Corporate Governance

in Nepal

By
Resham Raj Regmi
Advocate
Email: reshamraj@gmail.com
 What is happening?
 To incorporate different elements of CG Government
of Nepal has initiated different reform programs in
Nepalese Economy. Consequently, different existing
laws are amended and some new laws came into
force.
 At the same time institutional reform also taking
place and regulatory regime of the both corporate
and financial sector is strengthened.
 We can divide these reforms in two category i.e.
◦ Legislative Reforms
◦ Regulatory Reforms
 Legislative Reform
Different changes are made in
existing laws and some new
legislative instruments are also came
into force. We can divide these laws
in two category i.e.
–Directly related law, and
–Indirectly related law.
 Directly Related Laws
 New Companies Act, 2063 came into force
replacing the existing Companies Act, 2053.
 The Securities Act, 2063 came into force by
replacing the Securities Exchange Act, 2040.
 Insolvency Act, 2063 came into force.
 Competition Promotion and Market
Protection Act, 2063 came into force.
 Nepal Rastra Bank Act, 2058 came into force.
 Different banking institution related laws
were repealed by introduction of the Bank
and Financial Institutions Act, 2073.
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 Commodities Exchange Market Act, 2074
 Insurance Act, 2049 was replace by new Act in
2079
 Trade Union Act, 2049
 New labour Act, 2074 came into force
replacing Labour Act 2048
 Indirectly Related Laws
 Good Governance Act, 2064 came into force to
ensure good governance in public sector.
 Chartered Accountant Act, 2053 was amended in
2059.
 Right to information Act, 2064 came into force.
 Contributory Social Security Act, 2074 came into
force
 Consumer Protection Act 2075, and
 Other related laws also contributing for the
protection of rights of different stakeholders
 Major Provisions of the Companies Act,
2063 regarding CG.
• The objective of this new Act is to make operation of
company more simple, easy and transparent.
• Signatory directors are responsible for any mis-information
in prospectus. (Sec. 24)
• Provisions about the reduction of capital of the company
(Sec. 57).
• Buyback of its own share by the company (Sec. 61).
• Prohibition in landing or providing other financial
assistance to any body for the purpose of buying its own
share (Sec 62).
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 Prohibition of issuing and selling of share in
discount (Sec 64).
 Responsibility of directors in case of reduction of
property of company (Sec 60).
 Procedure for both annual general meeting and
special general meeting and other matter are
mentioned in chapter five of the Act.
 Right to vote and participate in general meetings
and right to vote for directors of shareholders is
guaranteed (Sec 70,71,72,)
 Board of Directors and Directorship
 Number of directors and constitution of board of
directors in both public and private companies are also
determined by the Act.
 The number of directorship is determined by
memorandum of association of corporation but it will
not be less than three or more than eleven for public
companies. (Sec 83)
 Incorporation women director (86)
 Incorporation of qualified and independent directors is
ensured. (Sec 86)
 Fiduciary duties of directors (sec 99)
 Audit Committee
 Section 164 makes provision for compulsory
Audit Committee for the companies having
more than three crores issued capital.
 Qualification of members of audit
committee and power, function and duties
of audit committee are also mentioned in
the same chapter. (Sec 165)
 Minority Protection
• There is a separate chapter dealing with protection
of the interest of shareholders in the new
Companies Act.
• Provisions of the Chapter 12 authorized
shareholders to stop the directors to commit
unauthorized action by knocking the door of court.
• Shareholders can get compensation from such
wrongdoers.
• They are also authorized to sue on behalf of the
company.
 Liquidation
• Voluntary and compulsory liquidation are recognised as
two way of exit.
• In Voluntary liquidation shareholders can decide for it by
passing special resolution in the general meeting. Directors
have to inform the Registrars Office about the decision of
voluntary liquidation with their declaration.
• Company can be send to liquidation by the decision of
Registrars Office (Sec 126). This process is called
compulsory liquidation.
• Provision for revival of the liquidated company in case of its
viability is also incorporated in the Act (Sec 137).
 Commercial Bench
• Provision for the establishment of commercial bench
in different court is incorporated.
• Different benches were established in different High
Courts.
• The Company Law Advisory Board is established for
advise necessary during administration of company.
 Major Provisions of the Securities Act,
2063
• The main objective of this Act is to protect the interest of
investor by managing and regulating the issue, transaction,
exchange, securities markets and person related with it for
the circulation of capital to economic development of nation.
• The Act has established Securities Board as regulatory
authority. Every aspect of securities is under the purview of
this Board. Corporations have to register and get permission
of the Board for the public issue of shares and other
securities.
• Operation, management and establishment of securities
markets participants is not possible without getting
permission of the Board.
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Following acts are considered as crime by this
Act and both fine and imprisonment can be
levied.
– Insider trading of securities (Sec 91)
– Influence in price through false transaction (Sec
95)
– undue influence in securities market (Sec 93)
– Misinformation and cheating (Sec 97)
 Insider trading
• If any person deals in securities or causes any other
person to deal in securities on the basis of any
insider information or notice that are unpublished or
communicates any information or notice known to
such a person in the course of the discharge of his or
her duties in manner likely to affect the price of
securities such a person shall be deemed to have
been committed an insider trading in securities.
 Major Provisions of the Insolvency Act,
2063
• This Act is the first legal instrument in
Nepalese legal system dealing with the legal
aspects of corporate insolvency. It has three
basic substances:
– Determination of insolvency procedure.
– Reconstruction of sick companies.
– Protection of creditors’ right during this process.
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 Insolvency process can be start only following the order of
court. (Sec 3)
 Company itself, creditors, shareholders, debenture holders,
liquidator and regulator can apply for insolvency. (Sec 4)
 Insolvency procedure shall be fair and transparent. Court can
always make vigil eye on the process. (Sec 13)
 Creditors meeting shall be called for decision in any issue and
restructuring of the company. (Sec 21, 24)
 Creditors will get priority during the payment of liabilities.
 Nepal Rastra Bank Act, 2058
• This Act redefine the objectives of the central bank.
• This Act made NRB fully autonomous. To bring
professionalism in the board of NRB itself by
specifying qualifications and code of conduct for
governor, deputy governors and other directors.
• Provision of audit committee in the NRB board of
become compulsory to enhance good corporate
governance.
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 Different powers like, supervision, regulation and power to
frame rules and bye-laws and issue necessary orders,
directives and circulars as mandatory also vested in the NRB
by this Act.
 The first amendment which substituted the existing section
86 of the Act has further strengthened the supervisory
authorities of NRB.
 Power to initiate resolution of problem bank was further
provided to NRB after second amendment, in 2073
 After these amendments the NRB can declare any bank or
financial institutions as problematic and initiate necessary
punitive, reformative or resolution related actions.
 Bank and Financial Institution Act, 2073
• The Bank and Financial Institution Ordinance, 2060’ was
promulgated as integrated law for all types of financial
institutions in January 2004,
• The renewed version of the Ordinance of 2060 was
changed as Bank and Financial Institutions Act, 2063.
 This Act make unified legal provision for all types of
financial institution.
 All the aspect of operation and management of the
banking companies except the process of incorporation
were regulated by this Act.
 Recently BAFIA, 2073 was promulgated by parliament
replacing the older Act.
 NRB is authorised as regulator and supervisor of the
financial sector.
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• Constitution of board of directors, number,
qualification, power etc are determined by
this Act.
• Appointment of chief executive officer,
• Criteria for licensing to operate banking
business,
• Classification and conditions for grading and
rating on the basis of performance and
capital,
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• Minimum capital requirement and different
funds,
• Activities allowed and not allowed,
• Maintenance of accounts in the standard
determined by the NRB and Accounting
Standard Board,
• Preparation of reports and records,
• Appointment of auditors and auditing,
• Merger and acquisition.
 Some Provisions of Insurance Act,
2079
 Nepal Insurance Authority is fully empowered as regulator of the
insurance business in Nepal.
 Nepal Insurance Authority is recognized as an advisor of the Government
of Nepal in the matter related to insurance.
 Nepal Insurance Authority is authorized to hear the grievances of the
consumers of the insurance company and also authorized to settle the
disputes arises between/among different insurance service provider.
 The chairperson and member need to disclose particulars of their
involvement in the insurance business including share ownership of any
insurance company.
 Prohibits to disclose confidential information and use the position for the
personal benefit by the chairperson, member, auditors, and other officials.
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 Instructs the chairperson, member, auditors, and other officials of the
Authority to disclose the any conflict of interest associated and remain
absent during the discussion and decision of such issue.
 Prohibits doing any insurance business without getting approval of the
Nepal Insurance Authority.
 To ensure the financial health of the insurance service provides this Act
has authorized the Nepal Insurance Authority to determine different capital
related fund including authorized capital need to be maintained by the
insurance company.
 Makes provision to be solvent as specified by the Nepal Insurance
Authority.
 Makes provision for Whistle Blower Protection Policy.
 Makes provision for inspection and supervision of the insurance service
provider by the Nepal Insurance Authority.
 Regulatory Reforms
Different regulatory instruments were amended and
new regulations came into force as the consequence
of regulatory reform.
 The Securities Board is institutionally empowered for the
regulation of the securities market.
 Company Registrar’s Office is empowered as administrator
of the company.
 NRB is empowered and issued directives for Corporate
Governance.
 Insurance board is empowered as regulator of Insurance
sector.
 Accounting Standard Board is constituted for the
determination of national accounting standard.
 Auditing Standard Board is constituted for the
determination of the national auditing standard.
 Corporation co-ordination division (MOF)
 The Securities Board
 Different prudential regulations were determined for
the regulation of securities market.
 All the participant of the security market need to get
permission from the Board.
 The public companies which are intended to issue
their share/debenture to the general public need to
get permission from the Board.
 Necessary requirements for regular and real time
disclosure are determined.
 Investor Education programs are being conducted
Following Instruments are enforced by
SEBON
• Securities listing and trading regulation, 2075
• Stock Exchange Operation Regulation, 2064
• Securities Business person (Stock Broker, Dealer &
Market Maker) Regulation, 2064
• Securities Business person (Merchant Banker)
Regulation, 2064
• Securities Registration and Issue Regulation, 2073
• Mutual Fund Regulation, 2067
• Specialized Investment Fund Regulation, 2075
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• Central Depository Service Regulation, 2067
• Credit Rating Regulation, 2068
• Mutual Fund Guidelines-2069
• Compliance Guidelines for Securities Broker, 2058
• Securities Issue Guidelines, 2065
• Bonus Share Guidelines, 2067
• Portfolio Management Guidelines, 2067 (2010)
• Securities Allotment Guidelines, 2068
 SEBON Guidelines on CG
Recognised Principles of Corporate Governance
• Responsibilities towards shareholders
• Fair treatment to all shareholders
• Accountability
• Transparency and flow information
• Responsibilities of BOD
• Responsibilities towards Stakeholders
 Nepal Rastra Bank
• NRB is empowered as regulator of financial
sector with full authority.
• Different types of regulations were introduced by
NRB for banking companies.
• A set of Directives is issued by NRB this set
contents directives for corporate governance.
• Bylaws related to Prompt Corrective Actions,
2064
• Problematic institution resolution bylaw, 2071
• NRB Inspection and Supervision bylaw 2070
• Merger and Acquisition Bylaw, 2073
 NRB Directives on CG
Previously different set of directives were
issued to maintain sound corporate
governance in different types of financial
institutions. The directive no 6 makes
provisions for different elements of corporate
governance which Nepalese banking
companies need to follow.
 Contents of the Directive
• Code of conduct for directors,
• Duties and responsibilities of directors,
• Directors education program
• Appointment of managing directors,
• Code of conduct for employee,
• Capacity enhancement of Employee
• Provision for audit committee, risk management committee
and Employee benefit and anti money laundering committee
• Prohibition to lend directors, shareholders and employees.
 Code of Conduct for Directors
• To maintain minimum acceptable conduct,
• Not to be involved in the activities which are
against the interest of the company,
• Not to work part-time in any other banking
companies,
• Not to be a director of any other banking
company except subsidiary,
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• Not to work as guardian or administrator of
the customer,
• Not to abuse authority,
• Keep record updated,
• Maintain credibility,
• Fair and equal treatment,
• Report to the NRB.
 Duties and responsibilities of the Board of
Directors
• Preparation of employee by-law and selection of competent
and qualified human resource for the perfect operation of the
company.
• Constitution of the Audit committee and preparation of
action plan for audit.
• Arrangement for the international audit by qualified auditor.
• Formation of Risk Management committee and identifying
and managing the risk.
• Preparation of credit, investment policies and necessary
budgetary plan.
• Ensure the compliance of the relevant laws and directives.
• Be accountable for delegated and its own activities.
 Code of Conduct for Employee
• To maintain minimum acceptable conduct,
• Not to be involved in the activities which are
against the interest of the company,
• Not to work part-time without permission of
the company,
• Not to be a director of any other banking
company except subsidiary
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• Not to work as guardian or administrator of
the customer,
• Not to abuse authority,
• Not to abuse information received during
their job,
• Keep record updated,
• Maintain credibility,
• Fair and equal treatment.
 Insurance Board
• Has issued Directive Related to CG in 2069
later revised on 2073
• Code of conduct for different insurance
professionals
• Provision for reporting by insurance
companies.
• Provision for licensing and supervision of
Insurance company by Board.
 CG Directives of Insurance Board
Includes
• Provision for formation, qualification and
disqualification of BOD.
• Function, Duty and Authority of BOD.
• Accountability and responsibility of BOD.
• Formation of Committees
• Code of Conduct of BOD
• Provision for CEO and Employee
• Prohibition on Insurance
• Prohibited functions
 Accounting Standard Board
Different standards are determined by this board
for different aspects of accounting and reporting.
• Nepal Financial Reporting Standards
• Nepal Accounting Standards
• Nepal Public Sector Accounting Standards
• Nepal Accounting Standards on Micro Entities
• Nepal Accounting Standards for Non Profit
Organization
 Auditing Standard Board
• 49 Different auditing standards are
determined to ensure the independency of
auditing.
• Every auditors need to follow the standard
determined by the board during the process
of auditing.
• The professional regulatory authority can
cancel the license of the of the auditor in case
of fraudulent practice.
 Corporation co-ordination division (MOF)

This division have following:

Vision
To lessen overviewing burden of State-owned Enterprises by the
government.
Mission
To ensure effectiveness in public enterprise management and accelerate
the divestiture of State owned Enterprises (SOEs) in order to ease the
pressure on public expenditure.
Objective
To promote enterprise efficiency through improved corporate governance
To promote and accelerate wider participation of the private sector in the
operation of SOEs.
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Thank You!