The plot thickens in the divestment saga of Nepal Indosuez as two private Nepali investor groups battle it out in the courts for shares in one of Nepal's first foreign joint-venture banks.
But Indosuez's French parent company, Credit Agricole, is so fed up of the complications that have arisen after a legal challenge from a rival Nepali business house to its divestment plan that it is getting ready to pack up its bags and go. "If no decision is taken by 15 Feburary we may simply leave the country," one senior Credit Agricole executive warned Wednesday. "And that will be a very bad day
for Nepal."

Indosuez was finalising its deal on a formal offer made by a consortium led by Prithvi Bahadur Pande?, former general manager of Himalayan Bank, when the Chaudhary Group disclosed earlier this month that it had agreed with Indosuez as far back as 1998 to buy its stocks. No one knew that a memorandum of understanding existed between Binod Chaudhary of the Chaudhary Group and Indosuez-not even the Nepal Rastra Bank.

After preliminary efforts to litigate in Singapore late October, the Chaudharys decided to bring it up at a Nepali court. The Supreme Court is now hearing the case, after a round at the appeals court. The Supreme Court has ordered additional information of the proposed acquisition, including details of the prospective buyers.

Chaudhary's lawyers are trying to establish that the 1998 MOU is a "binding contract", while Credit Agricole lawyers are set to prove that it is not a watertight agreement, but subject to a contract. How the Indosuez story unfolds will now depend on the battle between these two business giants and the court verdict: whether the agreement will be enforceable, if so the price, payment methods, and if the central bank will allow Chaudhary to buy.

There could also be questions on whether Indosuez should have entered into an MOU in the first place, disregarding issues like its promoter partner's right of first refusal. "We were trying to establish that the Chaudhary Group has the right of first refusal because of the agreement," says Sushil Pant, who represented the Chaudhary's at the appeals court. "Whether the central bank will permit it to buy is something else." Credit Agricole's lawyer Sudhir Shrestha responds: "My client's contention is that the MOU is subject to further contract depending on negotiation, it is not a contract."

The legal battle is about basics. But there is a larger war here between rival Nepali businesses in which a foreign investor is trapped and can't extricate itself from Nepal even if it wants to. Credit Agricole officials don't understand what is so complicated: they want to sell shares to one group and the other group is putting a legal spanner in the works. And they say they have reached the end of their patience. Said the senior executive: "We are being held hostage. We are disgusted, because there is no rule of law."

Strong words. And words that will be very damaging for Nepal. Government officials admit that the exit of Indosuez will further damage investor confidence in the country at a time when foreign investment is the only hope of kick-starting the economy. The Indosuez divestment is being closely watched by investors for signs of the government's seriousness (or lack thereof) in other privatisation and investment projects.

The possibility of an out-of-court settlement in the Indosuez case has not yet been ruled out because the battle is essentially over who gets how much. Should there be no settlement, Indosuez may be headed for a longer-than-expected delay to sell and exit, which would be a sign for other potential foreign investors why they should not come to Nepal.

Credit Agricole made up its mind to divest after trying for three years to convince the government to increase its share of ownership. Otherwise Nepal Indosuez was just not worth the trouble, given that the French group had already closed shop in even larger markets like Malaysia as a part of its international consolidation efforts.

When it began its selling efforts in July 2001, Indosuez wrote to the central bank seeking its clarification on if it should first offer its shares to its main Nepali promoter partners: state-owned insurer Rastriya Beema Sansthan (RBS) and Rastriya Banijya Bank (RBB). A 1995 rule bars individuals and institutions to own more than 10 percent stock in a bank. RBB and RBS already owned 15 percent each of Nepal Indosuez.

The central bank wrote back giving a yes-and-no answer that it should make the offer, but the two could not buy because of the 10% rule. Credit Agricole wrote to the NRB again seeking a more straight forward answer. The Rastra Bank sent a "re-clarification" saying that the RBB and RBS could not increase their holdings. Then in August Nepal Indosuez wrote to its promoter partners about its desire to sell and sought their opinion on the Rastra Bank rule.

RBB tried to seek government approval for buying, but did not get it because it was essentially bankrupt with a negative nett worth of nearly Rs 10 billion. On the other hand, RBS did not like the conditional offer, but there were questions about the insurer's lack of banking experience. More paper passed between the three organisations, including some requests for anti-corruption investigations by some RBS shareholders.
Finally in November Nepal Indosuez wrote again the governor of the central bank almost begging for a straight-forward answer on if the RBS and RBB could buy or not. The central bank wrote back quoting Directive Number 8, issued under the financial sector reform initiative which lays down ownership rules.
And just when it was looking like Indosuez was about to get along with its deal with Prithvi Bahadur Pande? and his consortium, the Chaudharys stepped into the scene. Indosuez is trying to offload its 50 percent holding of 849,922 shares at Rs290 million.

Further complicating matters is the context-Nepal's moribund financial sector with a steady erosion of the Rastra Bank's regulatory role due to increased political interference and patronage after 1990.

Even the private banking scene may not be as rosy as it is seen from the outside. According to banking and auditing sources, of all the 15 commercial banks in operation only one, Standard Chartered Bank, is fully sound because it complies with standards even more stringent than the central bank's new directives. The other is Indosuez which, despite some risky exposures because of consortium loans, is still said to be sound. Two other private banks are financially so-so, but the rest are ailing.