Upreti: Still busy in drafting new Companies Act.
After
about two years of marathon consultations, a new Companies Act is
drafted, but despite hope for its easy passage in the coming summer
session of parliament, there also are doubts. As the draft Act departs
significantly from the existing one in a number of respects, the traditional
mindset of the bureaucracy may resist the change. Further, the voluminous
English draft (l55 sections against 144 in the existing one) is still
being refined by adding some provisions, and is yet to be translated
into Nepali. Similarly, some other relevant acts needed for effective
implementation of the Companies Act are still to be finalized. And
as to the business community's reactions, its leaders say they have
not studied the draft as yet.
Among the major reasons for the fear of bureaucratic
resistance are in the underlying principle of the draft. As Bharat
Upreti, a corporate lawyer and a member of the team that prepared
the draft, says, the bureaucracy may not easily digest the idea of
giving total freedom to the companies on a number of matters that
the existing Act has placed on the discretion of the authorities.
This may be a welcome development for the business
community. But, according to Upreti, the draft Act also has tried
to make stronger regulations, particularly by way of requirements
of disclosure, which may not be so welcome to the country's private
sector that still prefers to keep its business information strictly
private. Besides, the draft does not incorporate some suggestions
that FNCCI made one year ago.
One of the major principles adopted in the draft
Act is that of making the government a facilitator rather than controller
of companies. Those aspects needed to be controlled are better kept
in the law related with the regulatory body concerned, says Upreti
and notes that the draft Companies Act contains very few provisions
relating to controlling functions, such as issue of shares or debentures.
Though the draft Act requires (as its predecessor does) the companies
to publish a prospectus before asking the general public for subscription
to shares or other instruments, it is mostly silent on the details
of what the prospectus should look like. The existing Companies Act
requires the company to get permission from the Company Registrar
about its prospectus before publishing it, while the Securities Board
Act requires that such permission should be received from the Board.
Thus, there is unnecessary duplication of responsibility and it makes
a facilitator body (Company Registrar) to work as a regulator for
which there already exists a separate body (Securities Board) . The
draft Act will remove such duplicity, hopes Upreti.
He also points out that the existing Companies Act,
as any other law in Nepal, has not been effective to address the real
issues while posing unnecessary hurdles in a smooth flow of business.
He gives example of companies (e.g. Nimrod Pharmaceuticals), the promoters
of which collected money as share capital from the general people
and absconded with the proceeds leaving the gullible investors high
and dry. Thus, there is obviously something wrong somewhere in the
existing Act, he says, giving yet another example that while public
limited companies are running at perpetual losses, private companies
owned by the same promoters or directors are running profitably. This
may be enough to show the failure of the controlling mechanism existing.
Therefore, another underlying principle followed
in drafting the new companies Act is maximum disclosure so as to ensure
transparency and good corporate governance. Upreti says, the draft
requires such disclosures, among others, as the salary paid to the
directors and high ranking officers of the company. Such information
are not required to be disclosed at all in the annual reports as per
the existing laws.
Unlike the existing Act which requires the face value
of shares to be issued by a company to be at Rs. 100, no more no less,
the new draft has left it to the discretion of the company itself.
"The promoters should be free to fix it in the articles of their
company", says Upreti reminding that, according to the practice
followed everywhere else, the promoters are free to select the methods
on how to raise the capital required for their proposed business because
it is an entrepreneurial or management issue that is best tackled
by the management itself.
"If we have to attract foreign investment, we
have to make our business laws compatible to the international norms
and practices so that when a foreign investor reads our laws for the
first time he does not get shocked to find strange provisions",
says Upreti explaining another underlying principle of the draft,
which is prepared under Corporate and Financial Governance Project
which has technical assistance from Asian Development Bank (ADB).
Accordingly, the draft Act has tried to make the provisions compatible
to current international practices.
Though enacted only four years ago, the current Companies
Act is not able to address the latest developments in the practice
of corporate governance. One such practice is that of a company buying
its own shares for a number of reasons. For example, it may like to
do so to ward off hostile take-over bids. Similarly, companies may
face themselves in situations when business prudence requires them
to sell their shares at discounts. That was being guided by the principle
of capital conservation, and thus it was not entirely wrong, opines
Upreti. "But the latest developments have modified the principle
allowing more flexibility to the companies". Accordingly, the
draft proposes to allow companies to buy their own shares and also
to sell shares in discount subject to the fulfillment of certain conditionalities.
Another new addition in the draft Companies Act is
provision for registration of foreign companies. Such a provision
was there in Nepal's Companies Act before the existing one was enacted
in 1997. The idea that led to the removal of the provision in 1997
was to let foreigners to operate here only as a local company. But
that was not practical, and had that provision been enforced strictly,
the foreign airlines and foreign contractors operating in Nepal would
have to form a local Nepali company to sell tickets from here or to
take contracts for projects here. Hence the necessity to have a provision
under which foreign companies can simply register themselves as foreign
companies and do the business. This way, they easily come into the
Nepali tax system so that the government would not need to devise
roundabout methods to collect taxes from such companies. In Upreti's
view, such companies are quite eager to register themselves in Nepal
because that will make it easier for them to claim the facilities
prescribed by the local laws.
Pointing out to the on-going practice of tax officers
not recognizing audited reports while assessing business taxes, Upreti
claims, the proposed Act is to address this anomaly as well. For this,
the Act is more elaborate about the requirements of auditor's report
so that auditors will not have to face pressures to cook up the information
before putting it on the report, thus making the report more reliable
and the tax officers finding it difficult to have a pretext to deny
it.
According to Upreti, another important reform is
in the provisions meant to check insider dealing. The section 53 of
existing Act concerning such dealings is impractical to enforce and
it restricts the volume of share trading. Relatives of a company's
key persons as per the definition of the section 53 are prohibited
from buying or selling shares of the company and the definition is
so extensive as to include among the relatives even the sons and daughter
of ones sisters, who may be residing so apart that the buyers of shares
from these persons may not be able to imagine such a relationship.
In case of such sales, the existing Act provides for seizure of securities
so traded. And this is against the principle, says Upreti. According
to him, the practice internationally is to punish the guilty but not
to invalidate the transaction or to seize the securities. "Yes,
there should be a lock-in period for the promoters and they should
also be punished if they indulge in insider trading. But it is not
possible for anyone while buying shares of a company to verify the
relation of the seller with the existing key persons of the company
as no such things are recorded in the share certificates except the
name of the father of the shareholder", says Upreti. Therefore,
the proposed draft has extensively rewritten the section removing
the impractical provision and incorporating a new own that requires
such key persons of the company to disclose the relevant information.
"In fact, this is not something that should come under companies
Act. In Britain it is placed under a separate statute", he adds.
The team has not put provisions about insolvency
in the draft as a separate Act on insolvency is being drafted by another
team under the same ADB assisted project. But Upreti says, provisions
for voluntary liquidation and mergers are being added to the draft
Companies Act. Still, a number of other ideas are also coming in and,
therefore, the draft Act is likely to have yet more provisions, informs
Upreti. One such idea is about having non-interested or independent
directors (i.e. who have no shareholding in the company) and this
is already included in the draft. But Upreti does not agree to the
demand of some business captains (as FNCCI also had demanded last
year), to have a provision for non-retiring directors. The draft Act
has made it optional to the promoters who can put such arrangement
in the Articles. In privately-held companies the directors are automatically
non-retiring in type, but in publicly held ones, it should naturally
depend on the shareholding structure and the Articles, Upreti points
out. As for the suggestion to restrict chairman from being involved
in executive duties, Upreti personally feels it better to have an
executive chairman. "What is important is transparency, but with
freedom of work for the benefit of shareholders." Regarding FNCCI's
suggestion to fix academic qualification and experience required to
become director, the draft has no such provisions specified.
