Government’s 21-Point ‘Booster Dose’ to Uplift the Stock Market: Capital Gains Tax Reduced, Intraday and Short Selling to be Introduced

Nepal's capital market has been plagued by a deep recession, policy instability, and natural disasters for the past few years. Against the backdrop of plummeting investor morale following billions in damages to the hydropower sector caused by the massive floods in rivers including the Bhotekoshi, the government has brought forward a highly ambitious ‘21-Point Strengthening and Revival Action Plan, 2083’ to bring the stock market back on track.

This is no ordinary directive or patchwork policy; it is a massive structural, legal, and technical ‘overhaul’ of the entire stock market. Viewed through an editorial lens, it outlines a clear blueprint to transform the traditional, confined NEPSE into a multi-dimensional financial market of international standards. In this article, we will thoroughly dissect the technical aspects hidden within the government's 21-point 'booster dose', its psychological impact on the market, and its potential challenges.

1. Historic ‘Shift’ in the Tax System: Tax Only on Net Profit (Netting) and Reduced Capital Gains Tax

The most complex issue that general investors have been raising for decades, which the state has always ignored, has been addressed this time—the provision of loss adjustment (Netting). Under the current system, if an investor makes a profit of Rs. 1 million selling one company's shares and loses Rs. 1 million selling another's, they still have to pay tax on the 1 million profit; the government does not recognize the loss.

However, Point No. 20 sets the course to abolish this unfair system. Now, profits and losses within a single fiscal year will be reconciled through the clearing system, and Capital Gains Tax (CGT) will only be levied on the remaining ‘net profit’. This provision will significantly minimize investment risks in the market. In addition, it is proposed to reduce the CGT for long-term investors holding shares for over 365 days from 5 percent to 3.75 percent, and for short-term investors (365 days or less) from 7.5 percent to 5 percent. This will work wonders psychologically to prevent 'panic selling' and develop a mindset for long-term investment.

2. Opportunities to Earn Even in a ‘Bearish’ Market: The Rise of ‘Short Selling’ and ‘Intraday’

The biggest technical flaw of the Nepali stock market is that it is strictly ‘one-way’. Investors can only make a profit when the NEPSE index goes up. When the market falls, there is no option but to sit and wait. However, Point No. 4 of the action plan announces the introduction of ‘Short Selling’ and ‘Intraday’ trading through a contemporary amendment to the Securities Act, 2063.

Once short selling is implemented, even in a declining market, investors can borrow shares to sell and buy them back later at a cheaper price to make a profit. Similarly, the ‘Intraday’ facility, which allows buying and selling on the very same day, will drastically increase market volume (turnover). To make this more effective, mechanisms like Margin Lending and Securities Borrowing and Lending are also being implemented. This will make NEPSE truly liquid and dynamic.

3. Institutional Investors and NRNs: Injecting Billions in ‘Fresh Funds’

When the market is dominated only by small and retail investors, even minor rumors or gossip cause unnatural volatility. To mature the market, ‘market makers’ and large institutional investors are required.

Targeting this, Points No. 15 and 16 of the action plan are opening the legal and structural doors for the Employees Provident Fund, Citizen Investment Trust, Social Security Fund, and Insurance Companies to invest in the securities market. Currently, these institutions pile up billions of their rupees in bank fixed deposits, citing risk aversion. Now, by rebalancing their portfolios and bringing them into the stock market, the market will never have to face extreme liquidity shortages.

Besides this, Point No. 7 proposes amending the Foreign Investment and Technology Transfer Act, 2075, and the Foreign Exchange Act to allow direct entry of Non-Resident Nepalis (NRNs) into the secondary market, with a proposal to be submitted to the Council of Ministers by the end of Ashwin 2083. The NRN investment coming in dollars will not only increase the country's foreign exchange reserves but also push NEPSE's capitalization to new heights.

4. Breaking NEPSE’s Monopoly: A New ‘Benchmark Index’

Analysts have long complained that the NEPSE Index we observe daily does not reflect the market's true picture. Companies with low capital and a small number of shares in the market can easily manipulate the overall index.

To stop this, the government, through Point No. 6, has announced that the current index will be treated merely as an ‘All Equity Index’, and a new ‘Benchmark Index’ will be introduced by the end of Mangsir. This new index will only include outstanding companies that have passed strict filters such as financial health, tradable shares (Free Float), liquidity, and corporate governance. This will make it clear which companies are genuinely strong and which are just flying on hot air.

5. Curbing Speculation by Banks: A 45-Day ‘Lock-in’ Period

The investment of banks and financial institutions in the capital market has always been controversial. The Rastra Bank understands that artificial volatility is created in the market when banks use depositors' money for short-term speculation in the secondary market.

To control this, a strict provision has been made in Point No. 21. Now, when banks and financial institutions invest in the secondary market, they will not be allowed to sell the purchased shares for at least 45 days. This will force banks to become ‘investors’ rather than ‘traders’. Additionally, a joint review of the overall provisions regarding the investment limits, risk weights, and collateral adequacy of banks will be conducted by the Rastra Bank and the Securities Board by the end of Kartik.

6. Introduction of New Instruments: From Corporate Bonds to ‘Share Splits’

The stock market is not just about ‘equity’ (ordinary shares). This action plan seeks to push Nepal's capital market towards bonds as well. Points No. 8 and 9 talk about developing a ‘Corporate Bond’ market to transform the bank-based financial system into a market-based one. Now, Green Bonds, Disaster Bonds, Social Bonds, and Project-Specific Bonds will be issued in the market.

Similarly, to increase the access of small investors, Point No. 11 announces the introduction of a policy by the end of Magh 2083 to divide shares of high-value companies (Share Split) and allow companies to purchase their own shares from the market (Buy Back). This will bring a radical change in corporate liabilities and dividend distribution in the market.

7. Sectoral Strictness in the Primary Market (IPO) and ‘Price Discovery’

Now, not just any company will be able to issue IPOs at a premium or easily. According to Point No. 1, the Securities Board of Nepal (SEBON) will set separate ‘specific qualifications’ for hydropower, manufacturing, hotel, agriculture, and pharmaceutical industries. Furthermore, future public offerings will only take place through a market-driven pricing system, i.e., ‘Price Discovery’ (such as Book Building). This will discourage the tendency of unloading shares of weak companies at inflated prices.

In addition, Point No. 18 states that an international-standard regulatory framework for Private Equity and Venture Capital (PE/VC) will be prepared by the end of Poush to provide capital to small enterprises based on startups and innovation.

8. Empowering Regulatory Bodies

To investigate financial crimes like insider trading in the securities market, an amendment to the Act is being pushed forward to grant authority directly to the Securities Board (SEBON) (Point 14). This will give the Board regulatory teeth. Likewise, the action plan mentions enhancing the institutional capacity of CDSC (CDS and Clearing) to make clearing and settlement faster and more efficient, and making mutual funds more transparent.

Analyzing it overall, this 21-point action plan brought by the Finance Ministry is the most courageous, comprehensive, and far-reaching document in the history of Nepal's capital market. It touches every component of the market—from taxes to technology, from regulators to investor psychology.

If this action plan is implemented to the letter, Nepal's NEPSE will become an international standard market, both technically and fundamentally. For technical analysts who trade looking at indicators like MACD and RSI, the market will never face a drought of volume and liquidity.

However, the ground reality is slightly different. In Nepal, the implementation of good policies has always been a tough nut to crack rather than their formulation. The government has given itself a ‘deadline’ to amend numerous Acts and build infrastructure within just 5 months (Ashwin, Kartik, Mangsir, Poush, and Magh). This requires unprecedented coordination between the Finance Ministry, Nepal Rastra Bank, Securities Board, NEPSE, and CDSC.

Will these agencies set aside their egos and interests to work on a war footing? Will the parliament amend the Acts on time? Investors are currently waiting for the answers to these very questions. In terms of policy, the government has prepared every foundation to make the market ‘bullish’; now it is time for honest implementation. The general investors' expectation is that this document succeeds in becoming a ‘turning point’ for the reform of the stock market.