Nepal's Capital Market Crisis — Years of Silence Break, and the Search for Accountability Begins

Subas Chandra Dhungana

Anyone who has invested in Nepal's stock market knows one uncomfortable truth — the effort required to earn a return is often matched, if not exceeded, by the energy spent fighting the market's own structural failures. Unstable tax policy, outdated technology, a compromised regulator, and a dangerously narrow market structure. These are not new grievances. But something has shifted. For the first time, investors, traders, analysts, and economists have stood together in the same room and said, with collective conviction — enough is enough.

Their demands have been compiled, documented, and placed before the relevant authorities. The list is long, varied, and largely reasonable. But the question that looms just as large as the demands themselves remains unanswered — who actually owns the responsibility of fixing this? The Ministry of Finance? Nepal Rastra Bank? The Securities Board of Nepal? NEPSE itself? No single authority has stepped forward with a clear answer. And that silence, many argue, is itself part of the problem.

The Tax Injustice — Everyone in the Same Basket

The grievance that draws the loudest voices from Nepal's investor community is not the market index, not the trading volume, and not even the interest rate. It is the tax structure — specifically, the absence of any meaningful distinction between short-term speculation and long-term productive investment.

Under the current system, a trader who buys shares in the morning and sells them by afternoon pays the same capital gains tax rate as an investor who has held a position for a decade, through market cycles, through economic downturns, through the patience that long-term wealth creation demands. From any standard economic policy perspective, this is indefensible. Short-term speculation and long-term capital formation are not the same activity, and taxing them identically sends precisely the wrong signal to the market.

The grievance deepens when the subject turns to bonus shares. When a company distributes additional shares instead of cash dividends, the investor receives nothing liquid — no money changes hands, no income is realized. Yet the current tax framework requires the investor to pay tax in cash on shares they cannot spend. Taxing the invisible is not sound policy; it is a burden that discourages the very behavior a developing capital market needs to encourage.

Then there is the question of policy stability, which investors argue matters as much as the policy itself. Every year, as the budget season approaches, there is genuine anxiety in the investor community — what will be changed, added, or removed this time? Rational long-term investment planning is impossible in an environment where the rules of the game are rewritten annually. The demand for a minimum five-year guarantee of stability in capital market tax policy is not an unreasonable ask — it is a fundamental precondition for serious long-term capital allocation.

A Market That Mirrors Nothing

Look at NEPSE's trading screen on any given day and the picture is immediately familiar — banking institutions and hydropower companies, with little else in sight. Nepal's stock market, for all its years of existence, remains a narrow reflection of the broader economy rather than a genuine representation of it.

Technology companies, manufacturing businesses, tourism enterprises, agricultural processors, export-oriented industries — these sectors, which collectively employ millions of Nepalis and drive real economic output, are largely absent from the exchange. The consequence is a market that cannot be properly diversified, where a shock in one sector ripples immediately through the entire index, and where investors are forced into a limited menu of choices regardless of their risk appetite or investment thesis.

Broadening the market requires more than simply listing more companies. It requires a genuinely fair book-building process that does not favor connected insiders, targeted incentives for quality companies in underrepresented sectors to pursue public listings, and a regulatory posture that actively welcomes market expansion rather than treating it as a compliance exercise.

The role of institutional investors in this context is equally critical and equally underdeveloped. Pension funds, the Social Security Fund, insurance companies, and mutual funds collectively manage enormous pools of capital that could provide the depth, liquidity, and stability that Nepal's market so desperately needs. Yet policy constraints, risk aversion, and bureaucratic inertia have kept these institutions from playing the active, stabilizing role that their counterparts perform in more developed markets worldwide.

The Regulator's Credibility Problem

There is an open secret in Nepal's capital market that most participants know but few say publicly — insider trading happens, artificial price manipulation occurs, and ordinary retail investors regularly end up on the losing side of transactions that were never designed to be fair.

The Securities Board of Nepal exists precisely to prevent this. The question that investors are now asking loudly is whether it has the independence, the capability, and the genuine political will to do so. The accusation that SEBON operates under political influence is not new, but it has grown more pointed as specific cases of apparent manipulation have come and gone without meaningful consequence.

The demand for an AI-driven real-time surveillance system capable of detecting suspicious trading patterns is technologically sound and financially achievable. The deeper demand — for a regulator that is genuinely independent and institutionally powerful enough to act on what it finds — is harder to fulfill but far more important. Technology can identify irregularities; only institutional courage can prosecute them.

Several specific policies have drawn sharp criticism in this regard. Lock-in periods imposed on local investors and mutual funds restrict the natural flow of capital and reduce market liquidity without clear corresponding benefits. The dividend cap on microfinance institutions and lock-in provisions on bank shares have similarly been flagged as interventions that distort market behavior rather than improving it. Investors are asking for a principled review of each of these restrictions — not blanket removal, but an honest assessment of whether they are achieving their stated objectives.

NEPSE — Decades Behind, One System Upgrade at a Time

While international exchanges operate at microsecond speeds, deploy algorithmic trading infrastructure, and offer investors mobile access to global markets around the clock, NEPSE's technological reality sits in uncomfortable contrast. System outages during peak trading hours are not rare occurrences — they are an accepted part of the trading day that investors have long since learned to expect and resent.

The demand here is unambiguous: not incremental improvements, but a comprehensive technological overhaul of NEPSE's trading management system to meet international standards. The infrastructure that underpins the exchange must be rebuilt, not patched.

Intraday trading and short selling have been discussed for years in Nepali financial circles. Their introduction, done carefully and in stages, would meaningfully improve market liquidity, sharpen price discovery, and create a more dynamic trading environment. Index trading, particularly involving the NEPSE-30, and the eventual development of a futures and options market would provide instruments that sophisticated investors need for risk management — tools that are standard in every major market but entirely absent here.

The secondary market for government and corporate bonds remains severely underdeveloped. Without a functioning debt market, investors lack fixed-income options, companies lack an alternative to bank financing, and the overall capital market ecosystem remains incomplete. Full automation of CDSC clearing processes and settlement systems would reduce operational risk and bring Nepal closer to the settlement efficiency that modern markets demand.

Two Unresolved Questions — Crypto and the Diaspora

Nepal's relationship with cryptocurrency is defined entirely by legal ambiguity. It is not formally legalized, not explicitly banned, and not regulated in any meaningful sense. Citizens who hold or transact in digital assets exist in a legal grey zone that exposes them to risk without offering any protection. Potential investment capital flows through informal channels rather than regulated ones. The demand for a clear, comprehensive regulatory framework for digital assets is not a call to embrace speculation — it is a call for the legal clarity that any serious economic environment requires.

The Non-Resident Nepali question carries its own weight of missed opportunity. Nepal's diaspora, scattered across the Gulf, Southeast Asia, North America, Europe, and beyond, sends home remittances that form a structural pillar of the national economy. These same individuals — who have demonstrated their economic connection to Nepal through billions of dollars in annual transfers — remain unable to invest easily in Nepal's secondary market through digital channels. The door that should be open to their capital remains only partially ajar, blocked by policy friction that serves no clear public interest. Removing that friction could channel significant diaspora investment into the domestic capital market in a structured, regulated, and beneficial way.

The Long View — From a Nation That Saves to a Nation That Invests

The demands being raised today are not only about fixing what is broken. Embedded within them is a more ambitious vision — the transformation of Nepal from an economy that saves passively to one that invests productively.

Right now, much of Nepal's household wealth sits in bank deposits earning modest interest rates, contributing little to productive economic activity. The aspiration is for that capital to flow instead into companies, projects, and industries that generate employment, build productive capacity, and create genuine national wealth. That transformation requires a capital market that people trust, understand, and can access with confidence.

Financial literacy is therefore not a secondary concern — it is the foundation on which everything else rests. The demand to incorporate investment education into school and university curricula as a core subject, not an elective, reflects a recognition that market participation without understanding is not an asset to the economy — it is a vulnerability. The proliferation of misleading financial advice on social media platforms, which has led countless retail investors into poorly informed decisions, further underscores the urgency of building a genuinely educated investor base.

The longer-term ambition — to develop Nepal's capital market into one of South Asia's competitive exchanges — is not fantasy. Countries that have achieved it started where Nepal is now. They started by taking the foundational demands of their investor communities seriously.

Responsibility Without Ambiguity

Reading through these demands carefully, one structural reality becomes clear — no single institution can address all of them, and pretending otherwise would be dishonest.

Tax policy reform sits with the Ministry of Finance and requires budget decisions and legislative action. Regulatory strengthening is SEBON's domain, demanding institutional will and operational independence. Technology modernization is NEPSE's responsibility, requiring significant investment and organizational commitment. Restrictions on institutional investors and monetary policy constraints require Nepal Rastra Bank to revisit positions it has held for years.

Where action is possible, it should happen. Where it is genuinely not possible — due to fiscal constraints, legal barriers, or competing policy priorities — the responsible authorities owe investors a clear, honest explanation. Not silence. Not deflection. Not the familiar promise of a committee to study the matter further.

Nepal's capital market did not reach its current state overnight. It arrived here through decades of policy neglect, weak enforcement, and a persistent absence of accountability. The path back is equally gradual — but it begins with one clear commitment: that every demand will be read, assessed, and answered with the seriousness it deserves.

The capital market's credibility, once lost, does not return quickly. But it has to start returning somewhere. And it has to start now.