Bloodline over balance sheets
In the wake of a financial scandal, the same questions always arise. Who was minding the shop? Where were the checks and balances? The answers usually point to a failure of corporate governance, the unsexy but vital framework of rules and practices that dictates how a company is run. At its heart, it is about ensuring that those who manage a firm are accountable to those who own it. The principles are universal—fairness, transparency, accountability, responsibility—but their application is local, shaped by law, culture and capacity. Nowhere is this contrast sharper than between South Asia’s giant, India, and its small Himalayan neighbour, Nepal.
Both have had their faith in capitalism tested. India’s liberalisation in the 1990s was accompanied by exuberance and excess. The stock-market scam orchestrated by Harshad Mehta, the “Big Bull”, exposed collusion between brokers and banks. A decade later, the Satyam computer-services scandal showed how creative accounting could flourish even in the IT sector, India’s global showcase. Nepal’s reckoning came later but hit closer to home. In the early 2000s, a rash of bank failures revealed how connected lending and weak oversight had infected the financial system. The ensuing clean-up, led by the Nepal Rastra Bank, its central bank, forced the closure or merger of several institutions. But the lesson that governance matters took time to sink in.
India began codifying corporate conduct early. A voluntary code drawn up by the Confederation of Indian Industry in 1998 led to a succession of reforms—Clause 49 of the listing agreement, the Companies Act of 2013 and a web of Securities and Exchange Board of India (SEBI) regulations. Each episode of fraud spurred another tightening of rules. Listed firms must now have independent directors, board-level audit committees and mandatory disclosure of related-party transactions. Investors, domestic and foreign, reward firms that comply. The best-governed companies trade at a premium.
Nepal by contrast lacks a formal corporate-governance code altogether. Regulation comes piecemeal, stitched together through directives from the central bank, the Securities Board of Nepal (SEBON) and a handful of state-owned institutions. The Nepal Stock Exchange remains narrow, with few listed firms and limited investor activism. In many companies—particularly family-run ones—the boardroom doubles as the dining room. Decisions flow from patriarch to kin; minutes are rarely kept. “People treat the company like an extension of the family estate,” says one Nepali auditor. “They talk about transparency, but only within the bloodline.”
Even so, progress is discernible. The NRB’s financial-sector reform programme, backed by the World Bank, has introduced fit-and-proper tests for directors and stricter reporting requirements for banks. Publicly listed firms must now submit corporate-governance reports and disclose conflicts of interest. Yet enforcement remains weak. Regulatory staff are underpaid and overextended; the courts are slow. A rule is only as strong as its weakest enforcement officer.
The contrast with India is as much about the ecosystem as edict. India’s deeper capital markets and more muscular regulators have created feedback loops that encourage good behaviour. Institutional investors (mutual funds, insurers, pension funds) demand accountability because they have the scale to do so. Proxy advisory firms issue voting recommendations that can shame recalcitrant boards. Media scrutiny is constant. In Nepal, by contrast, the market’s small size dulls external pressure. The average retail investor is more likely to speculate on rumours than read an annual report. In a system where ownership is concentrated, minority shareholders have little recourse beyond public complaint.
The economic stakes are high. Studies of Indian firms find that companies with stronger governance structures enjoy higher returns on assets and lower capital costs. In Nepal, a 2024 study by Arhan Sthapit and Rashesh Vaidya found a similar—if smaller—effect: banks with clearer accountability frameworks tended to perform better. But the sample was limited to the formal banking sector, which accounts for just a slice of the economy. The vast universe of small and medium-sized enterprises, which employ most Nepalis, remains largely untouched by formal governance norms. Their financial statements are often handwritten, if they exist at all.
Both countries face a common obstacle: the dominance of family ownership. In South Asia, dynastic capitalism is both a strength and a weakness. It provides stability and long-term vision but blurs the line between stewardship and self-dealing. Succession disputes can paralyse companies. Independent directors, when they exist, are often chosen for loyalty rather than independence. The incentives for reform thus depend on whether investors, lenders and regulators make good governance worth the trouble.
India’s experience suggests that codifying rules can only go so far. It took two decades, several scandals and the steady rise of institutional investors to create a semblance of accountability. Nepal’s trouble is more foundational: to build institutions capable of enforcing rules in the first place. Its regulators are learning by imitation—adapting SEBI guidelines, OECD principles and World Bank templates—but translation into local practice is uneven. The upshot is a hybrid system: modern on paper, informal in reality.
Governance reform rarely grabs headlines. It involves tedious paperwork, dull meetings and the occasional scandal to spur interest. Yet its absence is costly. Without credible oversight, capital retreats, entrepreneurship withers and economies stagnate. South Asia’s recent growth owes more to labour and remittances than to corporate dynamism. For both India and Nepal, improving how firms are run is the next frontier of productivity. ■
