Cumulative Burden of Regulations

– This article was originally published by Ankshita Chaudhary in the Himalayan Times on September 08, 2019.

Laws are critical tools for achieving broad public goals, but, poorly designed laws can do more harm than good; and the latter seems to be more applicable in case of Nepal.

The Companies Act is an over-arching precondition for enabling corporate governance and is indispensable to the proper functioning of markets. Yet, all too often, certain regressive clauses of the Act inflict economic costs that further discourage entrepreneurs, stifle innovation, and result in unintended consequences. At a granular level, even though there exist policy justifications for most regulatory imposition, in totality, such regulations only add to an entrepreneur’s compliance burden and create greater cynicism regarding the country’s investment climate.

In line with the Companies Act, businesses registered in Nepal are subjected to repetitive filing and reporting requirements, where identical set of financial statements and audit reports have to be filed to multiple agencies – the Office of Company Registrar (OCR) and the Inland Revenue Department (IRD). According to the Income Tax Act, 2058, every company must file a tax return along with its audited accounts, which includes the presentation of financial statements, on an annual basis with the IRD. This clearly makes the submission of documents related to financial compliance to OCR both redundant and unnecessary as a company is already filing the same set of documents at IRD. Besides, this increases the cost and the time taken for entrepreneurs, both domestic and foreign, as they have to comply with the regulations of IRD and OCR equally. Failure to comply with the filing requirements attracts a hefty penalty for such companies given that the concerned authorities are adept in exercising a sledgehammer approach in imposing penalties.

Similarly, the Act mandates the submission of fairly extensive number of documents while incorporating a company. Among the many, preparation of Memorandum of Association (MoA) and Articles of Association (AoA) are deemed to incur significant time and cost for a potential entrepreneur. As per the World Bank, it requires NPR 10,000 and takes 5 days for the preparation of these documents, which come out to be a huge percentage of the total time and cost involved for an average entrepreneur. Although professional verification or certification prior to submission to the OCR is no longer mandatory, entrepreneurs continue to use the service of professional lawyers or legal practitioners for verifying and drafting the MoA and AoA in practice. This is mainly done so as to avoid mistakes since the standard format availed by the government cannot be comprehended easily by an ordinary person. As these documents involve substantial legal jargons, entrepreneurs are compelled to seek support from legal professionals.

Another matter of contention in the Companies Act is that the OCR has been empowered with quasi-judicial powers and procedures resembling that of a court of law pursuant to which it is obliged to objectively determine facts and draw conclusions to provide the basis for an official action. Such actions may be to provide remedies to a situation or impose legal penalties that may affect the rights, duties or privileges of specific parties. As certain clauses allow OCR to take up judicial functions and initiate court action against delinquent clients to ensure compliance with all provisions of the Company Act, the act of resolving lawful matters, without legal expertise, results in the malpractice of discretionary interpretation of the circumstance in a particular party’s favor. This not only creates confusion in an impenetrable system, but also promotes rent seeking avenues and non-transparency among bureaucrats.

Moreover, since the Act is an extensive 200-page legislation, a potential entrepreneur cannot recall the technicalities and all such compliances prior to or in the process of starting a company. As complying businesses have raised concerns with the ambiguities within the Act, intensive reforms in the view of growing private sector emergence is the need of the hour.