Economy & Policy

Foreign Exachange Rate
(As fixed by Nepal Rastra Bank)

Source: Information published by Nepal Rastra Bank

Bullion Prices (Kathmandu)

In Rupees

Source: Nepal Bullion Traders Association

Demand of a Better Company Act

The three-year-old Company Act needs a number of amendments, say experts and the business community

It was only three years ago that the existing Company Act was enacted. And there have already been talks of amending it.

According to FNCCI, the apex body of the country’s business community, the required amendments are to encourage companies to go to the public to raise capital. Legal experts also suggest that there should be provisions for setting up non-profit companies as well. In a discussion program organized by Legal Research and Development Forum (Freedeal) early January, Bharat Raj Uprety, a lawyer, argued that the time has already come for Nepal to allow establishment of non-profit companies. The existing Act has no such provisions.

One of the areas requiring immediate amendment according to both Uprety and FNCCI, is to refine the existing provisions so as to develop Company Board as an effective body to resolve disputes. Uprety argues that the right to appeal should be provided against the decisions of both the Company Board as well as the Company Registrar.

Some of the points raised by the lawyer and FNCCI are related with encouraging companies to go to the public to raise capital. While FNCCI suggests that for this the interests of the promoters have to be protected, Uprety says the existing provisions for protecting the interests of the minority shareholders be refined and expanded. At present, there is a tendency among the companies going public to float only a very small portion of their total capital, say 30%, retaining the rest with the promoters. FNCCI suggests that the promoters should, as long as they do not reduce their initial capital in the company, be permitted to hold control over the management of the company. "Without such arrangement there will be no incentive for private companies to convert into a public one", says FNCCI pointing out that under existing provisions, if ‘outsiders’ become majority shareholders, the outsiders will have their say in the company and the objectives of the company will not be fulfilled. However, it is also doubted whether such a provision would be in line with the WTO arrangement under which takeover bids are to be allowed freely.

Another suggestion is to fix the face value of shares at Rs. 10 per share instead of Rs. 100 as fixed by the existing Act. It is hoped that with such a provision more people would be able to afford to buy shares in a company. But, FNCCI also wants the minimum number of shares to be bought and sold to be fixed at one hundred units.

Article 53 of the existing Act needs total revamping, say both the lawyer and FNCCI. Only those who have access to inside information on company matters, such as directors, chief of finance department and the company secretary, should be restricted from buying and selling shares of the company and such restrictions should be applicable only on particular situations, says FNCCI. Uprety suggests to have no such restriction at all, but to have a provision to disclose in the annual report the details of such transactions made by specified persons who are closely involved in the company management.

FNCCI has also suggested that there should be measures to enhance the quality of the Board of Directors. For this, it is suggested to have a screening procedure before anyone is allowed to stand for election to the post of a director in a company. It is also suggested to fix a minimum academic qualification for Board Members. Similarly, to broad-base the Board, it is suggested to have an arrangement that one third of Board members are from the promoters as non-retiring directors, one third independent directors and one third elected from among shareholders.

According to other suggestions, the board chairman should be non-executive, a director should retire at the age of 70, a sick company should be defined and suitable cure provided for, a company registrar should be arranged and the compulsion to buy shares to become a board director should be removed.

A for Average Performance Rating of HMG

Evaluting the performance of the present government, an ADB mission slashes down annual lending amount to Nepal

Whether it felt the pang or not, the nine-month old Bhattarai government received a rebuke from a major donor agency early March 2000 when the government had just started facing the winter session of parliament. The ADB country programming mission that visited Nepal from February 22 to March 2 rated the performance of the government this fiscal year only an ‘average’ and agreed for a level of annual assistance for the years 2001 - 2003 at US$ 80 million only. The figure is US$ 12 million lower than the average annual disbursement from the Bank over the past three years.

During the 10-days stay in Nepal, the ADB mission led by Marshuk Ali Shah, a former ADB Resident Representative in Nepal, met with government officials and other donors as well as representatives of various NGO’s and the private sector for an exchange of views. The outcome was an agreement with HMG that ADB will finance 11 projects totaling US$ 295 million during the three years. But the average annual allocation of assistance will be just around US$ 80 million. Over the last three years, ADB’s annual disbursement of assistance to Nepal had averaged US$ 92 million annually, according to a press release from ADB Resident Mission here.

The figure of US$ 80 million is however only an indicative planning figure, according to ADB. "The actual lending level will depend on Nepal’s achievements in key performance areas and also in meeting criteria set for sector involvement", says the press release. Five areas have been identified and performance standards established for further monitoring and evaluation of Nepal’s achievements. The identified areas include human development, fiscal performance, civil service reform, governance and portfolio development. The detailed performance indicators are being developed jointly by ADB and HMG, and they are close to finalization, it is said.

ADB’s Country Operating Strategy for Nepal adopted in July 1999, has stated, among others, that 20% of government spending has to be in human development, domestic fiscal revenue has to improve to 11% of GDP and beyond, an action plan for civil service reform should be adopted and implemented and international accounting and auditing firms should be allowed to practice in Nepal

Though the possibility of increasing the aid flow in the coming days is still there, because ‘a formal assessment of the performance is to be made late later year’, as ADB has stated, the chances of the improvement in the performance standard are bleak if the expectations of ADB officials are any indications. According to ADB’s Resident Representative in Nepal, Richard Vokes, the issues that concerned donor community a year ago still remain unchanged.

In line with ADB’s new Poverty Reduction strategy approved in November 1999 and its country operating strategy for Nepal, 45% of ADB lending for Nepal during the coming three years is to be for projects that would directly address poverty reduction. Accordingly, such lending is to be primarily in social infrastructure and agriculture sector.

Donor Rebukes Privatization

The claim of the Finance Ministry that privatization has been successful in Nepal is contradicted by another report on the same subject from a DFID study. A tale of two reports

Amid controversy over the performance of privatized units in Nepal, Department for International Development (DFID), a major donor for implementing privatization in Nepal, decided to make its own independent review of privatization policy. Privatization controversy was triggered when on December 1, last year, Adam Smith Institute (ASI), a British consultants at the Privatization Cell, Ministry of Finance published a glossy picture on the post privatization performance of the privatized units. The report entitled "Monitoring of Privatized Enterprises: A Report on Performance of Privatized Enterprises" was heavily criticized, particularly, by the trade unions for its, what they have called, "misleading facts and figures". Sponsored by the ASI and prepared by the Privatization Cell, the report has presented Nepal’s privatization as a success story. Coincidentally, the report was published amidst a heated controversy over the privatization of Butwal Power Company and Nepal Tea Development Corporation.

"Public perception (of privatization) is far from positive. Although there is broad consensus for privatization as a policy, there is criticism relating to implementation. The following concerns were expressed: past privatization transactions have been unsuccessful, there is non transparency of accountability of process, there are irregularities; there is no accountability in the utilization of proceeds; the interests of workers have not been protected."

"Protracted decision making and a lack of clear authority contribute to delay , in trun, undermining confidence in the process. Potential investors become less inclined to participate and enterprises suffer from uncertainty about their future status."

Picked up from the Executive Summary of the report, the first of the statements is totally different from what the earlier report had stated, while the point of the second statement was not analysed in the earlier study. The points of the third and fourth statement too were mentioned, though only passingly, in the previous study. However, the new report has indicated that privatization has not been a "reassuring success" that the Finance Ministry had claimed issuing its report in Decmber. Not only the DFID study results contradict with ASI findings, at places it even went to the extent of rebuking ASI. As for example, with regards to ASI proposal to amend Privatization Act, the consultants write, "it is the opinion of the review team that the re-enactment of the legislation would provide even more delays." (page 9). Similarly, the report says, "A study by the Cell states that most of the privatized enterprises are doing well although the individual analysis of those enterprises demonstrates that almost every enterprise is experiencing financial difficulty."

The report also deals more elaborately on the issues of employee retrenchment and job security after privatization. With contradictory findings on privatization, it is interesting to see what will be the future course of action for DFID, which had appointed ASI to advise HMG in executing privatization program. Will it stop funding Nepal’s privatization program? Or will it replace ASI by some other institute? Since its arrival ASI has not been able to privatize a single unit. The political uncertainty of the period of their work here is blamed for the failure.

Business Age Correspondent

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