One of the most important compliance requirements after you incorporate a company in Nepal is:
✔Getting a share register certified from the Office of Company Registrar (OCR)!
So, after incorporation here is what the company needs to do:
1. Enter into lease agreement for establishing its registered office
2. Register its business at ward office
3. Obtain tax registration
4. Open bank account
5. Notify the OCR about the establishment of the registered office, appointment of the auditor and if promoters have deposited their committed capital, allocate shares and prepare a share register.
In any case, the company is required to prepare and certify its share register within the financial year in which the company is registered. Section 46 of the Company Act 2063 requires companies in Nepal to prepare and keep a shareholders register in their registered office. One major aspect of certifying a shareholders register is that the OCR recognizes only the actual amount paid by the promoters/shareholders to the company for the shares subscribed.
A share register or the register of shareholders is an important document certified by the OCR that authenticates the investment made by the shareholders in a company and could be accepted as a net worth certificate for the shareholders concerned.
And there has been a lot of confusion regarding how the share register is updated and certified. The legal loopholes were used to certify fake and manipulated share registers showing inflated share investments for various purposes. The situation in some cases were such that the certified share register could not be trusted on their face value because one could easily get a shareholder updated and certified by depositing, withdrawing and re-depositing the same amount multiple times showing that the shareholders have deposited their share capital while in reality, the company did not receive the investment in full.
Take this for example:
Mr. A & B started a company committing Rs. 50 lakh each as share investment. Each of them deposited Rs. 5 lakh each and the same Rs. 5 lakh would be withdrawn and deposited again and again until the bank statement showed the total deposited amount to be Rs. 50 lakh each from both the shareholders. Based on same, the company could prepare and get the share register showing that both Mr. A & B have fully paid up their share capital to the company where in fact the company received only Rs. 10 lakhs in total.
The share register showing Rs. 1 crore fully paid up could be misutilized in so many ways including showing the bank that the equity investment of Rs. 1 crore was fully made and accordingly the higher loan could be withdrawn and utilized by the company. The shareholders Mr. A & B will have a net worth of Rs. 50 lakh each by just investing Rs. 5 lakh and that net worth itself could be misrepresented for a whole lot of fraudulent transactions.
The above instances are clearly illegal but widely practiced. Section 62 of the Company Act specifically prohibits companies in Nepal to provide loans or financial assistance to anyone to purchase its own shares but the above instance of re-routing the money is nothing but lending by the company to its shareholders to buy its own shares. Such an act is a punishable offense as per Section 160 of the Company Act carrying a fine up to Rs. 50,000 or imprisonment up to 2 years or both.
Hence the OCR has come up with some clarifications to plug these loopholes. Here is an overview of the notice in English:
Office of the Company Registrar, Tripureshwor
Notice Issued in relation to share register and evidence for paid up capital
Purpose: To increase the reliability of capital investment in any company at different stages.
Based on the collective request of the meeting of the office's senior officers dated 2080/05/10 to the registrar to amend the existing procedures and formulate a new working framework when accepting the records of activities related to financial transactions (such as initial share distribution, share price, capital increase, share purchase and transfer of rights by deed of company administration) in the company, following instructions have been issued and published for the information of all concerned through public notice to be followed by all office employees, company directors, company secretaries, company and trust service providers and other stakeholders.
1. The shareholder should pay the amount for shares to the company’s account through the banking system.
2. Since the law allows the payment transactions below Rs. 10 lakhs to be done in cash, for sale and purchase of shares of a company involving natural persons, cash transactions for such transactions below Rs. 10 lakh will not require bank statement as evidence of payment. However, where one of the parties involved is a company, a bank statement is required.
3. Companies established after 2080/05/18 must allocate shares based on full or partial payment of the amount against shares subscribed by the promoters/shareholders and accordingly prepare and get their share register certified from the OCR before they convene their first annual general meeting. Only then the annual update and other company administration related work should be done.
4. In case of companies whose audited financial statements after financial year 2073/74 specifies the paid up capital but a share register has not been obtained for the same, any company administration related work will be done after the certification of the share register after submission of proof of payment of such paid up capital.
5. A shareholder is required to deposit the amount against the subscribed shares after the date of share call and before the share allocation is made by the company. Accordingly the statement of deposit between such dates shall be accepted as the evidence of payment.
6. The shareholder must submit a certified statement with the seal of the relevant bank in the bank statement while submitting the evidence of payment for shares which the promoter has subscribed at the time of incorporation of the company or for making payment to the seller of shares in case of share sale/purchase. However, a system generated statement will be accepted as payment evidence if the transaction is between family members as per the relationship certificate.
7. When depositing the share call money in the bank account of the related company, it should be deposited in the name of the concerned shareholder. But if such a deposit is made by any relative of the shareholder then a document showing the relationship of the depositor with the shareholder and a declaration of the depositor that the amount has been deposited on behalf of the shareholder should also be submitted.
8. While certifying the share register of a company where the amount is repeatedly deposited in the company's bank account and is withdrawn from the account in a short period of time, a thorough study of such transactions should be made about such withdrawals and utilization of money (e.g. land purchase, building construction, equipment/plant & machinery purchase, license fee, or investment in other company) based on the nature of the company, duration of deposit of amount and withdrawal), commitment of shareholders for investment etc. If required, the deciding authority using their own wisdom and discretion may accept such payment evidence after review of the documents submitted in relation to the transactions like transfer/registration deed, engineering bills, auditor’s report, further clarification from the board of directors, invoices/receipts, declaration letters and in case of submission after the end of a financial year, whether such transactions are duly reflected as loans/advances in the audited financial statements.
Note: Earlier the same amount was routed and re-routed to show that the shareholders have paid up their committed amount to the company just to have the share register certified when the amount was actually not deposited in full.
9. In case of deposit of share call money in the company’s overdraft account, the bank statement or voucher showing the deposit of such amount will be only be accepted as the evidence of payment only if the same is certified by the bank in writing i.e. the amount deposited by the shareholder is against the share subscribed.
10. When transferring ownership of shares through a gift deed, the following must be observed:
- A recommendation of the concerned local authority specifying that the transferor and transferee are the members of the same household or a relationship certificate disclosing the same is mandatory;
- Only the senior member of a household can gift shares to the junior members;
- The name of the share issuing company, the number of shares and the price per share must be disclosed on the gift deed;
- This provision shall not apply to family members whose family relationship has been established through proof of kinship but partition has already been done;
- In case of transactions related to this provision for which the decision of the company has already been done but the update and certificate is yet to be done then such certification shall be done as per earlier provisions if an application is submitted within 45 days of the issuance of this notice.
11. If the decision-making authority has any doubt, suspicion or distrust regarding the paid up amount, then the authority may make decisions after review of further documents he/she may ask for from the related persons, bank or company.
12. At the time of liquidation of the company as per section 126 of the Companies Act, 2063, the liquidator shall also compulsorily adopt the banking system while making payment of any surplus amount to the shareholders after making payment of the company's total expenses and other liabilities.
Note: Earlier, a declaration from the shareholders that the money has been received would suffice.
