The government in a bid to implement the hedging rule has asked the banks concerned to submit their business plans to enforce guidelines to attract more FDI.
The government has enforced hedging guidelines to attract more FDI since the second week of September. The Ministry of Finance (MoF) in this regard has called upon banks to submit their business plans in order to delegate authority to them for providing hedging facilities to their clients.
Hedging is a risk management strategy used to reduce the risk due to fluctuation of asset price. It is a type of insurance that will cover additional liability created to any party (investor or government) due to the fluctuation of exchange rate.
Time and again, foreign investors have been blaming the government’s apathy to bring in law on hedging for their reluctance when it comes to injecting more capital in Nepal. The newly enforced rule is expected to attract more foreign direct investment (FDI) in the country.
In a public notice issued by the MoF, the banks have been asked to submit the business plans within 15 days. Based on eligibility of the banks, the ministry will authorize the banks to provide the hedging to foreign investors.
According to the hedging guideline, reservoir or semi-reservoir hydropower projects with at least 100 MW capacity will be provided with hedging facilities. Similarly, 220 kV transmission lines in a stretch of 30 km or more and metro railways or monorail with at least 10 km distance will be eligible to receive this facility.
Similarly, infrastructure projects like construction of roads, flyovers, underpasses, signature-bridges, tunnels, express highways with length of at least 50 km and international or regional airports that are subjected to toll charges, will also receive a hedging facility. Likewise, health, agriculture, education, tourism, information technology, industrial infrastructure and urban development with investment of at least Rs 2 billion will also receive a hedging facility to be provided by the government.
The banks and financial institutions which will float credit instruments in the international market to receive borrowing for the investment of green infrastructure will also be eligible to receive hedging service. Such investment, however, should be within the framework of the Special Drawing Right defined by the International Monetary Fund and the amount to be borrowed should not be less than USD 20 million.
The government will bear liability between five to 20 percent of the hedging risk, while the investors concerned will have to assume up to 35 percent of the premium amount of hedging.
