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Overview of the Hedging Regulations, 2075

1. Introduction to Hedging Regulations, 2075
   Hedging involves a strategic approach to managing risks associated with foreign currency exchange rate fluctuations, primarily to ensure exchange rate stability when repatriating returns on foreign investments. This is generally achieved through pre-agreed arrangements that lock the exchange rate at the time the foreign investment is deposited into a bank. Any entity or project seeking to engage in hedging arrangements must first obtain formal approval for foreign investment before proceeding with the hedging application process.
2. Eligibility for Hedging under the Hedging Regulations, 2075
   The Hedging Regulations, 2075, outline specific project categories that qualify for hedging facilities linked to foreign loan investments. These include:

1. Hydroelectric power generation projects with a capacity exceeding 100 megawatts
2. Construction of electric transmission lines spanning over 30 kilometers and carrying a voltage of 220 kilovolts or more
3. Development of railway, metro, or monorail systems extending beyond 10 kilometers
4. Construction of expressways longer than 50 kilometers
5. Any other projects designated by the Government of Nepal’s Council of Ministers

3. Procedure for Accessing Hedging Facilities in Nepal

• Step 1: Submission of Application to Bank
  The concerned project must submit a formal application to the designated bank to initiate the hedging facility process.
• Step 2: Review of Application
  Once the application is received, the bank undertakes a detailed review to confirm the completeness and accuracy of the provided documents. If discrepancies are identified, the applicant is given up to 15 days to submit the missing or corrected information.
  Upon receiving the necessary information, the bank reassesses the application. If the bank determines that the hedging facility cannot be granted, it will notify the applicant within seven days.
• Step 3: Granting Approval for Hedging
  If, after a thorough assessment, the bank deems it appropriate to grant the hedging facility, it will issue approval subject to specific terms and conditions.

4. Documents Required for Hedging Arrangements
   To apply for hedging facilities, the following documents must be submitted:

1. Project license
2. Investment agreement for the project
3. Documentation confirming approval for foreign investment and the procurement of a foreign loan
4. Memorandum of Association (MOA)
5. Articles of Association (AOA)
6. Official notification from the concerned ministry regarding the hedging arrangement

5. Regulations Pertaining to Foreign Exchange Rate Handling

5.1. Currency Conversion Provisions
As per the regulations, when foreign currency is deposited into a designated bank account, it is converted into Nepalese Rupees at the existing exchange rate on the date of deposit. This exchange rate is then fixed and remains unchanged for the entire hedging period.

5.2. Fixation of Exchange Rate
Following the conversion of the deposited foreign currency into NPR at the prevailing rate on the date of transaction, the exchange rate is locked in and cannot be altered during the hedging period.

5.3. Deposit of Foreign Currency
An approved project must apply to the bank to deposit the foreign currency received through a foreign loan. Upon acceptance of the application, the bank assigns an account to the applicant. The foreign currency must then be deposited into this account within the timeframe specified by the bank.

6. Hedging Facility Regulations

1. The hedging facility is granted for a maximum of five years, depending on the type and scope of the project.
2. Once approved, the bank issues a Hedging Solution Certificate, which confirms the arrangement and allows the project to hedge against exchange rate volatility.
3. A Hedging Fund is also maintained by the bank to manage both foreign currency deposits and hedging costs.

6.1. Hedging Charges
The bank assesses a hedging fee based on the risk associated with the foreign exchange rate. The amount varies from project to project. After the fee is calculated, the project must pay it to the bank. Upon receiving the payment, the bank issues the Hedging Solution Certificate.

6.2. Renewal of Hedging Certificate
To extend an existing hedging arrangement, a renewal application must be submitted to the bank no later than 30 days before the current certificate expires. If the renewal request is justified, the certificate may be extended for another term of up to five years, depending on the project’s scope.

6.3. Currencies Eligible for Hedging
Hedging is permitted only for specific foreign currencies as publicly announced by the bank. Investors can only hedge against currency risks associated with these designated currencies.

7. Creation of Hedging Fund
   The bank is responsible for establishing and managing a dedicated hedging fund. This fund is used to handle foreign currency deposits and associated hedging expenses. Any returns generated from the fund’s operations are deposited back into the fund in the same currency as originally received. The bank also determines the fund’s financial limits and capacity.
8. Conclusion
   Nepal’s Hedging Regulations, 2075, are designed to protect investors engaged in large-scale infrastructure and development projects from foreign exchange rate volatility. Projects such as hydroelectric plants, transmission lines, railways, expressways, and others as determined by the Council of Ministers, are eligible for hedging facilities. These facilities are available for a period of up to five years and are subject to a hedging fee as set by the bank. Prior approval for foreign investment is a prerequisite for accessing hedging arrangements.