Affecting Capital Market

Incomplete laws coupled with arbitrary interpretations are the root causes for the stunted growth of capital market in Nepal, argues Jagdish Agrawal citing some specific examples

Neither the Companies Act nor the Securities Exchange Act do provide for some of the basic requirements regarding the capital market. They lack provisions for book closure, fraction shares in case of right and/or bonus issue, distribution of dividends and about things to be taken care of at the time of fresh public issue. Similarly, signature verification or identification of genuine seller, proxy, qualifications of a public director, criteria for company listing in the stock exchange and utilization of share premium and capital reserve, are some of the other areas about which the laws are either silent or incomplete.

The next problem is related to the interpretation of the provisions of the Acts and rules and also in application of a specific section of a law to a non-related case. I am putting forward certain examples of such practices. Let us first see, who is the competent authority to make such an interpretation.

Section 15 of the Industrial Enterprises Act, 2049, says that income tax is not chargeable on dividends received from any industrial unit. Due to certain confusing words used in the section, it is however unclear as to who is the real beneficiary of the provision - industrial units or the shareholders? Section 42 (2) of Income Tax Act, 2031, says that the provisions of Industrial Enterprise Act prevail over the provisions of Income Tax Act.

In a recent case of Nepal Lever Ltd., the Director General (DG) of the Department of Tax (DoT) gave an interpretation that the beneficiaries of the provision are the industrialists and industrial units, not the common people. Here the question arises whether the Director General of the Department of Tax is competent authority to interprete the provisions of Industrial Enterprise Act. In my personal opinion, the competent authority in such a case involving the Industrial Enterprise Act should logically be either the Ministry of Industry or the Department of Industry, not others, except of course, the court of law.

Following this interpretation from the DG of the DoT, Nepal Lever deducted tax from the dividend it paid to its shareholders. Necon Air also faced a similar situation. However, it did not deduct tax from the dividend it paid to its shareholders.

Section 36 of Income Tax Act, 2031 and Section 26 of the Annexure 6 of Finance Act, 2056 deal with the provisions related to tax deduction at source. The Income Tax Act says that tax is to be deducted from the amount of the payment that is an income of the recipient. The Finance Act says that tax shall be deducted from rent on building and land @ 15% of the amount paid. Thus both Acts say that the deduction shall be from the amount of payment made, not from any other amount. But Section 9 of Income Tax Act that deals with the procedure to assess the rental income has created confusion in this regard. Sub-section (3A) of the same section of the Act has given power to the government to fix notional rent for property lying at specific areas and assess the rental income accordingly, irrespective of actual payment of rent made or received. And there is no mention made about the liability of the rent payer to deduct tax on the notional rent. As a result, the rent payer deducts tax only on the actual amount paid. Instead of making the provisions clear, the income tax authorities are compelling the taxpayers to pay 15% tax on the notional rent, not on the actual payment received. This is the clear case of application of a specific section of a law to an unrelated case.

Now let us turn to the laws related more directly to the capital market.

The second amendment in Security Exchange Act has withdrawn some most important powers of the Stock Exchange and these are all shifted now to the Security Board. Section 18 of the Act says that any organized institution desirous to deal in securities has to be registered with the Security Board from where a certificate has to be received. It means the Security Board is the first as well as the final authority of primary licensing. Section 18 and 19 of the law have fixed certain qualifications for security dealers to receive the registration certificate. But nowhere does it require them to be a member of a stock exchange. The other sections give powers to Security Board to cancel the certificates, to impose penalties on the certificate holders, to seek information from the dealers, to compel them to keep accounts in a prescribed manner, to make them keep security against transactions carried out, to make them pay the required fees etc. Section 16 (B) specifies that the stock exchange should give membership to the security dealers under the provisions of this Act. Similarly, sub-section 2 of the same section has given certain powers to stock exchange, such as to frame by-laws with regard to membership, kinds of membership, cancellation of membership, fees and deposits. Accordingly, Nepal Stock Exchange has framed by-laws and in doing so has taken all the powers that are specifically given to the Security Board by the Act. Exercising these powers, the stock exchange has canceled the membership of a broker company, and the matter is now under litigation.

With regard to appointment of directors of a bank, the section 5 (3) of The Commercial Bank Act says that the directors are appointed by a general meeting of the shareholders of the bank. It means that they are appointed by a majority vote. The election procedure is specified in Companies Act. Again the sub-section (4) and (4 A) have given the Government and Nepal Rastra Bank a right to nominate certain number of directors in any bank. Apart from these, no other provisions are there to give power to anybody else to nominate directors in a bank. But the banks have allowed their foreign partners as well as Nepali promoters to nominate certain number of directors. This power is given by Articles of Association of the banks, which are clearly against the provisions of the Companies Act and Commercial Bank Act.

These are but only some examples of misinterpretation of the law.

Let us see what this quotation says: "Written laws, are like spider’s webs, and will, like them, only entangle and hold the poor and weak, while the rich and powerful will easily break through them." (A Nacharsis to Solon). And this one: " Laws grind the poor, and rich men rule the law. (Goldsmith).

Similar is the situation in Nepal.

The court fees, security deposits, remuneration to the advocates and similar other expenses as well as wastage of time without bearing any fruit, are the situations that compel people to avoid court case. I think, for an amount of upto Rs. 10,000 it is worthless to file a lawsuit. Even if you win, the costs are far higher than what you receive at the end.

I, therefore, have certain suggestions to improve the legal situation in Nepal:

While making or amending any law, the major objectives of the enactment should be put on record. Every section of the Act and rules should be explained carefully and where needed, examples should be given to avoid any misunderstanding. Such objectives and examples also should be passed by parliament thus giving them the same weight as that of the articles of the Act. And these explanations and examples should be published along with the Act making them integral part of the Act.

Certain courts should be provided with powers to move a case (on their own initiative or on the basis of newspaper report or a letter) against any individual, the government authority, or a company that uses a law in a wrong manner, wrongly interprets any section of a law, works against the public policy or mishandles a public property.

And also, it should be made binding on the lower courts and authorities to follow a superior court’s rulings if the cases are similar.

Lastly, courts and other decision - taking authorities should be given a fixed time to finalize their decisions.