomed to investing through fund vehicles that clearly separate the role, liability and economics of fund managers, sponsors and investors. Major private capital markets have developed legal vehicles suited to long-term pooled investment, although no single form dominates globally. The United States commonly uses limited partnerships or limited liability companies, often with pass-through tax treatment. The United Kingdom and several Commonwealth jurisdictions favour limited partnerships for closed-ended funds. Singapore uses the Variable Capital Company for open-ended and umbrella structures, alongside limited partnerships for PE/VC funds. Luxembourg has attracted global fund capital through flexible vehicles such as the special limited partnership. India, meanwhile, has largely used trust structures for alternative investment funds, while also planning to launch VCC structures within GIFT City.

Against this comparative background, a well-designed LLP law could fill an important gap in Nepal’s fund architecture. If drafted with sufficient flexibility, it could provide limited liability, contractual freedom, clear allocation of management and investor rights, flexible capital contribution and distribution mechanics, continuity of the vehicle, and more efficient winding-up or termination procedures. These features would make Nepal’s fund structures more familiar, bankable and acceptable to domestic and foreign institutional investors, and would support the next phase of growth in Nepal’s PE/VC industry.

The lack of a legal form for funds in Nepal creates practical and structural limitations and uncertainties, including:

• The absence of a bespoke legal vehicle may complicate recognition by foreign investors, lenders, co-investors, tax authorities, and counterparties. International investors are generally more comfortable where the fund structure aligns with familiar global forms such as limited partnerships, LLPs, corporate funds, or trust-based models and where the legal consequences of participation are clear.
• The legal basis for limited liability of investors should ideally be anchored in primary legislation rather than one dependent solely on delegated regulation and contractual documentation. For domestic and foreign investors alike, confidence in the liability shield is critical. This is particularly so for passive limited partners, whose commercial expectation is that their liability will be limited to their committed capital except in narrowly defined exceptional circumstances.
• The current structure may not adequately reflect the allocation of rights and responsibilities typical in PE/VC arrangements: active management by the general partner or fund manager, limited control rights for passive investors, conflict governance through advisory committees, and flexible capital contribution mechanisms through drawdowns rather than full upfront funding.

A well-designed LLP regime could help fill that gap. The LLP has become a widely used vehicle in investment fund structures because it combines contractual flexibility with limited liability protection. Unlike companies, which are often subject to more rigid governance, capital maintenance, and distribution rules, LLPs can be structured through negotiated partnership arrangements that better reflect the economics of closed-ended funds. This is one reason why limited partnership-style vehicles remain the dominant global model for PE and VC funds.

What a Good Nepal LLP/Fund Regime Should Contain

If the Government proceeds with an LLP law aimed at increasing investment into funds, the reform should ideally include more than the mere creation of a new business form. For the reform to be effective, Nepal should consider the following design features.

• The primary legislation related to LLP should clearly establish separate legal personality and expressly protect limited liability of investors.
• The tax regime should provide clarity and neutrality, ideally through a pass-through model or equivalent relief from economic double taxation.
• Governance provisions should distinguish between sophisticated private funds and retail collective investment products, allowing LPAC-style governance and limited investor voting on reserved matters to be agreed between the investors and fund manager. The mandatory meeting requirements under by SIF Regulation should be revisited to align with the flexible governance while strengthening the fiduciary duties of fund managers.
• The regulatory framework should expressly permit drawdown-based commitments rather than requiring full upfront funding inconsistent with PE/VC practice.
• Co-investment, follow-on investment, warehousing, and related-party transactions should be regulated through disclosure and conflict-management rules rather than blanket prohibition that is currently in place as per a board level decision at SEBON.
• Insolvency, winding-up, retention of liquidation proceeds beyond the fund life for pending or anticipated litigation, tax, regulatory or creditor claims, creation of reserves for contingent liabilities, and investor clawback obligations should be expressly recognized and permitted to be addressed in the fund documentation. This would ensure that investors, lenders and counterparties understand the consequences of fund-level distress, including the order of application and distribution of fund assets, limited recourse to fund assets, continuing rights and obligations, and obligations that may survive expiry, termination or winding-up of the fund.
• Foreign investors should have clear pathways for investment into these structures. The current regime allows investors to invest in SIFs with SEBON’s approval however requiring prior approval from DOI for downstream investments. The DOI approval should be made part of automatic route approval to avoid duplication of processes and allowing a predictable timeline for portfolio disbursements for funds. It should also be clarified whether a fund with foreign investment can invest in negative list given that the foreign investors in fund are not going to be controlling a portfolio (unline a direct foreign investment).
• Regulatory treatment of changes in control arising from ordinary fund entry and exit should be calibrated to distinguish strategic control transactions from temporary or financial investments by regulated funds, using tools such as fast-track approvals, safe harbours, and differentiated treatment for passive financial investors so that portfolio companies that rely on fund investments do not inadvertently expose themselves to change in control taxes.
• Funds, fund managers, and their nominee directors should not be blacklisted or held liable solely because a portfolio company defaults; liability should arise only from actual misconduct or legally recognized responsibility, with any prudential or banking exemptions framed broadly and on a principled basis rather than limited to narrow cases.
• The fund regime should be integrated coherently with company law, foreign investment rules, securities law, anti-money laundering requirements, and sector-specific approvals. Fragmented reform will only reproduce uncertainty in a different form.

 Conclusion

The Budget’s recognition of the need for an LLP law to facilitate investment into funds is one of the more meaningful policy developments for Nepal’s private capital ecosystem. It reflects an understanding that if Nepal is serious about attracting angel investment, venture capital, private equity, and broader institutional capital, then the legal and regulatory system must evolve beyond traditional company and partnership models.

That said, legal form by itself will not be enough. Nepal’s next generation of fund reform must address the deeper structural issues that matter to investors: legal certainty, limited liability, tax pass-through, commitment-and-drawdown mechanics, governance flexibility, practical conflict-management tools, and proportionate treatment of regulated financial investors. These are not peripheral technical matters; they are the core infrastructure of a functioning private capital market.

The “bonus” of the proposed law is that it is not only helpful for the private equity industry but the structure can also be adopted by various professional service firms in audit, accounting and law and will provide basis for modernization for professional sectors we well.