The recent amendments to Section 18 of Nepal’s Companies Act, introduced by an ordinance from the Government of Nepal on 29 Poush 2081, bring significant changes to how company shares can be issued and acquired through means other than cash. These updates provide companies with flexibility in managing their share structures and recognizing non-monetary contributions.
The amendments, detailed in Sub-sections (3a), (3b), (3c), (3d), and (3e), expand on the existing provisions under Sub-section (3).
Existing Provision: Sub-section (3)
Before diving into the new amendments, it’s important to understand the existing Sub-section (3) of Section 18, which serves as the foundation for these updates.
Under Sub-section (3): “In subscribing shares or acquiring title thereto by the promoter or any other person in consideration fit other than cash payment and in acquiring any property by the company from the promoter or any other person at the time of commencement of its transactions, in the case of a public company, such consideration other than cash and such property shall be caused to be valuated by an engineer or accountant holding a certificate to conduct valuation work under the prevailing law.”
Impact: This provision emphasizes that when shares are issued or property is acquired by a public company in exchange for non-cash contributions, the valuation must be conducted by a certified engineer or accountant. The aim is to ensure transparency and fairness in these transactions.
Key Highlights of the New Amendments
1. Shares for Non-Cash Contributions (Sub-section 3a): Companies are now allowed to issue shares to founders or other individuals in exchange for non-cash contributions, even after the company’s establishment.
Impact: These contributions can include intellectual property, services, goodwill, or other resources of value. This provision recognizes the growing importance of intangible assets in modern business environments.
2. Special Resolutions for Share Issuance (Sub-section 3b)
When issuing or selling shares for non-cash contributions, a special resolution must be passed by the general meeting of the company. While passing such a special resolution, a decision may be made to issue or sell shares at a discount.
Impact: This requirement ensures shareholder approval and transparency. The resolution may also authorize the issuance or sale of shares at a discounted price, facilitating strategic partnerships and collaborations.
3. Valuating Non-Cash Contributions (Sub-section 3c)
When the company issues or sells shares or grants rights to the founder or any other person in any form other than cash, the company may also consider intellectual property, value appreciation, services, business goodwill, technical knowledge (know-how sharing), or transfer of technical expertise received from the founder or person. The value of the shares to be issued in such a manner must be based on the valuation determined with justifications by a certified engineer or accounting professional as per the prevailing law.
Impact: The valuation ensures a fair and justified determination of share value, adding credibility and trust to such transactions.
4. Shares in Exchange for Employee Compensation (Sub-section 3d)
If there is a written agreement between the company and its employees, shares may be provided in exchange for the remuneration, allowances, and benefits to be provided to the employees.
Impact: It aligns employee incentives with company growth. This approach is expected to help companies attract and retain top talent.
5. Limits on Non-Cash Share Issuance (Sub-section 3e)
When shares are provided to the founder or any other person in any form other than cash;
- For regular companies, it shall not exceed 20% of the paid-up capital.
- For startups, it shall not exceed 40% of the paid-up capital.
Impact: It prevents the dilution of paid-up capital as well as recognizes the unique needs of startups to attract innovative contributions during their growth phases.
Significance of the Amendments
The inclusion of Sub-sections (3a) to (3e) represents a progressive shift in corporate governance. These amendments provide businesses with the flexibility to leverage non-cash resources, enabling companies to collaborate with individuals or entities that bring intellectual property, technical know-how, or other valuable contributions to the table.
The requirement for certified valuation, carried over from Sub-section (3), ensures that these transactions remain fair, transparent, and compliant with the law. This is particularly important for protecting the interests of existing shareholders while allowing companies to innovate and grow.
Moreover, startups are among the biggest beneficiaries of these amendments. The higher cap on non-cash share issuance (40% of paid-up capital) allows them to acquire critical resources without requiring large cash reserves. This is crucial for sectors like technology and innovation, where intellectual property and expertise often hold more value than capital.
For established companies, the amendments offer a mechanism to reward employees, strengthen strategic partnerships, and integrate intangible assets into their operations.
Conclusion
The introduction of Sub-sections (3a), (3b), (3c), (3d), and (3e) to Section 18 marks a forward-thinking approach to corporate regulation. These provisions pave the way for more innovative and resourceful business models, enabling companies to adapt to the evolving demands of the modern economy while maintaining transparency and fairness. As businesses embrace these changes, they are likely to see enhanced opportunities for collaboration, growth, and sustainability in today’s dynamic economic landscape.
For more details, please refer to https://lawcommission.gov.np/content/13506/ordinance-made-to-amend-some-nepal-acts-related-to-financial-and-corporate-environment-reform-and-improvement/#flipbook-flipbookContainer/1/
Disclaimer: This note is provided solely for general information and does not constitute legal opinion. For specific legal query, please seek professional counsel.
