Report on Legislative Reforms of Corporate Governance in Nepal

Submitted To: Resham Regmi

Submitted By: Myra shrestha Term : VI

Date: 11th July, 2011

Legislative Reform
The few of the legislative reforms are as follows: a) Good Governance Act, 2064 came into force to ensure good governance in public sector. b) The Companies Act, 2063 came into force replacing the existing Companies Act, 2053. c) The Securities Act, 2063 came into force by replacing the Securities Exchange Act, 2040. d) Insolvency Act, 2063 came into force. e) Nepal Rastra Bank Act came into force from 2058. f) Different banking institution related laws were repealed by introduction of the Bank and Financial Institutions Act, 2063. 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). Prohibition of issuing and selling of share in discount (Sec 64). Responsibility of directors in case of reduction of property of company (Sec 60). 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 of qualified and independent directors is ensured. (Sec 86) Audit and 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) Functions, Duties and Powers of the Audit Committee (165) (a) To review the accounts and financial statements of the company and ascertain the truth of the facts mentioned in such statements;

(b) To review the internal financial control system and the risk management system of the company; (c) To supervise and review the internal auditing activity of the company;

(d) To recommend the names of potential auditors for the appointment of the auditor of the company, fix the remuneration and terms and conditions of appointment of the auditor and present the same in general meeting for the ratification thereof; (e) To review and supervise as to whether the auditor of the company has observed such conduct, standards and directives determined by the competent body pursuant to the prevailing law as required to be observed in the course of doing auditing work; (f) Based on the conduct, standards and directives determined by the competent body pursuant to the prevailing law, to formulate to policies required to be observed by the company in respect of the appointment and selection of the auditor; (g) To prepare the accounts related policy of the company and enforce, or cause to be enforced, the same; (h) Where any regulator body has provided for the long form audit report to be set out in the audit report of the company, to comply with the terms required to prepare such report; (i) To perform such other terms as prescribed by the board of directors in respect of the accounts, financial management and audit of the company. 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 wrong doers. They are also authorized to sue on behalf of the company. Power to prevent directors and officers from doing unauthorized act (138) (1) If, on behalf of a company, any director of officer of the company does any act beyond his jurisdiction, any shareholder of such company may make a petition to the court to prevent such act. (2) If, based on the report received by the office pursuant to section 124 in respect of any company, the office thinks that the business of such company could be carried on or is being carried on in such a manner as to be prejudicial to the rights and interests of any of or all shareholders of the company or any specific class or group of its shareholders or that nay act done or intended to be done by the company or the failure or the company to do any act required to be done has resulted in or would result in a prejudice to the interests of such shareholders, the office may make a

complaint/petition to the court against such company or its directors or officers. Remedy for act done against rights and interests of shareholders: (139) (1) Based on the ground that the business of a company is carried on or is likely to be carried on in such a manner as to be prejudicial to the rights and interests of any shareholder of the company or that any act done or intended t be done on behalf of the company or the failure of the company to do any act required to be done has resulted in or would result in a prejudice to the tights and interests of any shareholder, such shareholder may make a complaint/petition to the court for an appropriate order. (2) A shareholder who makes a petition pursuant to sub-section (1) shall prove that the director, managing director, manager or any officer who manages and controls the company has done or intends to don nay act with ulterior motive or made or intends to make undue discrimination, in contravention of the memorandum of association or articles of association or consensus agreement. Right to Shareholder to institute case on behalf of company (140) (1) A company may file in the court a case against any director, officer or shareholders or any person having control over the company pursuant to the consensus agreement to have any rights and interests of the company enforced. (2) If the company concerned fails to institute a case under sub-section (1), any shareholder holding two and half percent or more of the shares in the paid-up capital of the company singly or jointly with two or more shareholders holding five percent shares may, on behalf of the company, file in the court a case against any such director or officer or the person having control over the company or any other person. (3) While filing a case by a shareholder pursuant to sub-section (2), he shall state about what sort of effort he has made to persuade the company to institute the case by itself. 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 Registrar's 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. Four different benches were established in four Appel Court viz. Biratnagar, Patan, Butwal and Nepalgunj. 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 market participants is not possible without getting permission of the Board. 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. The following persons shall be deemed to be those who have access to the insider information or notice not published by any body corporate: (a) A director, employee or a person, who can obtain any information or a notice in the capacity of a shareholder of that body corporate, (b) A person who can obtain any information or a notice in the capacity of a professional service provider to that body corporate, (c) A person who can obtain any information or a notice having a direct or indirect contact with the person or source as specified in Clauses (a) and (b). 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. Insolvency process can be start only by 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. 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 recent amendment which substituted the existing section 86 of the Act has further strengthened the supervisory authorities of NRB. After this amendment the NRB can declare any bank or financial institutions as problematic and initiate necessary punitive and reformative actions. Bank and Financial Institution Act, 2063 The Bank and Financial Institution Ordinance, 2060 was promulgated as integrated law for all types of financial institutions in January 2004, and present Act is renewed version of the Ordinance of 2060. 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 are regulated by this Act. NRB is authorised as regulator and supervisor of the financial sector. 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. Minimum capital requirement and different funds are required. Activities allowed and not allowed are classified. Maintenance of accounts in the standard determined by the NRB and Accounting Standard Board. Preparation of reports and records, appointment of auditors and auditing and merger and acquisition are also parts of it.