Kathmandu, Aug 17 (IANS): Nepal's biggest tax-paying company Surya Nepal, in which Indian multi-product group ITC holds 59 percent stake, has decided to shut down its garments factory following prolonged labour unrest.

The factory that has been producing ITC's John Players and Springwood labels in eastern Nepal's Biratnagar district, known for militant trade unionism, was started in 2007, three years after Surya Nepal diversified into garments from tobacco production.

"The garments factory is no longer a viable business proposition," said Sanjiv Keshava, Surya Nepal's managing director.

"We were exporting 70 percent of our production to the US and Europe. But due to frequent labour unrest, closures and power shortage, our supplies were disrupted and orders cancelled, affecting our credibility," he said.

The decision to shut down the factory, started with an investment of about NRS 250-300 million, was taken by the company's board last week after a lockout since June 14, when workers, most of them women, went on the rampage.

They held 37 officials hostage for 24 hours without allowing them food and water. The captives were released only after police intervention, which led to the workers pelting the posse with stones.

"Our primary concern is the safety of our employees," Keshava told IANS. "If that can't be maintained, we can't run the factory."

The ruckus in June started after the labourers demanded payment for a period during which they were on strike. Nepal's new labour provisions say workers will not receive payment if they go on strike illegally.

Though Surya Nepal says it was ready to negotiate, the attack and the ensuing vandalism made the management decide to write off the factory as a loss.

However, Surya Nepal will continue to cater to the domestic market by tying up with local contractors to produce its brands.

The blue-chip company, operating with a paid-up capital of NRS 2 billion, last year paid the state revenues worth about NRS 7 billion.

"This is a Nepali company and we are still investing in Nepal," Keshava said.

Surya Nepal, which controls nearly 70 percent of the cigarette industry in Nepal, has freshly invested about NRS 1,000-1,500 million to build a new tobacco factory in Tanahun district, which is expected to be operational by 2013.

Keshava, who is also president of the Nepal India Chambers of Commerce and Industry (NICCI), says the closure of the garments factory should sound a wakeup call for the government as well as trade unions.

"As the president of NICCI, we are trying to get fresh investment in Nepal which the country needs," Keshava said. "Nepal has potential but industrialisation will take off only if the government can formulate policies and control the trade unions and the latter adopt a moderate approach."

The entire garments industry in Nepal has been badly hit by a mounting power crisis that this year saw factories reeling under an 18-hour power cut daily during the dry seasons, pushing up production cost for companies that could afford to run on generators and forcing the closure of those which could not.

All industries have suffered from the protracted political instability that saw four governments in four years with the republic now run by a caretaker government amidst uncertainty about when the new government would be formed.

The changes have prevented the state from formulating investor-friendly policies, including transparent labour laws and incentives for export-oriented companies.

The closure of Surya Nepal's garments unit comes after unrest forced Colgate Palmolive to close its factory in Nepal, Pepsi had to shelve its expansion plans, and Australian company Snow Mountain Engineering Corporation's licence to develop a 750 MW hydropower project was scrapped.