The Securities Board of Nepal (Sebon) has issued new directives on good governance that bars companies listed on the stock exchange from providing loans to family members of the members of their board of directors.

Likewise, members of the board have been permitted to serve in one position for a maximum period of four years, and the term cannot be extended. The new regulation is expected to maintain financial discipline in listed companies, the regulator said.

The companies have been given five months to comply with the new rules. The directives will go into full-fledged effect from the next fiscal year.

Sebon deputy spokesperson Niranjaya Ghimire said that the new rule had been issued to safeguard the interest of investors in the stock market. “The directive has been formulated in line with the practices in a number of Asian countries such as India, Sri Lanka and Malaysia,” Ghimire said. According to Sebon, the directive has focused on enforcing six principles being envisioned by the Organisation for Economic Cooperation and Development. They include making board members responsible to shareholders and other stakeholders, providing equal treatment to all shareholders and maintaining accountability and transparency besides making public vital information about the companies.

The new provision has forbidden board members from working in any other organisation. “A board member cannot work as an auditor, advisor, surveyor, broker and agent of insurance companies or as a staffer in other organisations,” the directive said.

Likewise, listed companies are required to make public their financial condition on a regular basis. If more than one member of a single family has to be appointed to the board, the company needs to mention this in its annual report. Similarly, the directive has barred an individual from holding the positions of both chairman and chief executive officer of the same company.

Listed companies need to form a separate risk management committee to assess and minimise possible risks. An internal control mechanism should be developed to look after possible financial irregularities. Any person convicted of financial irregularities cannot hold the position of board member or executive chief of listed companies for at least 10 years. Listed companies need to form a three-member independent audit assessment committee to look after the audit system.

Enforcing a separate purchase guideline and implementing a code of conduct for workers are also among the rules that listed companies will have to follow after the directive goes into effect. Currently, there are 207 companies listed on the stock exchange.

New sebon directives

• Board members can serve for a maximum of four years
• Board members are forbidden from working in other organisations
• Listed firms are to make public their financial condition on a regular basis
• Any person convicted of financial irregularities cannot hold the position of board member or executive chief of listed companies for at least 10 years
• An individual is barred from holding the positions of both chairman and chief executive officer of the same company