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Term Report
Scope of Disclosure in
Ace Institute of Management
January, 2014
Submitted By:
Sudarshan Paudel
MBAe, VIII Term, Sec B
Table of
Submitted To:
Dr. Resham Raj Regmi
Lecturer, Corporate Governance




Disclosure and Transparency..................................................................................3

OECD principles of Corporate Governance...........................................................4

Importance of corporate governance disclosures..................................................10

The role of disclosure in corporate governance....................................................11

Legal provision for disclosure in Nepal................................................................13


Disclosure by directors..................................................................................13


Directors to make disclosure on shares.........................................................14


Disclosure about securities............................................................................15


Disclosures by Organization..........................................................................15

Empirical evidence...............................................................................................19



In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal
scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means
pondered on the changing role of the modern corporation in society. From the
Chicago school of economics, Ronald Coase introduced the notion of transaction
costs into the understanding of why firms are founded and how they continue to
US expansion after World War II through the emergence of multinational corporations
saw the establishment of the managerial class. Studying and writing about the new
class were several Harvard Business School management professors: Myles Mace
(entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch
(organizational behavior) and Elizabeth MacIver (organizational behavior). According
to Lorsch and MacIver "many large corporations have dominant control over business
affairs without sufficient accountability or monitoring by their board of directors."

In the 1980s, Eugene Fama and Michael Jensen established the principalagent
problem as a way of understanding corporate governance: the firm is seen as a series
of contracts.
In the first half of the 1990s, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak,
Honeywell) by their boards. The California Public Employees' Retirement System
(CalPERS) led a wave of institutional shareholder activism (something only very
rarely seen before), as a way of ensuring that corporate value would not be destroyed
by the now traditionally cozy relationships between the CEO and the board of
directors (e.g., by the unrestrained issuance of stock options, not infrequently back
In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and
Worldcom, as well as lesser corporate scandals, such as Adelphia Communications,
AOL, Arthur Andersen, Global Crossing, Tyco, led to increased political interest in
corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of
2002. Other triggers for continued interest in the corporate governance of
organizations included the financial crisis of 2008/9 and the level of CEO pay.


Corporate governance refers to the system by which corporations are directed and
controlled. Sound corporate governance is an important element of sustainable private
sector development - not only because it strengthens businesses ability to attract
investment and grow, but also because it makes them, stronger, more efficient, and
more accountable. The governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation (such as the board of
directors, managers, shareholders, creditors, auditors, regulators, and other
stakeholders) and specifies the rules and procedures for making decisions in corporate
affairs. Governance provides the structure through which corporations set and pursue
their objectives, while reflecting the context of the social, regulatory and market
environment. Governance is a mechanism for monitoring the actions, policies and
decisions of corporations. Governance involves the alignment of interests among the

The vast amount of literature available on the subject ensures that there exist
innumerable definitions of corporate governance. To get a fair view on the subject it
would be prudent to give a narrow as well as a broad definition of corporate
governance. In a narrow sense, corporate governance involves a set of relationships
amongst the companys shareholders management, its board of directors, its
shareholders, its auditors and other stakeholders. These relationships, which involve
various rules and incentives, provide the structure through which the objectives of the
company are set, and the means of attaining these objectives as well as monitoring
performance are determined. Thus, the key aspects of good corporate governance
include transparency of corporate structures and operations; the accountability of
managers and the boards to; and corporate responsibility towards stakeholders.

In a broader sense, however, good corporate governance is the extents to which

companies are run in an open and honest manner- is important for overall market
confidence, the efficiency of capital allocation, the growth and development of
countries industrial bases, and ultimately the nations overall wealth and welfare. It is
important to note that in both the narrow as well as in the broad definitions, the
concepts of disclosure and transparency occupy centre-stage. In the first instance, they
create trust at the firm level among the suppliers of finance. In the second instance,
they create overall confidence at the aggregate economy level. In both cases, they
result in efficient allocation of capital.

Whatever may be the definitions of corporate governance, the most widely used
definition of Corporate Governance as defined by OECD Corporate Governance
principle, 2004 is Corporate governance involves a set of relationships between a
companys management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the company
are set, and the means of attaining those objectives and monitoring performances are
determined. determined. Good corporate governance should provide proper
incentives for the board and management to pursue objectives that are in the interests
of the company and shareholders and should facilitate effective monitoring, thereby
encouraging firms to use resources more efficiently.

Disclosure and Transparency

Transparency involves the timely disclosure of adequate information concerning a

companys operating and financial performance and its corporate governance
practices. For a well-governed company, standards of timely disclosure and
transparency are high. This enables shareholders, creditors and directors to effectively
monitor the actions of management and the operating and financial performance of
the company. Good transparency means that the financial reporting facilitates a clear
understanding of a companys true underlying financial condition. In part, this means
that contingent liabilities and non-arms length relationships with other related
companies are disclosed. In certain countries where accounting standards are limited,
a commitment to transparency may mean that the company adopts internationally
recognized accounting principles in addition to local accounting standards.

Transparency also dictates openness regarding non-financial performance

particularly relating to a companys business operations and competitive position.
Public disclosure of corporate charter, by-laws, and a clearly articulated corporate
mission also help to promote high standards of transparency. From a board
perspective, it is important to have clear disclosure of which the company directors
are the basis of their remuneration and the extent to which they are independent or
insiders. Financial reporting and disclosure should be clearly articulated and
completed to a high standard.

All publicly disclosable information should be promptly available and freely

accessible to the investment community and shareholders. Public disclosure is a
function of internal transparency and effective internal control policies. The
companys by-laws, statutes and/or articles should be clearly articulated and readily
accessible to all shareholders. The company should maintain a web site (unfortunately
in many developing countries there is inadequacy of effective communication
infrastructures) and make company reports, summary reports and/or other investor
relevant information available in both local language and English.

Auditors should be independent of the board and management and the companys
performance, and objectives. They should also be reputable and, as mentioned earlier,
they are one of the two most important professional advisers within the insurance
supervisory system.

4 OECD principles of Corporate Governance

Organization of Economic Co- operation and Development (OECD) is the first
international institution which introduced principles of corporate governance. It was
established in 1961 and presently it has 30 member countries with its headquarter in
Paris. The OECD Principles of Corporate Governance, originally adopted by the 30
member countries of the OECD in 1999, have become a reference tool for countries
all over the world. Following an extensive review process that led to adoption of
revised OECD Principles of Corporate Governance in the spring of 2004, they now
reflect a global consensus regarding the critical importance of good corporate
governance in contributing to the economic vitality and stability of our economies.
Good corporate governance the rules and practices that govern the relationship
between the managers and shareholders of corporations, as well as stakeholders like
employees and creditors contributes to growth and financial stability by
underpinning market confidence, financial market integrity and economic efficiency.
Recent corporate scandals have further focussed the minds of governments,
regulators, companies, investors and the general public on weaknesses in corporate
governance systems and the need to address this issue.

The OECD Principles of Corporate Governance provide specific guidance for

policymakers, regulators and market participants in improving the legal, institutional
and regulatory framework that underpins corporate governance, with a focus on
publicly traded companies. They also provide practical guidance and suggestions for
stock exchanges, investors, corporations and other parties that have a role in the
process of developing good corporate governance. They have been endorsed as one of
the Financial Stability Forum twelve key standards essential for financial stability.
The OECD Principles have become the international benchmark for corporate
governance, forming the basis for a number of reform initiatives, both by
governments and the private sector. The OECD began a review of the Principles in

2003 to take into account recent developments through a process of extensive and
open consultations. The new Principles were agreed by OECD governments in April
2004. The revision of the Principles reflects not only the experience of OECD
countries but also that of emerging and developing economies, including those
involved in the policy dialogue of the Regional Corporate Governance Roundtables
established by the OECD in co-operation with the World Bank Group. Consultations
with non-member partners were first undertaken through meetings of Roundtables
held in Asia, Eurasia, Latin America, Russia and Southeast Europe. Lessons and
conclusions emerging from this work were summarised in the publication,
Experiences from the Regional Corporate Governance Roundtables, OECD 2003.
Additional input was obtained from a special meeting attended by 43 non-member
countries organised in cooperation with the Global Corporate Governance Forum.
This article shows how the Principles take into account the lessons and conclusions
from non-member countries so that the Principles can continue to be relevant globally.
The OECD principles prescribe that the corporate governance framework should
ensure that timely and accurate disclosure is made on all material matters regarding
the corporation, including the financial situation, performance, ownership, and
governance of the company. There are however specific issues that need to be
addressed in regard to the requirements of disclosure and transparency. The following
are excerpts from the Annotations to the OECD Principles of Corporate Governance
(1999). They are quoted here because of the clarity and simplicity of the language
used in explaining the various issues involved.
A. Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
Audited financial statements showing the financial performance and
the financial situation of the company (most typically including the
balance sheet, the profit and loss statement, the cash flow statement
and notes to the financial statements) are the most widely used source
of information on companies. In their current form, the two principal
goals of financial statements are to enable appropriate monitoring to
take place and to provide the basis to value securities. Managements
discussion and analysis of operations is typically included in annual
reports. This discussion is most useful when read in conjunction with

the accompanying financial statements. Investors are particularly

interested in information that may shed light on the future performance
of the enterprise. It is important that transactions relating to an entire
group be disclosed. Arguably, failures of governance can often be
linked to the failure to disclose the whole picture, particularly where
off-balance sheet items are used to provide guarantees or similar
commitments between related companies.
2. Company objectives.
In addition to their commercial objectives, companies are encouraged
to disclose policies relating to business ethics, the environment and
other public policy commitments. Such information may be important
for investors and other users of information to better evaluate the
relationship between companies and the communities in which they
operate and the steps that companies have taken to implement their
3. Major share ownership and voting rights.
One of the basic rights of investors is to be informed about the
ownership structure of the enterprise and their rights vis--vis the
rights of other owners. Countries often require disclosure of ownership
data once certain thresholds of ownership are passed. Such disclosure
might include data on major shareholders and others that control or
may control the company, including information on special voting
rights, shareholder agreements, the ownership of controlling or large
blocks of shares, significant cross shareholding relationships and cross
guarantees. Companies are also expected to provide information on
related party transactions.
4. Members of the board and key executives, and their remuneration:
Investors require information on individual board members and key
executives in order to evaluate their experience and qualifications and
assess any potential conflicts of interest that might affect their
judgment. Board and executive remuneration are also of concern to
shareholders. Companies are generally expected to disclose sufficient
information on the remuneration of board members and key executives
(either individually or in the aggregate) for investors to properly assess

the costs and benefits of remuneration plans and the contribution of

incentive schemes, such as stock option schemes, to performance.
5. Material foreseeable risk factors.
Users of financial information and market participants need
information on reasonably foreseeable material risks that may include:
risks that are specific to the industry or geographical areas; dependence
on commodities; financial market risk including interest rate or
currency risk; risk related to derivatives and off-balance sheet
transactions; and risks related to environmental liabilities.
The Principles do not envision the disclosure of information in greater
detail than is necessary to fully inform investors of the material and
foreseeable risks of the enterprise. Disclosure of risk is most effective
when it is tailored to the particular industry in question. Disclosure of
whether or not companies have put systems for monitoring risk in
place is also useful.
6. Related party transactions.
It is important for the market to know whether the company is being
run with due regard to the interests of all its investors. To this end, it is
essential for the company to fully disclose material related party
transactions to the market, either individually, or on a grouped basis,
including whether they have been executed at arms-length and on
normal market terms. In a number of jurisdictions this is indeed
already a legal requirement. Related parties can include entities that
control or are under common control with the company, significant
shareholders including members of their families and key management
personnel. Transactions involving the major shareholders (or their
close family, relations etc.), either directly or indirectly, are potentially
the most difficult type of transactions. Disclosure requirements include
the nature of the relationship where control exists and the nature and
amount of transactions with related parties, grouped as appropriate.

7. Material issues regarding employees and other stakeholders.


Companies are encouraged to provide information on key issues

relevant to employees and other stakeholders that may materially affect








management/employee relations, and relations with other stakeholders

such as creditors, suppliers, and local communities.
Some countries require extensive disclosure of information on human
resources. Human resource policies, such as programmes for human
resource development or employee share ownership plans, can
communicate important information on the competitive strengths of
companies to market participants.
8. Governance structures and policies.
Capital structures and arrangements that enable certain shareholders to
obtain a degree of control disproportionate to their equity ownership
should be disclosed. Companies are encouraged to report on how they
apply relevant corporate governance principles in practice. Disclosure
of the governance structures and policies of the company, in particular
the division of authority between shareholders, management and board
members is important for the assessment of a companys governance.
B. Information should be prepared, audited, and disclosed in accordance with
high quality standards of accounting, financial and non-financial disclosure,
and audit.
The application of high quality standards is expected to significantly improve
the ability of investors to monitor the company by providing increased
reliability and comparability of reporting, and improved insight into company
performance. The quality of information depends on the standards under
which it is compiled and disclosed. The Principles support the development of
high quality internationally recognized standards, which can serve to improve
the comparability of information between countries.
C. An annual audit should be conducted by an independent auditor in order to
provide an external and objective assurance on the way in which financial
statements have been prepared and presented.
Many countries have considered measures to improve the independence of
auditors and their accountability to shareholders. It is widely felt that the
application of high quality audit standards and codes of ethics is one of the
best methods for increasing independence and strengthening the standing of

the profession. Further measures include strengthening of board audit

committees and increasing the boards responsibility in the auditor selection
Other proposals have been considered by OECD countries. Some countries
apply limitations on the percentage of non-audit income that the auditor can
receive from a particular client. Other countries require companies to disclose
the level of fees paid to auditors for non-audit services. In addition there may
be limitations on the total percentage of auditor income that can come from
one client. Examples of other proposals include quality reviews of auditors by
another auditor, prohibitions on the provision of non-audit services, mandatory
rotation of auditors and the direct appointment of auditors by shareholders.
D. External auditors should be accountable to the shareholders and owe a duty to
the company to exercise due professional care in the conduct of the audit.
The practice that external auditors are recommended by an independent audit
committee of the board or an equivalent body and that external auditors are
appointed either by that committee/body or by the shareholders meeting
directly can be regarded as good practice since it clarifies that the external
auditor should be accountable to the shareholders. It also underlines that the
external auditor owes a duty of due professional care to the company rather
than any individual or group of corporate managers that they may interact with
for the purpose of their work.
E. Channels for disseminating information should provide for fair, timely and
cost-efficient access to relevant information by users.
Channels for the dissemination of information can be as important as the
content of the information itself. While the disclosure of information is often
provided for by legislation, filing and access to information can be
cumbersome and costly. Filing of statutory reports has been greatly enhanced
in some countries by electronic filing and data retrieval systems. The Internet
and other information technologies also provide the opportunity for improving
information dissemination.
F. The corporate governance framework should be complemented by an effective
approach that addresses and promotes the provision of analysis or advice by

analysts, brokers, rating agencies and others, that is relevant to decisions by

investors, free from material conflicts of interest that might compromise the
integrity of their analysis or advice.
In addition to demanding independent and competent auditors, and to facilitate
timely dissemination of information, a number of countries have taken steps to
ensure the integrity of those professions and activities that serve as conduits of
analysis and advice to the market. These intermediaries, if they are operating
free from conflicts and with integrity, can play an important role in providing
incentives for company boards to follow good corporate governance practices.
Concerns have arisen, however, in response to evidence that conflicts of
interest often arise and may affect judgement. This could be the case when the
provider of advice is also seeking to provide other services to the company in
question, or where the provider has a direct material interest in the company or
its competitors. The concern identifies a highly relevant dimension of the
disclosure and transparency process that targets the professional standards of
stock market research analysts, rating agencies, investment banks, etc.

Importance of corporate governance disclosures

The strength of an organizations corporate governance systems and the quality of

public disclosures are becoming increasingly important to business for a number of
reasons. As sustainability becomes an ever more critical business issue, stakeholders
are paying more attention to what is reported and how. The global financial crisis has
sharpened the lens through which corporate governance structures are held to account
and expectations around transparency are raising the bar for more comprehensive and
proactive disclosures from forward-thinking organizations, as opposed to the release
of corporate governance details or policies in a reactive fashion. A distinction is
growing between those that maintain ongoing communications as part of an integrated
approach to corporate governance, and those that produce isolated or single issuebased communications, for example in response to legislation or as a risk
management exercise. Organizations that see disclosing information on corporate
governance as an opportunity to be transparent with stakeholders can potentially use
reporting processes to drive improvements to their structures and processes internally


(but good reporting doesnt necessarily lead to good governance, as has been
demonstrated in the economic downturn).

The role of disclosure in corporate governance

In simple language, transparency refers to the decision making and its enforcement in
a manner that follows rules and regulations. It also means that information is freely
available and is directly accessible to those who will be affected by such decisions
and their enforcement. It also means that enough information is provided and that is
provided in an easily understandable forms and media. Public disclosure is typically
required, at a minimum, on an annual basis though some countries require periodic
disclosure on a semi-annual or quarterly basis, or even more frequently in the case of
material developments affecting the company. Companies often make voluntary
disclosure that goes beyond minimum disclosure requirements in response to market
demand. A strong disclosure regime that promotes real transparency is a pivotal
feature of market-based monitoring of companies and is central to shareholders
ability to exercise their ownership rights on an informed basis. Experience in
countries with large and active equity markets shows that disclosure can also be a
powerful tool for influencing the behavior of companies and for protecting investors.

A strong disclosure regime can help to attract capital and maintain confidence in the
capital markets. By contrast, weak disclosure and non-transparent practices can
contribute to unethical behavior and to a loss of market integrity at great cost, not just
to the company and its shareholders but also to the economy as a whole. Shareholders
and potential investors require access to regular, reliable and comparable information
in sufficient detail for them to assess the stewardship of management, and make
informed decisions about the valuation, ownership and voting of shares. Insufficient
or unclear information may hamper the ability of the markets to function, increase the
cost of capital and result in a poor allocation of resources.

Disclosure also helps improve public understanding of the structure and activities of
enterprises, corporate policies and performance with respect to environmental and
ethical standards, and companies relationships with the communities in which they
operate. Disclosure requirements are not expected to place unreasonable

administrative or cost burdens on enterprises. Nor are companies expected to disclose

information that may endanger their competitive position unless disclosure is
necessary to fully inform the investment decision and to avoid misleading the
investor. The Principles support timely disclosure of all material developments that
arise between regular reports. They also support simultaneous reporting of
information to all shareholders in order to ensure their equitable treatment. In
maintaining close relations with investors and market participants, companies must be
careful not to violate this fundamental principle of equitable treatment.
While capital markets are both well-developed and well-functioning markets when
compared with product and other markets, they operate in a highly regulated
environment. Highly organized securities markets on stock exchanges also operate in
a highly regulated environment. This puzzle of why there is more rather than less
regulation in capital markets than in other markets, stems from the historical origin of
securities regulation: protection of public investors against manipulative and
deceptive activities by securities brokers and others. Thus, securities regulation in
most jurisdictions emerged and is centered upon the idea of retail investor protection.
The two fundamental ways of protecting investors are found in mandatory disclosure
and anti-fraud rules. The value of disclosure has been well recognized, and the
relationship between the amount of information available in the market place and the
"efficiency" of the stock market has been well analyzed.
Why the law must require the firm to disclose certain information, however, is not
entirely clear. Nevertheless, most industrialized economies today have a legal system
of mandatory disclosure. In fact, civil law countries have a register system of
merchants, which provides specific information regarding the amount of stated
capital, the names of officers and directors, and other pertinent information on
business entities. In many jurisdictions, securities law provides a detailed and
complex disclosure system for large public companies. The value of disclosure
depends on the value of information being disclosed. In general, information being
disclosed comprises of two kinds: accounting and non-accounting information.


Legal provision for disclosure in Nepal

There are various laws in Nepal in regards to disclosure by the organization and
directors. Company Act 2006 for all the companies registered in company of register
and Bank and Financial Institutions Act (BAFIA) for all the banks and financial
institutions which are regulated by Nepal Rastra Bank look after the respective
organizations. Here are some of the legal provisions laid by these two laws in Nepal:

7.1 Disclosure by directors

A director shall, no later than seven days after assuming the office of director, disclose
in writing to the company the following matters:

If he or his close relative has direct involvement or any kind of personal

interest in any kind of sale and purchase or other kind of contract related with
the transactions of the company. For the purpose of this clause, direct
involvement means and includes a situation where the director of his close
relative is a promoter of or holds more than ten percent shares of a company or
private firm or partnership firm or a director of a company involved in such

If he has any kind of interest in the appointment of the managing director,

company secretary, officer of the company;

If he is a director of any other company;

If he has made any dealing in the shares or debentures of the company or of its
holding or subsidiary company, about matters of such dealing.

If any director has an interest directly or indirectly linked to any kind of

contract, lease, transaction or agreement entered or to be entered with the
concerned company or its subsidiary company or comes to his knowledge that
such interest will be so linked, that director shall disclose that matter to the
company promptly setting out the extent and kind of such interest.
If any director gives written information to the company that he be considered
to have his personal interest in a transaction with any certain person, that

director shall be deemed to have disclosed his personal interest in any

transaction or contract to be done or made with such person.

7.2 Directors to make disclosure on shares

If a person while holding the office of director, acquires title to any shares or
debentures of the company or of a company which is a subsidiary or holding company
of that company or of another subsidiary company of the holding company, in any
manner, that person shall give information as follows on that matter to the company:

Details of his title;

Number of shares of each class in the concerned company or another company
to or in which he has title or interest while holding the office of director and
details of amount of debentures of each class.

If the following situation occurs, any director of a company shall give written
information thereof to the company in which he is a director no later than fifteen days
after such situation comes to his knowledge:

If, for any reason, he is going to acquire title to any shares or debentures of the
company in which he is a director or of a company which is a subsidiary or
holding company of that company or of another subsidiary company of the

holding company, in any manner, or he is going to lose his title;

If he enters into an agreement to sell the shares or debentures, as referred to in

Clause (a), held in his name;

If he assigns to any other person the authority granted by the company in
which he is a director to him to subscribe the shares or debentures of such

If a company which is a subsidiary or holding company of the company in
which he is a director or another company which is a subsidiary of such
company or other subsidiary of the holding company grants authority to him to

subscribe the shareholders or debentures of such company;

If he assigns to any other person the authority to subscribe the shares or
debentures of the company as referred to in clause (d).

The provisions contained in this Section shall also apply to the close relative of a
Director as if such relative were a director.

7.3 Disclosure about securities

In the event that the shares or debentures of a company is listed in a body operating
the Stock Exchange, after the director has made disclosure to the company about the
shares or debentures of such company pursuant to Section 94, the company shall
promptly give information thereof to such body. Such body shall publish the
information received pursuant to sub-section (1) in such manner as it thinks fit.
Disclosure should be accurate, clear and presented in an understandable manner and
in such a way that shareholders, depositors, other relevant stakeholders and market
participants can consult it easily. Timely public disclosure is desirable on a banks
public website, in its annual and periodic financial reports or by other appropriate
forms. It is good practice that an annual corporate governance-specific and
comprehensive statement is in a clearly identifiable section of the annual report
depending on the applicable financial reporting framework. All material developments
that arise between regular reports should be disclosed without undue delay.

7.4 Disclosures by Organization

(A) Basis of related party transactions
i. A statement in summary form of transactions with related parties in the
ordinary course of business shall be placed periodically before the audit
ii. Details of material individual transactions with related parties which are not
in the normal course of business shall be placed before the audit committee.
iii. Details of material individual transactions with related parties or others,
which are not on an arms length basis should be placed before the audit
committee, together with Managements justification for the same.
(B) Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from that
prescribed in an Accounting Standard has been followed, the fact shall be
disclosed in the financial statements, together with the managements explanation

as to why it believes such alternative treatment is more representative of the true

and fair view of the underlying business transaction in the Corporate Governance
(C) Board Disclosures Risk management
The company shall lay down procedures to inform Board members about the risk
assessment and minimization procedures. These procedures shall be periodically
reviewed to ensure that executive management controls risk through means of a
properly defined framework.
(D) Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through an issue (public issues, rights issues, preferential issues
etc.), it shall disclose to the Audit Committee, the uses / applications of funds by
major category (capital expenditure, sales and marketing, working capital, etc), on a
quarterly basis as a part of their quarterly declaration of financial results. Further, on
an annual basis, the company shall prepare a statement of funds utilized for purposes
other than those stated in the offer document/prospectus/notice and place it before the
audit committee. Such disclosure shall be made only till such time that the full money
raised through the issue has been fully spent. This statement shall be certified by the
statutory auditors of the company. Furthermore, where the company has appointed a
monitoring agency to monitor the utilization of proceeds of a public or rights issue, it
shall place before the Audit Committee the monitoring report of such agency, upon
receipt, without any delay. The audit committee shall make appropriate
recommendations to the Board to take up steps in this matter.

(E) Remuneration of Directors

All pecuniary relationship or transactions of the non-executive directors vis--vis the
company shall be disclosed in the Annual Report. Further the following disclosures on
the remuneration of directors shall be made in the section on the corporate governance
of the Annual Report:


All elements of remuneration package of individual directors summarized

under major groups, such as salary, benefits, bonuses, stock options, pension

Details of fixed component and performance linked incentives, along with the
performance criteria.

Service contracts, notice period, severance fees.

Stock option details, if any and whether issued at a discount as well as the
period over which accrued and over which exercisable.

The company shall publish its criteria of making payments to non-executive

directors in its annual report. Alternatively, this may be put up on the
companys website and reference drawn thereto in the annual report.

The company shall disclose the number of shares and convertible instruments
held by non-executive directors in the annual report.

Non-executive directors shall be required to disclose their shareholding (both

own or held by / for other persons on a beneficial basis) in the listed company
in which they are proposed to be appointed as directors, prior to their
appointment. These details should be disclosed in the notice to the general
meeting called for appointment of such director

(F) Management
As part of the directors report or as an addition thereto, a Management Discussion
and Analysis report should form part of the Annual Report to the shareholders. This
Management Discussion & Analysis should include discussion on the following
matters within the limits set by the companys competitive position:

Industry structure and developments.

Opportunities and Threats.


Segmentwise or product-wise performance.


Risks and concerns.

Internal control systems and their adequacy.

Discussion on financial performance with respect to operational performance.

Material developments in Human Resources / Industrial Relations front,

including number of people employed.

Senior management shall make disclosures to the board relating to all material
financial and commercial transactions, where they have personal interest, that
may have a potential conflict with the interest of the company at large (for e.g.
dealing in company shares, commercial dealings with bodies, which have
shareholding of management and their relatives etc.)

For this purpose, the term "senior management" shall mean personnel of the company
who are members of its core management team excluding the Board of Directors).
This would also include all members of management one level below the executive
directors including all functional heads.
(G) Shareholder
In case of the appointment of a new director or re-appointment of a director the
shareholders must be provided with the following information:

A brief resume of the director;

Nature of his expertise in specific functional areas;

Names of companies in which the person also holds the directorship and the
membership of Committees of the Board; and

Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v)


Disclosure of relationships between directors inter-se shall be made in the


Report, notice of appointment of a director, prospectus and letter of

offer for issuances and any related filings made to the stock exchanges where
the company is listed.

Quarterly results and presentations made by the company to analysts shall be

put on companys web-site, or shall be sent in such a form so as to enable the
stock exchange on which the company is listed to put it on its own web-site.

A board committee under the chairmanship of a non-executive director shall

be formed to specifically look into the redressal of shareholder and investors
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of









Shareholders/Investors Grievance Committee.

To expedite the process of share transfers, the Board of the company shall
delegate the power of share transfer to an officer or a committee or to the
registrar and share transfer agents. The delegated authority shall attend to
share transfer formalities at least once in a fortnight.

Empirical evidence

Empirical work has produced strong evidence that disclosure and corporate
governance do indeed at both the country and Individual Corporation levels. High
levels of disclosure, as measured by indices of opacity, are found to be associated with
lower country risk premium and costs of capital and higher trading volumes or
liquidity. Disclosure is a key factor contributing to financial market efficiency and for
providing the information necessary for market discipline to be effective. Market
discipline and disclosure, in turn, are of central importance to the provision of the
robust corporate governance necessary for stable markets and investor confidence.
This analysis suggests that changes to disclosure requirements, while directly
beneficial to owners, also carry indirect costs. As such, the optimal level of disclosure
could be less than maximal disclosure even if disclosure were otherwise free (i.e., if
one were free to ignore the actual costs arising from stricter accounting rules, more
record keeping, etc.). Going beyond that level would then reduce firm value.

Consequently, reforms that affect all three factors, such as those proposed in response
to the Financial Crisis of 2008, affect executive compensation through multiple
channels. To the extent that such reforms independently reduce firm profits or reduce
managerial bargaining power.
A firms disclosure policy is fundamentally connected to its governance. Improved
disclosure provides benefits, but it also entails costs. These costs are both direct, in
terms of greater managerial compensation, and indirect, in terms of the distortions
they induce in managerial behavior (e.g., managements actions aimed at signal
distortion). Stronger disclosure rules and greater scrutiny of firms should be
associated with an increase in actions aimed at signal distortion (a past example of
such actions being, perhaps, Enrons use of special-purpose entities, which led to its
financial statements being particularly uninformative). In addition to accountingrelated actions, increased disclosure requirements could lead to changes in real
investments, particularly an increase in myopic behavior (e.g., substitution away from
longer term investments, such as R&D, toward shorter term investments or actions
that affect reported numbers sooner).


Corporate governance refers to the system by which corporations are directed and
controlled. Transparency involves the timely disclosure of adequate information
concerning a companys operating and financial performance and its corporate
governance practices. Transparency also dictates openness regarding non-financial
performanceparticularly relating to a companys business operations and
competitive position.
The OECD Principles of Corporate Governance provide specific guidance for
policymakers, regulators and market participants in improving the legal, institutional
and regulatory framework that underpins corporate governance, with a focus on
publicly traded companies. Transparency refers to the decision making and its
enforcement in a manner that follows rules and regulations. It also means that
information is freely available and is directly accessible to those who will be affected
by such decisions and their enforcement.


The two fundamental ways of protecting investors are found in mandatory disclosure
and anti-fraud rules. The value of disclosure has been well recognized, and the
relationship between the amount of information available in the market place and the
"efficiency" of the stock market has been well analyzed. There are various laws
regarding disclosure in Nepal and disclosure helps in great extent to ensure corporate
governance because research has shown strong evidence between disclosure and
corporate governance at both the country and Individual Corporation levels.