The Study of Agency Problem in Surya Nepal Pvt. LTD.: Submitted by Aashma Sunuwar

THE STUDY OF
AGENCY PROBLEM IN
SURYA NEPAL PVT. LTD.
Submitted By
Aashma Sunuwar
Section : kites
Roll No.: 02
Submitted To
Bindu Raj Khanal
Apex College
Kathmandu, Nepal
November, 2019
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CHAPTER I
INTRODUCTION
1.1 Background of the study
As students of MBA program, 1st trimester, we are required to research on Agency,
problem of a specific industry and prepare a report consisting possible suggestions. This
intensive program, as a blend of real world experience and classroom lectures, gives the
students an opportunity to identify the present situation, its future prospects and gain
handful of information. Thus, students are assigned the topic- Agency problem on behalf
of which I am submitting this report of my findings on Surya Nepal Garment.
1.2 Introduction of Agency Theory

A number of key terms and concepts are essential to understanding agency theory.
 An agent is employed by a principal to carry out a task on their behalf.
 Agency refers to the relationship between a principal and their agent.
 Agency costs are incurred by principals in monitoring agency behavior because of
a lack of trust in the good faith of agents.
 By accepting to undertake a task on their behalf, an agent becomes accountable to
the principal by whom they are employed. The agent is accountable to that
principal.
1.3 Concepts in Agency Theory:
The Agency Relationship whereas agency law deals with the legal relationship between a
company and its directors, the theory of agency deals with the relationship between:
i. Companies owner
ii. It's managers (directors)
Agency theory is based on the idea that when a company is first established, its owners
are usually also its managers. As a company grows, the owners appoint managers to run
the company. The owners expect the managers to run the company in the best interests of
the owners; therefore a form of agency relationship exists between the owners and the
managers.
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1.4 Introduction of Agency problem
The principal–agent problem, in political science and economics, (also known as agency
dilemma or the agency problem) occurs when one person or entity (the "agent") is able to
make decisions and/or take actions on behalf of, or that impact, another person or entity:
the "principal". This dilemma exists in circumstances where agents are motivated to act in
their own best interests, who are contrary to those of their principals, and is an example of
moral hazard.The agency problem does not exist without a relationship between a
principal and an agent. In this situation, the agent performs a task on behalf of the
principal. Agents are commonly engaged by principals due to different skill levels,
different employment positions or restrictions on time and access.
1.5 Objectives of the study

The major objectives of the study are as follows:
a) To know about what is agency problem.
b) To know how agency problem takes place in organization.
c) To gain information about agency problem occurred in Surya Nepal Private
Limited (SNPL).
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Chapter II
Agency Problem at Surya Nepal Pvt. Ltd.
2.1 Introduction to Surya Nepal Pvt. Ltd. (SNPL)
An Indo-Nepal-UK joint venture, Surya Nepal Private Limited (SNPL) which started
operations in Nepal in 1986 is now the largest private sector enterprise in Nepal and a
subsidiary of ITC Limited, India. Their businesses include manufacturing and marketing of
cigarettes and readymade garments in Nepal as well as exports of ready-made garments with
a total turnover of over US $175 million. Surya Nepal spread its business operations into
garment sector with the purpose of diversification. They started manufacturing of garments
with leased capacities under the John Players label, for ITC Limited, India, in January 2004.
They launched the brand in Nepal in October 2004 to fulfill the need of today’s youth
who seek quality and style in apparels within a reasonable price. Surya Nepal Private Ltd.
was established with Vision of "Growth through Quality and Excellent". It is formally known
as Surya Tobacco Company. It is a joint venture between British American Tobacco (BAT)
holding 2%, ITC Limited with 59% and Nepalese entrepreneurs holding 39% shares. It has its
factory in Simra, with the head office located in Kathmandu.SNPL has given a new shape to
the domestic cigarette market. The company initially started its production with two brands of
cigarette, Naulo and Bijuli of which Naulo was later dropped. At present the brand under its
wings are Surya, Shikhar, Khukuri, Bijuli and Chautari each of which has their own brand
extensions. Surya is the highest selling brand in Nepal at the premium segment where as
Khukuri is general segment brand.
SNPL has over 70% to 75% of the total market share of the cigarette industry in Nepal in
terms of value. In the premium segment it commands about 95% of the total market share. In
the high segment sales is about 82% to 85% while in the lower segment it's about 60%. In
terms of bandstand sales, its brands are the most sellable brands in Nepal. SNPL has the
largest and strongest distribution network coverage among all the FMCG companies in
Nepal, covering all over Nepal. 75000 retailers are served through 6000 secondary
wholesalers and 60 whole distributors.
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Some products image of SNPL available presently
2.2 Agency problem in Surya Nepal Pvt. Ltd.

Remunerations demanded by workers for the eight days strike that took place in mid-
April 2011 and the management’s refusal to provide any, under the “no work no pay”
provision, in long run turned out to be the main reason for the permanent closure of Surya
Textile. Workers didn’t agree with the “no work no pay” pact arguing that they were present
inside the industry’s premises during the strike but could not work, because the industry itself
was closed. This way, arguments and counter arguments continued and it deepened the
conflict between management and labors. On 2011 June 14, the situation worsened when
factory workers, under backing of major trade unions, locked up 42 officials of the
management (Ghimire, August 18) without food and water supply for more than 24 hours
(Lee, August 25). Finally, police had to rescue the captivated officials forcefully, because the
major trade unions wanted their demand to be fulfilled immediately, or else they were not
ready to release the officials. During the rescue clash, 8 labors and 12 policemen were injured
(ibid.). After the officials were rescued, the management announced an indefinite closure of
the industry to be effective from June 15 itself.
Since June 15 to August 17 the industry remained closed during which laborers and
even the trade unions demonstrated to re-open the industry but the management continuously
refused to re-open citing unfriendly industrial climate and security problems rather they
wanted to close the industry forever. Finally, an agreement was reached among
representatives of Morang Industry Organization, Trade Unions and Surya Nepal to shut
down the industry permanently paying Rs 29,800 as lay-off benefits to each worker and also
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according to agreement, the laid-off workers will be given priority as per the workers’
efficiency and capacity if the company comes up with new venture or resume its factory
again (HNS, August 20). The security problems, militant trade unionism and their irrational
demands, according to the management, forced the company to permanently close the textile
industry (HNS, August 18).
 Salary was not the problem

Irrespective of many other cases where monthly wage is the main cause of rift between
management and laborers, Surya Textile looks like an exception. Sanjiv Keshava, Surya
Nepal’s managing director, claims themselves as a good paymaster and explained that they
paid almost double the amount stated in the minimum wage (Lee, August 25). Similarly,
news published about Chattra and Damber Kumari Shrestha shows that the couple earned
more than 10 thousands in total (Ghimire, et al., 2011) which is at least equal to the minimum
salary for workers fixed by government i.e. Rs 6,200. The news, about Sarala Khadka also
proves that she earned 6-7 thousands a month, an amount more than the minimum salary
fixed by the government (Nagarik, March 6). These cases show that Surya Garment was not
closed because of laborers' dissatisfaction in the amount of salary paid to them.
 Latent causes of the shutdown
On the one side where management claims the over-politicization of trade unions and their
often violent assertions to be major cause behind the closure of Surya Textile Industry, the
trade unions and their political leaders argues that labor unrest is not the only reason for the
closure of Surya Garment. Hari Roka, a Constitutional Assembly member representing the
United Communist Party of Nepal (Maoist), blames that Surya Garment has cheated national
coffer by creating false Value Added Tax (VAT) bill (HNS, August 25) and to escape the
penalty it has been shut down. Another possible reason for the permanent shutdown of Surya
Garment is identified as its inability to compete in the global market (Lamsal, G.). Besides all
above reasons, government inability in creating conducive environment for industrial
activities is prime factor in closure of Surya Textile. Prolonged power cuts, minimal
infrastructure, liquidity crisis, etc. are some of the areas where the government should have
helped.
Finally, whatever the management and the trade unions claim the workers clearly
were not in favor of closing the industry. Saraswati Ghimire, who worked for Surya Textile
blames the union leaders for the closure of industry. She explains, “this is all because of our
over dependence and faith on so called labor leaders” (Nagarik, March 6). It is true that both
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the Surya Textile and Government have lost their income but important of all, laborers are the
one who has been hampered the most.
Chapter III
Conclusion
3.1 Conclusion
The conflict between the employees and management is unavoidable. Every organization
faces conflict. There is not any organization that has not any conflict. Conflict is the
opportunity for the organization if it is handled properly. Proper handling of the conflict
always gives positive outcomes to the organization. The management should take conflict as
positively and try to resolve as fast as possible.
The purpose of this study was to know about the agency problem, how it takes place in any
organization and how does the company tackle it. For understanding about agency problem,
we took the example of Surya Nepal Pvt. Ltd (SNPL).
We came to know that the agency problem refers to the conflicts between the interest of the
employees and the managers. It takes place in any organization if the demands of the
employees are not fulfilled by the management. Similarly, SNPL also faced the agency
problem in 2011 as SNPL could not fulfill several demands of its employees. As a result,
SNPL had to face several lockouts and strikes in the factory. Due to these, it had to bear
several losses. Hence, Agency problem can arise in any organization at any time. It can lead
organization towards serious damages and failure. So, the management should address
agency problem in time and should try to fulfill the genuine demands of the employees in
proper way. This can help the organization to survive in long run, to maintain good relation
between management and employees and to create peaceful working environment.
3.2 Solutions to Principal-Agent Problems
Solutions to the principal-agent problem aim to align the interest of both parties. There are
two main areas of improvement to address the problem:
1. Contract design
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The main purpose of contract design is the creation of a contract framework between the
principal and the agent to address issues of information asymmetry, stimulate the agent’s
incentives to act in the interests of the principle, and determine monitoring procedures.
2. Performance evaluation and compensation

The agent’s compensation is the primary method of aligning the interests of both parties.
In order to address the principal-agent problem, the compensation must be linked to the
performance of the agent.
The performance of the agents is measured by subjective evaluation because it is a more
flexible and balanced assessment of complex jobs. The most common methods of agents’
compensation include stock options, profit-sharing, and deferred compensation.
Nevertheless, these types' compensations alone are not the panacea for the principle-
agent problem.
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REFERENCE
http://visitloma.blogspot.com/2012/03/case-study-closure-of-surya-nepal.html
http://businessjournalist.blogspot.com/2011/08/surya-nepal-shuts-garment-unit.html
https://www.academia.edu/10630441/CHAPTER-I_Profile_of_Surya_Nepal
https://www.snpl.com.np/content/company-profile.html
https://corporatefinanceinstitute.com/resources/knowledge/other/principal-agent-problem/
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THE STUDY OF

1.2 Introduction of Agency Theory

1.5 Objectives of the study

2.2 Agency problem in Surya Nepal Pvt. Ltd.

 Salary was not the problem

3.2 Solutions to Principal-Agent Problems

2. Performance evaluation and compensation

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