Growth of Corporate Governance in Nepal

Abstract

Good governance is important for the effective delivery of the vision of any organization. Corporate Governance gains greater importance as it is the largest sector in all country involving resources which make larger contribution in the economic development of the country. Unless the proper Corporate Governance no country around the world can developed or progress. Beginning of 21st century was mark by emergence of Corporate Governance by collapse of high level corporations around the world. So, Corporate Governance depends upon the set of institutions such as laws, norms, regulations which creates firms in competitive market economy.

The introduction sections of this research paper, briefly explain about the meaning of Corporation, Corporate Governance, scams and description about Corporate Governance in Nepal. After that, general meaning of Corporate Governance have been addressed. Then, the history of corporate governance has been highlighted including the history of USA, UK, India and Nepal. This research paper also discussed in brief about the six principles of OECD on the Corporate Governance.

Introduction

At present the business is driven by the corporations. Chief Justice Marshall defined corporation as an artificial being, invisible, existing and intangible only in contemplation of the law. Corporate Governance is as old as corporations. The corporations of today’s world are replacing partnership, sole proprietor of earlier time’s corporations to maximize its profits and accumulate capital.

Most scholars believes that failure or collapse of corporations such as Enron in USA, Tesco in UK, Petrobras scandals in Brazil, Toshiba in Japan, Satyam incident in India and perhaps Volkswagen in Germany heavily contributed to the increased adoption of Good Corporate Governance practices across all sector around the world. The causes of corporate failure is due to lack of inadequate regulatory mechanism including failure of board of director, lack of information flow among the management, unethical business conduct, fraud in audits, with internal control, responsibilities of boards, unaccountability are the common problems in corporate governance. It means regulating the corporation socially, environmentally and economically responsible in order to protect the interest of stakeholder or adverse impact as a result of operational activities or reduce the loss or decision of hierarchy management.

Corporate Governance in Nepal is still at its developing stage but other developing and developed countries have updated guidelines/codes/rules on corporate governance including Asian countries like India, Pakistan, Sri-Lanka etc. Nepal’s neighboring countries have recognized the importance of corporate governance and increased transparency in the corporate sector. India has several high-level committees/commission to look at corporate governance. Securities and Exchange Board of India (SEBI) approved mandatory corporate governance listing requirements in the year 2000 and have made several amending at present. In each country, the codes have begun the process of encouraging or requiring companies to recognize the importance of good corporate governance practices.

In Nepal there are more than two thousand companies including small, medium enterprises and private unlisted companies. There are about 200 listed companies. Nepal Stock exchange is only stock exchange and Securities Board of Nepal (SEBON) to regulate the market under the Securities Act, 2006. Nepal also has separate security exchange board (SEBON) which was established in year 1993 by the government of Nepal, it is in slow progress to regulate the corporate governance.

Body

The word “Corporate Governance” was introduced for the first time by Bob Tricker in his book in 1948. He states that corporate governance is concerned with the way of corporate entities are governed, as distinct from the way businesses within those companies are managed. Corporate Governance is system in which the administrations of the corporations are control by the basis of rules, ethic, regulation and values. Simply, Corporate Governance means how the corporations are controlled. It creates the relationship among the management, control shareholder, minorities shareholder and other stakeholder. Corporate governance is defines as, private and public corporations, including laws, guidelines and acknowledged business practices, which together administer the relationship in the market economy, between corporate managers and business people (corporate insiders) on one hand and the individuals who invest in organizations on the other. It is process or structure in which business or affairs relating to company are controlled and managed. It protects the interest of stakeholder through the best management practices. It brings the interest of investor and manager in a same line for the benefit of investor. 

History of corporate governance 

• United States

In United States, the influence of corporate governance is designed as per the nature of shareholder ownership federalism policy and laws related to it. After the collapse of Enron, WorldCom, the formal legislation and guidelines was enacted by legislature. Sarbanes Oxley Act 2002 is important legislation to address the shortcomings in corporate governance for the misrepresentation of CEO and CFO in financial information amounts to criminal penalty. The most important regulatory body in USA is Securities and Exchange Commission (SEC) which was established by SEC act 1934 to overlook the functioning of primary and secondary market with giving more attention in protecting the security holder rights and control the corporate frauds.

• UK

Indeed, even while these advancements in the US blended a sound discussion in the UK, a progression of corporate scams and falls in that nation occurred in the late 1990s which stressed banks and financial specialists over their investments and led the government in UK to understand the inefficacy of the current legislation and self-guideline. Well known enterprises, for example, Polly Peck, Bank of Credit and Commerce International (BCCI), British and federation and Robert Maxwell's Mirror Group International fallen like a pack of cards. When it was understood that the current regulations and guideline were not satisfactory to control the unjustifiable practices, the Cadbury committee was set up in 1991 which present the 'code of best practices' in 1992. Companies Act 2006, UK corporate administration code 2010 manages corporate governance and limits the corporate frauds in UK.

• India

After independence the development of enactment of corporate governance and financial system in India emerged in business sector. The Companies Act 1956 and other governing laws functioning of joint stock companies that protected the investor ride made strong foundation in corporate sector. Indian economy policy became more market oriented 1991. In 1992 SEBI, Indian securities market regulator was established by legislature as a statutory body under SEBI Act 1992. The main aim of Act was to protect the interest of investors and to promote the development of and to regulate securities market in India.

In 2000 SEBI promulgated the Clause 49 of stock exchange listing agreement. Clause 49 was voluntary code of corporate governance of Indian forms which was guidelines made by Kumar Mangalam Birla committee that suggested change in listing agreement of stock exchange. Naresh Chandra Committee report on Audit and governance 2002, the department of company affairs under the ministry of finance and company affairs founder high level committee in chairmanship of Shri Naresh Chandra to examine corporate auditing and independent directors. Narayan Murthy committee report 2003 “SEBI committee on corporate governance” was established to improve corporate governance standards in India in keeping the market dynamic. 

• Nepal

The first company Act 1951 was influenced by the British company Act 1929 by which Biratnagar Jute Mills was established in 1956 which was the first joint stock company established under this Act. Later The company Act 1951 which provisioned of incorporation of company, limited liability, legal personality, separate identity, distinction between public and private company, parent and subsidiary company. 

Existing Corporate Laws

The Laws was enacted to bring dynamic changes in economic development of the country with the process of economic liberalization and to make effective management and administration of Companies.

• The Company Act, 2063

The Company Act, 2063 came into implementation on Kartik 24, 2063. It is the prevailing law of the nation. It contains 21 chapters and 188 Sections and involves practically all arrangements identifying with the objectives referenced in the preamble. It is a continuation of the previous law; accordingly, it involves practically all legal provisions of the statutes aside from expanding the measure of fine however it has made a few new arrangements in contrast with the Act of 2053. Act has tried to comprise almost all contemporary aspects of modern business. New company act 2063 was enacted with addressing the contemporary issues like corporate governance, protection of investors, independent in business, dispute settlement  related to companies, Provision of commercial bench in Supreme Court and voluntary dissolution of companies were new features added in Company Act 2063. 

• Securities market and regulator history in Nepal

In 2033 securities market started in Nepal with 6 public corporations with 100 public shareholders, about 4000 share holders throughout the country. At the very beginning the development of securities market was very challenging because of inadequate rules and regulations to regulate securities market, lack of awareness in investment in buying and selling of securities, majority of banking and financial Institutions, insurance companies and corporations were state owned. The Nepal Rastra Bank was established as central bank in 1957. Central bank charter was aimed to mobilize capital to encourage industrial activities which started with the establishment of the Nepal Industrial Development Corporation (NIDC) in 1959 in addition to facilitate domestic borrowing, the Public Debt Act was promulgated in 1961 paving the government to issue treasury bills and bonds. The promulgation of Former Board Member, SEBON under the article 173 of the Company Act, 1964 expanded the process of raising capital for industrial enterprises. However, the securities market did not flourished. Following the will of state to initiate securities market ‘Security Marketing Centre’ (SMC) on1976 was started with the direct initiative of the government and the central Bank. Company Act was not able to address issues in regulating securities market could not gain momentum for a long time.

The government enacted securities transaction act 2040 which came into force in 2041B.S. The political changes and Nepal took liberalization economic policy that increased economic activities, the necessity of monitoring securities market was realized which resulted in amendment of securities transaction act 2040B.S. Securities transaction regulation 2050 was published in Nepal Gazette which enabled the enforcement of the Act and securities board was established. In 2062B.S Ordinances were passed for the act that gave securities board as autonomous body, semi judicial body and legislative body to make necessary rules and regulations in monitoring securities market. 

Overview of Nepalese Capital Market

Capital Market of Nepal entered into a new era in 1993 with the inception of Securities Board of Nepal (SEBON), an apex regulator of securities market. Since 2050-2074, SEBON has been able to introducing basic legal and market infrastructures to operate Nepal's capital market smoothly. SEBON is established and being operated under the Securities Related Act 2063. SEBON Board comprises of various ministries, business community & independent professionals but it has not received the independent institutional status as most of critical aspects of SEBON hits back to MoF for final approval even after due approval by SEBON's Board where said ministry has representation on the same Board. This has resulted in delays for enactment of new acts/regulations or for amendment of existing ones which otherwise could have been expedited in line with market requirements. SEBON over the period has been enhancing its institutional capacity to meet the market requirements & challenges. However, its pace of growth has been slow as compared to the growth of market. Major shift required for overall development of capital market is an independent SEBON with strong regulatory & supervisory wings. Certain level of investment in physical infrastructure is also the need of hour. This will enhance investor's confidence towards the sector for larger participation in days ahead. The financial market of Nepal in contrast has matured more strongly as compared to the capital market.

NEPSE, a government entity and the only stock exchange of the country was incepted in 1993 & opened its floor for trading in 1994. The open outcry system of trading which was since inception has been replaced by Wide Area Network (WAN) & off late the brokers has also been expanding their presence out of capital through Remote Work Stations (RWS). NEPSE has also been exploring replacing the existing trading software to online trading platform, which if formalized is expected to revolutionalize the reach of the investors for active trade & settlement as in that context branchless reach will be the core focus rather than physical branching out of broker's network. Further, the GoN in its annual budget speech has been trying to privatize NEPSE to enhance its professionalism since last few years but it has failed to materialize. In addition, certain improvements in existing index have also been felt necessary but no changes have been initiated in last couple of years. In international context stock exchanges explores the need of the market & develops products/services by lobbying with regulators to meet the market demand. However, NEPSE has a long way to go to reach that stature, which is required for the development of the market. 

Some of the major stakeholders of the capital market are mentioned as under:

Ministry of Finance (MoF), Government of Nepal (GoN), Nepal Stock Exchange Ltd. (NEPSE), CDS & Clearing Ltd. (CDSC), Merchant Banks (MBs), Brokers, Depository Participants (DPs).

OECD Principles on Corporate Governance

The principles developed by the OECD is internationally recognizes. On May 1999, twenty nine member countries constituted the Organization for Economic Cooperation and Development (OECD). The OECD principles are declared as the basic minimum standard to be observed by the international business organization for the common good of wider interest, culture and practices.

Six Principles of OECD on the Corporate Governance

Six Principles of Good Corporate Governance developed by the OECD focuses on-

• Ensuring the basis for effective Corporate Governance
• Rights of shareholders and key ownership functions
• Equitable treatment of shareholders/ owners
• Role of Stakeholders in Corporate Governance
• Disclosure and Transparency of transaction
• Responsibilities of the Board of Directors.

Conclusion

Corporate Governance refers to the system to make Directors more accountable for their policies and actions towards the shareholders or minority stakeholders. It allows companies to grow diversify and do everything necessary to increase corporation sustainability and value. Though, Corporate Governance is not a new term for developed countries but it is the new term in Nepalese corporate sector. Securities Board (SEBON) is moving forward for the development, making the listing companies more responsible, transparent and accountable. The growing business scams in business sectors in Nepal and world great corporate collapses of Enron, WorldCom, Xerox has given a sense of importance of corporate governance in Nepal. In order to discourage these kinds of scams, various regulatory framework of Nepal regulates the companies like foreign investment laws, Companies Law, Securities law, labor laws and other acts, rules and regulations. Company law of Nepal has given the importance on the corporate governance.

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