KATHMANDU: The government has amended the Company Act through an ordinance, enabling the issuance of up to 40% “sweat equity shares” for contributors to startup companies in various forms.
Previously, startups were unable to offer shares to partners or employees who invested in innovative ideas or labor due to the existing legal provisions prohibiting such allocations. Startups, especially in the information technology and other sectors, had been requesting the government to introduce legal provisions allowing shares to be issued in return for labor or intellectual contributions, similar to practices abroad.
The ordinance, approved by the Council of Ministers on Friday, introduces this amendment to the Company Act, 2063, as part of efforts to improve Nepal’s economic and business environment and boost investment. Currently, founders often lose their majority stake or face the risk of exclusion because ideas and reputation are not legally recognized as forms of investment. A senior government official noted that this has hindered the growth of a conducive startup ecosystem in the country, prompting the introduction of this provision.
Under the new arrangement in the Company Act, companies can now issue sweat equity shares based on contributions such as intellectual property, value addition, services, business reputation (goodwill), technical know-how, or the transfer of technical knowledge.
For general enterprises, sweat equity shares can constitute up to 20% of the total shareholding, while for startups, the limit is set at 40%.
While the existing company law allows for shares to be issued in exchange for land, property, or other assets, it does not recognize ideas or reputation as shareable assets. The new amendment seeks to address this gap, according to the official.
Similarly, the proposal includes a provision allowing companies to grant employees shares in lieu of salary, allowances, and other benefits. This provision is also currently absent in the law.
The ordinance further simplifies procedures for private companies, such as exempting additional approvals and the need for three years of audited financial statements when issuing premium-value shares through a special resolution passed by the general meeting.
Additionally, private companies converting into public companies will no longer require approval for trading operations. Currently, both cases require approval from the Office of the Company Registrar.
For public companies, except those in the banking, financial, and insurance sectors, a director in one public company can now hold a directorship in another public company with similar objectives.
To encourage compliance, companies that fail to submit details, reports, or information will be granted a two-year grace period, with a 90% waiver on fines. Provisions have also been introduced to facilitate the deregistration of non-operational companies.