KATHMANDU: Nepal’s capital market has seen a series of policy initiatives in recent months aimed at improving its structure and performance. The Securities Board of Nepal (SEBON) is working on developing a new benchmark index, expanding institutional investor participation and advancing the restructuring of the Nepal Stock Exchange (NEPSE).
The government has also announced various plans to strengthen and revive the capital market. However, despite these reform initiatives, the stock market has yet to gain the expected momentum, raising concerns about investor confidence.
Nepal is currently governed by a near two-thirds majority government led by the Rastriya Swatantra Party (RSP). Under Prime Minister Balendra Shah’s leadership, economist Swarnim Wagle serves as finance minister. There have been no publicly visible disagreements over leadership between Prime Minister Shah and RSP Chair Rabi Lamichhane. Lamichhane has repeatedly expressed his commitment to allowing Shah to serve as prime minister for five years.
Despite expectations of political stability and economic reforms under the government, the stock market’s inability to reach new highs remains a concern.
Market observers say stock market performance depends not only on index movements or policies announced by the government but also on investor confidence, effective policy implementation, companies’ financial health, actual market demand and expectations of future returns. They argue that market enthusiasm is unlikely to return until reform announcements translate into tangible changes in trading activity and investor behaviour.
SEBON has proposed revising the methodology used to calculate the existing NEPSE index and developing a new benchmark index that better represents price movements of actively traded shares.
The proposed index could be named the NEPSE Benchmark Index, while the existing NEPSE index would be retained as the NEPSE All Equity Index.
According to SEBON, the existing NEPSE index is based on the total market capitalisation of listed companies. As a result, it includes shares that are held by founders, the government and other shareholders who may not be readily available for trading. This means the index may not fully reflect the actual performance of shares available in the daily market.
The proposed new index would use freely tradable ordinary shares as its basis.
The change is expected to make it easier for investors to understand market conditions based on the actual demand and supply of tradable shares. However, the impact will depend on the index calculation methodology, its implementation and how effectively investors use it.
SEBON has also made public a draft institutional investor policy aimed at expanding the participation of institutional investors in Nepal’s capital market.
The proposal identifies various categories of institutional investors, including banks and financial institutions, the Employees Provident Fund, the Citizen Investment Trust, the Social Security Fund, insurance companies, collective investment schemes and foreign institutional investors.
The draft also proposes setting investment limits for institutional investors across government securities, bank fixed deposits, institutional debt instruments, listed shares, collective investment funds and infrastructure-related securities.
Greater participation by institutional investors is expected to increase long-term capital, deepen market liquidity and help manage volatility.
However, the policy remains at the draft stage, meaning its immediate impact on the market is yet to be seen. Its effectiveness will depend on when it is implemented, the investment framework adopted and the amount of capital institutional investors ultimately commit to the market.
Discussions between SEBON and NEPSE officials have covered several areas of reform, including NEPSE’s capital and ownership structure, institutional governance, technology, human resources and trading systems.
The implementation of recommendations made by the NEPSE Restructuring Suggestion Committee has also been discussed, alongside efforts to diversify market products and services.
Preparations are underway for the introduction or expansion of various trading instruments and market mechanisms, including intraday trading, short selling, margin trading, exchange-traded funds (ETFs), and the bond and debt markets.
If implemented effectively, these measures could expand investment options and help modernise the market’s trading infrastructure.
However, not all these arrangements have been fully implemented. Market observers caution that investors may become disappointed if announcements and preparations are mistaken for benefits that are already available.
Market observers say policies encouraging capital gains, lower interest rates, adequate liquidity and greater institutional participation could help create a favourable environment for the stock market.
However, these factors alone cannot guarantee an increase in share prices. Companies’ profitability, dividend-paying capacity, the overall economic situation, investors’ risk appetite and confidence in future returns are equally important.
Investors remain cautious because it is still unclear when and how the benefits of policy reforms will become visible in the market.
To sustain market momentum, observers stress the need for coordination among regulatory authorities, the government, Nepal Rastra Bank and NEPSE, alongside time-bound policy implementation and transparent information flow.
Political stability, policy reforms and institutional restructuring have opened up new possibilities for Nepal’s stock market. Yet, whether these opportunities translate into actual trading activity, stronger investor confidence and sustainable market growth remains uncertain.
NEPSE’s restructuring and the introduction of new investment instruments could give the market a new direction. Ultimately, however, the outcome will depend on the speed, effectiveness and transparency of implementation.
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