Business Law

Banking Offences and Punishment Act, 2064 (2008): critical examination and reform

1. Background and main provisions

The Act was enacted to protect the banking system, depositors and public trust by declaring certain acts offences and prescribing punishment. Its main features are:

• Offences: forging or altering cheques, drafts, bills, cards and other banking instruments; fraudulent or false entries and statements; embezzlement and misuse of funds by bank employees; obtaining credit by false documents; unauthorised access to a bank's system or customer account; issuing cheques knowingly without funds; obstructing inspection and supervision; and helping others to commit these acts.
• Punishment: imprisonment and fine, with the fine linked to the amount involved, plus compensation to the affected bank or customer and confiscation of the proceeds; attempt, abetment and conspiracy are also punishable.
• Process: investigation by police, prosecution by the government attorney, and trial in the district court, with NRB able to provide information and file complaints.

2. Critical examination

Strengths

• It gives banks a specific criminal law instead of relying only on the general Penal Code, and covers insiders and outsiders alike.
• It protects public confidence and complements the Bank and Financial Institutions Act, 2073, the Negotiable Instruments Act, 2034 and the Asset (Money) Laundering Prevention Act, 2064.

Weaknesses and gaps

1. Outdated for cyber crime. Enacted in 2008, it does not clearly address phishing, SIM swapping, card skimming, ATM and mobile-wallet fraud, ransomware, identity theft, QR and fake-app fraud, or crypto-linked laundering. These are partly covered by the Electronic Transactions Act, 2063, so there is overlap and confusion over which law applies.
2. Weak punishment and deterrence. Fines are small compared with the large sums involved in modern frauds, and there is no strong provision for recovery and restitution.
3. No clear liability for the bank or the customer. The Act does not settle who bears the loss in digital fraud, the bank, the customer or the payment service provider, leading to disputes.
4. Weak enforcement capacity. Police, prosecutors and judges lack digital forensic skills. Evidence from electronic records is difficult to collect and prove, and trials are slow.
5. Cross-border problem. Cyber offenders often act from abroad and the Act has weak provisions for mutual legal assistance and evidence sharing.
6. Reporting disincentive. Banks often hide frauds to protect reputation, so offences go unreported and unpunished.
7. Inadequate coordination among NRB, the Department of Money Laundering Investigation, the Central Investigation Bureau and the Cyber Bureau of Nepal Police.

3. Practical improvements

4. Conclusion

The Act remains a useful foundation for protecting the banking system, but its drafting predates digital banking. To meet the present challenge of cyber crime, Nepal should amend it to cover modern offences, raise deterrent penalties, clarify liability, and build enforcement and international cooperation capacity, together with strong prevention by banks themselves.

Issue of debentures by a company in Nepal

A debenture is a written acknowledgement of debt issued by a company under its common seal or authorised signature, carrying a fixed interest and repayable on a stated date. A debenture holder is a creditor, not an owner, and ranks before shareholders in winding up. The governing laws are the Companies Act, 2063, the Securities Act, 2063 and SEBON rules, and NRB directives for banks and financial institutions.

1. Conditions for issuing debentures (about 4 marks)

1. Type of company. A public company may issue debentures to the public. A private company cannot invite the public to subscribe.
2. Authority. The Memorandum and Articles of Association must permit borrowing and issue of debentures. The board of directors decides and, where the Articles or law require, the general meeting approves the amount, terms and security.
3. Capital limit and financial condition. Issue should be within the borrowing power fixed by the Articles and the company must have audited financial statements with a sound debt-equity position.
4. Credit rating. For a public issue SEBON requires rating of the debenture by an approved credit rating agency.
5. Security and trustee. Secured debentures need a charge on the company's assets, and a debenture trustee is appointed to protect the holders' interest.
6. Regulatory approval. A public issue needs SEBON's approval. A bank or financial institution needs prior NRB approval, and bank debentures meeting the criteria (minimum maturity, no early redemption without approval) count as Tier 2 capital in the capital adequacy framework.
7. Types. Secured or unsecured, convertible or non-convertible, redeemable, registered or bearer. Convertible debentures must set the conversion terms in advance, and the resulting shares are subject to the share-issue rules.

2. Procedure of issue

1. Board resolution (and general meeting approval) on amount, interest rate, tenor, security, conversion and use of proceeds.
2. Appointment of issue manager, credit rating agency, debenture trustee and auditor.
3. Preparation of the prospectus with the purpose, risks, financial status, terms and the trust deed.
4. Application to SEBON, and NRB where required, for approval and registration of the prospectus.
5. Public notice, application, allotment, and refund of excess money (through ASBA / C-ASBA for a public issue).
6. Issue of debenture certificates or credit to the demat account within the time the law fixes.
7. Registration of the charge with the Office of the Company Registrar, entry in the register of debenture holders, and listing on NEPSE for trading.
8. Annual reporting and compliance to the trustee, SEBON and the Registrar.

3. Sale, mortgage and cancellation (about 6 marks)

(a) Sale or transfer

• Debentures are freely transferable by a transfer instrument, or by trading on NEPSE when listed and held in demat form, unless the terms restrict it. The company records the new holder in the register.
• Practically, the secondary market for debentures in Nepal is thin, so liquidity is limited and holders usually hold to maturity.

(b) Mortgage or pledge

• A company may secure its debenture issue by a mortgage or floating charge on its land, building, plant or other assets. The charge must be registered with the Company Registrar and in the Land Revenue Office where land is mortgaged, and the trustee enforces it for the holders.
• A holder may also pledge or deposit the debenture with a bank as collateral for a loan, since it is a financial asset. The bank holds the certificate or marks a lien on the demat account.
• Practical issues: asset valuation, a prior charge held by banks, and the chance that the company defaults on the registration.

(c) Redemption and cancellation

• On maturity the company pays the principal and the debentures are redeemed and cancelled, with entry in the register. Redemption may be made in instalments, at a premium, or by conversion into shares.
• Money should be set aside through a debenture redemption reserve or sinking fund, and an early buy-back is possible only if the terms allow.
• Where the company defaults, the trustee can enforce the security, apply to the court, or seek the appointment of a receiver. In liquidation, secured debenture holders are paid from the secured assets first.
• Defective issue, breach of law or non-fulfilment of conditions may lead to SEBON cancelling the approval and refund to subscribers.

4. Practical aspects

• Companies prefer debentures because interest is tax-deductible and ownership is not diluted, but listing and rating cost money.
• Most Nepali debentures are issued by commercial banks and development banks to raise capital, with a five- to ten-year term and an interest of about 8 to 11 per cent, and unsecured bank debentures dominate.
• Weak secondary market, low investor awareness, concentration in the banking sector and a lack of corporate debentures are the main limits.

5. Conclusion

The Companies Act and securities laws give a clear framework for issuing, transferring, securing and cancelling debentures. A Branch Manager must check the authority, rating, security, regulatory approval and registration before dealing with, lending against or accepting debentures as collateral.