An investor is a person who makes an investment on an entity with an expectation of receiving a financial return. Shareholders are those who invest in securities market precisely, on the shares. While engaging in securities transactions by issuing, purchasing, selling or exchanging of securities and other similar acts, investors ought to be protected by laws of the country.
How are investors legally protected in Nepal?
Protection under Securities Act, 2063
The Securities Act, 2063 envisions to protect the interests of the investors in securities, by developing the capital market to mobilize necessary capital for the economic development of the country. The protection it grants for investors investing in Nepal are:
a. Protection against insider dealing
Insider dealing is dealing in securities or causing any other person to deal in securities on the basis of any insider information or notice that are unpublished. Insider dealing is treated as criminal offense punishable by Law. Since insider dealing directly affects the investors investing in securities market, the act has made insider dealing punishable with a fine equal to the amount in controversy or with imprisonment for a term not exceeding one year or with both.
b. Protection against False trading
False trading takes place in two major conditions:
a. The actual ownership is not changed, even though the purchase or sale of securities is done directly or indirectly.
b. An offer is made to purchase or sell securities on the same price upon knowing the price offered by another for sale or purchase.
False trading may cause increase, decrease or frequent change in the price of securities. Such trading is punishable with a fine of fifty thousand rupees to one hundred thousand rupees or with imprisonment for a term not exceeding one year.
c. Protection against misleading information
Making or publishing misleading or fake statements, hiding any fact or information with malafide intention, is punishable with a fine of one hundred thousand rupees to three hundred thousand rupees or with imprisonment for a term not exceeding two years. No one shall transact on such securities by fraud or misrepresentation.
d. Protection against Fraudulent transactions
Making any technology, planning or committing any act to defraud others, getting any person to do any act by misrepresenting intending to make them purchase, sell or exchange securities is punishable with a fine of one hundred thousand rupees to three hundred thousand rupees or with imprisonment for a term not exceeding two years.
e. Protection of interest of investors
Stock Exchange Board of Nepal (SEBON), the apex regulator of share market, can even refuse to issue a license to a body corporate to carry on a stock exchange if it does not appear just and appropriate for the protection of investors’ interest. The board can make such arrangements to prevent insider trading or any other offense relating to securities transactions.
If anyone has sustained any loss or damage by the reason of effect in the price of securities purchased or sold by any one as a result of the commission of act contrary to interest of investors, such loss and damage may also be recovered or realized from the offender of such offense.
Protection under Company Act, 2006
a. Investors’ protection fund
In an attempt to protect the investors from losses arising due to the error on the part of other stakeholders, Investors’ protection fund is established under Company Act, 2006. If any investor doesn’t present a claim to have refunded the amount invested in the shares of a company even within five years, such amount shall be credited in investor protection fund. However, prior to that, 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. And that amount shall be used 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 company. It prevents the investors from losing their access to over their share ownership and amount.
b. Protection against discriminatory allotment of primary share
Companies are obliged to allot the shares within a maximum period of three months after the date of closure of share issue. If the allotment of shares cannot be made even within the time along with the grace period of 7 days, the companies shall refund the amount of share along with interest. If the funds are insufficient, the shortfall amount shall be borne by the promoters and directors personally.
Similarly, if the allotment of shares is made discriminatorily or with intent to cause any loss or damage to any investor, they can file a petition, setting out the reasons for the same, in the court on that matter. The court then may issue an order for realization of compensation for such loss or damage as well as reasonable expenses incurred in the legal action from such officer personally.
Protection under Commodities Exchange Market Act 2074
Sec 17 of Commodities Exchange Market Act 2074 provides that a Commodities Exchange Market has to establish an Investor Protection fund to protect the investors from potential systematic risks. The board to regulate such market can issue directions to body corporate for the protection of investors and if such body makes any damage or loss to investors acting against the Law, it is made liable to bear penalty from 1 million rupees to 5 million rupees.
Special protection of foreign investors
Foreign Investment and Technology Transfer Act, 2019
In addition to the above mentioned protection, foreign investors are granted with some special rights and protection to promote their interest and protect their existence.
1. Rights relating to national treatment
According to World Trade Organization, national treatment is the principle of giving others the same treatment as one’s own nationals. For the purpose of foreign investment, it implies that foreign investments shall be treated no less favorably than the same or similar investment made by Nepalese citizens in respect of in respect of the terms applicable to the management, maintenance, use, transfer and sale of such investment. The protection may include protection relating to freedom in determination of price of goods and services, freedom to repatriate profit, investment, pay interest of, and repay the principal of, a loan.
2. Protection against nationalization and expropriation
The law has granted industry with foreign investors with right against nationalization wherein the government of Nepal has the duty not to transfer their ownership to the state for title/ possession or control. Similarly, except for the public purpose, no industry with foreign investment can be expropriated directly or indirectly. If it is required to expropriate it for the public purpose, due process referred to in the prevailing law must be fulfilled before such expropriation.
In addition to national instruments, Nepal has signed Bilateral Investment Promotion and Protection Agreement with Finland, India, Germany, Mauritius, United Kingdom, and France to establish specific rights and obligations to meet the primary purpose of protecting foreign investments against discriminatory measures by the host state. For instance, the BIPP Agreement signed with India in 2011 ensures protection and promotion of investments, guarantees rights of foreign investors, and ensures them fair and equitable treatment, security, and dispute resolution mechanisms.
Accessing values, historical data, future predictions and existing legal and judicial protection, the level and strength of investor protection in Nepal is rated 5.8 out of 10 by World Bank collection of development indicators which implies that the legal protection of shareholders in Nepal is comparatively inadequate. So, the legislature and concerned body shall now have a consciousness on inadequacy and address the need of the shareholders and reflect the same in the enactments.