KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Legal Provisions regarding the rights and protection of the shareholders

interest under Company Act, 2063

A Term Paper submitted to Dr. Hari Sharan Chakhun, Faculty

(KUSOM)

In partial fulfillment of the requirement for the

Legal Environment for Business in Nepal (GEM 502)

Submitted By:

Krittika Gorkhali (22313)

MBA Spring 2022

ACKNOWLEDGEMENT

I wish to convey my deepest gratitude to Kathmandu University School of

Management for designing legal environment for business in Nepal course in our
program and for encouraging and providing valuable opportunities that will be very
helpful and beneficial in the near future. I am confident that this course has been
extremely insightful and has immensely helped in extending the horizon of my
knowledge.

I would like to express my humblest gratitude to Dr. Hari Saran Chakhun,

facilitator of the course, Legal Environment for Business in Nepal for providing me this
opportunity to prepare the term paper titled, “Legal Provisions regarding the rights and
protection of the shareholders interest under Company Act, 2063”.

The research carried out for this term paper has indeed given me a vivid picture of
the significance of protection of shareholder’s interest and also of the minority
shareholders and rights conferred to them. Besides that, I have also provided
recommendation for protection of shareholder’s interest.

Last, but not the least, I would like to thank my family and friends as well as
every other individual for sparing their time and helping me in every possible way in the
accomplishment of this term paper.

Sincerely,

Krittika Gorkhali

MBA SPRING 2022

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Abbreviation

NEPSE Nepal Stock Exchange

SEBON Securities Board of Nepal

OECD Organization for Economic Co-operation and Development

MoA Memorandum of Association

AoA Articles of Association

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Table of Contents

ACKNOWLEDGEMENT............................................................................................................ii
Abbreviation.................................................................................................................................iii
Chapter 1.......................................................................................................................................1
Introduction..................................................................................................................................1
1.1 Background of the study.......................................................................................................1
1.2 Objectives of the study.........................................................................................................2
1.3 Significance of the study.......................................................................................................2
1.4 Limitations of the study........................................................................................................2
1.5 Literature Review..................................................................................................................3
Chapter- 2.....................................................................................................................................6
DOMESTIC PROVISIONS, PREVAILING CONDITIONS AND INTERNATIONAL
SCENARIOS.................................................................................................................................6
2.1 Existing Domestic Legal Provision of rights of shareholders.................................................6
2.2 Existing Domestic Legal Provision of protection of shareholders.......................................14
2.3 Protection of minority shareholders...................................................................................20
2.3 Minority rule, majority protection......................................................................................23
2.4 International scenario of rights and protection of shareholder’s interest..........................26
2.4.1 Current scenario of rights and protection of shareholder’s interest in India...............26
2.4.2 Current scenario of rights and protection of shareholder’s interest in Ukraine..........32
2.5 Prevailing practices in Nepal...............................................................................................36
Chapter 3: Conclusion and Recommendation..........................................................................39
3.1 Conclusion..........................................................................................................................39
3.2 Recommendation...............................................................................................................41
References...................................................................................................................................44

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 Chapter 1

Introduction

1.1 Background of the study

A shareholder, commonly referred to as a stockholder, is any person, company, or

institution that owns at least one share of a company’s stock. Because shareholders are a
company’s owners, they reap the benefits of the company’s successes in the form of
increased stock valuation. Shareholders play an important role in the framing and profits
of the company. Shareholders are the owner of the company and are the main
stakeholders in the company.

Business owners should also ensure that the company has the correct constitution in
place and is structured in a manner that best serves the business and the business owners.
Shareholder protection is achieved through the company having appropriate articles of
association in place which governs how the company is run and a shareholders’
agreement.

In Nepal, companies are mostly established and governed by Companies Act 2063.
Shareholders play an important role in a company and it is very important for a company
and regulatory bodies to look after them as they should be safeguarded. Suppliers of
capital are more willing to make loans or provide investment when their rights are clearly
stated and effective remedies are available in the event of violations.

Company law requires that the company to act in the interest of its shareholders and
benefit the company as a whole. The interest of shareholders would mean all
shareholders, including minority shareholders. In reality, however, the majority
shareholder usually controls the board of directors and thus dictates the actions of the
company. The day-to-day operations of the business are left to the directors and managers
of the company with little direct input from the minority shareholders, which also leaves
them little grounds to complain. Unlike majority shareholders who can exercise their

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rights by voting in general meetings, minority shareholders may not have sufficient votes
to make a difference. Instead, minority shareholders can rely on different kinds of
contractual or legal remedies to address wrongdoing by the company’s controllers.

Hence, Company Act, 2063 (2006) provides number of provisions related to rights of
shareholders, acts to protect interest of shareholders and also to protect minority
shareholders.

1.2 Objectives of the study

The main objectives of this study are as follows:

i. To understand existing legal provision of rights of shareholders

ii. To know the acts for protection of shareholder’s interest and also for minority
shareholders
iii. To examine prevailing practices of rights and protection of shareholders in Nepal
iv. To examine international scenario of rights and protection of shareholder’s
interest
v. To make further recommendation for protection of shareholder’s interest

1.3 Significance of the study

This paper mainly helps us to understand the knowledge regarding the rights and
protection of the shareholders interest in Nepal and in different countries through various
provisions, acts, research papers, reports, articles, and websites. It also highlights how the
provisions relating to protection of shareholders increases confidence of shareholders in
capital market.

The paper can also be beneficial for other interested researchers and students in this
field as they might find suitable data and information to conduct research of similar
nature. Moreover, the study reveals the rights and protection of shareholder’s interest
which is important to the stakeholders and investors in various aspects of decision
making.

1.4 Limitations of the study

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 This study is solely based on secondary data, understanding, and knowledge confined
to limited sources. The statistics were also limited to the context of Nepal, India and
Ukraine and hence due to limited access, the study might have narrowed down some of
its scopes.

1.5 Literature Review

Mrabure (2020) conducted research for studying corporate governance (CG) and
protection of stakeholders’ rights and interests. It analyzes whether effective boards of
directors in addressing shareholders’ interests prove to be effective in guaranteeing the
interests of the rest of the firm’s stakeholders. This research states that minority and
dispersed shareholders could be perceived as a kind of stakeholders, rather than owners
outright, whose interests are impacted by the decisions of controlling shareholders and
top management. This research concludes that the corporation should determine its
primary stakeholders (according to their power level and influence, they exert on the
organization) so as to prioritize its level of attention on those ones of strategic importance
to the organization and it is important that the organization realizes that it is impossible to
satisfy all stakeholders hence it is best to create a balance between meeting organizational
objectives and that of its stakeholders.

Emmon and Schmid (1999) citing Shleifer and Vishny (1997) they postulated that
corporate governance ensured investors in corporation received adequate return on their
investment otherwise, outside investors would not lend to the firm or purchase their
equity securities. Consequently, firm would be forced to rely on internally generated
funds. They added that legal and political environment are critical influence on the nature
of corporate governance and there by improve corporate performance in every country
(Emmons & Schmid 1999, Shleifer & Vishny 1997). Hence investor protection and
stronger rule of law are related to corporate governance and organization performance.

Mehar (2003) examined corporate governance and dividend policy. He noted that
payment of dividend is extremely important and, in some economies, firms are even
forced to pay dividend through external finance (Mehar 2003). Abdullah and Valentine
postulated that the fundamental theories of corporate governance started with the

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discussion of agency theory expended to stewardship theory, stakeholder theory and
evolved to resource dependency, transaction cost, political and ethical related theories
like business and virtue ethics. However, these theories address the cause and effect of
variable such as the configuration of board members, audit committee, independent
director and top management and their social relationships rather than it regulatory
framework. They concluded that combination of various theories would be the best
approach to described good governance practice rather than focusing on single theory
(Abdullah & Valentine 2009).

Similarly, Kajola (2008) examined the nexus between corporate governance

mechanisms and firm performance using panel method and ordinary least square as a
method of estimation, his findings revealed evidence of positive significant relationship
between corporate governance mechanism and measure of organization performance
(Kajola 2008). Odaki and Kodama argued that the theories of economic institutions
predict that complimentary exists between the natures of corporate governance of its
human capital investment. They postulated that the way a firm is owned and controlled is
interrelated with human capital investment and the way employees are trained and paid
(Odaki & Kodama 2010).

Various literature has studied the role of minority shareholders in public companies.
The literature has found that minority shareholders, on average, do not engage in active
monitoring of the manager. Due to a small stake in the firm, the benefits from monitoring
are not large enough to justify the costs of monitoring. Edmans & Manso (2010) find that
a structure with numerous small blockholders can be suboptimal for governance, as
splitting of equity between numerous shareholders leads to a free-rider problem. Some
papers have further found that even a larger stake may not necessarily incentivize the
shareholder to engage in active monitoring. For instance, Kahn & Winton (1998) show
that a blockholder may instead ‘cut and run’: not intervene and sell her shares. Even
institutional investors may not actively monitor managers, due to free-rider problems
(Grossman & Hart 1980; Shleifer & Vishny 1986), conflicts of interest such as other
business ties with the firm (Duan, Hotchkiss and Jiao 2014) or potential business ties
with the firm (Cvijanovic, Dasgupta and Zachariadis 2016). Moreover, McCahery,

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Sautner & Starks (2016) find that legal factors such as rules against concerted action can
also limit active monitoring by institutional investors.

Chapter- 2

DOMESTIC PROVISIONS, PREVAILING CONDITIONS AND

INTERNATIONAL SCENARIOS

2.1 Existing Domestic Legal Provision of rights of shareholders

Shareholders or Investors are considered to be the real owners of a company.

They are the source of capital required to mobilize via capital market. They benefit,
through dividends and capital appreciation, and wealth maximum when the company
performs well. On the other hand, they equally carry the risk of losing part or full portion
of their investment if the company performs badly and goes for liquidation. As an owner
of the company, a shareholder has some fundamental rights along with which s/he should
perform his/her role responsibly.

Company Act 2063 has provided various rights to the shareholders which are
described as follows:

Power to file petition if dissatisfied with amendments

Sub-section 4 of section 21 states that if a shareholder of a public company is not

satisfied with an amendment made to the objectives of the company may, on fulfilling the
following requirements, file a petition, setting out the reasons therefore, in the court to
have that amendment declared null and void:

(a) A shareholder or shareholders holding at least five percent shares of the paid-up
capital of the company, except the shareholders who consent to or vote for the
amendment or alteration, has to make a petition,

(b) A petition has to be filed within twenty-one days after the adoption of the resolution
to amend the objectives of the company,

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(c) Where any one is to file a petition on behalf of one or more than one shareholder
entitled to make petition, the petition has to be filed by a person who is authorized in
writing for that purpose.

However, unless and until the court is satisfied that the information about the
contents, date, time and venue of a petition made under Sub-section (4) has also been
given to the company, the petition shall not be heard.

Right to get notice of general meeting (Section: 67)

Sub-section 2 of section 67 points out that a public company shall send a notice
specifying the place, date and agenda of meeting to every shareholder at the address
supplied by that shareholder to the company, in advance of at least twenty-one days to
hold the annual general meeting, and in advance of at least fifteen days to hold the extra-
ordinary general meeting. A notice thereof shall also be published at least twice in a
national daily newspaper. Provided, however, that while calling any general meeting
which has been adjourned, if such meeting is not transacting any new agenda, a notice of
that meeting published in a national daily newspaper in advance of at least seven days
shall be deemed to have been duly given.

(3) No decision shall be taken in any general meeting on any matter which has not been
notified in advance pursuant to Sub-section (2), except in the following circumstances:

(a) Except as otherwise provided in the other sections of this Act, If the shareholders
representing sixty-seven per cent of the total shares of the company who are entitled to
vote at the general meeting, attend in person or by proxy and vote in favor of taking a
decision on any matter,

(b) If the matter was already notified for being transacted in any general meeting which
has been adjourned.

(4) Except in cases where the Office gives prior approval to hold the general meeting
elsewhere, the general meeting of a public company shall be held either at the district
where the registered office of such company is situated or at such place adjoining to the
district of registered office as is convenient to most shareholders.

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(5) A list indicating the name, address of the existing shareholders of the company and
the number of shares held by them shall be kept at the meeting venue for inspection by
the shareholders.

Similarly, sub-section 9 states that where any corporate body has purchased shares in a
company, a person appointed by such corporate body shall be entitled to attended and
vote at the general meeting of the company, on behalf of such body.

Right to participate and vote in general meeting; and right to appoint proxy
(Section 71)

(1) Except as otherwise provided in this Act or the articles of association of a company,
only the person whose name is registered as a shareholder in the shareholder register
shall, subject to Section 70, be entitled to attend the general meeting and cast votes at the
rate of one vote for each share held by him/her.

(2) Except in cases where the articles of association of a company prohibit the proxy of a
shareholder from exercising the right to vote, any shareholder may, subject to this
Section, appoint another person as his/her proxy to attend the general meeting and vote
instead of him/herself.

(3) Subject to Sub-section (1) or (2), where a shareholder who is entitled to vote is not
able to personally attend the meeting, he/she may appoint a proxy to vote in his/her stead,
by an instrument of proxy executed in the prescribed format and signed by him/her and
the proxy so appointed shall be entitled to attend or vote in the meeting, subject to the
provisions contained in Section 72.

(4) where two or more persons jointly hold any shares, only the vote cast or instrument of
proxy executed by the partner appointed by such partners or by the proxy appointed by
that partner pursuant to Sub-section (2), and failing such appointment of any partner, by
the partner whose name appears first in the serial order, out of the partners, in the
shareholder register maintained pursuant to Section 46 shall be valid.

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Right to vote in election of director (Section 72)

(1) Except as otherwise provided in the articles of association, on a poll in election of

directors, every shareholder shall be entitled to cast such number of votes as may be set
after multiplying the number of shares held by him/her by the number of directors to be
appointed; and the director who casts such votes may cast all his/her votes for a single
candidate or may cast votes in a manner that his/her votes are divided for more than one
candidate as indicated by him/her.

(2) A corporate body entitled to appoint a director pursuant to this Act or articles of
association may appoint directors in proportion to its shareholding, and in such a case, it
shall but be entitled to cast vote in the election. Provided, however, that a corporate body
which is not able to appoint even a single director in proportion to the number of shares
and the total number of directors or which fails to appoint a director in exercise of the
power conferred by this Sub-section may, like other shareholder, take part in the election
of directors representing shareholders, cast vote or file candidacy up to the number of
directors that can be elected in proportion to the shares held by that body in such election.

Right to put a matter for discussion and decision (Section 74)

Sub-section 3 of section 74 states that the opinion of majority of the shareholders

present in the meeting shall be deemed to be the decision of that meeting on every matter
put to the vote. Such voting may be taken in such manner including a show of hands,
voice voting, division of shareholders in groups or poll (use of ballet paper) as well as
other appropriate method as prescribed by the Chairperson. Provided, however, that in
the case of a special resolution, the resolution shall be deemed to have been adopted by
the meeting only if the shareholders representing seventy-five percent shares out of the
shareholders present in the meeting vote in favor of the resolution.

Right to file a petition if AGM is not held timely (Section 76)

Every public company shall hold its first annual general meeting within one year
after it is permitted to commence its business, and thereafter it shall hold the annual
general meeting every year within six months after the expiry if its financial year. If any
public company fails to call the annual general meeting even within three months after

8
the expiry of the time-limit then the office may give direction to call the annual general
meeting of such company.

Sub-section 3 of section 76 states that if the company fails to conduct the annual general
meeting even within three months after the receipt of the direction from the office to call
the annual general meeting, any shareholder may make a petition, setting out the matter,
to the court. Where such petition is made, the Court may either cause to hold the annual
general meeting or issue any other appropriate order.

Agenda to be Passed During AGM (Section 76)

Except as otherwise provided in the Act, matters of distribution of dividends to

shareholders, appointment of directors and their remuneration, appointment of auditor
and his remuneration of such other items as required by this Act or the articles of
association to be decided by the annual general meeting of the company can be presented
at the decided by the annual general meeting of the company can be presented at and
decided by that meeting. Provided, however, that on the rate of dividends to be
distributed to the shareholders shall be made in a manner to exceed the rate of such
dividends fixed by the board of directors.

Provisions on sending abstract of financial statement to shareholders (Section 84):

Shareholders have right to receive abstract of financial statement which is

disclosed in section 84 of company act 2063. Abstract of financial statement shall be sent
to every shareholder along with the notice of annual general meeting.

Right to inspect the agreement entered into with the directors (Section 96)

While appointing a managing director and other director taking responsibility of

the management of the company, there shall be entered into an agreement in writing
stipulating the terms of appointment, remuneration and facilities; and no facilities or
payment other than the remuneration and facilities specified in such agreement and any
facilities receivable as specified by the general meeting shall be provided or made.

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According to sub-section 5 of section 96, there shall be made such arrangement that the
shareholders can inspect, free of charge, the agreement entered into with the directors.

Right to receive report made by the auditor (Section 117)

The Company shall, subject to the provisions contained in this Act, send a copy of
the report made by the auditor to the shareholders. Whether there is a provision of formal
trade union in such company, the company shall, at the request in writing of such trade
union, provide one copy of such report to that trade union.

The Company shall, subject to the provisions contained in this Act, send a copy of
the report made by the auditor to the shareholders. Whether there is a provision of formal
trade union in such company, the company shall, at the request in writing of such trade
union, provide one copy of such report to that trade union.

Right to receive inspector’s report (Section 124)

The inspector appointed shall, on conclusion of the investigation, submit a report,

accompanied by his/her opinions, to the Office. The Office shall give a copy of such
report to the applicant if any shareholder makes an application to get a copy of report, the
office shall issue a copy thereof to him/her, by collecting the prescribed fees.

Right to liquidate the company (Section 126)

Expect in case where a company has become insolvent in accordance with the
prevailing law on insolvency, the shareholders of the company may liquidate the
company either by adopting a special resolution in the general meeting or memorandum
of association, articles of association or consensus agreement.

Right to be informed about liquidation progress and receive their share of amount
(Section 131)

Sub-section 2 states necessity to inform the shareholders of the company about

the progress on the liquidation proceedings in every six months after the appointment of
the liquidator. After liquidators obtains and recovers all properties or amounts required to

10
be obtained and recovered on behalf of the company and repay and discharge the debts
and other liabilities of all the creditors of the company; he/she needs to call the general
meeting of shareholders and present therein a proposed report and return on the
distribution of the remaining properties of the company to the shareholders. If the
shareholders holding at least seventy-five per cent of the paid-up share capital consent to
the return, to make payment of amounts to the shareholders accordingly. At the
completion of liquidation proceedings, to prepare a report on the properties recovered,
payments made to the creditors and distributions made to the shareholders, on behalf of
the company, and submit such report, certifying that the company has been liquated,
accompanied by the auditor’s report, to the Office.

Power of shareholder to make complaint during liquidation (Section 133)

If any creditor or shareholder of a company thinks that there is any irregularity in

respect of any act or action of the liquidator, while liquidating the company pursuant to
this Chapter, such creditor or shareholder may make a complaint to the court against such
act or action within fifteen days of the receipt of information thereof.

Power of shareholder to inspect books of account (Section 146)

(1) Any shareholder of a private company or his/her proxy may inspect the documents or
records related with the transactions of the company during office hours. Documents
include: minute books of the general meeting and board of directors; annual financial
statements; share register; and accounts of the company.

(2) The director or officer of a private company shall make adequate arrangement so that
the shareholders could inspect the documents and records as referred to in Sub-section
(1).

Return of transactions (Section 147)

Any shareholder of a private company has right to demand the company for a
return of transactions of the company for any financial year.

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Right to receive Bonus share (Section 179)

(1) A company may, by adopting a special resolution in the general meeting, issue bonus
shares to its shareholders, out of the amount available for the distribution as dividend.

(2) Where a company is to issue bonus shares pursuant to Sub-section (1), the company
shall give information thereof to the Office before issuing such shares.

Right to receive dividend (Section 182)

(1) Dividend shall be distributed to the shareholders within forty-five days of the decision
made to provide dividend.

(2) A company fully or partly owned by the Government of Nepal may distribute
dividend only after obtain in prior approval of the Government of Nepal; and the
Government of Nepal may give necessary directive on the matter of dividend to be
distributed by such company.

(3) In the event of failure to distribute a dividend within the tine limit as referred to in
Sub-section (1), the dividend shall be distributed together with the interest thereon at such
rate as may be prescribed.

(4) The person whose name is maintained in the shareholder register at the time of
declaration of a dividend or his/her legal heir shall be entitled to such dividend.

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2.2 Existing Domestic Legal Provision of protection of shareholders

Good corporate governance, especially protection of shareholders’ rights, is

crucial for attracting capital. Effective corporate governance and protection of
shareholders’ rights help to assure the availability of both sources of funds: Debt and
Equity. Suppliers of capital are more willing to make loans or provide investment when
their rights are clearly stated and effective remedies are available in the event of
violations. When, by contrast, applicable legislation and/or company by-laws allow
management or controlling shareholders to derive material benefits from company
activities at the expense of creditors and investors, neither loans nor investments are
likely to be forthcoming. Fair and equal treatment of all holders of common shares is one
of the key principles of effective corporate governance.

Various provisions are made to protect the rights of shareholders in Nepal. Company Act
2063 has provided number of provisions for protecting rights of shareholders which are
provided below:

Limited liability

Section 8 of company act has stated that shareholders have limited liability.
Limited liability is a form of legal protection for shareholders and owners that prevents
individuals from being held personally responsible for their company’s debts or financial
losses. The liability of a shareholder of a company incorporated under this Act in respect
of its transactions shall be limited on to the maximum value of shares which he has
subscribed or undertaken to subscribe.

Duplicate copies to be issued (Section 25)

Sub-section 1 of Section 25 states that if any shareholder or any other person

concerned demands for a duplicate copy of the memorandum of association, prospectus,
annual accounts and audit or directors report or any document submitted by the company
to the Office the concerned company shall provide a duplicate copy of such document by
collecting the fees prescribed in the articles of association. Provided, however, that any
person whoever may demand for such document in the case of a public company. If the

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concerned company does not provide duplicates of such documents pursuant to Sub-
section (1), the Office shall provide duplicates of such documents from its records by
collecting the prescribed fees.

Prohibition on purchase by company of its own shares (Section 61)

If company purchases its own shares or buys back tis share without any condition
applied then it may impact financial situation of company which directly impacts wealth
of shareholders. Hence, Section 61 points out prohibition on purchase by company of its
own share. Sub- section 1 states that no company shall purchase its own shares (buy-
back) or lend money against security of its own shares.

However sub-section 4 states that where a special resolution is adopted by the

general meeting, the concerned company may buy back its shares within a period of
twelve months of the adoption of that resolution:

Prohibition on providing loan or financial assistance by company to purchase its

own shares (Section 62):

Company could provide financial assistance for purchasing its own share had
there been no provision which could contribute to artificial rise in share price and may
facilitate share cornering which is harmful for the welfare of shareholders. Thus, no
company shall provide any loan or financial assistance of any kind to any person for
purchasing its own shares or the shares of its holding company or getting entitlement too
such shares in any manner. Provided, however, that nothing contained in this Section
shall prevent a company from providing loans to any employees of the company to
purchase the fully paid-up shares of that company or its holding company or acquire
ownership over such share s in any manner, under a scheme of selling shares to its
employees.

Prohibition on issue or sale of shares at a discount (Section 64):

Section 64 provides provisions to protect shareholders from the possible harm

which could be caused by selling shares at a discount improperly. It includes following
prohibition on issue or sale of shares at a discount:

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(1) A company shall not issue or sell its shares at a discount.

(2) Notwithstanding anything contained in Sub-section (1), a company may, on the

following conditions, issue or sell shares at a discount by adopting a special resolution at
the general meeting to that effect, not being less than the percentage specified in that
resolution:

(a) In issuing or selling shares pursuant to a capital restructuring scheme of the company,

(b) In issuing or selling shares pursuant to a scheme of converting loans borrowed by the
company into shares with the consent of creditors;

(c) In issuing or selling shares pursuant to an employee share scheme;

(d) In issuing shares on such other conditions as approved by the Office.

Prohibition on giving false statements by officers (Section 102)

If any officer, knowingly giving false statements in a general meeting of a

company, about the actual financial situation of the company, encourage to distribute
higher dividend to the shareholders of the company than that can be distributed from the
profits, thereby affecting the capital of the company, the officer giving such false
statements shall be personally liable for such act. This prohibition protects shareholders
from making wrong investment decision based on false statements.

File lawsuit if officers have defrauded or cheated shareholders (Section 124)

Sub-section 2 of section 124 points out that if, from any report made by the
inspector, It appears to the Office that any directors, managing directors, managers,
employees or any other officers of the company have knowingly caused any loss or
damage to the company or have defrauded, cheated the shareholders or creditors or
committed any other illegal acts, the Office shall, notwithstanding anything contained in
the prevailing laws, order the company to file a lawsuit on behalf of the company against
them.

Investor protection fund (Section 183)

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(1) Where any investor does not present a claim to have refunded the amount invested in
the shares of a company even within five years, there shall be established an investor
protection fund to which such amount shall be credited.

(2) The amount credited to the fund established pursuant to Sub-section (1) may be spent
for the improvement in the capital market, investment policy, companies’ law or law
relating to trade, business and profession, training to the employees of the Office or the
company or in any other activity relating to the company administration.

(3) The management and operation of the fund established pursuant to Sub-section (1)
shall be as decided by a committee consisting of the Registrar, the Chairperson of the
Securities Board or his/her representative and one representative appointed by the
Securities Board from amongst the organization operating the stock exchange.

(4) The Office shall maintain the records of expenses made out of the fund established
pursuant to Sub-section (1) and have the fund audited.

(5) Any amount obtained from the Government of Nepal, any donor agency or any
person or body may also be credited to the fund established pursuant to Sub-section (1).

(6) Where any investor does not present a claim pursuant to Sub-section (1), prior to
crediting the amount to the investor protection fund, a notice shall be published in a
national daily newspaper inviting the concerned to receive such amount, within the time
limit of at least one month.

Chapter 12 of company act has provided list of provisions for protection of shareholders
which are given below:

Power to prevent directors and officers from doing unauthorized act (Section 138)

(1) If, on behalf of a company, any director or officer of the company does any act
beyond his/her jurisdiction, any shareholder of such company may make a petition to the
Court to prevent such act. Provided, however, that no petition may be made under this
Section in connection with any act or action done or taken or intended to be done or taken
for the fulfillment of any liability created from any act or action already done or taken by
the company.

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(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 manners 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
any act done or intended to be done by 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 interests
of such shareholders, the Office may make a complaint/ petition to the Court against such
company or its directors or officers.

(3) On receipt of a petition as referred to in Sub-section (1) or (2), the Court may inquire
into the concerned company or its directors or officers and issue an appropriate order.

Remedy for act done against rights and interests of shareholders (Section 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 to 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 rights 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 do any 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.

(3) On receipt of a petition as referred to in Sub-section (1), the court may if, upon
inquiring into the concerned company, director or officer, the claim set forth in the
petition appears to have reasonable, issue such order in the name of the company as it
thinks appropriate for providing remedy thereto.

Right to shareholder to institute case on behalf of company (Section 140)

17
(1) A company may file in the Court a case against any director, office 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 share
holder holding two and half percent or more of the shares in the paid-up capital of the
company separately 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/she shall state
about what sort of effort he/she has made to persuade the company to institute the case by
itself.

(4) Where a case is filed pursuant to Sub-section (2), the Court may decide whether it
would be appropriate to keep on the case being run by the shareholder or to get the
company to take over the case, and if it is found appropriate to get the company to take
over the case, it may order the company to take over the case.

(5) Any case once filed pursuant to Sub-section (1) or (2) shall not be capable of being
dismissed or being compromised except in cases where such compromise contains such
terms and conditions as specified by the Court. www.lawcommission.gov.np

(6) Where a case file pursuant to Sub-section (2) is adjudged sustaining the claim made
by the claimant shareholder, the expenses incurred by him/her in the institution of such
case and reasonable expenses made for the services of legal practitioner shall be
reimbursed by the company. Where such claim is not sustained, such amount out of the
expenses incurred by the defendant in defending such case as the Court thinks
appropriate shall be reimbursed from the complainant shareholder.

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2.3 Protection of minority shareholders

An extremely important prerequisite for attracting investment is ensuring that all

shareholders, domestic (internal) and foreign, government and private, are treated
equally, irrespective of the state policy on foreign investment. OECD principles
recognize that availability of efficient, effective, inexpensive remedies for violations of
shareholder rights are an important indicator of the degree to which they are protected.
Confidence of minority investors increases if the legal system has mechanisms that allow
minority shareholders to appeal to courts when their rights are violated.

Position of minority shareholders if their interest is ignored is given in section 138

and 139 of company act 2063. Shareholders have the power to prevent directors and
officers from doing unauthorized act which is stated in section 138 of company act 2063.

(1) If, on behalf of a company, any director or officer of the company does any act
beyond his/her jurisdiction, any shareholder of such company may make a petition to the
Court to prevent such act. Provided, however, that no petition may be made under this
Section in connection with any act or action done or taken or intended to be done or taken
for the fulfillment of any liability created from any act or action already done or taken by
the company.

(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 manners 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
any act done or intended to be done by 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 interests
of such shareholders, the Office may make a complaint/ petition to the Court against such
company or its directors or officers.

(3) On receipt of a petition as referred to in Sub-section (1) or (2), the Court may inquire
into the concerned company or its directors or officers and issue an appropriate order.

19
 Similarly, Section 139 of company act 2063 has provided remedies for act done
against rights and interests of shareholders:

(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 to 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 rights 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 do any 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.

(3) On receipt of a petition as referred to in Sub-section (1), the court may if, upon
inquiring into the concerned company, director or officer, the claim set forth in the
petition appears to have reasonable, issue such order in the name of the company as it
thinks appropriate for providing remedy thereto.

(4) In issuing an order pursuant to Sub-section (3), notwithstanding anything contained in

the memorandum of association, articles of association or consensus agreement, the
Court may, without prejudice to the generality of the said Sub-section, also issue the
following order, namely:

(a) Preventing the act and action done and taken against the rights and interests of any or
all shareholders and carrying of the business of the company in the future in a due
manner;

(b) Preventing any act and action being done and taken or requiring to do any act not
done or intended not to be done by the company;

(c) Requiring to institute, on behalf of the company a civil case against any one, in
pursuance of a direction given by the court;

20
(d) Requiring to buy back the shares of any shareholder in accordance with the
procedures set forth in this Act, by reducing the capital of the company, and to return the
amount of such shares;

(e) In the event of any loss and damage being suffered any shareholder from a
discrimination made against him/her, requiring the company or the person making such
discrimination to pay compensation to the shareholder for the same;

Prohibition on loans to officers or shareholders (Section 101)

Minority shareholders will be affected if company provides loan to majority

shareholders or close relatives. Therefore, sub-section 1 of section 101 includes
provisions to prevent such activities. i.e., No company shall make any loan or provide
any financial assistance to its officer, substantial shareholders or officer, shareholder of a
holding company or a close relative of such person nor shall it give any guarantee or
provide security in respect of any loan borrowed by such officer or shareholder or close
relative from any other person.

Disclosure of shareholding in annual report (Section 109)

Sub-section 12, 13 and 14 of section 109 provides provisions for disclosure to be

made in annual report. Disclosures made by the substantial shareholders of the company
to the company in the previous financial year should be disclosed in annual report.
Details of shareholding taken by the directors and officers of the company in the previous
financial year and, in the event of their involvement in share transaction of the company,
details of information received by the company from them in that respect must be
published in annual report. Likewise, details of disclosures made about the personal
interest of any director and his/her close relative in any agreements related with the
company during the previous financial year should also be disclosed in the annual report.

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2.3 Minority rule, majority protection

Majority and minority define who has the power to rule. The structure of
democracy is as such, where the majority has the supremacy. In the corporate world, also
the rule and decisions of the majority seem to be fair and justifiable. The power of the
majority has greater importance in the company, and the court tries to avoid interfering
with the affairs of the internal administration of the shareholders. With the superiority of
the majority, there is always inferiority among the minority, which shows an unbalance in
the company. The Companies Act, 2013 of India reduces the inferiority of the minority.
The rules of the majority and also the rights of the minority in a company have been
briefly described below:

Powers of Board of Directors

The Companies Act distributes the power between the board of directors and the
shareholders. The board and the shareholders exercise their powers through meetings in a
democratic way. The meetings include the meetings of the board of directors and the
general meetings. The shareholders entrust certain powers on the board of directors,
which is through the Memorandum of Association (MoA) and Articles of Association
(AoA). The board of directors have all the powers and can to do all the things and acts
just the same as the company exercises its powers. But the Act restricts the board of
directors from the powers that only the shareholders can do in the general meetings.

Majority Powers

A company stands as an artificial entity. The directors run it but they act according to
the wish of the majority. The directors accept the resolution passed by the majority of the
members. Unless it is not within the powers of the company. The majority members have
the power to rule and also have the supremacy in the company. But there is a limitation in
their powers. The following are two limitations:

I. The powers of the majority of the members are subject to the MoA and AoA of
the company. A company cannot authorize or ratify any act legally outside the
memorandum. This will be regarded as the ultra vires of the company.

22
 II. The resolution made by the majority should not be inconsistent relating to The
Companies Act or any statutes. It should also not commit fraud on the minority by
removing their rights.

Principle of Non-Interference

The general rule states that during a difference among the members, the majority
decides the issue. If the majority crushes the rights of the minority shareholders, then the
company law will protect it. However, if the majority exercises its powers in the matters
of a company’s internal administration, then the courts will not interfere to protect the
rights of the majority.

Foss Versus Harbottle

Foss v. Harbottle lays down the basics of the non-interference principle. The
reasons for the rule is that, if there is a complaint on a certain thing which the majority
has to do if there is something done irregularly which the majority has to do regularly or
if there is something done illegally which the majority has to do legally, then there is no
use to have a litigation over such thing. As in the end, there will be a meeting where the
majority will fulfil their wishes and make decisions.

Benefit and Justification

The benefit and the justification of the decision of the case are:

I. Recognizes the country’s legal personality

II. Emphasizes the necessity of the majority making the decisionsAvoid the
multiplicity of suits

Exceptions to the Rule

The rule is not absolute for the majority; the minority also have certain protections.
The Non-interference principle does not apply to the following:

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 I. Ultra-Virus Act
An individual shareholder can take action if they find that the majority has
done an illegal act or ultra-virus act. The individual shareholder has the power
to restrain the company. This is possible by the injunction or the order of the
court.
II. Fraud on Minority
If the majority commits fraud on the minority, then the minority can take
necessary action. If the definition of fraud on the minority is unclear, then the
court will decide on the case according to the facts.
III. Wrongdoer in Control
If the company is in the hands of the wrongdoer, then the minority of the
shareholder can take representation act for fraud. If the minority does not have
the right to sue, then their complaint will not reach the court as the majority
will prevent them from suing the company.

Resolution Requiring Special Majority

If the act requires a special majority, but it passes by a simple majority, then an
individual shareholder can take action.

Personal Action

The majority of shareholders always oblige to the rights of the individual

membership. The individual member has the right to insist on the majority on compliance
with the statutory provisions and legal rules.

Breach of Duty

If there is a breach of duty by the majority of shareholders and directors, then the
minority shareholder can take action.

Prevention of Oppression and Mismanagement

To prevent the majority of shareholders from oppression and mismanagement, the

minority can take action against them.

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2.4 International scenario of rights and protection of shareholder’s interest

2.4.1 Current scenario of rights and protection of shareholder’s interest in India

Over the past decade, legislative and regulatory changes have improved corporate
governance standards, enhanced minority shareholder rights, created new shareholder
remedies, codified directors' duties and encouraged greater institutional shareholder
engagement in India. Also, proxy firms are now active in the Indian market and investors
have become more adept at using the media. These changes have coincided with other
market developments. First, succession issues and over-leveraged balance sheets have
made promoters and professional management of certain listed companies vulnerable.
Second, the high levels of investment in listed Indian companies by international
financial investors has led to greater accountability. Third, there have been two recent
contested public M&A transactions. Finally, some international activist investors have
taken positions in Indian listed companies. These dynamics have even affected
companies with a better governance history and have led to the rise of shareholder
activism in India.

Although activism in India is at earlier stage of evolution in comparison with the

United States, Indian promoters can no longer take their shareholders for granted. Some
of the legal and regulatory framework adopted in India for rights and protection of
shareholders in current scenario are presented below:

i) The ability of shareholders to appoint and remove directors

In India, directors of public companies are appointed by shareholders, just as they
are in many other common law jurisdictions. However, there is no mandatory annual re-
election requirement for directors of public companies. This contrasts with the position in
England and Wales, where the requirement under the UK Corporate Governance Code on
a 'comply or explain' basis for all FTSE 350-listed companies to annually reappoint
directors serves as a powerful governance tool to keep directors in check. However, there

25
have been recent instances where investors have been more active with regard to the
appointment and removal of directors of listed companies.
An investor can also theoretically seek board representation as a 'small
shareholder' by acquiring a small number of shares and then petitioning the company
with the support of the lower of 1,000 other small shareholders or 10 per cent of the total
number of small shareholders. However, this has been hard to achieve in practice. For
instance, in August 2017, Unifi Capital failed in its attempt to appoint a small shareholder
director on the board of Alembic (the small shareholders were allegedly clients of Unifi
Capital), and in 2021 the Supreme Court ruled that an 18.37 per cent shareholder could
not use this provision to gain board representation.
The removal of a director prior to expiry of his or her term requires an ordinary
shareholders' resolution (i.e., approval by a simple majority), and the director must first
have been given an opportunity to be heard. In May 2018, institutional investors and
certain funds removed a director of Fortis Healthcare in this manner. This is the first
example of an activist campaign leading to changes on the board.
Also, the removal of non-statutory responsibilities or designations conferred upon
directors does not require shareholder approval. For instance, the articles of Tata Sons did
not require shareholder approval for the removal of Cyrus Mistry from his role as chair of
the board (although the removal of his directorship required shareholder approval).

ii) Control over executive remuneration

Shareholders have voted down executive remuneration packages in a number of
instances. In 2018, shareholders rejected the compensation of the managing director and
promoter of the Apollo Group), leading to a 30 per cent reduction in his compensation,
which was subsequently approved. Previously, the executive remuneration resolutions in
Tata Motors' annual general meeting in 2014 were rejected, and in 2011 Seamac and
ARSS Infrastructure in 2011 withdrew their executive compensation resolutions. In 2017,
Infosys, a leading IT company, was criticized by its founders for the levels of severance
payments made to exiting executives.
Also, the alignment of incentives and compensation in financial institutions is
now an area of regulatory focus. In November 2019, the Reserve Bank of India published

26
guidelines governing compensation in private sector banks, including requirements to
balance fixed and variable compensation, and have introduced clawback provisions, and
there is one example of a private bank (ICICI Bank) seeking to claw back past
compensation from a former CEO following allegations of wrongdoing.

iii) The ability to requisition shareholders' meetings and postal ballots

Shareholders holding at least one-tenth of voting paid-up share capital can notify
the board to requisition an extraordinary general meeting (EGM), and if the board does
not call the EGM within 21 days of the requisition notice, the shareholders may
themselves call the EGM (to be held within three months). If the directors fail to convene
an EGM following a valid requisition notice, they become liable for any requisition-
related expenses.
Indian company law does not expressly provide shareholders the ability to pass
written resolutions, but there are provisions permitting postal ballots. In 2017, a public
shareholder sought appointment as a non-executive director unsuccessfully through
electronic voting.

iv) Shareholders' influence over corporate strategy

Under Indian company law, directors are delegated the authority to manage
company affairs, subject to the satisfaction of their duties. Public campaigns to encourage
a change of strategic direction have so far been uncommon, but shareholders do have
certain powers to keep management and promoters in check.

Although there is no Indian equivalent as comprehensive as the 'class tests' under

the UK Listing Authority's Listing Rules, the SEBI (Listing Obligations and Disclosure
Requirements) Regulations 2015 (the Listing Regulations) require shareholders' special
resolutions (i.e., a 75 per cent approval threshold) for any disposal of a controlling
interest in a 'material subsidiary' or any transfer of a significant portion of the subsidiary's
assets.

27
 Also, regardless of listing status, as a result of statutory special resolution
approval requirements, minority shareholders holding more than 25 per cent of a
company's voting power can influence certain key corporate actions such as the issuance
of new shares on a non-pre-emptive basis (which will affect non-cash consideration in
M&A transactions), any transfer of an undertaking by a public company (which is the
most direct statutory control over M&As) and any borrowing by a public company in
excess of that company's paid-up share capital, free reserves and securities premium
(which will affect the financing of M&A transactions).

In addition, qualifying related party transactions require shareholder approval

(simple majority) under both company law and the Listing Regulations. Finally, the
Listing Regulations provide for the rights of shareholders to 'participate in, and to be
sufficiently informed of, decisions concerning fundamental corporate changes' and a
principle requiring the 'protection of minority shareholders from abusive actions by, or in
the interest of, controlling shareholdings either directly or indirectly, and effective means
of redress'. These principles have not been used by activist shareholders, but boards of
listed companies do need to be wary of potential investor complaints to SEBI in the
future.

v) The position of shareholders and boards in public M&A situations

In theory, Indian law confers considerable power on minority shareholders in
public M&A situations. There are restrictions on the board taking frustrating action and
so defenses such as poison pills are difficult to implement. In addition, although there is
no formal obligation under Indian takeover regulations to treat shareholders equally in a
bid situation, equality of treatment is a guiding principle under the Listing Regulations,
and so it would be difficult for a target to provide selective information to certain bidders.
Also, just as in England and Wales, M&A transactions can be structured through court
schemes, which need to be approved by a majority of shareholders holding 75 per cent in
value of the shares. In contrast with England and Wales, there is no practice of obtaining
irrevocable undertakings in the Indian public M&A market, so there is no further

28
segregation of classes of shares (beyond the classes that already exist). Therefore,
shareholders holding just over 25 per cent will be able to block a scheme.
Despite the availability of these rights, hostile takeovers have historically been rare.
However, 2018 saw a contested public M&A transaction involving Fortis Healthcare, in
which shareholders succeeded in removing a director. Further, in 2019, Larsen & Toubro
completed a hostile offer for Mindtree.

vi) Legal remedies available to shareholders

The Companies Act 2013 is perceived as having significantly improved
shareholders' legal remedies. Although it is true that new remedies have been created, the
lengthy nature of the litigation process in India and the judicial history of enforcing
shareholder rights should temper expectations.

Minority shareholders (comprising 100 members, or shareholders holding 10 per

cent voting power) can claim relief against oppression and mismanagement under the CA
2013 on the ground that the company's affairs are being conducted in a prejudicial
manner. Also, a similar threshold of shareholders can also, in certain circumstances,
apply to the National Company Law Tribunal (NCLT) to investigate the company's
affairs.

However, cases under the preceding company law (the CA 1956) indicate that
claimants historically found success difficult under the earlier law. More recently, the
Supreme Court judgment in Tata Consultancy Services Limited v. Cyrus Mistry
Limited illustrates the challenges with the use of some of these provisions. Following
differences between Cyrus Mistry, then executive chair of Tata Sons, and Ratan Tata, the
former chair, on 24 October 2016, Cyrus Mistry was removed from the executive chair of
Tata Sons through a board resolution and was subsequently removed as a director of Tata
Sons pursuant to an EGM held on 6 February 2017. Shareholder resolutions passed at
EGMs removed him from the boards of other group companies. Cyrus Mistry challenged

29
his removal, questioned historic corporate actions and the use of affirmative voting rights
in the articles of Tata Sons. The NCLT ruled against Cyrus Mistry, but the National
Company Appellate Tribunal (NCLAT) ordered his reinstatement. On further appeal, the
Supreme Court ruled against Cyrus Mistry and upheld his removal. The Supreme Court
acknowledged that the CA 2013 had broadened the scope of oppression and
mismanagement regime. However, it cited Cyrus Mistry's involvement in management in
previous decisions, his past acceptance of the articles and the fact that Tata Sons is
controlled by two charities in concluding that the NCLT was correct in rejecting Cyrus
Mistry's assertions.

Also, CA 2013 has introduced a 'class action' concept in Indian company

law. Shareholders holding a threshold level of shareholding can institute class action suits
if they believe that the company's management or affairs are being conducted in a manner
that is prejudicial to the interests of the company or its shareholders. The NCLT has the
power to issue a broad range of directions and can also order damages. This moves Indian
company law away from the restraints of the exceptions to the rule in Foss v.
Harbottle. However, given the state of the litigation process in India, the effectiveness of
this remedy remains to be seen.

vii) Other issues

Similar to other jurisdictions, shareholders need to be aware of insider dealing
concerns when engaging with a listed company, under the SEBI (Prohibition of Insider
Trading) Regulations 2015, as well as the SEBI regulations restricting manipulative,
fraudulent and unfair dealings in shares.

With regard to 'concert party' issues, the test of 'concertness' under Indian
takeover regulations is by reference to a common objective to acquire shares or voting
rights in, or control over, a listed target. The use of voting agreements is rare, but
shareholders sometimes cooperate on corporate actions requiring shareholder approval
(which might also cause concern).

30
 Finally, although companies do not have a general obligation to provide investors
with details of specific shareholders' holdings, companies do need to maintain a register
of members that is available for inspection. As far as listed public companies are
concerned, certain significant acquisitions and disposals do need to be reported to the
market and there are periodic disclosures of promoter positions. In addition, like other
jurisdictions, Indian company law has recently introduced the concept of a register of
significant beneficial owners, which shareholders are able to inspect.

2.4.2 Current scenario of rights and protection of shareholder’s interest in Ukraine

An extremely important prerequisite for attracting investment is ensuring that all

shareholders, domestic (internal) and foreign, government and private, are treated
equally, irrespective of the state policy on foreign investment. In Ukraine currently, the
State often demands and receives preferential treatment as a shareholder, which is
unacceptable from a corporate governance point of view. Such demands for favored
treatment may be observed at the highest levels of policy formulation as well. An
example is the Feb. 3, 1999 letter of the State Tax Administration to the Cabinet of
Ministers of Ukraine entitled “On Payment of Dividends on the State’s Stake in Joint
Stock Companies to the Budget”. People expressed their dissatisfaction with the fact that
general shareholder meetings sometimes decide not to allocate profit for payment of
dividends. The letter also identifies oblasts where representatives of regional offices of
the State Property Fund supported the decision of the general shareholder meeting to
invest profits back into the company instead of paying dividends on the State’s shares to
the budget. To ensure timely and consistent payment of dividends to the budget, the State
Tax Administration offered to define short time periods for paying dividends on all State
shares. This shortsighted position has a number of negative consequences. It tramples on
two important principles of good corporate governance that are necessary to attract
investment. It elevates the State from being one among many equal shareholders to a
privileged position. The STA’s position also overrides the principle that the general

31
shareholder meeting, as the highest body of the enterprise, has the discretion to decide
how to allocate profits, and whether and when to pay dividends.

At the same time, it sometimes happens that the State’s acts as a shareholder in
ways that violate the rights of other investors. For instance, the State twice caused
disruptions of the general shareholder meeting of OJSC “UkrNafta.” First, the State
representative failed to appear at the meeting in summer 1998. Second, on June 21, 2000,
on the eve of the general shareholder meeting, the Cabinet of Ministers issued a
Resolution replacing the chairman of the management board of the National JSC
“Naftogas Ukrainy.” The statutory fund of the latter company had 50% plus one share of
OJSC “UkrNafta,” making it the controlling shareholder. Both the old and the new
chairmen of the management board of the National JSC “Naftogas Ukrainy” showed up
at the “UkrNafta” general shareholder meeting to represent the interests of the State.
Before the information was received about the Resolution of the Cabinet of Ministers, the
dismissed chairman of “Naftogas Ukrainy” was registered as the State’s representative.
After the meeting had begun, the Cabinet of Ministers action was announced.
Controversy then erupted over who should be considered a plenipotentiary representative
of the National JSC “Naftogas Ukrainy.” Debates continued for the whole day, but no
consensus was reached.

Violation of the Principle of Equal and Equitable Treatment of Shareholders

Share dilution takes place when companies issue shares to managers or favored investors
at below market value, thus diluting other shareholders’ interests. Share dilution results in
an investor’s percentage ownership of a company shrinking, while the value of the
overall company increases by a much smaller percentage. Share dilution has been one of
the most widespread violations of shareholders’ rights in Ukraine for several years. The
case of OJSC “Dniproshina” generated the most controversy inside and outside Ukraine
(see Attachment), but similar cases continue to occur. The Law of Ukraine “On Business
Associations” declares that existing shareholders have the preemptive right to purchase
shares of additional issues. However, the law does not provide any mechanism for
guaranteeing the exercise of that right. Nor does it specify that the right is granted to
enable all shareholders to preserve their percentage stakes in the statutory fund of the

32
company. Joint stock company managers often take advantage of the Law’s ambiguity to
interpret the right in a way that places one shareholder in a more advantageous position at
the expense of the others. (For example, the charter of Open JSC “Dniproshina” gave
founding shareholders a privileged position compared to the other shareholders. The law
also prescribes a maximum period for open subscriptions (6 months), without providing
any minimum period. As a result, it has become a common practice in Ukraine to limit
subscription periods for new issuances to very short time periods, which makes it difficult
for shareholders exercise their preemptive rights. For example, OJSC “Levada” (Kharkiv
oblast) conducted subscription in a remote country district for just two days. Similarly,
OJSC “Stirol” proposed an additional issuance with a one-day open subscription period.
At present, the SSMSC has no legal grounds to refuse to register share issues based on
the fact that subscription periods are extremely short or take place in remote,
inconvenient locations, even though such circumstances appear designed to prevent
shareholders from exercising their preemptive rights. Some attempts have been made to
resolve these problems without waiting for changes in the governing statutes. In May
2000, the SSMSC issued an Explanation of shareholders’ preemptive rights, and later
drafted a Regulation “On the Procedure for Increase (Decrease) of the Statutory 4 Fund
of Joint Stock Companies” recently adopted at the SSMSC sitting2. The draft Regulation
not only describes shareholders’ preemptive rights, but also establishes a two-stage
procedure for conducting an open subscription period. The first stage must last at least 15
days, giving shareholders more time to exercise their preemptive rights. Companies will
not be able to ignore the SSMSC Regulation clarifying and protecting shareholders’
preemptive rights because it has the force of law. The SSMSC also has the right to issue
warnings and order violations of the Regulation corrected. Failure to comply may be
sanctioned. Passage of the draft Regulation by the SSMSC will provide important
protections to shareholders against dilution of their stakes. A variety of creative ways
have been developed to deprive shareholders of the right to participate meaningfully in
the general shareholder meeting: notice of the general meeting is not provided to all
shareholders or is provided too late; materials necessary to make informed decisions
about matters on the agenda are not provided in a timely fashion (usually, the company
says the materials are not ready, a condition that lasts until the meeting itself);

33
shareholders’ representatives are excluded from participating in the general meeting for
flimsy reasons (in one case, the excuse given was that the date in the proxy was written in
numbers, not in words; sometimes, companies demand that shareholder representatives
produce a proxy certified by a notary, based on a requirement included in the notice of
the general meeting; the Law “On Business Associations,” however, allows proxies to be
certified by the management board or the registrar). Sometimes, shareholders convening
an extraordinary general meeting violate the rights of other shareholders. For instance,
the State, 69 percent shareholder of State Joint Stock Energy Company
“KharkivOblEnergo,” attempted to hold a general shareholder meeting to change the
composition of the company’s board. The State published a notice of the meeting that
said where and when it would be held, but failed to specify the purpose and agenda,
preventing other shareholders from submitting proposals to the agenda. Although the law
requires that a general meeting be held, as a rule, at the location of a joint stock company,
exceptions to the rule frequently occur. Holding a general meeting in another oblast or
country is one way to exclude direct participation of certain shareholders, particularly of
minority ones. (Recently, a general shareholder meeting of Open JSC 2 This Regulation
is to undergo the state registration with the Ministry of Justice of Ukraine. 5 “Khersonsky
Combinat Khleboproduktov” was held in Budapest. As a result, the State, a 25 percent
shareholder, was not represented.3 A whole series of violations of the principle of equal
treatment of shareholders occurs because Ukraine’s legislation lacks the concepts of
“affiliated person of the company” and “interested person transactions”, and does not
require disclosure of information on one’s affiliation and interest in the transactions
concluded by a company.

Fairly common problems for Ukraine are asset stripping and profit skimming.
Asset stripping refers to a company’s transfer of assets, at below market value, to an
entity affiliated with management or affiliated with a large shareholder (including the
state). Shareholders are thereby deprived of the value of their investment for the purpose
of insiders’ self-enrichment. The term “profit skimming” (“diversion of cash flow”,
“nonmarket transfer pricing”) covers a wide variety of methods a manager or large
shareholders use to divert profits to their private benefit.

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35
2.5 Prevailing practices in Nepal

In current scenario, insider trading is highly prevalent in Nepal which causes harm to
the shareholders especially, minority shareholders. So, different laws are made to control
these activities.

SEBON staffs profiting from inside information

The heads of the Nepal Stock Exchange (NEPSE) and Securities Board of Nepal
(SEBON) as well brokers and industrialists have been found to have profited from insider
trading and conflict of interest, eroding the public’s trust in the country’s stock market.

An investigation by Himal Khabar found Nepse CEO Chandra Singh Saud and
SEBON Chair Bhishma Raj Dhungana bought shares for family members in Sarbottam
Cement at far lower prices just before its Initial Public offering (IPO).

The board of directors of Sarbottam Cement decided to sell 6 million shares in the
company through a book building process. The shares were valued at Rs750 per unit to
raise Rs4.65 billion, of which only 12.9% were included in the initial public offering.

However, many of the shares were sold pre-IPO for less than Rs250 per unit even
before the public offering, and others are believed to have been given for free as
‘presents’ to important people. Benefiting were close family members of SEBON’s Chair
Dhungana, Nepse CEO Saud, as well as Global IME Capital which was handling
Sarbottam’s IPO.

Global IME Capital’s parent company Global IME Bank is headed by Chandra
Dhakal, who is vice-chair of FNCCI and is also a member of SEBON. Dhakal’s brother
has 30% share in an investment company that bought some of the shares. Chandra
Dhakal therefore had a conflict of interest in being in a position to be the regulator in the
sale of investment vehicles in a company that his family had invested in.

“For a CEO of the Stock Exchange or its employees to use information about an
IPO to personally buy shares is a direct and serious conflict of interest,” explains capital
market expert Mukti Aryal. “Buying shares in a company that is going to be traded on

36
its own platform opens up the possibility of share price manipulation. In a case like this
the SEBON official has to declare a conflict of interest and step down.”

The irregularity in Sarbottam Cement share offering is not the first of its kind,
with the Securities Act 2007 violated previously. In 2014, investors at Citizens
Investment and Employees Provident Funds were caught exchanging investment with
the Upper Tama Kosi Hydropower with shares for themselves in return. The regulations
were subsequently overhauled and loopholes plugged.

In order to prevent these kind of activities, Nepal’s Securities Act 2007 Clause
91 codifies into law measures against front running, prohibiting SEBON staff from
divulging and profiting off any inside information received by their position.
Regulatory authorities are also not allowed to be in contact with company executives,
founders and managers or exchange any benefits with them. SEBON’s Code of Ethics
bars the board’s members and chair and their families from engaging in any transaction
from which they can financially benefit.

Insider Trading in Current Scenario

One of the eye-catching examples of insider trading in Nepal is of the Corporate

Development Bank (CORBL). The stock rose from Rs 210 to Rs 498, an increment of
more than 130% within two weeks.

The reason for this unusual but spectacular increase was because the company had
applied with SEBON to issue a 1:1.5 rights issue. Before the news was announced the
company’s insiders or SEBON insiders bought the shares of the company. Finally, when
the news was announced the price reached as high as Rs 798. This is when the insiders’
started to sell the shares which they had got cheaply and the price was down to Rs 670.

Similarly, when the news came out that Ajod Insurance Limited (AIL) had called
its 3rd AGM on 7th Baisakh, 2078 and was going to take the agenda of the right share to
its annual meeting, the prices were already hiked which led to the SEBON’s
investigation. This eventually led the issue to be postponed as of now. The National

37
Microfinance Laghubitta’s (NMFBS) acquisition of the Mahila Sahayatra Laghubitta
(MSMBS) also resulted in Mahila Sahayatra Laghubitta’s price increment before the
news being public. One of the most recent cases is of Radhi Bidhyut Co Ltd. (RADHI)
where the share price had already increased by more than 50% in the last 20 days with
the high increase in volume before it had declared impressive 36.5% bonus shares.

For preventing insider trading, various laws and punishment relating to insider
trading are made in Securities Transactions in Nepal which are given below:

1. A person who commits insider trading as referred to in Section 91 shall, upon being
convicted of the offense of insider trading, be liable to the punishment with a fine equal
to the amount in controversy or with imprisonment for a term not exceeding one year or
with both punishments.

2. If a person intentionally makes or publishes any statements or projection related

statements with the knowledge that such a statement is false, misleading, or fake, or hide
any fact or information with mala fide intention, to purchase or sell securities, such a
person shall be deemed to have committed an act of misleading. They shall be liable to
the punishment with a fine of one hundred thousand rupees to three hundred thousand
rupees or with imprisonment for a term not exceeding two years or with both
punishments, and where anyone has suffered any loss or damage from such transactions,
such loss or damage shall also be recovered.

3. If anyone knowingly or with mala fide intention, does not maintain, make, prepare or
submit such accounts, books, statements, reports, notices, information, or similar other
documents as required to be maintained, made, prepared, or submitted under this Act or
the Rules or Bye-laws framed under this Act within the time specified for the
maintenance, making preparation or submission of such accounts, books, statements,
reports, notices, or information or if one makes, prepares, or retains false statements or
documents, the Board may punish such a person with a fine of fifty thousand rupees to
two hundred thousand rupees.

4. If anyone issues securities carry on or cause to be carried on a stock exchange or

operate or causes to be operated securities transaction in the capacity of a securities

38
business person without fulfilling such requirements as required to be fulfilled under this
Act or the Rules or Bye-laws framed under this Act, the Board may punish such a person
with a fine of fifty thousand rupees to one hundred fifty thousand rupees.

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Chapter 3: Conclusion and Recommendation

3.1 Conclusion

The development of shareholder rights grew steadily in many countries over the
past years. In particular, the protection of shareholders against shirking of the board
members and the officers have increased significantly in many countries. The protection
of minority shareholders against the expropriation of major shareholders has also been
provided in the acts.

In Nepal, companies are mostly established and governed by Companies Act

2063. Company Act, 2063 (2006) provides number of provisions related to rights of
shareholders, acts to protect interest of shareholders and also to protect minority
shareholders. As an owner of the company, a shareholder has some fundamental rights
along with which s/he should perform his/her role responsibly.

Many recent cases illustrate that activist shareholders take it further than plain
company monitoring at general meetings. They engage in private negotiations with
boards in order to influence the company’s strategy. So doing, these investors seem to
circumvent the existing legal devices regulating shareholder voice, which gives rise to
substantial concerns in the corporate governance arena.

Good corporate governance, especially protection of shareholders’ rights, is

crucial for attracting capital. Effective corporate governance and protection of
shareholders’ rights help to assure the availability of both sources of funds: debt and
equity. Suppliers of capital are more willing to make loans or provide investment when
their rights are clearly stated and effective remedies are available in the event of
violations. When, by contrast, applicable legislation and/or company by-laws allow
management or controlling shareholders to derive material benefits from company
activities at the expense of creditors and investors, neither loans nor investments are
likely to be forthcoming.

40
 OECD principles recognize that availability of efficient, effective, inexpensive
remedies for violations of shareholder rights are an important indicator of the degree to
which they are protected. Confidence of minority investors increases if the legal system
has mechanisms that allow minority shareholders to appeal to courts when their rights are
violated.

The structure of democracy is as such, where the majority has the supremacy. In
the corporate world, also the rule and decisions of the majority seem to be fair and
justifiable. With the superiority of the majority, there is always inferiority among the
minority, which shows an unbalance in the company. To prevent the majority of
shareholders from oppression and mismanagement, various provisions are made for
protecting minority shareholders.

Shareholders thereby play an important role in the functioning of a company.

They have various rights which include the appointment of the company’s director,
auditor etc., to voting rights and having a say when the company goes insolvent. With
every right, comes a corresponding responsibility which the shareholder must carry out
diligently. Therefore, proper laws and acts should be made to provide rights to
shareholders, protect their interest and protect minority shareholders.

41
3.2 Recommendation

1. Improve the legislation that regulates activity of joint stock companies

The best way to solve most of the problems of unequal treatment of shareholders
and violation of their rights is by enacting effective laws. In Nepal, there are no
modern and adequate laws regulating activities of joint stock companies. Thus,
violations of shareholders’ rights frequently occur that do not violate any
applicable law. Amendments should be made to balance the interests of minority
shareholders and a strategic investor. It should protect minority shareholders
while giving strategic investors more opportunities to restructure the company and
provide more efficient management. The act should also include following
elements:
a) It should contain protections against share dilution and, asset stripping
b) It must define more precisely the roles of the various bodies of a
company
c) It should include requirement that major transactions and conflict-of-
interest transactions be approved by the supervisory board or, in certain
cases, by the general shareholder meeting
d) The act should provide appraisal and redemption rights for shareholders
that vote against reorganization, major transactions, or charter
amendments that limit their rights
e) Proper provisions should be made to prohibit placement of shares at a
price lower than market price, with certain exceptions
f) Requirement of cumulative voting for election of supervisory board
members (each shareholder is entitled to cast all his votes, calculated by
multiplying the number of his shares by the number of seats on the board,
for one candidate, or distributed them among several candidates);
g) It must contain a definition of affiliated persons and the duty of
disclosing information on one’s affiliations and conflicts of interest.

42
2. Include norms that provide equal rights for shareholders and guarantees their
protection in company charters and internal documents
Information in the press, seminars, direct work with companies, and work through
market intermediaries, should all be used to explain to joint stock companies and
their shareholders what can be done now to make companies more attractive for
investors. In addition, trade organizers can refuse to list joint stock companies
unless their bylaws contain provisions that protect investors’ rights. In this way,
investors would be assured, without having to do additional research, that
necessary shareholder protections are contained in the by-laws of companies
listed on a stock exchange or trading and information system (or at least listed in
one of the higher tiers). These companies, in turn, would have greater
opportunities to attract investments.

3. Enhance the role of SEBON in protecting shareholders’ rights

Securities commissions should have the unambiguous right to appeal to court to
protect the rights and interests of investors, especially minority shareholders.
Market participants frequently express their objections, even fears, about
increasing the role and powers of the bodies of State regulators. However,
empowering SEBON to appeal to court to protect shareholders’ rights will
promote development of equitable and fair markets.

4. Unite professional stock market participants and other interested parties to

improve corporate governance
The Corporate Governance and Shareholders’ Rights Task Force should be
created to address corporate governance problems in Nepal. This Task Force may
include representatives of State executive power bodies, international donor
organizations and participants of the Nepalese stock markets. Then the Task Force
should draft regulations and explanations aimed at improving corporate
governance.

5. Prior approval by the general shareholder meeting for major transactions

43
Shareholders, particularly citizens, have little confidence that the court system
will provide a fair and fast solution cases. Several avenues exist for protecting
shareholders’ rights. First, shareholder protections can be included in the
company charter and by-laws. This is particularly important in countries with
weak shareholder protections on the legislative level like: Nepal. Provisions
should be made to require prior approval by the general shareholder meeting of
major transactions or transactions in which a manager has a personal interest.
Such measures would decrease risks to investors and creditors of share dilution,
asset stripping and other violations of their rights.

6. Increase the level of corporate culture

The level of corporate culture should be increased in both the joint stock
companies’ management and shareholders. The members of supervisory boards
and joint stock companies’ management boards must be well educated about
rights and ways to protect rights of shareholders. The corporate governance best
practices must be well advertised and adopted.

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References

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https://www.indiafilings.com/learn/company-law-majority-rule-and-minority-rights/
#:~:text=If%20the%20majority%20crushes%20the,the%20rights%20of%20the
%20majority.

Company Act (2063)

Emmons, W. R., & Schmid, F. A. (1999). Corporate Governance and Performance.

Working Paper 1999-018A. Federal Reserve Bank of St. Louis.

https://doi.org/10.20955/wp.1999.018

Fung, GM, (1993) A Common Goal From Different Paths: Protection of Minority
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Hill, J, (1992) Protecting Minority Shareholders and Reasonable Expectations. 10

Companies and Securities Law Journal 88.

Kajola S. O. (2008). Corporate Governance and Firm Performance: The Case of Nigerian
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Mehar A. (2003). Corporate Governance and Dividend Policy (pp. 1-13). Munich
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Mrabure K.O (2020). Corporate Governance and Protection of Stakeholders Rights and
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Organisation for Economic Co-Operation and Development (OECD, 1999, 2004).

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