Nepal needs a deeper stock market, and first an honest one

Nepal's stock market has an unusually large public. About 8.1 million demat accounts have been opened to trade on NEPSE, the national exchange, according to figures SEBON gave parliament in late September. Market capitalisation was about Rs 4.47 trillion on 1 October, roughly $29bn. For a country short of long-term capital, this is an asset. It is being wasted.

A market that has lost faith

The NEPSE index ended the last fiscal year at 2,597.80, down from 2,794.79 a year earlier. By August it was about 18% below its peak of 3,227. It has since slipped below 2,600 again, as we have reported. Falling prices are not in themselves a failure; markets fall. The failure is that many investors no longer believe prices are fair.

That belief has been earned over years. An analysis in B360 in August described repeated political interference, instability in the leadership of the Securities Board of Nepal (SEBON), allegations of insider trading and share manipulation, and inconsistent standards for pricing initial public offerings and for disclosure. It noted that four of the board's chairpersons had faced serious controversy.

The wrong first remedy

The policy response this year has leaned towards adding liquidity. In July the central bank's monetary policy raised the limit on loans against shares to a single borrower from Rs 150m to Rs 250m. Lending against share collateral already stood at about Rs 162.87bn. The finance ministry's own 21-point plan promises margin trading and a new index.

Some of this is useful. A market needs leverage and instruments, including the short selling that SEBON's chairman has said he wants to introduce. But borrowed money in a market where investors suspect manipulation tends to amplify the swings rather than deepen the market. When prices fall, margin calls force sales, and small investors bear the losses. Credit should follow confidence, not substitute for it.

What honesty requires

The more important commitments are in SEBON's own agenda for this year, published in July. It promises to strengthen investigations into securities crimes, to act against market manipulation and unlicensed advisers, including social media promoters, and to adopt free-float indices that better reflect what can actually be traded. Gopal Prasad Bhatta, a former central bank executive director appointed chairman in June, has said he would seek an ordinance if legal changes stall, and that he wants the regulator aligned with the principles of IOSCO, the international body for securities regulators.

These are the right priorities. They will be judged by three things.

First, enforcement. Insider trading laws mean little if cases are announced and then fade. The regulator should publish, at least twice a year, the number of investigations opened, cases referred for prosecution, penalties imposed and their outcomes. Investors will believe enforcement when they can count it.

Second, disclosure. Listed companies should report material information promptly and in a standard format, and directors' and promoters' trades should be published within days. Issue prices for IPOs should rest on audited numbers and transparent methods, not negotiation.

Third, independence. A regulator whose chairman can be removed or pressured by whichever government holds office cannot police the politically connected. Fixed terms, clear grounds for dismissal and a budget not subject to ministerial goodwill are the basic protections.

Why it matters beyond the market

A backlog of 124 IPO applications, including hydropower, manufacturing and hotel companies, shows that firms want to raise equity in Nepal. Banks are flush with deposits and short of borrowers, a problem we have examined. A trusted stock market would let savings reach productive companies directly.

Nepal does not need a bigger casino. It needs a market where a teacher in Pokhara and an insider in Kathmandu trade on the same information. Build that first, and depth will follow.