march 2016 the nepal hartered accountant · ra. dev bahadur bohara member ra. surendra keshar...

March 2016Vol. 18 No. 3

Journal of the Institute of Chartered Accountants of Nepal

CHARTEREDCCOUNTANTA

T H E N E P A L

Happy New Year 2073

March 2016Vol. 18 No. 3

Global Nepal Printing Press Service Pvt. Ltd.Tel: 4102772

CA. Prakash Lamsal ChairmanCA. Mahesh Khanal Vice-ChairmanCA. Nil Bahadur Saru Magar MemberCA. Hemanta Pokharel MemberCA. Sanju Adhikari MemberCA. Shraddha Singh Shrestha MemberRA. Dev Bahadur Bohara MemberRA. Surendra Keshar Amatya MemberRA. Dharanidhar Adhikari MemberMr. Binod Prasad Neupane Secretary

Editorial 2

President's Message 3

Accounting

Accounting for Employee Loans- CA. Pooja Gupta

5

Economy

Bull is Bullish- CA. Anal Raj Bhattarai

8

Working of the Fixed Exchange Rate Regime: Some Country Evidences Relevant for Nepal- Mr. Tula Raj Basyal

10

NRB’s Decision to Hike Paid-up Capital by Multifold : More of Tyranny Less of Foresight- CA. Biswash Gauchan

15

Multinational Company: An Introduction- Mr. Gyan Mani Adhikari

23

Information Technology

Ransomware – A Dangerous Threat to your Digital Files- CA. Mukunda Pokharel

27

IT Governance and Auditing Entity-Level Controls- CA. Gaurav Khwaunju Shrestha

30

Taxation

Thin Capitalization- Highly Talked Issue in International Taxation- CA. Kaushlendra Jha

43

News 46

Notices 7, 22, 42

Contribution

NB Bank Ltd.

Nabil Capital

Sipradi Trading Pvt.Ltd.

Butwal Power Company Ltd.

Tourism Development Bank Ltd.

Nepal Telecom

The Institute of Chartered Accountants of Nepal (ICAN) has signed Membership Pathway Agreement (MPA) on 10 March 2016 with CPA Australia to further develop the relationship between the two bodies. This agreement has opened up avenues to ICAN domiciled members to become the member of CPA Australia subject to some conditions. It is the first ever membership agreement signed by ICAN with foreign professional accountancy organization (PAO). It has created new thresholds in leadership and influence by reaching out to global accounting regulators and foreign accounting institutions to the extent that it is appreciated by all members of ICAN. In addition, the agreement paves the way for creating new professional opportunities for members in the global arena.

CPA Australia is one of the largest accounting bodies with a membership of more than 150,000 finance, accounting and business professionals in 121 countries across the globe. CPA Australia’s core services to Members include education, training, technical support and advocacy. Employees and Members work together with local and international bodies to represent the views and concerns of the profession to governments, regulators, industries, academia and the general public.

Being a socially aware responsible institution, ICAN has not only wholeheartedly supported the concerned government authorities with constructive suggestions and inputs towards the formulation or the revision of legislation but rather always contributed actively to develop, protect and promote the accounting profession by making the members and the practicing accountants understand the responsibility towards the importance of the accounting profession for the growth national economy.

The Professional Development Committee (PDC) of the institute will continue its efforts towards increasing the professional opportunities available to the members by exploring new areas where the expertise of the members could be utilized in a productive and fruitful manner. As a part of this process, it will continue to discuss with foreign bodies, regulatory authorities, and users of services of the profession.

Some initiatives are also under way for getting recognition of CA qualification with other professional accounting bodies. The ICAN is always aware of playing a proactive role on the international front to fructify its goals of globally building a brand image of the profession across the world.

Dear Professional Colleagues,

It is my immense pleasure to use this medium to share with you some of the activities performed by the Institute over the period January 2016- March 2016. During this period, ICAN carried out activities like educational programs, continuous development of its members, strengthening of international relation etc.

Students, Education and Educational Plan

We successfully conducted 15 days training on CA and AT courses (9th batch) on General Management and Communication Skill (GMCS) at ICAN premises, Satdobato from 12 March to 3 April, 2016. In total 39 students participated the training Program.

The result of Chartered Accountancy examination held in the month of December 2015 has been published on February 14, 2016. The successful candidates shall be eligible for obtaining ICAN membership on fulfilling necessary requirements prescribed by the Institute.

In a bid to disseminate the importance and generate awareness about chartered accountancy education to students, parents and other stakeholders, the Institute as its regular activity organized career counseling program in different parts of the country. This activity is useful to attract the students in CA education and deliver them the requirements for becoming Chartered Accountant.

National Convention on “Spectrum of Opportunities” for CA Students was held on18th &19th March, 2016, which was jointly organized by the Institute of Chartered Accountants of Nepal (ICAN) and its students wing Nepal Chartered Accountant Students’ Association (NCASA) in Biratnagar, Morang. Altogether 297 individuals participated in the convention.

Member and Professional Activities

It’s a matter of proud that The Institute of Chartered Accountant of Nepal celebrated its 19th Anniversary with special function at Hotel Yak & Yeti, Kathmandu on 2072/10/17 (31 January 2016) in the presence of The Honorable Minister of Finance Mr. Bishnu Prasad Poudel. The Chief Guest, Special Guest and Guest of Honors applauded the Institute for the progress achieved and suggested to improve its regulatory regime.

Addressing the function, the chief guest suggested the members of the Institute to respect ethical values and professional standards while providing their services. During the function the Institute honored the First and Second Council’s Presidents, Staff of the Institute and given away the Gold and Silver Medals to merit holder students of different levels of CA exams.

I would like to mention that the Institute has started the practice of selecting the best article of the year published in the ICAN Journal from 2072 B.S. In this connection, the article titled “Accounting Professionals to Improve Governance and Financial Management System in Corporate and Public Financial Management (PFM) Sector” was selected as the best article which was published in Vol.17 No.3, March 2015 issue of The Nepal Chartered Accountant.

The Institute organized 60 hours training course for Registered Auditor members on NFRS/NAS from 22 January to 26 March, 2016 in order to enhance the capacity of the accounting professionals of various sectors and provide the knowledge on NFRS/NAS for adoption in their organizations.

The conference themed “Earthquake & Supply Constraints- Opportunities & Challenges” was organized by coinciding with 19th anniversary day of the Institute. The conference was attended by 100 individuals that included the members and non-members of the Institute.

International Relation

I would like to share that the Institute has continued its efforts to enhance the capability of its members with this view, the Institute of Chartered Accountants of Nepal arranged an exposure cum study visit of Malaysia and Singapore from 27 February to 03 March 2016 for its members with the objective of providing exposure of Malaysian Institute of Accountants (MIA), National Audit Department of Malaysia (NADM) and some accounting firms in Malaysia. The delegation comprising 14 members attended the meeting with the representatives from MIA and Auditor General of Malaysia and shared the organizational system, processes and business practices in Malaysia.

It is my pleasure to bring in the notice of the entire membership that after long deliberations with CPA Australia, ICAN has signed Membership Pathway Agreement with CPA Australia on 10th March 2016. It is the first ever membership agreement signed by ICAN with foreign PAO. This pathway can help opening the avenues to the ICAN domiciled CA to enter in an International accounting arena.

In course of participating International events, on 26 January 2016 one of our Council Members as a resource person attended the conference which was jointly organized by ICASL, IFAC and SAFA in Colombo, Sri-Lanka and presented a paper on behalf of the Institute.

I would like to inform that as a Board Member of SAFA, I attended the SAFA Committee meetings held in Lahore, Pakistan on 28-29 January, 2016 representing the Institute.

Institutional Development

It is reiterated that the Institute has already formed a Quality Assurance Board to monitor the quality of the audit firms. It has already started carrying out its functions and is planning to conduct an interaction program with key regulators and members of the Institute in near future.

The Institute has published its Citizen Charter for its members, students and all stakeholders to obtain the rquired information. I hope this Charter will help to all stakeholders for getting services in time.

I assure the members that I will continue to update you via this journal and other medium about the progress of the Institute regularly.

Before I conclude I wish to extend my greetings of Happy New Year 2073(B.S.) to all the members.

Best wishes !

CA. Prakash LamsalPresident

The Nepal Chartered Accountant March 2016 5

ACCOUNTING

This article takes us through the example of accounting for loans given to the employees at subsidized or below market interest rates. Similar accounting treatment is applied in many circumstances where subsidized or interest free loans are disbursed:

1. By a Government to support some sort of activities of a company;

2. By a holding/parent company to its subsidiary or vice versa

IFRS Rules for Employee LoansThere are two aspects which we can look in an employee loan transaction. One it meets the definition of financial instrument under IFRS 9 / IAS 39. Second, some employee gets some benefits from the transaction which can be in the scope of either IAS 19 Employee Benefits or IFRS 2 Share based Payments. For a simple understanding of accounting of the transaction of employee loans we ignore the share based payments.

CA. Pooja GuptaCA. Gupta is the writer works in Mumbai and is

author of the book Financial Instruments Standards She can be reached [email protected]

Accounting for Employee Loans

Whenever the loan is granted to an employee, the next question which comes in the mind of the employer is if he leaves the company - Should he repay the entire loan back? Can he continue with the loan but at market rates? or Can he continue with the loan as per the present agreement terms of subsidized rates? The accounting treatment will depend on the answers to the above questions.

The Nepal Chartered Accountant March 20166

ACCOUNTING

Case Study: IStaR Ltd. provided a loan of Rs. 200,000/- to its employee Ms. Galaxy on 1-April-20X1 @ 5% repayable in 3 equal installments. At the end of each year installment due will be Rs. 73,442/- (Note: if you discount Rs.73,442 with 5% discount factor for 3 years you will get Rs.200,000/-). The market interest rate was 9% when the loan was disbursed to Ms. Galaxy.

We will now look at the accounting treatment of the employee loan in the books of IStaR Ltd.

Recognition and Measurement of Employee LoansIFRS 9/ IAS 39 states that financial asset (employee loan in our case) should be recognized on the balance sheet at fair value when the entity enters into a contract with the party.

We have classified the loan in Amortized Cost category under IFRS 9 or Loans and Receivables category under IAS 39.

Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We can infer from the above definition that Rs. 200,000/- is not the fair value at initial recognition. So then what is the fair value for IStaR Ltd. of Ms. Galaxy’s loan?

In order to determine the fair value IStaR will need to the following:

a. Know the market interest rate for similar loans (here, 9%)

b. Discount all future estimated cash flows of the loan with 9% discount rate to arrive at the present value of the loan. The present value is the Fair Value of the employee loan.

The PV function in Excel will give us an amount of Rs. 185,903/- (=PV(9%,3,73442,0,0).

The difference amount of Rs. 14,097/- between the loan disbursed amount Rs. 200,000/- and fair value Rs. 185,903/- will normally be recognized upfront in the profit and loss account. However, this difference is an employee benefit and must be recognized as per the general principles of IAS 19 since this standard does not provide any guidance of accounting for this kind of transaction.

Employee BenefitsWhenever the loan is granted to an employee, the next question which comes in the mind of the employer is if he leaves the company - Should he repay the entire loan back? Can he continue with the loan but at market rates? or Can he continue with the loan as per the present agreement terms of subsidized rates?

The accounting treatment will depend on the answers to the above questions.

If the employee can continue with the loan under the same advantageous conditions even after he terminates the employment, it means that the employee benefit has already been earned.

In practical terms – it is recognized straight in profit or loss and the journal entry is:

• Debit Profit or loss – Employee benefits: 14,097• Debit Financial assets – Loans: 185,903 • Credit Bank: 200,000

If the loan will revert to a market interest rate after the employee leaves, then the benefit has not been fully earned and is available only while the employee provides services to the entity.

In line with IAS 19, an expense should be recognized when the employee provides its services, therefore in this case, we cannot recognize the full amount of Rs.14,097 in profit or loss at the time of making the loan.

Instead, we need to defer the expense and allocate it to


ACCOUNTING

the periods when the employee provides services.

The journal entry is:

• Debit Deferred expenses for employee benefits: 14,097

• Debit Financial assets – Loans: 185,903• Credit Cash: 200,000

Amortize the Deferred expenses for employee benefits in profit or loss – but how? Amortization on straight line basis is prohibited. There are several acceptable methods but the most common one is based of effective interest rate (EIR) method. The employee benefit will be treated as short term benefit.

The cost of such an employee benefit in each period is estimated as the difference between:

• The interest income for the period based on the fair value of the loan asset (using effective interest method at the market rate of 9%); and

• The interest payable by the employee (at 5%)

The following table will summarize the amortization amount and the effective interest rate accounting:

Year

AmortizedCost at the

Start EIR @ 9% Cashflow

AmortizedCost at the

End

HistoricalCost at the

StartInterest

@ 5% Cashflow

HistoricalCost at the

End

Difference(Amort

amount)

1 185,903 16,731 73,442 129,192 200,000 10,000 73,442 136,558 6,731

2 129,192 11,627 73,442 67,378 136,558 6,828 73,442 69,944 4,799

3 67,378 6,064 73,442 0 69,945 3,497 73,442 0 2,567

Total 14,097

The journal entries at the end of the year 1:

#1 Interest income on the loan using the effective interest method (at 9%):

• Debit Financial Assets – Loans: 16,731• Credit P/L – Interest income: 16,731

#2 The 1st installment paid by the employee:

• Debit Bank: 73,442• Credit Financial Assets – Loans: 73,442

#3 The employee benefit resulting from the employee loan:

• Debit P/L – Employee benefits: 6,731• Credit Deferred expenses for employee benefits: 6,731

For year 2 and year 3 entries similar to #2 and #3 above will be passed. At the end of year 3 the loan will stand at nil amount.

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ECONOMY

When the price of a particular share rises, that stock is said to be "up," meaning up in price. When the price falls, the stock is said to have gone "down." An investor is said to be "bearish" if they believe the stock market will go down. A "bearish" investor will buy stock cautiously. A "bullish" investors believe the market will go up. They will charge ahead and put more money into the market. Likewise, the term "bear market" describes a time when stock prices have been falling on the whole.

A "bull market" is a period when stock prices are generally rising. Bears are cautious animals who don't like to move too fast. Bulls are bold animals who might charge right ahead. Unlike Spain, where the running of the bulls is a tourist attraction and participants really enjoy, the raging bull in the stock market is an entirely different animal.

Due to non-economic reason, (which most of us are aware of) for many years we had shy bear in the stock

Bull is Bullish

One thing that is certain, we will have a bear market. In fact, in the history of the stock market, we always have bear markets after bull markets and vice versa. The question is when? We don't have a clue when a bear market will come. Do not let anyone fool us into believing that they can predict the market accurately.

CA. Anal Raj BhattaraiCA. Bhattarai is a Fellow Member of ICAN.

He can be reached at [email protected]


ECONOMY

market. But after the promogulation of new constitution and logical ending of Tarai unrest, now we have muscular bull in stock market.

The Nepalese bull has made impressive combat during last twelve months. On the first week of April 2015 index was hovering around 940 level but bullish bull had taken market to all time high at 1377 on last week of March 2016. Many market players believe that market will continue to behave like this during next fiscal year.

Conducive market conditions and adequate policy response of the regulators, and availability of low-priced credit, and impressive earning of listed companies, we can easily predict that bull market may last for another couple of years. The impressive bounces recorded on during last quarter of current fiscal year 2015/16 with a majestic jump of 190 points touching 1377 points making record in the history of Nepalese Stock Market. This trend is expected to continue for some time and coming day market will move ahead creating new history.

After those majestic jumps, some of the stock analyst had raised their concern saying market is overvalued. Capital Market regulator had also issued various press release cautioning investors to behave wisely. However, many analyst had dare to take opposite views and decided to follow the crowd. They are confident that market will continues to have strong bull for coming years.

At this juncture, let us examine doubts whether Nepalese Stock market is overvalued or not? How soon we have bear market? Are we heading for another bull market during next fiscal year 2016/17?

I must confess here that, it is very difficult forecast market behavior. Many times stock market had behaved irrationally and at the sometime it had also worked as catalyst to economic growth. Anyone attempting to jump on the bull market better be very careful!

Looking at the market mix and nature of share traded in Nepalese stock market, there is a general agreement that the stock market is not marked to market value, meaning that most stock prices are not trading at desirable multiples of their earnings. As a result, climbing on the stock market now could mean significant short-term gain.

Even if the correction occurs (some of analysts are predicting), the new investors stands a good chance to see their value of investments made today grow up by 10-15 percent within short period. Since investment in the market involves risk, the investors need to be cautious about their portfolio mix. Well mix portfolio structure is highly recommended.

One thing that is certain, we will have a bear market. In fact, in the history of the stock market, we always have bear markets after bull markets and vice versa. The question is when? We don't have a clue when a bear market will come. Do not let anyone fool us into believing that they can predict the market accurately. If we can't forecast stock market movements, in that situation there is not much point in wasting valuable time on it.

So why do investors worry about bear markets? They worry because they don't want to lose money when their stocks decline in value. In dire circumstances, you might lose your money if your neighbor succeeds in forcing you to sell your assets under his terms. However, the "marketability" (Stock can be sold or bought easily in the stock market) in the stock market gives peoples the false impression that they can jump in and out quickly. If you need to jump in and out frequently, then you will naturally be troubled by market's volatility, as it becomes a game of musical chairs. Over time, people usually earn more from owning stock than from leaving money in the bank, buying bonds, or making other investments.


ECONOMY

1. An Introduction to Fixed Exchange Rate Regime

Exchange rates are fixed, flexible, and variants of the two. In a fixed exchange rate (FER), exchange rates are set at officially determined levels and are changed only by the direct action of the authorities. In a flexible or floating exchange rate system, exchange rates are not officially fixed but are determined by conditions of supply and demand in the foreign exchange market. In other words,

in the FER regime, the central bank signals its readiness to buy and sell the domestic currency for foreign currencies at a predetermined rate. One of the greatest benefits of FER is that it provides price stability, the main objective of the monetary authorities in most countries today. By pegging the domestic currency to the currency of a low-inflation country, the ability to maintain price stability is enhanced, provided there is a strong commitment on the part of the authorities to maintain the FER.

Working of the Fixed Exchange Rate Regime: Some Country Evidences Relevant for Nepal

With respect to Nepal, the IMF Executive Board concluded the Article IV Consultation in November 2015 concurring that the peg to the Indian rupee continued to serve as a transparent anchor and that monetary policy should be geared toward supporting the peg. While a temporary increase in inflation as a result of the recent supply shocks should be accommodated, Directors recommended that, as conditions normalize, monetary policy be reoriented to keeping Nepalese inflation close to that in India.

Mr. Tula Raj BasyalMr. Basyal is a Former Executive Director of

Nepal Rastra Bank.He can be reached at

[email protected]


ECONOMY

Further, FER helps to avoid exchange rate fluctuations and reduces the unfavorable effects of exchange rate uncertainty on trade and investment. According to the International Monetary Fund (IMF), the list of the countries and the currencies to which they are pegged is as described below (For example, the IMF categorizes exchange rate arrangement of Nepal as well as that of Bhutan, Lesotho, Namibia, and Swaziland along with other countries as the conventional pegged arrangement, with the number of such countries aggregating 42, as listed in Text Table 1 below.)

Text Table 1. Countries Pegging their Currencies

Particulars

US dollar: (13 Countries)1. The Bahamas, 2. Bahrain, 3. Barbados, 4. Belize,

5. Eritrea, 6. Jordan, 7. Oman, 8. Qatar, 9. Saudi Arabia, 10. South Sudan, 11. Turkmenistan, 12. United Arab Emirates, and 13. Venezuela

Euro: (18 Countries)1. Cabo Verde, 2. Comoros, 3. Denmark, 4. São Tomé

and Príncipe, 5. Benin, 6. Burkina Faso, 7. Côte d’Ivoire, 8. Guinea-Bissau, 9. Mali, 10. Niger, 11. Senegal, 12. Togo, 13. Cameroon, 14. Central African Republic, 15. Chad, 16. Republic of Congo, 17. Equatorial Guinea, and 18. Gabon.

Composite Currencies (6 Countries)1. Fiji, 2. Kuwait, 3. Libya, 4. Morocco, 5. Samoa,

and 6. Solomon Islands

South African Rand ( 3 Countries)1. Lesotho, 2. Namibia, and 3. Swaziland

Indian Rupee: (2 Countries)1. Bhutan and 2. Nepal

Source- International Monetary Fund, October 2014, Annual Report on Exchange Arrangements and Exchange Restrictions, 65th Issue, Washington, DC

2. Fixed Exchange Regime in Lesotho, Namibia, and Swaziland as well as Bhutan and Nepal

On December 5, 1974, the Rand Monetary Area (RMA) agreement was signed among Botswana, Lesotho, South Africa, and Swaziland, formally establishing currency

union in this area. However, Botswana opted to withdraw from the RMA in 1975 because of a desire to pursue an independent monetary policy. On April 1, 1986, the RMA agreement was revised to establish the Common Monetary Area (CMA) comprising Lesotho, Swaziland, and South Africa. Under the terms of agreement, Lesotho and Swaziland continued issuing their own national currencies. Namibia became independent in 1990, and joined the CMA in 1992. Thus, the multilateral agreement replaced the trilateral agreement when Namibia joined the CMA. Namibia issued its own national currency, the Namibian dollar, in 1993.

Lesotho, Namibia, and Swaziland have maintained FER regime with South African rand. The CMA has many of the characteristics of a monetary union, like the exchange rates vis-à-vis other member countries are fixed and, among them, there are no payment restrictions and capital flows are free. CMA is a free trade area and maintains common external tariff. In the external sector transactions, CMA countries have adopted current account convertibility. Among the CMA countries, there is free capital mobility. Under the arrangement, while national currencies circulate in small countries, there is a de facto common currency—the South African rand. As per the current parity arrangements, national currencies of the small countries and the rand are perfect substitutes, with no transaction cost in conversion. However, absence of these arrangements like the single currency, common central bank, external exchange rate anchor, common pool of reserves, agreed convergence criteria, and regional surveillance of domestic policies, particularly fiscal and structural policies, etc. does not make the CMA a full-fledged monetary union like the European Union.

Bhutan and Nepal have maintained FER regime with Indian Currency (IC) while the exchange rate arrangement of India and South Africa is categorized as floating. Bhutan has not adopted both current account and capital account convertibility, both with India and other countries. Bhutan


ECONOMY

first issued its own paper currency (ngultrum) in 1974 and pegged it at par with Indian rupee, which is adopted as legal tender in Bhutan. So, both currencies exist side by side and are used interchangeably for domestic transactions, while only the Indian rupee is used for trade with India. As an unknown quantity of Indian rupee also circulates within Bhutan as legal tender, the extent of monetization of Bhutan is difficult to estimate. Unlike the CMA countries where there is capital account openness within the CMA, Bhutan has not allowed current account and capital account convertibility even with India. IC is legal tender in Bhutan and ngultrum serves as the medium of exchange for trade payments in the border areas.

In Nepal, the FER with the IC has been in operation since April 16, 1960. Since September 17, 1966, the dual currency was completely abolished by declaring that Nepalese Currency (NC) was the only legal tender throughout the country. The exchange rate of the NC with the US dollar and other currencies was made flexible since February 12, 1993. There has been no capital account convertibility both with India and the rest of the world. However, Nepal has adopted current account convertibility for almost two and a half decades under the Article VIII arrangement of the IMF. Never the less, unlike in Bhutan, IC is not legal tender in Nepal and NC is not accepted for payments in the border trade.

3. Macroeconomic IndicatorsThe average inflation during the 24-year period (1991-2014) was 6.8 percent in South Africa, 4.5 percent in Lesotho, 5.9 percent in Namibia, and 7.9 percent in Swaziland (www.imf.org/database). The inflation in Lesotho and Namibia was lower while the inflation in Swaziland was higher than that in South Africa. Similarly, the economic growth during the same period averaged at 2.6 percent only in South Africa compared to 4.0 percent in Lesotho, 4.1 percent in Namibia, and 3.1 percent in Swaziland. Thus, the economic growth in Lesotho, Namibia, and Swaziland was higher than that in South Africa.

On the other hand, the average inflation during the 24-year period (1991-2014) was 7.6 percent in India, 5.9 percent in Bhutan, and 7.6 percent in Nepal. The inflation in Bhutan was lower than that in India while the inflation in Nepal was equal to that in India. At the same time, the economic growth during the same period averaged at 6.5 percent in India compared to 6.7 percent in Bhutan and 4.5 percent in Nepal (www.worldbank.org/indicator). Thus, the economic growth in Bhutan was higher than that in India whereas the economic growth in Nepal was lower than that in India. The inflation effect of India was more dominant in inflation in Nepal while the growth effect of India was less effective in economic growth in Nepal.

As depicted in Table 1, among the seven economies under review, Nepal’s per capita income in current US dollars was lowest in 1994 and also in 2014. Increase in per capita income in 2014 compared to 1994 in current US dollars was also lowest in Nepal. Net change in external balance of goods and services as percent of gross domestic product (GDP) between 1994-2014 shows deteriorating balance for six of the seven economies except for Lesotho which witnessed 36.6 percent improvement over the period to a deficit of 60.8 percent.

4. IMF’s Assessment as per Article IV Consultations of Some Countries Adopting Fixed Exchange Rate Regime

The IMF generally reviews favorably the FER toward serving the purpose of reducing economic fluctuations, fostering better monetary conditions, and ensuring price stability. In this respect, the recent reviews of the FER have been made by citing some references of the Article IV Consultations conducted by the IMF Executive Board.

IMF Executive Board concluded 2015 Article IV Consultation with the Kingdom of Lesotho in January 2016 noting that the currency’s (loti’s) parity with the South African rand served Lesotho well by supporting


ECONOMY

macroeconomic stability and integrating the economy with the region. The Board also advised that it was critical that an adequate level of international reserves be maintained to ensure this exchange rate regime.

While concluding the 2015 Article IV Consultation with Namibia in October 2015, the IMF Executive Board remarked that Namibia’s real effective exchange rate (REER) misalignment was possibly smaller as the recent deterioration of the current account did not seem closely related to the exchange rate developments. The overvaluation could be corrected if the government were to successfully embark on its planned fiscal consolidation. Given the fixed exchange rate with the rand, a nominal depreciation would not necessarily result in improvements in the current account.

On the conclusion of the Article IV Consultation with Swaziland, the IMF Executive Board in November 2015 remarked that Swaziland’s REER depreciated since its peak at end-2010 and moved close to its historical average recently. Since the currency (lilangeni) is pegged to the South African rand, the depreciation mostly followed the rand, although the pace of the recent depreciation was less pronounced for Swaziland. On average, the REER depreciated by about 12 percent between end-2010 and end-2014, reversing the bulk of the appreciation of 2009-10.

While concluding the Article IV Consultation with Bhutan in June 2014, the IMF Executive Board observed that given Bhutan’s close economic relationship with India, the peg to the Indian rupee served Bhutan well and remained an appropriate nominal anchor. Directors took note of the staff’s assessment that the real exchange rate was overvalued. They encouraged the authorities to make progress on structural reforms, to boost competitiveness, create jobs, and help diversify the economy. Directors encouraged elimination of exchange restrictions as soon as macroeconomic conditions permitted.

With respect to Nepal, the IMF Executive Board

concluded the Article IV Consultation in November 2015 concurring that the peg to the Indian rupee continued to serve as a transparent anchor and that monetary policy should be geared toward supporting the peg. While a temporary increase in inflation as a result of the recent supply shocks should be accommodated, Directors recommended that, as conditions normalize, monetary policy be reoriented to keeping Nepalese inflation close to that in India.

5. Lessons for NepalFER in Nepal was more instrumental for aligning Nepalese inflation with Indian inflation whereas productivity level and economic growth in Nepal could not match with the productivity and growth in India. The growth rate of Lesotho, Namibia, and Swaziland exceeded the growth rate in South Africa which implied that the policy regime adopted in the region substantially favored these smaller economies vis-à-vis South Africa. Even the inflation in Lesotho and Namibia was less than that in South Africa, which implied that South Africa provided these smaller economies possible assistance for ensuring macroeconomic prudence. FER could be sustainable and mutually beneficial when trust, cooperation, and coordination underpin the mutuality of economic interests among the neighboring countries. Such coordinated policy framework, which is essential for the success of the policy regime across countries, has been lacking in South Asia. Instead of helping smaller neighbors in their quest for prosperity, big neighbors seem to demonstrate rivalries and big-brotherly attitude. In an interdependent world, such individualistic outlook could defeat the very purpose which it wants to serve. Therefore, establishing currency union ultimately leading to economic union will turn out to be an improbable proposition for many more years to come in South Asia. Domestically, resource mobilization and utilization should receive priority for expediting economic development process


ECONOMY

besides fostering an enabling environment for trade diversification and export promotion. Trade relations based on trade agreement need to be updated with enhanced negotiation skills and strengthened trade capabilities. Nation’s trade transactions with the world should be made sustainable by enhancing cooperation,

coordination, and negotiation skills that contribute to address problems and mitigate challenges under the agreed multilateral, regional, and bilateral framework for trade. Besides adapting exchange rate regime for growth and stability, the fundamentals for FER need to be fostered and maintained for the time being.

Table 1. Macro Indicators (Lesotho, Namibia, Swaziland, and South Africa; Nepal and India)

Lesotho Namibia Swazi- land South Africa Bhutan Nepal India

Area (thousand sq. km.) 30 826 17 1221 38 147 3287

Population (million) 1.9 2.2 1.1 55.0 0.8 28.4 1286.8

Per Capita Income, 1994, current US dollars 437 2264 1503 3650 529 195 353

Per Capita Income, 2014, current US dollars 1034 5406 3477 6482 2560 701 1581

Increase in Per Capita Income in 2014 compared to 1994, current US dollars 597 3142 1974 2832 2031 506 1228

PCI-Av. Annual Growth % for Two Decades 4.4 4.4 4.3 2.9 8.2 6.6 7.8

Share % of GDP: Agriculture, Industries, Services, 1994 18.3+39.8+ 41.9

11.3+26.9+ 61.8

13.4+42.2+ 44.4

4.6+35.0+ 60.4

34.9+30.0+ 35.1

43.1+21.7+ 35.2

28.3+26.4+ 45.3

Share % of GDP: Agriculture, Industries, Services, 2014 8+31.9+ 60.1

7+31.8+ 61.2

6.3+44.1+ 49.6

2.5+29.5+ 68.0

17.7+42.9+ 39.4

33.7+15.6+ 50.7

17.8+30.1+ 52.1

Change in %age share of agri. -10.3 -4.3 -7.1 -2.1 -17.2 -9.4 -10.5

Change in %age share of industry -7.9 4.9 1.9 -5.5 12.9 -6.1 3.7

Change in %age share of services 18.2 -0.6 5.2 7.6 4.3 15.5 6.8

Av. Growth Rate, % (1995-2014) 3.8 4.1 3.2 3.0 7.4 4.3 6.9

Av. Inflation Rate, % (1995-2014) 7.0 7.5 7.3 6.2 6.5 7.2 7.2

External Bal. on G.& S., 1994, GDP % -97.4 -1.3 -9.2 2.2 -9.9 -12.4 -0.3

External Bal. on G.& S., 2014, GDP % -60.8 -26.2 -12.3 -1.9 -21.1 -29.6 -2.3

Net change in G&S balance between 1994-2014, %age points 36.6 -24.9 -3.1 -4.1 -15.3 -17.2 -2.0

Source- World Bank (website:data.worldbank.org/indicator)


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Nepal Rastra Bank (NRB) in its 2072/73 monetary policy announced on 23 July 2015 has decided to hike the minimum paid up capital of commercial bank, development bank and finance company by multifold to be met within next two fiscal year i.e., by the end of Asad 2074. The decision was so dramatic that it sent shockwaves to the country’s banking sector, causing banks and Financial Institutions (FIs) to scramble for possible partners for merger and acquisition (M&A). It is particularly interesting to note that it is the first monetary policy of the new Governor. In view of that many believe that he wants to take a very bold decision to leave a legacy of being one of the most resolute and effective Governors in the history of country’s central bank. On the contrary, there are also other sections of people who are of the opinion that it is indeed the bureaucracy of NRB who took the advantage of new Governor’s inexperience to make him agree on measures which they believe is long overdue, in spite of being very unpopular. Whatever may be the true

intention, the decision doesn’t seem to be based on the proper analysis of ground realities and therefore doesn’t echo the concerns of stakeholders. Ideally, such measures are taken during the period of crisis and the banking sector is nowhere near that. The central bank being the apex body of banking sector has to broaden its view in foreseeing the implication of such decision which is likely to do more harm than good to the country’s economy. The manner in which decision was taken is extremely ad hoc as no consultation was carried out with stakeholders on the one hand and on the other hand no analysis of the likely consequences of such decision seems to be undertaken. Though the sole objective of the policy appears to be the consolidation of the banking sector through aggressive M&A, but even in the best case scenario, the implication of the policy to the overall economy looks blatantly adverse. The economy of the country cannot simply absorb the extent of capital flight into banking sector leading to a crowding out effect in the real sector of the economy.

NRB’s Decision to Hike Paid-up Capital by Multifold : More of Tyranny Less of Foresight

NRB in increasing paid up capital is to force M&A activities so that the number of existing banks and FI are reduced considerably, reopening license goes against its own overriding goal. The NRB’s policy and implementation plan are contradicting with each other and it doesn’t convey unified and consistent message to the public at large raising doubts over its intention and integrity.

CA. Biswash GauchanCA. Gauchan is a member of ICAN



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As the country is reeling under the consequences of massive earthquake followed by supply constraints due to political agitation and external factors, what is needed is the huge investment in real sector of the economy to uplift its overall productive capacity. On the contrary, the policy will only aggravate the situation by channeling more resources to already outsized banking sector leaving other sectors of the economy to suffer from continued underinvestment.

The central bank has cited few reasons in support of its unilateral decision and I would like to argue how each of them is based on misplaced beliefs and wrongful judgment:

1. It has been made to believe that the paid up capital of our banking sector is the lowest in South Asia. On the contrary, the data in table 1 depicts a completely different picture. The minimum paid up capital of a commercial bank in Bhutan and Maldives are much lower than ours while those of Afghanistan and Bangladesh are marginally higher despite latter’s economy being almost ten times bigger than the size of Nepal. The highest minimum paid up capital in South Asia is that of Pakistan followed by India and Sri Lanka. As none of these countries are planning to increase the minimum paid up capital anytime soon, Nepal within two years will become the country with the second highest minimum paid up capital in the region along with India surpassing both Sri Lanka and Bangladesh. Let us not forget that the economy of India is 104 times bigger while Sri Lanka is about 4 times bigger than the economy of Nepal. In addition, our bank’s minimum paid up capital will become more than 3 times larger than that of a bank in Afghanistan though the economies of these two countries are almost equal in size. Similarly, the minimum paid up capital for commercial banks in Uganda, Tanzania and Kenya which are equal, two and half times and three times the size of our

economy in that order and are sharing similar human development indices and development challenges are Rs. 70 crore, 23 crore and Rs. 1 billion respectively – much lower than our existing requirement. Measured by percentage of nominal Gross Domestic Product (GDP), even the current paid up capital of Rs. 2 billion for a commercial bank in Nepal is indeed one of the highest in the world.

Minimum paid up capital of commercial banks in SAARC countries Table 1

AFG BAN BHU IND MLD NEP PAK SRIMinimum Paid up capital in local currencies in billion 1.35 2.0 0.30 5.0 0.03 2.0 10.0 5.0

In USD equivalent in million 23.5 26.67 4.5 80.0 2.0 20.0 100.0 40.0

Size of economy compared to Nepal 1.03 9.44 0.11 104.37 0.15 12.65 3.8

16 60 5 90 7 30 36 25

Sources: Central Banks websites

2. The highly ambitious scenario of more than halving current number of banks and FIs in next two years considering the sole objective of reducing the number of banks and FI will help us in understanding overall implication of the decision in the economy of resource strap country like ours. In the most likely situation, the existence of non-national level finance companies will come to an end in the light of extremely harsh capital requirement imposed upon them. Similarly, as there is no difference in capital requirement between 1 district and 3 district development banks, development bank with one district coverage will migrate to 3 district development banks. Moreover, these FIs will probably merge either among themselves or with a higher graded institution to meet the capital requirement. Likewise, most of the national level development banks by either merging with each other or with one or more regional development banks or finance companies can meet their capital requirement. In the similar fashion, 20 out of 30


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commercial banks will find it difficult to meet the capital on their own, so they will resort to merger with suitable FIs including their counterparts as well. It is however highly unlikely that commercial banks will merge with each other for the sake of meeting capital requirement. Nonetheless for our analytical purpose we have assumed that 8 commercial banks will merge with another bank as a highly optimistic scenario. These commercial banks include those having problems amid persistent financial and governance issues as well as those which have received their operating license after the imposition of moratorium in 2009 finding it difficult to secure reasonable market share amid excessive competition among large number of banks and FIs. We are assuming that under the best case scenario, we will end up having 22 commercial banks, 15 national level development banks, 10 regional banks with ten district coverage, 15 regional banks with 3 district coverage and 10 national level finance companies – in total 72 from existing 154 institutions as exhibited in the following table:

Best case merger scenario in two years Table: 2

Commercial Banks

Development Banks

Finance Companies Total

National National 4-10 dist. 3 dist. 1 dist. National 1-3 dist.

Current paid up capital 2 billion 640million

200million

100million

200million

100million

No. of Institutions 30 24 13 27 12 42 6 154

New paid up capital 8 billion 2.50billion

1.20billion

500million

800million

400million

Best case merger scenario 22 15 10 15 0 10 0 72

Paid up Capital 71/72 (No.) 98.3 billion (30) 27.535 billion (76) 15.764 billion

(48)141 billion

(154)Paid up Capital 73/74 (No.) 176

billion (22)57 billion

(40)8 billion

(10)241 billion

(72)

Sources: NRB Monetary Policy 2072/73, NRB Current Macroeconomic situation of Nepal 2014/15, NRB circulars and NRB website

Going by NRB’s new minimum paid up capital, the banking sector will have a paid up capital close to Rs. 241 billion within two years against Rs. 141 billion as of last financial year, an increase of 71%

in just about two years. Imperatives of injecting additional Rs. 100 billion within two years in comparison to Rs. 141 billion paid up capital built over the entire history of Nepal’s banking sector can have massive impact in our economy that the policy maker and central bank has to contemplate since more than 90% of the investment has to be raised from within the country given very small foreign holding in our banking sector (Standard Chartered, Nepal SBI, Everest Bank and Nepal Bangladesh Bank). The situation will be worse if the best case scenario of reducing the total no. of banks and FIs from 154 to 72 will not be achieved in two years because the banking sector will be inundated with even higher capital.

3. Analysis of the monetary aggregates: The shortcoming of the decision can be better understood from the analysis of monetary aggregates. The following table highlights comparison of the monetary aggregates among some of the countries in the region as well as those economies which are comparable to Nepal such as Uganda and Kenya:

Analysis of Monetary Aggregates Table 3(In percentage)

BAN IND NEP PAK SRI Uganda KenyaPaid up Capital /GDP 6.66 2.12 1.46Capital & Reserves/GDP 4.83 7.10 10.47 5.53 5.02 4.54 9.37Capital Adequacy Ratio 11.35 13 12.70 15.10 16.70Reserve Money 9.58 15.38 23 5.91 5.95Narrow Money (M1/GDP) 10.46 65 35.62 6.26 9.40 17.48Broad Money (M2/GDP) 51.83 88.4 43.97 35.37 15.80 36.99Broad Money (M3/GDP) 85.13 93 55.88 39.61 23.38 43.49Total Deposit/GDP 49.04 72.92 82.61 40.64 20.22 41.74Loan & Advance/GDP 46.72 52.10 75.98 50.88 21.16 39.98Claims on Private Sector/GDP 37.57 64.65 36.44 14.22 36.08NPL 9.69 3.80 3.80 12.80 4.20Profitability (ROE) 8.09 10.70 14.40 23.50 16.50Profitability (ROA) 0.60 0.80 1.50 2.10 2.00

Sources: Based on central banks’ statistics, SAARCFIN e-bulletin, Financial year considered is 2014 except for Nepal for which 2014/15 is used for monetary aggregates.

In comparison to these countries, the monetary aggregate of Nepal as a percentage of GDP is quite


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high suggesting somewhat overstretched banking sector. Higher level of credit compared to GDP signals that beyond a certain point further credit expansion could be counterproductive to the financial stability of the country. Credit is indeed the means of increasing money supply in the economy through the creation of new deposits which will again be used to provide additional credit and the process keeps on repeating itself. With sizable increase in paid up capital in a very short span of time, there will be a pressure on scaling up business to maintain similar level of return - which can lead to the instances of moral hazards on the part of both the Management and Board. As these institutions will transform into behemoth organizations, each of them can pose systemic risk to the economy because of “too big to fail” phenomenon. Considering an optimum commercial bank with a paid up equity of 8 billion, deposit of 80 billion and credit of 70 billion; the total assets of a single commercial bank alone will be over 4 to 5 % of GDP posing significant challenges in the management and supervision of these companies in the wake of systemic risk associated with its size and nature. Moreover, the total paid up capital as well as Capital & Reserves (C&R) of our banking sector as a whole as a percentage of GDP is already the highest in the region and any further attempt to increase it substantially within a period of two years as envisaged in our current monetary policy would only invite more problems than would help in fostering stability and economic development. The banking sector currently has a combined Capital & Reserves (which includes undistributed profit of 2071/72) of Rs. 220 billion and using a rule of thumb, it will be sufficient to support a total credit equivalent to ten times the C&R, i.e., Rs. 2,200 billion compared to total credit of Rs. 1,614 billion based on the consolidated financials of last financial

year published by NRB. Hence, with no additional capital we still have a room for credit expansion of additional Rs. 586 billion representing 36% growth from current level which will be difficult to achieve in next two years – a sign of excess capacity in our banking sector. Moreover, at this pace and scale, the total credit is going to exceed the size of our GDP signaling already outsized banking sector and some underlying structural anomalies of our economy. In addition, considering the best case scenario presented in the above table, if the banking sector has to inject Rs. 100 billion in a matter of two years to meet NRB’s minimum paid up capital requirement, it will provide additional credit space of Rs. 1,000 billion accounting for 50% of our GDP. When the country has been facing excess liquidity for last several months and NRB has been taking unprecedented measures to address the matter, forcing banks and FIs to inject substantial capital in the form of minimum paid up equity is simply superfluous and arbitrary.

4 Opening branches in other countries in South Asia: A Central Bank sets minimum paid up capital requirement for banks and FIs by considering host of factors related to country’s needs and its economy. As far as opening an offshore branch or subsidiary is concerned, the decision is personal and the concerned bank shall accordingly satisfy all the conditions required by the regulatory authorities of the concerned country. Hence, in the process of facilitating one or two domestic banks to expand abroad, it is preposterous to impose a capital requirement of a foreign country to the whole domestic banking sector. Moreover, not all the banks in a country will be opening branches in the other countries. Insofar, when none of the banks in Nepal including fully government owned bank has made any intention of expanding abroad in more than 75 years of its banking history, slapping capital prescription based on this assumption is quite untenable and counterproductive.


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5 Funding capital intensive projects: Time and again, it is heard especially in relation to investment in hydroelectric project that even if whole banking sector of the country comes together it will not be able to finance a project of 250 MW. For instance, consortium has to be organized for funding small to medium projects of 5 to 25 MW. I find this argument a reason for increasing the paid up capital very naïve and irrational. We have to understand that banking sector doesn’t operate in vacuum and it has to anchor around real sector of the economy. When the size of our economy is just USD 20 billion, the banking sector can only generate resources commensurate with its size and its income (GNP). Potential (which is not yet harnessed) of a country’s economy cannot alone determine the amount of financial resources that a banking sector of country can generate. The size of the economy along with multitude of factors such as depth, credibility, openness of our financial market will determine it. Nepal has 100,000 MW of technically feasible hydroelectric potential which requires total investment of USD 200 billion, equal to ten times the size of our own GDP. Even for a country like India, it needs funding from foreign market to exploit potential of this magnitude and scale, let alone a small economy like Nepal. World Bank has estimated an investment need of 13 to 18 billion US dollar in Infrastructure over a period of 2011 to 2020 for Nepal to graduate from LDC to developing one. It is quite irrational to expect mobilizing this resource entirely from domestic market when the size of our economy is too small compared to our needs and our financial market is too shallow and narrow. Increasing paid up capital with a view to address these concerns seems totally misplaced and undesirable.

6 Consolidation of banking sector by removing categorization and keeping commercial bank only:

The “Financial Sector Development Strategy” envisions the removal of different categories of FIs to eventually have only commercial bank. The policy to create different categories of FIs was initiated with good intension when commercial banks were hesitant to reach out to the mass and were conduits of only few privileged and well off individuals and corporates. So finance companies came into being from early nineties to promote retail financing followed by development banks from late nineties and beginning of the millennium to extend banking services to areas outside capital in small towns and district headquarters with the concomitant aim of channeling funds towards development sector. Their establishments have helped promoting competition and expanding banking services to areas and places hitherto not reached out by commercial banks. However, during the whole process, what seemed to be totally overlooked was the importance of creating differentiation and complementarity among different categories leading to stiff competition among large number of FIs crowding together in the same market. As a result they ended up doing essentially the same thing defeating the very purpose of creating different categories of FIs. Regulatory authorities and management alike could not act proactively and innovatively to promote differentiation in creating niche for each category of institution, rather convergence in scope and areas of operations got reinforced in the process. All the categories of FIs have been financing vehicle loan as well as providing consortium loan to hydroelectric projects in the same market. The central bank that has created these categories and issued licenses after following due process cannot eliminate them simply because the original goals were either not served or because the numbers of these institutions are just too many. Who is to blame for it and who created it in the first place? The central bank has to take due share of its


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responsibility and come up with exit strategy that is gradual and calibrated. It is premature to envisage that these challenges can be fully resolved in a matter of two year or during one Governor’s term. Trying to initiate sweeping reform without properly assessing its broader macroeconomic implication can cost the economy severely. There is still merit in creating differentiation, for example, introduction of Non-Banking Financial Companies (NBFC) specializing in special products or line of credit. Once the consolidation phase is over, the central bank can promulgate new laws relating to the establishment of NBFC and as a part of exit strategy, the existing finance company can be incentivized to opt out to be transformed into NBFC. Similarly the development banks can be allowed to make equity investment in infrastructure projects such as hydroelectric ventures, toll roads, power transmission lines etc. so that overtime it can build niche in this area and play complementary role vis-à-vis commercial banks thereby promoting both scale of investment and transparency in the infrastructure funding. Reserve Bank of India has introduced the concept of differentiated banks by rolling out Payment Bank and Small Finance Bank and recently issued 6 and 11 licenses respectively. These are some of the things we can try to emulate from other countries for the development and stability of our banking sector. Furthermore, once the moratorium is lifted, both the development banks and finance companies can be allowed to compete for the license of a commercial bank, similar to what has been practiced in many countries as opposed to automatic upgrading followed in the past.

7 Basel III implementation: Nepal has been ahead of Basel’s requirement for the most of its banking history. Even as of now, all the commercial banks are BASEL III compliant as far as capital requirement is concerned though it is yet to be enforced officially.

BASEL III provides norms for capital adequacy, leverage position and liquidity requirement mainly from risk management perspectives. Our capital adequacy guidelines have been stricter than those contained in BASEL II and III frameworks to which our banking sector in general have always conformed. Increasing paid up capital by four times in a matter of just two years doesn’t augur well in the pretext of BASEL III compliance.

8 Opening up license for new bank with a capital of 10 – 15 billion and removing moratorium: It is at the sole discretion of the Central bank of the sovereign country to decide on when to lift moratorium based on its assessment of the situation. When the paramount objective of

NRB in increasing paid up capital is to force M&A activities so that the number of existing banks and FI are reduced considerably, reopening license goes against its own overriding goal. The NRB’s policy and implementation plan are contradicting with each other and it doesn’t convey unified and consistent message to the public at large raising doubts over its intention and integrity.

9 Opening foreign banks branches to do retail banking: Currently foreign banks are permitted to do only wholesale banking in the country. Accordingly, thresholds have been imposed on the minimum amount of deposit they can mobilize from a single party and credit they can provide to a single party. Due to this restrictiveness, foreign banks will not find it feasible to operate their branch in the country. Once such restrictions are lifted, foreign banks with global ambition will not find capital requirement of a small country like ours a major stumbling block for their international expansion.

10 In the medium to longer term, the capital market may face a brunt of the decision as it pushes back


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our secondary market to a similar state when the banking sector alone constituted more than 80% of total market capitalization (two third at the time of decision) thereby amplifying the overall risk in the capital market in the light of overconcentration in one sector. In the short run, it looks as if the capital market has responded positively to the decision of the central bank, but it is very unlikely that the momentum will be sustained over a longer period. While it may be money making opportunity to the shareholders of only handful of banks which are able to meet the new capital threshold on their own, for the majority of the other banks and FIs the bullish sentiment can very quickly turn into bearish run. Similarly, most of these banks including those who have fared extremely well will in no circumstance be able to sustain the same rate of return that they have been reaping for the last several years. Moreover, flooding of capital market with the shares of only one sector within a very short span of time will result into excessive portfolio concentration thereby sharply heightening the vulnerabilities in the financial market.

11 There are host of areas where central bank can initiate reforms in the banking sector including its own management. Professionalizing of its departments and skilling of its staff are crucial in taking forward the reform process. Plethora of ad hoc directives that either do not conform to professional standards and international practices such as accounting and auditing standards or are impractical; unwarranted focus on witch hunting in the past; embroiling on petty issues; and excessive interference in the internal management of banks undermines the larger role of the central bank in streamlining and steering the country’s banking sector into more advanced and risk based management system. By any standard, the operational efficiency of Nepal’s banking system is probably one of the best in the world.

The banking sector has contributed immensely to whatever has been achieved so far and is one of the bright spots of our economy. However, there are ample of negative vibes fueled by the very ones who are at the helm of affairs which will not be conducive in creating healthy and robust banking system in the country. In every sector there are few rogues who deserve to be identified and prosecuted in a timely manner and Nepal banking sector is no exception. But due care has to be exercised while addressing these issues so that honest people don’t feel intimidated to take rightful decision in a free and fair manner, else it will be difficult to uphold and maintain the moral standard and professional integrity necessary to revitalize the most promising and transparent sector of our economy.

While sustained capital increment is good for every prospering sector and institutions, any abrupt and aggressive increase could be equally destabilizing and counterproductive. Both the timeframe and scale of increment are unreasonable and hence, the central bank has to revisit its decision and come up with more practical framework. The central bank’s objective of reducing the number of banks and FI- probably the highest in the world in comparison to the size of our GDP on the back of no differentiation among different categories of FIs is well appreciated and shall indeed be pursued with vigor and tenacity for the overall development and consolidation of banking sector. But putting whole onus of achieving this objective in a single factor –minimum paid up capital is unwarranted and can actually be damaging. It has to be supplemented by host of other policy measures such as incentivizing differentiation among different categories, introduction of NBFC to which existing finance companies would have the option of migration, tax rebate, concessional terms for branch expansion, time extension for meeting minimum paid up capital etc.


ECONOMY

Based on the analysis of financials and the future prospects of country’s banking sector, it is hard to contemplate that any rational investors either domestic or foreign would be in favor of NRB’s decision. This is because there is no economic sense and business logic to increase paid up capital by at least four times in a span of merely two years given that there is no possibility of achieving similar rate of return for many years to come under the weight of massive paid up capital amid very little prospects of commensurate business growth and economic development. NRB shall pay heed to the genuine concerns of stakeholders to avoid the ramifications of likely failure of its policy on the overall economy of the country. In the economy in which the share of the banking sector is already outsized and overstretched, NRB’s unilateral decision could be counterproductive from the point of view of misallocation of the resources.

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ECONOMY

IntroductionA multinational company (MNC) is a business that either owns or controls foreign subsidiaries in more than one country. It is this ownership or control of productive assets in other countries which makes the distinct from an enterprise that does business overseas by simply exporting goods and services.

MNCs cover the entire spectrum of business activity, from manufacturing to extraction,

agricultural production, chemicals, processing, service provision and finance. There is no typical line of activity of a multinational. Some MNCs are truly 'global', with production located in a wide variety of countries and regions. In the process of business expansion, they may decide to go it alone and create wholly owned subsidiaries. Alternatively, they might share ownership and hence some of the risk, by establishing joint ventures.

Mr. Gyan Mani AdhikariMr. Adhikari is a lecturer at different colleges.

He can be reached [email protected]

Multinational Company: An Introduction

MNCs cover the entire spectrum of business activity, from manufacturing to extraction, agricultural production, chemicals, processing, service provision and finance. There is no typical line of activity of a multinational. Some MNCs are truly 'global', with production located in a wide variety of countries and regions. In the process of business expansion, they may decide to go it alone and create wholly owned subsidiaries.


ECONOMY

If MNC investment is made at regulated structure, many governments insist on owing or controlling a share in the new enterprise, but at different level or size of investment. It also depends on the nature of the business and its perceived national importance.

Trends in Multinational InvestmentSince the mid-1980s multinational business have been downsizing, they have been shrinking the size of their headquarters, removing layers or bureaucracy and reorganizing their global operations into smaller autonomous profit centers. Gone is the philosophy that big companies will inevitably do better than small ones. In fact, it now appears a hybrid form of business organization, which combines the advantages of size with the responsiveness and market knowledge of smaller firms. The key for the modern multinational is flexibility, and to be at one and the same time both global and local.

The Transnationality IndexTransnationality refers to the significance to foreign activities as part of either the performance of a country or business as a whole. The index offers both opportunity to evaluate the degree of globalization, as well as being able to identify the most globally oriented countries and business.

The transnationality index for multinational business is composed of the average of three ratios:

• Foreign assets to total assets• Foreign sales to total sales• Foreign employment to total employment

Types of MNCsCompanies may choose to go multinational due to many reasons such as nature of their business, their corporate business strategies, etc. Generally, multinationals are classified as followings:

1. Horizontally Integrated Multinational: A multinational that produces the same product in many countries. The main objective of this type of multinational is to achieve growth of expanding into new markets.

2. Vertically Integrated Multinational: A multinational undertakes the various stages of production in different countries for a core business. Thus, in some countries it will go backwards into the business's supply chain to the components or raw material stages, and in others it will go towards into the product's assembly or distribution. The principle motive behind such a growth strategy is to be able to exert greater control over costs and reduce the uncertainty of the business environment. For example, oil companies such as Shell and Esso are undertaking in a global operation the extraction of crude oil, controlling its transportation, refining it and producing byproducts and controlling the retail sale of petrol and oil products.

3. Conglomerate Multinational: A multinational that produces a range of different products in different countries. By this process of diversification, they look o spread risks and maximize returns through the careful buying of overseas assets through such type of diversification. Unilever is a good example of a conglomerate multinational. It operates worldwide from 103 sites in various food, homecare and personal care markets.

The Produce Lifecycle and the MNCsThe product lifecycle of the MNCs can be split into following four phases.

1. The Launch Phase: This phase will tend to see the new product produced in the economy where the product is developed. It will be exported to the rest of the world. At this stage, the monopoly position of the producer and the novelty of the product enable the business to charge high prices and make high profit.


ECONOMY

2. The Growth Phase: Due to the expansion trend of the market, rival firms will seek to introduce the new product. Prices begin to fall. In order to maintain competitiveness, the business will look to reduce costs, and this stage might consider shifting production overseas to lower-cost production centers.

3. Maturity: At the early stage of maturity, the business is still looking to sell its product in the markets of the developed economies. Thus, it may still be happy to locate some of its plants in such economies. As the original market becomes increasingly saturated, however, the MNC will seek to expand into market overseas which is at an earlier stage of development. Part of this expansion will be by the MNC simply exporting to these economies, but increasing it will involve relocating its production there too.

4. Maturity and Decline: By the time the original markets are fully matured and moving into decline, the only way to extend the product's life is to cut costs and sell the product in the market of developing countries. The location of production may shift once again, this time to even lower cost countries. By this stage, the country in which the product was developed will almost certainly be a net importer, but it may well be importing the product from a subsidiary of the same company that produced it within that country in the first place.

Problems Facing MultinationalsIn the process of expanding business, multinationals may face a number of problems resulting from their geographical expansion.

1. Language Barriers: In general, MNCs employ expatriate rather than local staffs. As a result, they have to face language barriers in their functioning. The problem of language is less of a difficulty in the developed economies of the world than it is in the developing markets or economies.

2. Selling and Marketing in Foreign Markets. Strategies that work at home might fail overseas given wide social and cultural differences. Many multinationals are frequently accused of imposing American values in the design and promotion of their products, irrespective of the country and its culture. This can lead to resentment and hostility in the host country, which may ultimately backfire on the MNC.

3. Attitudes of Host Governments: Government will often try to get the best possible deal for their country from multinationals. This could result in governments insisting on part of ownership in the subsidiary or tight rules and regulations governing the MNC's behavior, or harsh tax regimes. In response, the MNC can always threaten to locate elsewhere.

4. Communication and Coordination between Subsidiaries: Diseconomies of scale may result from an expanding global business. Lines of communication become longer and more complex. These problems are likely to be greater, the greater is the attempted level of control exerted by the parent company.

Advantages of MNCsMNCs have positive contribution to national economy. They are explained below:

Employment: Due to low level of capital formation, most of the developing countries are suffering from unemployment and underemployment. Most countries attempt to entice MNCs to depressed regions where investment is low and unemployment is high. The employment that MNCs create is both direct in the form of people employed in the new production facility, and indirect, through the impact that the MNCs has on the local economy. They also help in professionalization of management and development of human resources.

Technology Transfer: Technology transfer refers to the benefits gained by domestic producers from the technology


ECONOMY

imported by the MNCs. For example: domestic producers copy the production technology and working practices of the MNCs. This process is referred to as the ''demonstration effect''. In addition to copying practices, technology might also be transferred through the training of the workers. When workers move jobs from the MNCs to other firms in the industry, or to other industrial sectors, they take their newly acquired technical knowledge and skills with them.

Sources of Public Revenue: MNCs are required to pay tax and therefore contribute public revenues. Hence, MNCs are important resources of revenue in host countries.

Impacts on BOP: The MNCs investment will represent a direct flow of capital into the country. Similarly, MNC investment is likely to result in both import substitution and export promotion. Hence, MNCs help to improve BOP situation in host countries.

Industrial Development: MNCs bring huge investment and advanced technology which ultimately help to develop industries and entrepreneurship. It results in efficient utilization of resources in domestic industries. This process emerges competitive environment.

Problems Associated with MNCs MNCs may also create negative effects to host countries. The main problems associated with MNCs to host countries are as follows:

• They may use their power in the markets of host countries to drive domestic producers out of business, thereby lowering domestic profit and domestic investment.

• The bulk of their profits may simply be repatriated to shareholders in the rich countries, with little, if any, invested in the developing country. This will tend to make the foreign exchange gap worse.

• The technology and skills brought in by the multinationals may be fiercely guarded by the MNCs. What is more; the dominance of the domestic market by MNCs may lead to the demise of domestic firms

and indigenous technology, thereby worsening the skill and technology base of the country.

• MNCs are often 'footloose', meaning that they can simply close down their operations in foreign countries and move. If a country has a large foreign multinational sector within the economy, it will become very vulnerable to such footloose activity, and face great uncertainty in the long turn. It may thus be forced to offer the multinational 'perks' in order to persuade it to remain. These perks are clearly costly to the taxpayer.

• MNCs enable them to exert various controls over the host countries. They may not ready to follow regulatory and control measures implemented by government of host countries.

Does MNC Investment Contribute Development?Whether investment by multinationals in developing countries is seen to be a net benefit or a net cost to these countries depends on what are perceived to be their development goals. If maximizing the growth in national income is the goal, then MNC investment has probably made a positive contribution. If, however, the objectives of development are seen as more wide reaching, and include goals such as greater quality, the relief of poverty, a growth in the provision of basic needs (such as food, health care, housing and sanitation) and a general growth in the freedom and sense of well being of the mass of the population, then the net effect of multinational investment could be argued to be anti-development.


INFORMATION TECHNOLOGY

Imagine a scenario: you worked on a proposal for a week and one morning, the day you were to present the proposal to your client, the file is locked and no more accessible. A message appears in your screen “Unfortunately, the files on this computer have been encrypted. To obtain the encryption key for this computer, which will automatically decrypt the files on this computer, you need to pay $750 or equivalent. You have 96 hours to submit payment to receive the decryption key. Otherwise your files will be permanently destroyed. Click Next to select your preferred payment

method”.

This type of attacks are actually happening to many organizations and individuals around the world and in Nepal, too. This is like kidnapping your documents, photos, videos or any kind of digital documents and asking for ransom to gain access to your own documents stored in your

Ransomware – A Dangerous Threat to your Digital Files

Ransomware is a dangerous kind of malicious tool which uses encryption to lock the documents and the decryption key is only given when a sum of money is paid to the party who created the Ransomware. In many cases, there is little option but to pay the money to gain access to the documents. It is almost impossible to break the encryption because it takes many years to even mighty powerful computers to break the encryption based on the type of encryption method used.

CA. Mukunda PokharelCA. Pokharel is a Member of ICAN

He can be reached [email protected]



own computer or mobile phone.

Ransomware is a type of malicious software designed to block access to a computer system until a sum of money is paid. According to Wikipedia - Ransomware is a type of malware that restricts access to the infected computer system in some way, and demands that the user pay a ransom to the malware operators to remove the restriction. Some forms of ransomware systematically encrypt files on the system's hard drive, which become difficult or impossible to decrypt without paying the ransom for the encryption key, while some may simply lock the system and display messages intended to coax the user into paying. Ransomware typically propagates as a Trojan, whose payload1 is disguised as a seemingly legitimate file.

Infographics source: sentinelone.com

Unlike viruses, which have the high probability that they can be cleaned or removed, Ransomware is a dangerous kind of malicious tool which uses encryption to lock the documents and the decryption key is only given when a sum of money is paid to the party who created the Ransomware. In many cases, there is little option but to pay2 the money to gain access to the documents. It is almost impossible to break the encryption because it takes many years to even mighty powerful computers to break the encryption based on the type of encryption method used. The time and

1 The data that is being carried within a malicious file, packet or other transmission unit.

2 The FBI says you may need to pay up if hackers infect your computer with ransomware. http://www.thebostoncalendar.com/events/cyber-security-summit

resources required are not practically feasible for us.

There are some ways or keys available to deactivate or decrypt files encrypted by some ransomwares (search on the internet or look at http://blog.rigotechnology.com for any available solutions for ransomware targeted to Nepal); but there is no guarantee that you will be able to get access to the files without paying for it.

That is why it is very important to prevent ransomware attacks from happening in the first place.

Some basic tips to prevent from ransomware

1. Backup your data

Start a practice to back up your data online or on some external hard drive or USB drive. You can access the backup data in case some kind of disaster happen.

2. Think before you click

Almost every Ransomware spread through the Internet via file-sharing websites (like torrents), attachments from an email, infected malicious files, and links to file downloading websites shared in social networking websites. So, whenever you see an attachments or any link, always think before you click, and make sure the link and file you are downloading are from a trusted source.

3. Harden your anti-spam filters

Many spams emails contain eye-catching messages and are attached with Ransomware which when clicked by you gets your machines infected. Make sure your Anti-Spam filters are enabled and your mail server does not allow extensions like .exe, .vbs, or .scr in attachments (if you are using Gmail or Windows Live Mail, these extensions are already disabled. You should do this if your organization has own mail server.

4. Do not open suspicious attachments

Always suspect a file that is attached to your emails or shared in social networking websites. Do not open any files that you suspect. And in case you need to open those files make sure you open it in an isolated virtual environment.



5. Use show file extension settings

This is a feature in Windows that permits you to view what kind of document is being opened. An attacker can hide malicious code in different file format like in excel file e.g., account.xlsx.scr to execute their hidden command. Enabling to show file extension in setting would allow you to see what extension file you are opening.

6. Always update

Make sure your system is always updated (not only antivirus but windows operating system and browsers, too). Updates usually contains critical patches to several security vulnerabilities.

7. Turn your firewall on

Every system has its own firewall. Make sure your Firewall is enabled and properly configured.

8. Scan all compressed and archived files

Many malicious code and file may be inside a compressed file. Use anti-virus and scanners to scan that compressed file before opening.

9. Apply the principle of least privilege

As far as practicable, create a non-administrator user with limited access and use that account for your regular work. Restricting the privileges may prevent malware from running or limit its capability to spread through the network.

10. Define software restriction policy

Software restriction policy should be defined by the user to stop automatically executing files in their system or process from places like ProgramData, AppData, Temp and Windows\SysWow. You may need your IT Administrator Assistance to do this.

11. Disable Windows PowerShell

Windows PowerShell is a framework for task automation, it must only be enabled when necessary. To disable Windows PowerShell, go to Control Panel> Program and Features> Turn Windows Features on and off. Locate Windows PowerShell 2.0, uncheck it and click OK.

12. Enhance Security of Microsoft office component

Block macros or Visual Basic code in office documents downloaded from web unless you trust the source of the document.

13. Block Popups (ad-blocker)

Pop-ups are the entry point for Trojans and malware. Adding add-on or extensions for blocking popups can reduce entry point for Trojans and malware. One good ad-blocker is Ad Block Plus in Firefox or Chrome browser.

14. Disable Flash Add-on in your browser

Adobe Flash not only eats up your battery power, it is one of the major weakness to attack your computer if not regularly updated. It is always wise to disable Flash in your browser.

15. Deactivate Autoplay

Disabling autoplay will block harmful process to run from external media devices like USB and external hard drive.

16. Block known-malicious Tor IP addresses

Tor network (gateway) is used to communicate with command and control server. Blocking tor network connection is a good way to prevent malware from communicating to control server. You may need your IT Administrator Assistance to do this.

If you have already become a victim of Ransomware or even after all the precautions, you become a victim:

i) Don't panic;ii) Take the machine offline by unplugging

network cable or disabling Wi-Fi so that the malware cannot propagate to your network;

iii) Shut down your computer; andiv) Contact some security expert

ConclusionRansomware is a dangerous kind of Trojan with very limited option to fight back. According to the security researcher’s prediction and the current trend, Ransomware is becoming the greatest cyber threat of year 2016. The best way to be protected is to be aware now and take precautions to prevent it from targeting you.



The continuous development of the new technologies was followed up by a rapid and continuous integration of such technologies in the organization level. Information Technologies become an essential issue in strategic development and performances enhancement of any organizations. The acclaimed advantages induced by information technology component are in balance with new risks arising from such technology. The rapid pace of the technological change asks for timely update on information technologies with a thorough understanding of the risks and opportunities associated with this phenomena. The management of the organizations faces a new challenge in the structural re-definition of the

information technologies component in order to create value addition and to minimize the risks through an efficient management of all the relevant resources of the organization.

Information Technologies Governance, a subset of corporate governance, focuses on the belief that the managers, directors, and others in charge of the organization must understand the role of information technology in the organization. Information Technologies Governance focuses specifically on information technology systems, their performance and risk management. The primary goals of Information Technologies Governance are to assure that the investments in infrastructure related to information technologies

CA. Gaurav Khwaunju ShresthaCA. Shrestha is a Member of ICAN


IT Governance and Auditing Entity-Level Controls

Information Technologies Governance is more than just security of information system and its resources, since it encompasses the entire organization where technology in information system and business components work together, and involves crucial concepts that includes disaster recovery planning, systems acquisition and maintenance policies, and organizational structure which creates value that fits into the overall Corporate Governance Strategy of the organization.



generate business value, and to mitigate the risks that are associated with information systems. This can be done by implementing an organizational structure with well-defined roles for the responsibility of information, business processes, applications and infrastructure

Why Information Technology Governance is Necessary?Information Technologies Governance is more than just security of information system and its resources, since it encompasses the entire organization where technology in information system and business components work together, and involves crucial concepts that includes disaster recovery planning, systems acquisition and maintenance policies, and organizational structure which creates value that fits into the overall Corporate Governance Strategy of the organization.

A value realization and delivery framework helps the Information Technology department to accomplish both the demand and supply side of operations. As each system is considered and evaluated, there should be continuous assessment for alignment with the business needs and strategies. However, environmental scanning with respect to new technologies adopted or available can help the organization identify obsolescence or other factors that could require changes in information system infrastructure. To enable value realization, value management methodologies should be in place. Operational objectives such as effectiveness, efficiency, and economy are used to testify whether value realization has been achieved or not Examination and assessment of management information system throughout the systems life cycle can be facilitated by internal audit or rotational testing by the external auditors. The organization could develop well efficient metrics to monitor and control the value assessment process.

Despite efforts of the software industry to identify and adopt best practices in the development of information

technology projects, there is still a high rate of failure and missed objectives. Most of the information technology projects do not meet the organization’s objectives. Effective governance framework, with well-defined roles and responsibilities for stakeholders associated with information system including Information System Auditors should ensure that investments in information technologies are aligned and delivered in accordance with corporate objectives and strategies. Any projects without this framework are more susceptible to failure increasing the cost, lack of adaptation among the stakeholder, poor performance. Many organizations fail to consider the importance of information technology governance and take the projects without fully understanding what the organization’s requirements are for the project and how this project links to the organization’s objectives.

Another important aspect in Information Technology Governance is the Resource Management which is concerned with the management of information technology resources and the organization of information technology infrastructures within a corporation. This critical dimension of information technology governance processes aims to provide high level direction for sourcing and use of resources, to oversee the aggregate funding for information system at the entity level and to ensure that there is adequate capability and infrastructure to support current and expected future business requirements. Another aspect of this domain is the issue of project management as the projects has considerable impact on the financial position and strategic direction of the organization, it must be properly governed.

Risk Management is another important issues in the Information Technology Governance as the risk on entity level cannot be eliminated. It will exist all the time however the management of the entity is responsible with minimizing it to an acceptable level. Risk management should be a continuous process which begins by assessing the level of exposure of the organization and identifying



the main incident of risks. Once identified, risks have to be minimized using control procedure and finally residual risk should be adjusted at acceptable level.

Performance measurement, an another element of Information Technology Governance, is concerned with determining whether information systems implemented in the organization have achieved the goals set for them by the Board and senior management. For performance measurement, Information Technology Governance practices should define and monitor the various measures together with management to verify that objectives are achieved and measure performances related to information system through metrics or similar other indicators

Implement a Sustainable Information Technology Governance FrameworkToday, Information Technology Governance is on the agenda of many organizations, and high-level Information Technology Governance models are being created by every organization to align the objective of information technology project with business objective. However, having developed a high-level Information Technology Governance model does not imply that governance is actually working in the organization. Conceiving the Information Technology Governance model is the first step, implementing it into the organization as a sustainable solution is the next challenging step.

The important question now is how organizations can pragmatically implement a sustainable information technology governance framework? Information Technology Governance can be deployed using a mix of structures, processes and relational mechanisms. Structures involve the existence of responsible functions such as information technology executives and a diversity of information technology committees. Processes refer to strategic decision making and monitoring via e.g. the Information Technology Balanced Scorecard. The relational mechanisms to decision making an monitoring include business and Information

Technology participation, strategic dialogue, shared learning and proper communication. Each of these practices serve specific or multiple goals in the complex IT governance challenge.

Evaluation of Information Technology GovernanceAs information technology governance is a crucial subset of corporate governance, similar to the assessment of overall corporate governance, the cultural and operating environment of the functional areas of management information systems is the beginning point of the evaluation of information technology governance. Management Information System should be viewed as a partner within the business rather than an adversary or servant. Information Technology dependence should be avoided. Such dependence occurs when there is a disconnection between the business strategy and the management information system operations, exhibited when senior management, such as other executives and the board, abandon supervision of information technology. This tends to result in the reliance upon a small group of individuals within the organization for information needs, requirements, or operations of system. Instead, the head of information technology department should be a participant in executive meetings, with feedback, decision making, and information flowing among members of the executive team and other parts of the organization.

Strong entity-level controls in information technology form a foundation for the control environment in information technologies within a company. They demonstrate that management is serious about internal controls, risk management, and governance. A strong overall control environment and attitude that originates from the top to down throughout the organization leads to strong controls over decentralized processes and functions. Conversely, weak entity-level controls increase the likelihood that controls will be weak throughout the organization, because upper management has not



demonstrated and communicated to the organization that internal controls are valued.

Auditing Entity-Level ControlsEntity level controls in information technology environment show the effectiveness and efficiencies of Information Technology Governance in achieving the objective of the organization through investment in information technology infrastructures. Assessment and evaluation of these controls are important in efficient functioning of the Information Technology Governance. Information System Auditor should assess the entity level controls to ensure that the entity level controls in information technology environment are functioning as desired. At least, the following areas should be considered for an entity-level controls review.

1. Review the overall organization structure to ensure that it provides adequate segregation of duties, clear assignment of authority and responsibility over information technology operations

How to Accomplish ?

• Ensure that the company has Information Technology Organization Reporting Structures that eventually report to a person that is close enough to day-to-day Information Technology operations

• Chief –Executive-Officers should have an annual information security evaluation conducted, review the evaluation results with staff, and report on performance to the board of directors.

• consider interviewing a sample of Information Technology employees and customers to determine whether there is a consistent understanding of the division of responsibility.

• Organizations should establish a security management structure to assign explicit individual roles, responsibilities, authority, and accountability.

• Ensure that the responsibilities for initiating, authorizing, inputting, processing, and checking data

should be segregated

2. Review the information technology strategic planning process and ensure that it aligns with business strategies. Evaluate the organization's processes for monitoring progress against the strategic plan.

How to Accomplish ?

• Obtain the evidence of a strategic planning process within information technology infrastructure, and understand how the planning is performed. It should highlight the need for continuous improvement, not a one-time effort.

• Determine how company strategies and priorities were used in developing the information technology strategies and priorities.

• Review documented short- and long-term technology priorities.

• Evaluate processes in place for periodical monitoring of the progress against those priorities, re-evaluating and updating those priorities.

Review the Risk-Assessment Processes placed for the security of data and information system resources and evaluate whether it is in alignment with organizational mission, vision and strategy.

How to Accomplish ?

Obtain the evidence that the organization is periodically considering the risks to the Information Technology environment and making conscious decisions as to whether to accept, mitigate, or avoid those risks. Inspect the board Minute and supporting document justifying risk tolerance objective. Inquire board member and management regarding the process for setting risk tolerances.

Mandatory training for board members on the concepts of enterprise risk management. Board



approval of Enterprise Risk Management framework and code of ethics.

Inspect board Enterprise Risk Management training program.

Inspect board minutes and documents justifying selection of Enterprise Risk Management framework.

Inspect code of ethics.

Management clearly provides a strategy for identifying risks. Board approves management’s strategy and provides feedback. Compare the organization’s identified risks to risks identified by the auditor during the client business risk assessment phase of the financial statement audit, looking for gaps. Inspect board minutes and supporting documents where approval of risk assessment strategy is provided.

Board evaluates management’s recommendations for risk responses. Compare risk responses to recommendations of external or internal auditors or other specialized reports.

Inspect documents recommending risk response activities.

Inspect board minutes of approval. Inspect reports of specialists. Recommending specific courses of action

with respect to risk responses. Evaluate management’s plan for Enterprise Risk

Management control activities. Document the control activities, evaluate design effectiveness, and conduct tests of Enterprise Risk Management control activities where reliance will be placed on the controls.

Inquire the management and request documentation to support information and communication methods; evaluate the adequacy. Obtain copies of the regular communications and inspect it.

Evaluate management recommendations for change to Enterprise Risk Management process. Inspect board minutes with respect to process and approval of change to Enterprise Risk Management process.

3. Review performance indicators and measurements for information technology to ensure that processes and metrics are in place and approved by key stakeholders for measuring performance of day-to-day activities and for tracking performance against service-level agreements, budgets, and other operational requirements.

How to Accomplish ?

• Obtain a copy of any metrics being captured for the information technology organization's routine activities (such as system uptime and response time).

• Determine the goals for those metrics, and ensure that the appropriate stakeholders have approved those goals.

• If actual performance is significantly inferior to goals, determine whether root-cause analyses have been performed to understand the problem and whether plans are in place to solve the problem.

• Review any Service-Level Agreements that have been established for supporting Information technologies key stakeholders. Ensure that processes are in place for measuring actual performance against the requirements of the Service-Level Agreements and for correcting any deviations.

• Ensure that processes are in place for establishing budgets and for holding the information technologies organization accountable for meeting its budget by obtaining copies of the information technologies budget for the current and preceding years, as well as copies of any "budget versus actual" analyses.

• Determine how any significant variances were reported and resolved.



4. Determine whether technology and application strategies exist, and evaluate processes for long-range technical planning.

How to Accomplish?

• Obtain the evidence that long-term technical planning is being performed.

• For purchased applications and technologies, determine whether Information technologies understand the vendor's support roadmap for those products.

• The Information technologies organization should understand when their versions of the products will cease to be supported and create plans for either upgrading or replacing the products.

• Determine whether processes are in place to monitor for changes in relevant technologies, consider how those changes will impact the company,

• Identify the opportunities to use new technologies to help the company.

5. Ensure that information technology security policies exist and provide adequate requirements for the security of the environment. Determine how those policies are communicated and how compliance is monitored.

How to Accomplish?

• Obtain a copy of the company's Information technologies security policies. Ensure that they adequately cover the company's Information technologies environment. At a minimum, the policies should include coverage of the following areas:

Usage of the company's information resources by employees for personal usage.

Data classification, retention, and destructionRemote connectivity Server security Client security Password and other logical Access

Review the company's password policy. It should provide adequate guidelines dictating requirements for the composition of company passwords (for example, minimum of eight characters, combination of letters and numbers, difficult to guess, and so on), for aging company passwords (such as requiring that they be changed every 90 days), for locking accounts after a certain number of unsuccessful logon attempts, for timing out login sessions after a period of inactivity, and for retaining a password history so that previous passwords cannot be reused for a certain period of time.

• Review the company's logical access policy. It should provide adequate guidelines dictating requirements for every user to have a unique ID, for accounts to be suspended upon employee termination or job change, and for users to be granted the minimum access necessary to perform their jobs.

• Obtain a list of employees involved in the creation and approval of the Information technologies security policies to ensure that key stakeholders were included during the policy creation

• Ensure that the Information technologies security policies were approved by an executive, such as the CIO or CEO. This will provide the Information technologies organization with the authority and backing necessary to enforce the policies.

• Review processes for periodically reviewing and updating the policies to ensure that they keep up with the ever-changing Information technologies environment. Obtain the evidence that these processes have been executed.

• Review processes for periodically evaluating changes in the environment that might necessitate the development of new policies. Obtain the evidence that these processes have been executed.

• Ensure that provisions have been made for obtaining approved exemptions from the policy.



The Information technologies security organization should facilitate the exception process, including providing a recommendation and an opinion on the risk presented by the request, but they usually should avoid making the final decision as to whether or not to accept the risk.

• Review processes implemented by Information technologies security and other Information technologies organizations for monitoring compliance with the policies. Ensure that enforcement and escalation processes are in place that results in the correction of noncompliant situations. Review a sample of recent applicable compliance-monitoring reports, and ensure that significant issues were tracked to resolution.

• Ensure that a mechanism exists for employees to report security incidents or concerns and that those reports are followed up on and tracked to resolution.

• Review a sample of recently reported incidents, and determine whether they were resolved adequately.

6. Review and evaluate policies and processes for assigning ownership of company data, classifying the data, protecting the data in accordance with their classification, and defining the data's life cycle.

How to Accomplish ?

• Review the company's data classification policy. It should have provisions for identifying owners for all critical company data. It also should provide a framework for classifying database on its criticality (for example, confidential, internal data, public data).

• Obtain the a list of data owners and documentation indicating that those owners have classified their data.

• For a sample of this data, review evidence that protection has been implemented in alignment with the classification.

• Determine whether life-cycle information has been created for company data. For a sample of major data elements, review documentation of the data's life-cycle requirements, including retention, archive, and destruction requirements. Requirements will be identified for how long the data should be active (online, easily accessible, modifiable if appropriate, and backed up periodically), when and for how long they should be archived (possibly offline, not necessarily easy to access, no longer modifiable, and no longer backed up periodically), and when they should be destroyed.

• Review and obtain the evidence that life-cycle requirements have been implemented.

7. Review and evaluate processes for ensuring that end users of the Information technologies environment can report problems, are appropriately involved in Information technologies decisions, and are satisfied with the services provided by the technologies.

How to Accomplish ?

• Ensure that a help desk function provides end users with the ability to report problems.

• Review and evaluate processes for capturing problems and ensure that they are tracked to resolution.

• Obtain a list of recent complaints, and select a sample, ensuring that all complaints were resolved and that no complaints were closed without the consent of the user who entered the complaints.

• Ensure that a process exists for obtaining end-user feedback after complaints are closed.

• Obtain the evidence that user-satisfaction metrics are kept and that management follows up on end-user feedback.

• To ensure that the help desk does not seek customer satisfaction at the expense of security, review policies and processes for obtaining proper approvals prior to



responding to user requests for having passwords reset and for obtaining system access.

• Review a sample of these sorts of complaints, and ensure that proper processes were followed and approvals obtained.

• Obtain the existence of customer dealing teams to provide input and prioritization of Information technologies projects and enhancements.

• For significant areas of the business, key stakeholders should be identified to provide guidance to the Information technologies organization regarding projects and decisions that affect them..

• Review any Service-Level Agreements that have been established for supporting Information technologies’ key stakeholders. Ensure that processes are in place for measuring actual performance against the requirements of the Service-Level Agreements and for correcting any deviations.

8. Review the IT organization's process for approving and prioritizing new projects. Determine whether this process is adequate for ensuring that system acquisition and development projects cannot commence without approval. Ensure that management review project status, schedule, and budget periodically throughout the life of projects.

How to Accomplish ?

• Review structured process used for investigation for completeness and reasonableness. Examine cost-benefit for thoroughness and reasonableness. Ensure that formal proposals are prepared for all new systems, with cost-benefits prepared, and a structured process followed (e.g., consultation of affected users, careful consideration of alternatives).

• Consider appropriateness and competence of individuals assigned to the task of functional requirements review. Examine evidence of approval

of functional requirements

• Examine testing plans for reasonableness and completeness. Examine results of testing and process used to clear problems and errors found. Ensure that testing plans are prepared, in alignment with functional requirements and known potential problem areas.

• Review testing plans for thoroughness considering all data types, with sufficient detail to provide for completeness, occurrence, and accuracy of data conversion.. Examine and re-perform reconciliations associated with data conversions of key data elements (such as general ledger account balances).

• Examine processes used for “emergency” changes that brought systems down

• Examine evidence of approval for program changes, on a test basis. Ensure that all program maintenance changes should be approved, documented, and tested prior to implementation.

9. Ensure that effective processes exist for complying with applicable laws and regulations that affect it and for maintaining awareness of changes in the regulatory environment.

How to Accomplish?

• Identify the single point of contact that is responsible for monitoring the regulatory environment and its impact on information technology. This person should be responsible for identifying laws and regulations that apply to the company's information technology environment, ensuring that the responsibility for complying with those rules has been explicitly assigned to the appropriate person and monitoring the regulatory environment for additions and changes that will affect the company.

• Review the processes used to monitor the regulatory environment, and evaluate their effectiveness.



• Obtain a list of information technology -applicable regulations that have been identified, and obtain the evidence that responsibility for compliance with those regulations has been assigned and is being monitored.

10. Ensure that hiring and termination procedures are clear and comprehensive.

How to Accomplish ?

• Review Human Resource policies and procedures and ensure management establishes/enforces standards for hiring the most qualified individuals, with emphasis on education, prior work experience and evidence of integrity and ethical behavior. Recruiting practices (particularly for employees with access to assets susceptible to misappropriation) include in-depth employment interviews, background checks and presentations on entity’s culture, expected behaviors and operating style.

• Ensure that termination procedures include physical and logical access revocation, return of company-owned equipment, and supervision while the former employee collects his or her belongings.

11. Review and evaluate processes for ensuring that information technology employees at the company have the skills and knowledge necessary for performing their jobs.

How to Accomplish ?

• Identify the mechanisms that ensure that qualified people are hired and that provide for continuous enhancements of employee skills and knowledge.

• Ensure that job descriptions exist for all information technology positions and that the job descriptions specifically state the knowledge and skills required for each job.

• Review evidence that these job descriptions are referenced during the hiring process. Review

processes for keeping the job descriptions up to date.

• Review the information technology organization's training policies and ensure that they provide the opportunity for employees to attend training classes and seminars for enhancing and updating their skills and knowledge. Obtain the evidence that information technology employees have taken training over the past year.

• Review performance-review processes. Obtain the evidence that information technology employees are receiving regular feedback on their performance.

• Ensure that processes exist for identifying poor and top performers, coaching them, rewarding them and terminating from their responsibility if performance does not improve.

12. Review and evaluate processes for controlling nonemployee logical access.

How to Accomplish ?

• Ensure that policies require approval from an employee prior to a nonemployee obtaining logical access to company systems.

• If feasible, obtain a sample of nonemployee accounts, and validate that they have appropriate approval.

• Review and evaluate processes for communicating company policies, information technology security policies, rules and procedures to non-employees prior to granting them system access. Obtain the sample of evidence of occurrence of such communication.

• Review and evaluate processes for removing logical access from non-employees when they have ceased to work with your company or otherwise no longer need access.

• Consider obtaining a sample of current nonemployee accounts and validating that those nonemployees are still working with your company and still have a need for their current level of access.



• Ensure that nondisclosure agreements are signed by nonemployees to legally protect your company from inappropriate use of company data.

• Pull a sample of non-employee accounts, and obtain a copy of the Non –Disclosure Agreements (NDA) for those accounts.

• Ensure that consideration has been given to identify the data that should not be accessed by non-employees and activities that should not be performed by non-employees.

13. Review and evaluate processes for managing third-party services, ensuring that their roles and responsibilities are clearly defined and monitoring their performance.

How to Accomplish ?

• Review the process for selecting vendors.

• Ensure that the process requires soliciting multiple competitive bids, the comparison of each vendor against predefined criteria, involvement of knowledgeable procurement personnel to help negotiate the contract, evaluation of the vendor's technical support capabilities and experience providing support for companies of similar size and industries as yours, performance of a thorough cost analysis, and investigation of each vendor's qualifications and financial health.

• For a sample of recent vendor selections, review evidence that the process was followed.

• Ensure that contracts with third-party service providers specifically define the roles and responsibilities of the vendor and include defined Service-Level Agreements.

• Review a sample of contracts for evidence that expectations have been specifically defined.

• Ensure that contracts include nondisclosure clauses, preventing the vendor from disclosing company information.

• Also ensure that contracts include right-to-audit clauses that allow you to audit vendor activities that are critical to your company.

• Review a sample of contracts for evidence that these clauses are in place where applicable.

• Review processes for monitoring the performance and providing oversight of existing third-party service providers.

• For a sample of existing vendors, Obtain the evidence that they are being monitored for compliance with Service-Level Agreements and that they are performing the responsibilities defined in the contract.

14. Review an.635d Evaluate Processes for Ensuring that the Company is in Compliance with Applicable Software Licenses.

How to Accomplish ?

• Obtain the evidence that the company maintains a list of enterprise software licenses such as Microsoft Office, Enterprise Resources Planning(ERP) application accounts, accounting software etc and has developed a process for monitoring use of those licenses and complying with the terms of agreement.

• Determine how decentralized (non-enterprise) licenses are monitored and tracked. This would include software purchased by employees and placed on their company computers, as well as software downloaded from the Internet.

• Comprehensive software asset management requires a centralized database that contains information on exactly what software the company has the right to use (licenses purchased) and on exactly what software is being used in the environment (licenses used) and can compare the two.

• Test the effectiveness of the method used at your company either by performing your own scans on a sample of computers or by reviewing evidence from the company's processes.



15. Review and evaluate controls over remote access into the company's network

How to Accomplish ?

• Ensure that a user ID and strong password are required for remote access and that these information are transmitted over secure and encrypted communication channels.

• Determine whether approval processes are in place for granting remote access, especially for non-employees. Take a sample of users with remote access, and Obtain the evidence of approval.

• Evaluate processes for removing dial-up and VPN remote access accounts when employees leave the company. Take a sample of users with remote access, and ensure that they are still active employees.

• Evaluate controls for ensuring that dedicated external connections to business partners are removed when no longer needed. Take a sample of current connections, and by means of interviews and documentation review, determine whether they are still legitimately necessary.

• Evaluate controls for ensuring that unauthorized connections cannot be made to the network and/or for detecting them if they are.

• Evaluate controls for ensuring that unauthorized modems or Virtual Private Network connection points cannot be placed on the network and/or for detecting them if they are.

• Ensure one location has primary responsibility for updating the information. Exception reports are printed and differences between locations followed up. Head office controls all program changes and the branch offices are sent only the object code. Use control totals, record counts, and sequential numbering of transactions and follow up any missing or out-of-sequence data.

16. Review and evaluate policies and procedures for controlling the procurement and movement of hardware.

How to Accomplish ?

Review and evaluate the company's asset management policies and procedures, and ensure that they encompass the following:

Ensure that asset procurement process requires appropriate approvals prior to the purchase of hardware.

Ensure that the company is using asset tags and has an asset management database.

Ensure that an inventory contains the asset number and location of all hardware, along with information about the equipment's warranty status, lease expiration, and overall lifecycle (that is, when it is no longer eligible for vendor support).

Ensure that an effective mechanism is in place for keeping this inventory up to date. A sample of asset tags also should be inspected visibly and tied back to the inventory.

Ensure that unused equipment is stored in a secure manner. Also ensure that data are erased properly from equipment prior to its disposal.

17. Ensure that media transportation, storage, reuse, and disposal are addressed adequately

How to Accomplish ?

Review of Information Technologies policies, procedures, and security awareness training documents ,conduct the user interviews and review the following while auditing media control policies and procedures.

Sensitive information to be encrypted prior to transporting it through a third-party carrier.

Magnetic media to be digitally degaussed prior to



reuse or disposal. Optical and paper media to be physically torn prior

to disposal. Users to be trained adequately on how to store and

dispose of computer media. Computer media to be stored in a physically secure,

temperature-controlled, and dry location to prevent damage to the media.

18. Ensure that system configurations are controlled with change management to avoid unnecessary system outages.

How to Accomplish ?

• Ensure that the configuration-management procedures include processes for the following:

Requesting changes (including processes for end users to request changes).

Determining the specifics of what should change

Prioritizing and approving proposed changes. Scheduling approved changes. Testing and approving changes prior to

implementation. Communicating planned changes prior to

implementation. Implementing changes. Rolling back (removing) changes that don't

work as expected after implementation.

Perform a network and application what-if analysis to determine the outcome of a planned change. Without a what-if analysis, organizations take significant risks to change and overall network availability. In many cases, network changes have resulted in collapse causing many hours of production down time. In addition evidence for a number of application fail ,cause and impact to other users, department and other associate applications

should be collected.

• Approvals should incorporate a risk assessment and typically are granted by a committee made up of stakeholders.

• Obtain a sample of Change-Control Requests, as well as other configuration management documentation, from information technology departments of the organization.

19. Verify that capacity monitoring and planning are addressed adequately

How to Accomplish ?

Ensure that systems and facilities are designed to anticipated capacity requirements by selecting architecture documents.

Review the Service Level Agreement between the company and the network organization for a service that includes capacity and performance management. The service would include reports and recommendations to maintain service quality.

Review the System monitoring logs to determine the percentage of systems that are approaching or exceeding capacity thresholds. The monitoring activity of Capacity Management includes:

Central Processing Unit & Memory Utilization Input / Output rates Device utilization Queue length Storage utilization Transaction rate Packet rate Response time Bandwidth utilization Review the System availability reports to

ensure that system capacity issues are not causing undue downtime.



ConclusionInformation technology governance is a broad and complex topic with many parts. Creating and sustaining a more effective Information technology governance environment will take time and resources. It should focus on achieving incremental information technology governance success in priority areas, based on their value proposition or reduction of major issue to the organization. It is not a one-time event

and to achieve higher level of information technology maturity, information technology governance should be persistently and relentlessly perused both from a top down and bottom up perspective. It is important to define clear roles for the board, executive management, information technology governance project team and information system auditor including ownership and accountability for each component and overall initiative.


TAXATION

The birth of thin capitalization has taken place with the motivation of base erosion where the multinational companies financed through relatively high level of debt compared to equity in their foreign subsidiary and another companies having significant interest. If the capital of an entity is structured/funded highly from loan fund and low share capital, such entity is called high leveraged capital gearing and under capitalization company in financial management and thin capitalization under taxation regime in many countries. Hence, thin capitalization may also be termed as anti-avoidance mechanism which is prevalent in many countries. Thin capitalization rules cap the

amount of debt for which interest is tax deductible. The OECD (Organisation for Economic Co-operation and Development) has published a draft Background Paper for Country Tax Administrations in 2012 and IMF Working Paper in January 2014 which has been exhaustively covered the Thin Capitalization Rules and Multinational firms’ capital structure practice in more than 54 countries around the world. The paper examines how thin capitalization rules worldwide affect the capital structures of foreign affiliates of US multinational firms. Countries' thin capitalization regimes differ among several key dimensions. First, they tend to vary in definition of the

Thin Capitalization- Highly Talked Issue in International Taxation

The countries that adopted thin capitalization rules in early are Canada in 1972, France in 1979 followed by Australia, United Kingdom and USA in 1980s and the others countries after 1990. The situation around the world mostly in developed countries and its subsidiary in developing countries reflecting more alarming in current days which is at high pitch of discussion to discourage the thin capitalization activities or high debt coverage multinational through fixing of debt equity ratios, disallowing of interest to the extent of arm's length.

CA. Kaushlendra JhaCA Kaushlendra Jha is a Business Consultant

in India and Nepal, He can be reached at

[email protected]


TAXATION

maximum debt ratio, beyond which interest on debt is no longer deductible. The definition of maximum debt ratio fall into two main categories, first either they restrict total debt or they limit debt from related parties. Second, thin capitalization rules differ in the treatment on interest on debt determined to be excessive. For instance, interest deductibility may be denied only for interest on debt in excess of the limit or on all debt, and also possibly be re-qualified as a dividend. Third, countries vary in interest in enforcement of the thin capitalization rules. In some countries, the rules trigger automatic disallowances on interest deductions and some other countries apply some discretion in their application, and consider the corporate indebtedness at similar, but unrelated. Firms that stand at arm’s length to determine whether interest deductibility is limited.

The countries that adopted thin capitalization rules in early are Canada in 1972, France in 1979 followed by Australia, United Kingdom and USA in 1980s and the others countries after 1990. The situation around the world mostly in developed countries and its subsidiary in developing countries reflecting more alarming in current days which is at high pitch of discussion to discourage the thin capitalization activities or high debt coverage multinational through fixing of debt equity ratios, disallowing of interest to the extent of arm's length.

The influence of Debt financing can be understood with simple example in company A table below:

Particulars Debt Financing

Equity Financing

Profit Before Interest and Dividend 100 100Less: Deduction of Interest 100 0Profit After Interest 0 100Tax @25% 0 25Dividend 0 75TDS @5% on Repatriation 15 3.75Total Tax 15 28.75

We can see in above example that the company A is paying total taxes of Rs.28.75 in case of Equity financing

and of Rs.15 only in debt financing means saving of Rs.13.75 (Rs.28.7-Rs.) in case of debt financing or say the company is thinly capitalised or debt leveraged company.

In the context of foreign investor who has owned subsidiary company in Nepal can finance different ways where interest on loan is cheaper in foreign countries comparatively than in Nepal and may charge high interest rate through thin capitalization mechanism and least bother on divided declaration and repatriation. If the foreign company where divided are not taxable from subsidiary company but shall be taxable at two times in Nepal which are corporate tax and withholding tax prefer to invest its subsidiary through debt financing in place of equity. Hence, there are three benefits in case of debt financing like deductibility of interest in subsidiary resulting in less corporate profit and tax, easy repatriation with final withholding, no repatriation of divided tax in subsidiary company.

On the other hand, debt financing is also equally experiencing the thin capitalization in domestic investors too in some and other form. There are many private business houses where the business incurred loss and even heavy losses and funded by debt totally loan from promoters and shareholders instead of equity funding or injecting which shows unparallel turnover of the company with meagre paid up share capital of the company.

These business houses have financed its business and even purchase of capital assets like land and building in the name of the company through bank financing and getting interest deductibility though tax planning. The directors and promoters have funded the company through debts and never other to inject paid up capital in the absence of thin capitalization rules in the country and any other restriction in corporate laws and income tax laws there on.

In our context, the causes of thin capitalization can be seen in Annual Report of the Auditor General of Nepal and an


TAXATION

example extracted from Annual Report is given below.

(Rs in Thousand)

Tax payers’ Nature of

transaction

Income Year

Loan Amount

Paid up Capital

Interest Expenses

Ratio of Loan to Capital

Distillery 2067/68 63,12,09 50,00 6,66,32 1:126

Industry 2067/68 1,19,49,27 1,50,00 12,79,53 1:253

Medicine 2068/69 9,42,04 5,00 3,71,82 1:74

Industry 2068/69 44,19,39 81,83 2,02,75 1:54

Source: Auditor General’s Annual Report 2070(2014)

In the absence of these rules, investor prefers to put capital in the form of loan than equity which reduces the tax base. The current income tax law has only put some restriction in case of exempt controlled entity.

The provisions are in case, the amount of interest paid by a resident Entity controlled by an Exempt organisation to that organisation or association that controls the resident entity may deduct in an income year under the said sub-section shall not exceed the total of the following amounts:

(i) All interest amounts received in that year that are to be included in calculating Taxable Income of that Entity, and

(ii) Fifty percent of the Adjusted Taxable Income of that Entity in that year which has been calculated without including the amounts of interest paid by the entity;

(iii) The remaining amount of Interest which is not allowed to be deducted and not deducted as per above may be carried forward and shown as exposes during the next year through same process.

The Income tax Act has defined "A resident entity controlled by an exempt organisation" means an entity which becomes a resident entity in that year and in which the following persons or organisations enjoyed underlying ownership or control of 25 percent or more at any time during that year.

(a) Exempt organisation and persons associated with them.

(b) Persons enjoying tax concession in that year under section 11 or persons associated with such persons;

(c) Non-Resident persons or persons associated with them or

(d) Any combination of persons mentioned in clause a to c.

These provisions has put restriction on debt financing in place of equity by exempt controlled resident entity but not in normal case of debt financing by resident entity.

The country may apply one of the two primary methods to limit interest deductibility of the company is found debt leveraged company. Firstly, there can be simply deny some or all interest deductibility which Nepal in doing in some respects, second they reclassify the excess interest as dividend which is not in practice in Nepal.

The returning in the form of interest in disguised dividend or profit from the investment made by promoters or shareholders. There are number of private companies in group companies and associates where loan have been exchanged and attracted the case of thin capitalization but Nepal has still not introduced thin capitalization rules so far to protect its income tax base. Although there are four special cases under current Income tax Act, 2058 where Inland Revenue Department upon written notice, can re-characterize the transactions with amended quantification and matter. The four cases are under Section 29-Indirect payments, Section 33-Transfer Pricing and other arrangements between associates, Section 34-Income Splitting and Section 35-GEAR (General Anti Avoidance Rule). Even if the income tax authority can linkage the thin capitalization with above provision but there is no such specific rules on Thin Capitalization other than above mentioned occasion as such in Nepalese tax system.

Hence, the emergence or need of a specific thin capitalization rules is felt not only in case of international taxation but in domestic taxation as well.


NEWS

Training Course on NFRS/ NAS RA. Member Capacity Development Committee of The Institute of Chartered Accountants of Nepal successfully conducted 60 hours training course on NFRS/NAS from 22 January to 26 March, 2016.

President CA. Prakash Lamsal delivering speech in NFRS Training

This program was conducted in every Friday and Saturday for three hours a day in Kathmandu for 20 days by covering the contents of the following Standards that were delivered to the participants.

S. No NAS/ NFRS Name of the Standards

1 Conceptual Framework

2 NAS 1 Presentation of Financial Statements

3 NAS 2 Inventories

4 NAS 16 Property, Plant and Equipment

5 NAS 38 Intangible Assets

6 NAS 40 Investment Property

7 NAS 37 Provisions, Contingent Liabilities and Contingent Assets

8 NFRS 5 Non-Current Assets Held for Sale and Discontinued

9 NAS 36 Impairment of Assets

10 NAS 18 Revenue

11 NAS 23 Borrowing Cost

12 NAS 8 Accounting Policies, Changes in Accounting Estimates & Error

13 NAS 10 Events after the Reporting Period

14 NAS 24 Related Party Disclosure

15 NAS 41 Agriculture

16 NAS 12 Income Taxes

17 NAS 11 Construction Contracts

18 NAS 7 Statement of Cash Flow

19 NFRS 13 Fair Value Measurement

20 NFRS 1 First time Adoption

The objective of the training course was to provide the knowledge on NFRS/NAS for their adoption in various sectors. The course were delivered by the expert in the related field. Altogether 45 members participated in the training course.

Conference on “Earthquake & Supply Constraints- Opportunities & Challenges”The Institute of Chartered Accountants of Nepal organized a conference themed on “Earthquake & Supply Constraints- Opportunities & Challenges” in hotel Yak and Yeti in Kathmandu on 31 January 2016. The conference was organized by coinciding with 19th anniversary day of the Institute. The conference was commenced with the opening speech from the ICAN President CA. Prakash Lamsal.


NEWS

A Glimpse of the Conference

The conference was conducted in two sessions. The conference segments, Chairperson, Paper presenters, and commentators were as follows:

S. No:

Session Heading Chairperson Commentator Paper

Presenter

1 Earthquake & Supply Constraints- Opportunities & Challenges

Hon’ble Dr. Yuba Raj Khatiwada, Vice- Cahairman, National Planning Commission

Mr. Babu Ram Gautam, Council Member and Assistant Auditor General

Mr. Baikuntha Aryal, Joint Secretary, Ministry of Finance

2 Role of Professional Accountants on the Road to Economic Recovery and Resilience

Hon’ble Bhanu Prasad Acharya, Auditor General

CA. Madan Krishna Sharma, Past Chairman, Accounting Standard Board.

CA. Narendra Bhattarai, IPP and Chairman Accounting Standard Board.

The conference was conducted successfully and found effective because it was based on contemporary issues faced by the nation. The participants were members and non-members of the Institute. Altogether 100 individuals participated in the conference.

19th Anniversary Program of the InstituteThe Institute celebrated its 19th Anniversary Program with special function at Hotel Yak & Yeti in Kathmandu on 2072/10/17 (31 January 2016). The Honorable Finance

Minister Bishnu Prasad Poudel was the Chief Guest and Honorable Auditor General Bhanu Prasad Acharya was special guest of the program. The Chairs of SEBON and Insurance Board were also present in the program as guests of honor. The other dignitaries invited were Past Presidents, Past and Current Council Members, ICAN Committee Members, and stakeholders who were present in the program. ICAN staffs were also present in the program.

President CA. Prakash Lamsal welcoming Honorable Finance Minister of Nepal

The President CA. Prakash Lamsal welcomed the Chief Guest and Special Guests by offering batch and flower bouquet.

Honorable Finance Minister of Nepal Inaugurating the Program by Lightning the Lamp

The program was formally commenced with the inauguration by lightning the lamp by the Chief Guest


NEWS

Honorable Finance Minister. National Anthem was also played after formal inauguration of the program.

The President, CA. Prakash Lamsal welcomed the participants and tabled the Annual Report and highlighted the work done by the Institute over the previous twelve months. He also gave an overview of the salient financial indicators of the Financial Statements for the year ended 31 Ashad 2072 (16 July 2015). He also shared the work plan for current fiscal year. The President thanked all the stakeholders for their cooperation and contribution in the functioning of the Institute.

Honorable Finance Minister of Nepal Delivering Speech on the Program

The Chief Guest of the function, Honorable Finance Minister appreciated the Institute for the progress achieved till date. He emphasized that as a regulatory body ICAN has still to improve its regulatory functions. In this occasion, he underscored the significance of accounting professionals in the development of the economies and markets in the country and suggested to further initiate various activities for the development of the profession. He also urged the ICAN members to respect the values and ethics for upholding the integrity of the profession. He committed to provide all possible support to the Institute for its professional development initiatives.

In the anniversary ceremony, the Institute honored the First and Second Council President by offering token of

appreciation for their contribution to the development of Institute and accounting profession in the country.

Group Photograph of Award winning Students and ICAN Staffs with Dignitaries

On behalf of the Institute, Honorable Auditor General Bhanu Prasad Acharya given out the various Medal and Certificate to the merit holder students of December 2014 and June 2015 chartered accountancy examination on the presence of concerned founder of the Medal. The medals given away in the program included were KB Chitracar Gold Medal, BK Agrawal Gold Medal, Prakash Jung Thapa Gold Medal, Dr. Govinda Ram Agrawal Gold Medal, Narayan Bajaj Silver Medal, Shivaman Singh and Chandra Bhandary Silver Medal and Narendra Vashishtha Gold Medal.

The Institute has started the practice of selecting the best article of the year published in the ICAN Journal from 2072 B.S to encourage the contributors and value the quality articles. The article contributed by CA. Pradeep Kumar Shrestha on the title “Accounting Professionals to Improve Governance and Financial Management System in Corporate and Public Financial Management (PFM) Sector” was selected as the best article which was published in Vol.17 No.3, March 2015 issue of The Nepal Chartered Accountant.


NEWS

Best Staff of the Year with ICAN President and Executive Director

Similarly, Hon’ble Auditor General Bhanu Prasad Acharya, on behalf of the Institute gave away the best ICAN staff certificate to Mrs. Pragya Aryal, Miss. Krishna Kumari B.C and Mr. Hardulal Chaudhary. Acknowledging the outstanding performance of selected staff these certificates are given every year in the occasion annual anniversary of the Institute.

Addressing to the function, the ICAN First President and SAFA Past President CA. Komal Bahadur Chitracar praised the achievements gained by the Institute at National and International level. He congratulated the qualified students and the staff for their hard work and effort to attain the achievement.

Similarly, speaking on the occasion, the Chairman of Insurance Board Dr. Fatta Bahadur KC congratulated the Institute for the development efforts and achievements of the institute and also applauded the students and the staff for their success and contribution.

Speaking on the occasion Chairman of SEBON Dr. Rewat Bahadur Karki highlighted the importance of the Institute and its practicing members in carrying out the audit of companies under SEBON. He also congratulated the Institute, Staff and qualified students for their achievements.

Before concluding the program, on behalf of the institute the President, CA. Prakash Lamsal gave away the token of love to Guests of honor.

Vice- President CA. Mahesh Khanal Formally Concluding the Program

Vice- President CA. Mahesh Khanal formally concluded the program by offering vote of thanks to Chief Guest, Guests of Honor, and all participants of the program.

Student News

9th Batch General Management and Communication Skill (GMCS) ProgramThe 9th batch of 15 days General Management and Communication Skill (GMCS) training was successfully completed at ICAN premises, Satdobato from 12 March to 3 April, 2016. This training is mandatory for getting Chartered Accountant membership of the ICAN for newly qualified CA students and it is also mandatory for AT students for obtaining Accounting Technician (AT) license.

Participants of GMCS Program.


NEWS

This training was organized aiming with enhancing better oral, written skill and non-verbal communication for getting better opportunities in the market. This training is not only confined to enhance the communication skill but also helps to enhance the quality of general management skill required for attaining higher level position. In total 39 students participated in the training of which 37 were newly qualified CA and 2 were newly qualified Accounting Technicians.

Chartered Accountancy and Membership Examination Result PublishedThe result of Chartered Accountancy Examination held in the month of December 2015 has been published on February 14, 2016. As per the result 536 students of CAP I Level out of 673, 46 students of CAP II level out of 1322 were qualified to join CAP II and CAP III level respectively and 31 students out of 459 were qualified for the membership of ICAN on fulfilling the remaining requirements prescribed by the Institute. Similarly, 19 CA degree holders from foreign countries were qualified in membership examination out of 115 applicants. The successful candidates will be eligible for obtaining ICAN membership on fulfilling necessary requirements prescribed by the Institute. Details of the results are as follows.

S. No

Level Description Both Group

First Group

Second Group

Total

1 CAP ITotal appeared 673 673

Pass in exam 536 536

2 CAP IITotal appeared 777 290 255 1322

Pass in exam 17 32 34 83

3 CAP IIITotal appeared 175 152 132 459

Pass in exam 9 30 48 87

4 MembershipTotal appeared 115 115

Pass in exam 19 19

National Convention on “Spectrum of Opportunities”National Convention on “Spectrum of Opportunities” for CA Students was held on 18th & 19th March, 2016, which was jointly organized by the Institute of Chartered Accountants of Nepal (ICAN) and Nepal Chartered Accountant Students’ Association (NCASA) in Biratnagar, Morang. It was hosted by Biratnagar Branch of ICAN and Eastern Regional Chapter of NCASA.

President CA. Prakash Lamsal, delivering welcome speech in the Convention.

CA. Prakash Lamsal, President of ICAN chaired the opening session and delivered the welcome speech. Hon’ble Auditor General, Mr. Bhanu Prasad Acharya was the Chief Guest. CA. L P Bhanu Sharma delivered the Key Note Speech. The other dignitaries were Mr. Pawan Kumar Sarda, President, Morang Merchant Association, Mr. Shiv Shankar Agrawal, President, Chamber of Industries Morang, CA. Hari Kumar Silwal, President, ACAN, Mr. Toyam Raya, Chief District Officer, Morang, Mr. Ghanshyam Lal Das, Vice Chancellor, Purwanchal University, Mr. Tul Bahadur Shrestha, Registrar, BPKIHS Dharan, CA. Narendra Bhattarai, Chairman, ASB and Past President, CA. Binay Prakash Shrestha, Executive Director, ICAN, RA. Mohan Kumar Subedi, Member ASB and CA. Manish Goyal VC EIRC, ICAI, Mr. Anil Acharya, President, NCASA. The Convener of the program and ICAN Biratnagar Branch Co-ordinator


NEWS

CA. Aswani Bansal thanked all the guests, invitees and students for their participation in the program.

The Program was conducted in four technical sessions and a total of 12 papers were presented on the NFRS, Forensic Audit, DTAA and Transfer Pricing and Auditing in Computerized Environment.

The technical sessions and their Chairperson, Judge and Paper Presenter were as given below.

Technical Session

Session Heading Session Chairperson

Session Judge Session Paper Presenter

First Nepal Financial Reporting Standards- Road Map and Challenges

CA. Narendra Bhattarai, IPP and Chairman, ASB/N

RA. Mohan Kumar Subedi CA. Anil Joshi

Dinesh Agrawal, Anima Pokharel Abhishekh Ghimire

Second Forensic Audit CA. Jagdish Bhattarai

CA. Sushil Kr. AgrawalCA. Pawan Kr. Rathi

Prabesh DhakalAbhishek Agrawal Sachin Agarwal

Third Transfer Pricing & DTAA

CA. Aswani Bansal

CA Umesh Raj PandeyCA Kinjal Pokharel

Amrit Poudel,Sudip Poudel,Sudesh Pandey

Fourth Auditing in Computerized Environment

CA. Sushil Kumar Agrawal

CA Arun Raut Prof Dr. D N

Chaudhary

Jyoti Agrawal,Hira Bahadur Khatri Barsa Baral

Top four papers presented were selected and awarded in the program. Anima Pokharel, Sachin Agrawal, Sudip Poudel and Barsa Baral were awarded as a best paper presenter in First, Second, Third and Fourth Session respectively.

Participants and Officials Cheering the Convention

CA. Hari Kumar Silwal and Professor Dr. P K Jha delivered motivational speech on first and second day of the program.

Altogether 297 students including paper presenters from Nepal and India participated in the convention. The Convention ended with Valedictory Session which was addressed by CA. Aswani Bansal. Hon’ble Judge Kumar Pokharel as chief guest delivered the encouraging words to the students and other dignitaries graced the closing session. Token of Love were presented to the Chief Guest and Guest of Honor.

Career CounselingThe Institute of Chartered Accountants of Nepal organized career counseling program in different parts of the country with the aim of providing the importance and awareness of chartered accountancy education to the interested visitors. During the program, various aspects of CA education such as the eligibility criteria of enrollment, future prospects, recognition, membership criteria of the Institute and relevant information was briefed and discussed. This program was conducted by ICAN Officials. During the 3 months period around 1000 students in Kathmandu valley and 5000 in outside the valley got the opportunity to get information on CA Education. The participants of the program had shown keen interest on the CA education. Program was organized at Biratnagar, Butwal, Bhairahawa, Palpa,Syangja, Pokhara, Tanahun, Parbat, Baglung, Myagdi, Dhangadi, Nuwakot and Kathmandu Valley.

Student RegistrationThe status of the student registration in different course and level during the Period of 1 January-March 31 is as follows:

CAP I CAP II CAP III AT

3 527 40 1


NEWS

Member News

The List of 70 Chartered Accountant Members Registered in ICAN in Fiscal

Year 2072/73

S.No. Mem. No. Name

1 882 BIBEK SHRESTHA

2 883 ANUJ ACHARYA

3 884 HARI PRASAD GYAWALI

4 885 PRAWIN KARKI

5 886 KALPANA GIRI

6 887 PRIME SHRESTHA

7 888 VIROCHAN KHANAL

8 889 PRIYATAM SHRESTHA

9 890 BIPIN RAJ AMATYA

10 891 VIKASH TODI

11 892 PRAVEEN KUMAR UPADHYAYA

12 893 RAJ KUMAR PHUYAL

13 894 SUNIL JOSHI

14 895 SUJEEP SHRESTHA

15 896 PRADEEP SIGDEL

16 897 HEMANTA RAJ RAMALI

17 898 MANISH KHAWAS

18 899 DINESH K.C.

19 900 SAGAR BHANDARI

20 901 PRAYAS SHRESTHA

21 902 SUMIT BAHADUR PRADHANANG

22 903 SUNIL KUMAR SHAH

23 904 ROSHANI KARKI

24 905 PUNYA PRASAD PRASAIN

25 906 MUKUL RAJ PANTHI

26 907 ANIL POKHREL

27 908 PRAJWAL POKHAREL

28 909 SURAJ NIROULA

29 910 BIKESH SHRESTHA

30 911 ARUN ARYAL

31 912 NAWA RAJ BASNET

32 913 NIRAJ KHADKA

33 914 SHANKAR THAPA

34 915 RAMESH ARYAL

35 916 GOPAL PANGENI

36 917 AVIN PRASAD RAJBHANDARI

37 918 DIAMOND SINGH YONJAN

38 919 SHESH MANI DAHAL

39 920 SITARAM THAPA

40 921 ZOYA KHAN

41 922 DEEPAK THAPA

42 923 ASHIS AGARWAL

43 924 SHREE KRISHNA THAPA MAGAR

44 925 MANJU KATWAL

45 926 SABITA GHIMIRE

46 927 KUNDAN SHARMA

47 928 AMRIT SHRESTHA

48 929 PRAMILA SHRESTHA

49 930 SUSHRUT DHAKAL

50 931 SUNITA K.C.

51 932 MUKTI NATH SUBEDI

52 933 SHOVA SHRESTHA

53 934 SABEETA DHAKAL

54 935 SURAJ TIMSINA

55 936 SHISHIR BHATTARAI

56 937 AMITA DANGOL

57 938 AMRIT GIRI

58 939 SAMRAT BISTA

59 940 JOGAMEHAR SHRESTHA

60 941 SUNIL CHAPAIN

61 942 PRAKASH ADHIKARI

62 943 SNEHA GOENKA

63 944 SUNITA THAPA

64 945 RABINA THAPA

65 946 SHREESHA SHRESTHA

66 947 MANISHA ADHIKARI

67 948 SUVAS RIJAL

68 951 KINJAL POKHREL

69 955 MANOJ ADHIKARI

70 957 RAMESH BARAL


Status of Membership, Certificate of Practice and Audit Firms

The status of membership, Certificate of Practice and Audit Firms as of 31 March 2016 is given below:

Category/ Class

Membership COP Firm

Total No

Renewal No

Total No

Renewal No Total No Renewal

No

FCA/CA 947 651 703 347 617 349

RA- B 3377 1925 3140 1382 1624 1385

RA- C 1606 849 1473 680 816 680

RA -D 2284 1256 2092 1093 1181 1089

Total 8214 4681 7408 3502 4238 3503

International News

Malaysia and Singapore VisitThe Institute of Chartered Accountants of Nepal arranged an exposure cum study visit of Malaysia and Singapore from 27 February to 03 March 2016 for its members with the objective of providing exposure of Malaysian Institute of Accountants (MIA), National Audit Department of Malaysia (NADM) and PWC Malaysia.

Group Photograph of Exposure Visit Participants

The delegation comprising 14 members attended the meeting with the representatives from MIA, Auditor General and PWC; and shared the organizational system, processes and business practices in their respective countries. The delegation members visited Singapore/

Malaysia in personal expenses. The delegation was led by Mr. Binod Neupane, Joint Director of ICAN.

Membership Pathway Agreement with CPA Australia

ICAN has signed Membership Pathway Agreement with CPA Australia on 10th March 2016. This agreement has opened up ICAN domiciled members to become the member of CPA Australia subject to some conditions.

President, Vice president and Executive Director in Agreement Signing Program

It is the first ever membership agreement signed by ICAN with foreign PAO.

Conference on “Empowering Asia’s Small and Medium Business Hub”

Council Member CA. Prakash Jung Thapa attended the conference which was jointly organized by ICASL, IFAC and SAFA as a resource person on “Empowering Asia’s Small and Medium Business Hub” in Colombo, Sri-Lanka on 26 January 2016. As a resource person and the panelist he presented the paper on “Growing your Practice: Review, Compilation and Agreed-Upon Procedures Engagements”.

SAFA Committee and SAFA Board Meeting

President CA. Praksah Lamsal attended the SAFA Board and Committee meeting held on 28-29 January, 2016 on Lahore, Pakistan


Report

Highlight of Exposure Visit

On the date 2016/02/26, 4 Chartered Accountant members and 9 Registered Auditor members from ICAN along with Joint Director of ICAN Mr. Binod Neupane visited Malaysia on the invitation from Malaysian Institute of Accountants. The 14 members team had a 5 days visit in Malaysia including a one day refreshment trip to Singapore.

On 2016/02/29 the team visited Malaysian Institute of Accountants (MIA). The team was warmly welcomed by the MIA members along with the Chief Executive Officer of the MIA Ho Foong Moi organized a half day knowledge sharing program. The session was basically about the organizational structure of MIA, functional activities of MIA, regulatory role of MIA to its members, ways for enrollment in MIA as members and functional role of different committees and sub committees in MIA. In the course of the session, the team also exchanged the information about the ICAN. Joint Director Mr. Binod Neupane shared the information about the organizational structure of ICAN, various Committees and Sub-committees with their functions. The team also briefly described about the examination procedure of ICAN and the ways of getting the membership of the ICAN.

Similarly on 2016/03/01 the team visited the National Audit Department of Malaysia (NADM). The Director of the NADM organized a half day meeting where he described about appointment, tenure and functions of the Auditor General in Malaysia. During the meeting, both the team exchanged the information regarding the office of the Auditor General in the respective countries, assignment of the wok to other audit firms and the ways audits are being conducted in the government organizations and the Director also described how the office co-ordinate with the Ministry of Finance in performing various task. After the completion of the meeting, the team had lunch with the Honorable Auditor General of Malaysia Tan Sri Hj. Ambrin bin Buang.

The next day, PWC Malaysia invited the team for sharing the knowledge about their working environment, audit procedures, manpower management, audit documentation and other audit related matters. PWC Malaysia shared the knowledge about their Risk Assurance services, consulting and other financial services. They described the audit procedures followed by them, audit documentation and working paper files. They also shared the information about the human resource planning, the hierarchy of staff in PWC and their staff rules and regulations for proper Human resource management.

BUTWAL POWER COMPANY LIMITEDP. O. Box: 11728, Ganga Devi Marga - 313Buddha Nagar, Kathmandu, NepalTel: 977-1- 4784026, 4785295, Fax: +977-1-4780994Email: [email protected]

+

Promise to changelives for better

PIONEER IN HYDRO POWER DEVELOPMENT, SINCE 1965

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3

Darchula

Bajhang

Dadeldhura

Kanchanpur

Kailali

Doti

Surkhet

BankeNepalgang

Dang

KapilbastuRupandehi

Butwal

NawalparasiChitwan

Makawanpur

Parsa

Bara

Dh

an

ush

a

Siraha

Udayapur

SunsariMorang

Biratnagar Jhapa

Ilam

Bhojpur

Terh

ath

um

Sindhuli

Ma

ho

tta

ri

Dolakha

Sindhupalchowk

Gulmi

Pa

rba

t

Gorkha

Tanahu

Nuwakot

Dhading

Pa

tan

BhaktapurKTM

Saptari

Dhankuta

Achham

JajarkotDailekh

Arghakhanchi

Humla

Mugu

Dolpa

Bardia

Puthan

Rolpa

Salyan

Rukum

Jumla

Bajura

Myagdi

Manang

Bagung

Kaski

PokharaRasuwa

Ra

uta

ha

t

Sarlahi

Palpa

Ramechhap

Okheldhunda

Khotang

Salukhambu

Lukla Shankhuwasabha Taplejung

Panch

thar

Palanchok

Syangja

Lamjung

Mustang

Jomsom

24

5

67

8

9

10

11

12

1315

OfficeCorporate Office, Kathmandu

Liaison Office Butwal

11

12

Jhimruk Power PlantAndhikhola Power PlantKhudi Power Plant

Generation Assets131415

ProjectsAndhikhola Upgrading ProjectLower Manang Marsyangdi ProjectMarsyangdi III ProjectNyadi ProjectKabeli - AKabeli - CTamorDudh Dona Project

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Distributes Electricityto 36000 Consumers

EDC DarimchaurEDC Galyang

910

Khudi Hydropower LimitedNepal Hydro & Electric Limited

Nyadi Hydropower LimitedBPC Services Limited

Keton Hydropower LimitedKabeli Energy LimitedHimal Power Limited

Subsidiary Companies

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march 2016 the nepal hartered accountant · ra. dev bahadur bohara member ra. surendra keshar...

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