Sebon Seeks Bigger Institutional Role to Reduce Volatility in Nepal’s Share Market

KATHMANDU — The Securities Board of Nepal has opened discussions with the country’s major public savings and investment institutions as it seeks to expand institutional participation in a capital market still dominated by individual investors.

Senior officials from the Employees Provident Fund, Citizen Investment Trust, Social Security Fund and Nepal Insurance Authority participated in the discussion held in the presence of Sebon Chairperson Dr Gopal Prasad Bhatta.

According to the securities regulator, the meeting reviewed the current state of institutional investment, barriers preventing its expansion and the policy support required to encourage large institutions to participate more actively in the securities market.

The initiative comes as Sebon identifies institutional investment as one of its priorities for fiscal year 2026/27.

Although the number of individual investors in Nepal has increased substantially in recent years, the role of institutions with long-term financial resources remains comparatively limited. This has left the market more vulnerable to short-term sentiment, rumours and speculative trading.

Retail investors continue to shape market direction

Nepal’s secondary market is largely influenced by individual investors, many of whom make investment decisions based on short-term price movements.

High retail participation is not inherently negative. It broadens public ownership of listed companies, improves access to investment opportunities and increases trading activity.

However, a market dominated by individual participants can become highly sensitive to interest-rate changes, political developments, regulatory announcements and unverified information.

Retail investors are also more likely to enter or leave the market at the same time. This can cause rapid price increases during optimistic periods and equally sharp declines when sentiment changes.

Institutional investors generally operate differently. They manage large pools of funds, maintain longer investment horizons and are expected to base their decisions on financial analysis, risk assessment and portfolio allocation.

Greater institutional participation could therefore reduce the influence of short-term speculation and provide a more stable source of demand for securities.

Public funds have capacity to become long-term investors

The institutions involved in the discussion collectively manage large volumes of retirement savings, social-security contributions, insurance funds and long-term public money.

Their financial structure makes them natural institutional investors.

The Employees Provident Fund and Citizen Investment Trust manage savings that remain invested for long periods. The Social Security Fund receives regular contributions from workers and employers, while insurance companies collect premiums that must be invested to meet future claims.

These institutions do not normally face the same immediate withdrawal pressure as ordinary deposit-taking institutions. They can therefore invest part of their funds in longer-term assets.

Their participation could provide consistent demand for shares, bonds, debentures and other market instruments.

However, the source material does not disclose how much these institutions currently invest in securities or how much additional capital could enter the market. The immediate impact of Sebon’s initiative therefore cannot yet be quantified.

Stronger participation could improve market stability

Sebon believes institutional investors can contribute to stability, liquidity, price discovery and corporate governance.

Market stability does not mean preventing share prices from falling. Prices must be allowed to respond to company performance and economic conditions.

The role of institutional investors is instead to reduce disorderly movements caused mainly by panic or speculation.

When prices decline below levels justified by company fundamentals, long-term institutions may view the situation as an investment opportunity. Their purchases can provide liquidity at a time when individual investors are rushing to sell.

During an excessive market rise, professional institutions may reduce exposure rather than continue buying at inflated prices. Such behaviour can help moderate both sharp rallies and severe declines.

But institutional participation will improve stability only when investment decisions are independent, professional and transparent. Using public funds merely to support the market index would create new risks rather than strengthen the market.

Better price discovery could reduce speculative valuation

Price discovery refers to the process through which buyers and sellers determine the fair market value of a security.

In a mature market, prices reflect company earnings, future business prospects, interest rates, economic conditions and industry risks.

In a retail-dominated market, prices can sometimes be influenced more heavily by rumours, trading groups and short-term momentum. This can produce a wide gap between a company’s financial performance and its share valuation.

Institutional investors generally employ analysts, fund managers and risk specialists. Their research-based buying and selling can bring additional financial information into the market.

If institutions actively assess company balance sheets, management quality, earnings capacity and sectoral risks, their transactions could encourage prices to reflect economic fundamentals more accurately.

More reliable price discovery would also help companies raising capital through initial public offerings, rights issues and further public offerings.

Institutional funds could deepen market liquidity

A market is considered liquid when investors can buy or sell securities without causing unusually large price movements.

Nepal’s market often experiences periods in which trading is concentrated in a limited number of companies. Shares of less popular companies may have few buyers or sellers, even when the overall market records substantial turnover.

Institutional investors can improve liquidity by maintaining diversified portfolios and trading across a wider range of securities.

Their involvement could be particularly important in the bond and debenture markets, which remain less active than the equity market.

Long-term institutions are well suited to investing in government securities, corporate bonds, infrastructure bonds and other fixed-income products. Expanding these instruments would reduce the capital market’s excessive dependence on ordinary shares.

It would also provide companies with alternatives to bank borrowing and offer investors products with different combinations of risk and return.

Traditional investment practices remain an obstacle

During the discussion, Sebon Chairperson Bhatta urged institutional investors to move from traditional investment practices towards a “smart investment” approach.

The statement suggests that large public institutions may still be concentrating funds in conventional instruments such as fixed deposits, government securities and a limited range of established assets.

These investments provide relative safety, but excessive dependence on them can reduce portfolio diversification and limit the development of the capital market.

A smarter investment approach would require institutions to evaluate expected returns, liquidity needs, risk exposure and long-term obligations before allocating funds across different asset classes.

It would also require professional fund management rather than investment decisions driven by administrative convenience or external influence.

Institutions handling workers’ savings and insurance funds must remain cautious. Their objective cannot be to pursue high returns by taking uncontrolled market risk.

The central challenge is to expand capital-market participation without compromising the security of contributors’ money.

Regulatory barriers need to be identified clearly

Representatives of the participating institutions raised policy, legal and operational difficulties affecting investment expansion.

However, Sebon’s statement did not specify the exact barriers or the reforms requested by each institution.

The obstacles could include limits on investment in listed securities, approval requirements, unclear taxation, a shortage of suitable financial products, weak market liquidity or internal restrictions on portfolio management.

Some institutions may also lack specialised investment teams or modern risk-management systems.

Without identifying these constraints publicly, it is difficult to assess whether regulatory reform alone will lead to higher institutional investment.

Sebon will need to convert the consultation into specific measures, with responsibilities and implementation timelines. Otherwise, the discussion may have little effect on actual market participation.

Governance safeguards will be essential

Greater institutional investment could also improve governance in listed companies.

Large shareholders have stronger incentives than small individual investors to examine company performance, vote at annual meetings and question management decisions.

They can demand better financial disclosure, stronger boards and more responsible use of shareholder funds.

However, this benefit depends on whether public institutions exercise their shareholder rights actively and independently.

If their investment and voting decisions are affected by political pressure, conflicts of interest or informal arrangements with company promoters, institutional ownership may fail to improve governance.

Strong internal controls, public disclosure of investment policies and clear accountability will therefore be necessary.

The institutions must also prevent employees or officials from using confidential investment decisions for personal benefit.

Institutions should not be used to artificially support the index

Calls for greater institutional participation often become stronger when the share market is declining.

This creates a risk that public funds could be pressured to purchase shares simply to prevent the market index from falling.

Such intervention would be inappropriate.

The purpose of institutional investment should be to earn sustainable, risk-adjusted returns for contributors and policyholders—not to guarantee profits to existing shareholders.

Artificial support can delay necessary price corrections and transfer market risk to workers, pension contributors and insurance customers.

Institutions should enter the market on the basis of independent valuations and approved investment strategies. Their purchases should not be directed by a short-term target for the benchmark index.

Sebon’s proposed regulatory facilitation should therefore protect institutional independence rather than encourage administrative intervention in investment decisions.

More financial products needed for meaningful expansion

Institutional participation cannot grow substantially unless the market offers enough suitable securities.

Nepal’s capital market remains heavily centred on bank, insurance, hydropower and finance-company shares. The number of high-quality corporate bonds, infrastructure funds, investment funds and hedging products remains limited.

Large institutions cannot responsibly place a major share of their assets in a narrow group of listed companies.

Expanding institutional participation will therefore require the development of new financial instruments alongside regulatory reform.

Infrastructure bonds could help direct long-term savings into electricity, transportation and urban development. Corporate bonds could reduce companies’ dependence on bank loans, while professionally managed funds could allow institutions to diversify their exposure.

The development of a stronger bond market would be particularly important because pension and insurance funds generally require predictable long-term returns.

A step towards a more balanced market

Sebon’s consultation signals that the regulator recognises an important structural weakness in Nepal’s capital market.

The market has expanded significantly in terms of investor accounts, online trading and public participation. But its institutional foundation has not developed at the same pace.

A larger number of retail investors has increased activity, yet participation by professionally managed long-term funds remains limited.

Bringing public savings institutions more actively into the market could provide stability, improve liquidity and strengthen the connection between share prices and company fundamentals.

But the outcome will depend on the quality of the reforms that follow.

Institutional investment must be based on research, diversification, professional management and clear accountability. Policy support should remove unnecessary barriers without weakening prudential safeguards.

The discussion is therefore only an initial step. Its significance will be measured by whether Sebon introduces concrete reforms and whether major institutions begin allocating more of their long-term resources to a wider range of market instruments.

Greater institutional participation could make Nepal’s capital market more mature and resilient. It will not, however, automatically eliminate volatility or protect investors from losses. That will require better companies, stronger disclosure, wider financial products and consistent regulation alongside institutional capital.