Nepal's Stock Market at a Historic Turning Point: Can Short Selling End the One-Way Market?

On Tuesday, They Surrounded the Regulator.
On Wednesday, He Promised Them Short Selling.

Nepal’s market is about to learn a second direction. What follows is the part nobody puts in a press release.

Last Tuesday, a crowd of investors surrounded the securities regulator. Their demand was the oldest one in Nepal’s capital market, the demand that has been made to every SEBON chairman through every downturn since 1994: make it go up.

The next morning, Dr Gopal Prasad Bhatta sat before the parliamentary Finance Committee and gave an answer. Not a support fund. Not a circuit breaker tweak. Not the ritual promise to “restore investor confidence.” He told the committee, in plain terms, that the days of protest were numbered because SEBON would soon let investors profit when the market falls.

Borrow a share at Rs 50, sell it, buy it back at Rs 30, pocket the difference. Short selling. In Nepal. Soon.

He said something else that morning, almost in passing, that deserves more attention than the announcement itself. He described being besieged as a first in his life, and then he explained why the siege happens. Every one of Nepal’s 7.7 million demat account holders makes money in exactly one way: buy, wait, pray for a rise. When an entire market can only be right in one direction, the entire market becomes a pressure group for that direction. Investor associations don’t besiege the SEC in Washington when the S&P falls, because half of Wall Street is positioned to be right when it does. They besiege SEBON because in Kathmandu, a falling market has no winners. Only victims, and someone to blame.

That is the most honest thing a Nepali regulator has said about his own market in years. The siege is not a public order problem. It is a market design problem wearing a public order costume.

THREE DOCUMENTS, SEVEN WEEKS, ONE DIRECTION

If this were one chairman’s talking point, I’d file it with two decades of similar talking points. It isn’t.

On 29 May, Finance Minister Dr Swarnim Wagle stood in Parliament and committed the government, in the FY 2083/84 budget itself, to restructuring NEPSE and introducing intraday trading, short selling and derivatives in phases, with a zero-tolerance line on cornering and insider trading thrown in for good measure. This week, SEBON published its Capital Market Development Roadmap 2083. And alongside it came the Board’s annual policy for the new fiscal year, which reads less like a wish list and more like a build order: a gradual move of the settlement cycle towards T+1, legal and institutional groundwork for a central counterparty, full straight-through processing from trade to settlement, an auction market for trades that fail, intraday trading on a trial basis, securities lending and borrowing introduced gradually with short selling behind it, and market makers plus authorized participants to stand in the middle of it all.

For the first time I can remember, the budget speech, the regulator’s blueprint and the regulator’s annual program are pointing at the same three instruments, in roughly the same order. That alignment is new. It matters.

Nepal’s market history is not a history of bad ideas. It is a history of good ideas launched before their plumbing.

THE TWO GHOSTS IN THE ROOM

Ask any brokerage how many active margin trading accounts it runs. Margin trading has been permitted on paper for the better part of a decade. The directive exists. The circulars exist. The market never did, because the regulation was published without solving the financing chain behind it, the capacity of brokers to run it, or the economics for anyone involved. We built a door and forgot the building. That is the base rate against which every new instrument announcement in this country should be judged.

The second ghost is darker. Nepal has already run an uncontrolled experiment in derivatives. Through the late 2000s and early 2010s, self-styled commodity exchanges multiplied across Kathmandu, selling margined gold and silver contracts to retail clients with no regulator, no clearing house and no capital rules behind them. It ended the way it always ends: collapsed platforms, vanished deposits, burnt savings, and a 2074 Act that arrived to regulate a sector after it had already caught fire. The lesson was never that derivatives are dangerous. The lesson is that derivatives without clearing, capital and surveillance are a bonfire with a ticker symbol.

“The lesson is that derivatives without clearing, capital and surveillance are a bonfire with a ticker symbol.”

Anyone dismissing today’s caution as timidity should be made to explain those two episodes first.

YOU CANNOT SHORT WHAT YOU CANNOT BORROW

Now the plumbing, starting with the pipe everything else connects to.

A legitimate short sale begins with a borrowed share. Which means short selling is downstream of a functioning securities lending and borrowing market, and SLB is not a circular you publish. It is a market you build. Someone has to lend. In Nepal, the natural lenders are the institutions sitting on large, patient portfolios: the Employees Provident Fund, Citizen Investment Trust, the insurers, the mutual funds. Every one of them needs permission from its own supervisor to lend a single share. Every one of them needs a fee that makes lending worth the bother. And every one of them needs legal certainty on questions that sound boring until Rs 10 crore hinges on them: who owns the share mid-loan, who receives the dividend declared during the loan, what collateral secures it, and what happens when the lender wants it back on a Tuesday and the borrower can’t deliver.

None of that architecture exists today. Until it does, any short selling framework is a car parked proudly in the showroom with no fuel in the country.

WHEN THE FLOAT RUNS OUT

In October 2008, hedge funds were confidently short Volkswagen when Porsche quietly revealed how much of the company it actually controlled. The freely tradable shares all but vanished, the shorts stampeded for an exit that wasn’t there, and for one surreal day Volkswagen became the most valuable company on earth. Fortunes that had taken decades to build evaporated in a squeeze that took hours.

Now look at a typical NEPSE register. Promoter holdings dominate. The genuinely tradable float in many scrips is a sliver of the listed capital. Thin float is exactly what makes cornering possible on the long side, and it is exactly what makes a short squeeze lethal on the short side. Picture a trapped short in a market with daily price bands: the price limits up, he cannot cover, it limits up again the next day, and

he watches his losses compound behind a door that only opens for a few per cent of movement each session. The budget’s zero-tolerance language on cornering will be tested far more violently in a two-way market than it ever was in a one-way one.

The design answers are known, and they need to be written down before launch, not after the first casualty. Covered shorts only, with a hard ban on naked selling. A locate requirement before the sale. An initial list restricted to high-float, high-liquidity scrips. Published short interest, so the market can see a crowded trade before it detonates. Every serious market learnt these rules by bleeding. We have the rare option of learning them by reading.

WHO PAYS WHEN A BROKER FAILS AT 11:47 AM

Nepal settles trades without a central counterparty. Every trade is a bilateral promise, backstopped by a settlement fund built for a slower, gentler market. In a long-only, T+2 survivable world, because positions move at the speed of paperwork.

Intraday trading changes the physics. So do short positions. So, eventually, do margined derivatives. Velocity plus two-way exposure means a single mid-sized broker failing mid-session can pull others down with it, and the question “who stands behind the trade” stops being academic. SEBON’s policy names CCP preparation explicitly, which is the single most encouraging line in the whole document. The test is brutally simple: does the CCP, or at minimum a genuinely capitalized guarantee structure with a real default waterfall, arrive before the instruments or after the first crisis?

The same test applies one layer down. Intraday trading without automated pre-trade risk checks at the broker level is not a liquidity reform. It is a machine for manufacturing broker defaults, and a meaningful share of our brokerage industry still runs on thin capital and overnight reconciliation. Back offices are not glamorous. Neither are foundations.

THE TAXMAN HASN’T BEEN TOLD

One more trap, hiding in the budget’s own fine print. The FY 2083/84 budget made capital gains tax on listed securities final, which is a genuinely good reform. But the entire CGT machine assumes one sequence of events: buy, hold, sell, with tax withheld at the moment of disposal.

A short sale runs that film backwards. The sale happens first; the purchase comes later. What exactly gets withheld, against what cost base, at the moment of a sale that precedes its own purchase? And an intraday trader completing thirty round trips a day: is that a capital gain or business income? These sound like accountants’ quibbles. They are not. If the Finance Act doesn’t answer them before launch, the Inland Revenue Department will answer them after launch, retrospectively, and retrospective tax treatment is how promising instruments die in this country.

HOW YOU’LL KNOW IT’S REAL

Ignore the speeches from here on. Watch the sequence.

Straight-through processing completed and the settlement cycle actually at T+1. A clearing backstop with real capital and a written default waterfall. Then, the tell that matters most: an SLB regulation with named lender categories, conservative haircuts and workable legal mechanics. Then covered shorts on a short list of liquid scrips with disclosure rules attached. Then the intraday trial, with pre-trade margining that actually rejects orders. And when derivatives finally arrive, index futures before single-stock contracts, which quietly raises one more prior task, because a derivatives-grade index needs a free-float, investable construction that today’s index does not provide.

If the phases land in that order, this is the most consequential modernization of Nepal’s market since dematerialization, and the people building it will deserve more credit than they’ll get. If the instruments are rushed out ahead of the plumbing because a soft market needed a headline, the order of events is just as predictable: announcement, scandal, suspension, and a decade of institutional scar tissue that sets the next reform back by a generation.

Is NEPSE ready today? No, and nobody serious claims it is. Can it be ready within the phased horizon the budget and the Board have both signed up to? Yes. The diagnosis is right, the direction is right, and for once the sequence on paper is right too.

Here is the thought I keep returning to. The siege outside SEBON doesn’t end when the market rises. It ends when the crowd outside has a way to be right in both directions, and the machinery underneath them is strong enough to hold whichever way they lean. That machinery is buildable. It is being promised. Now it has to be built, in order, bolt by unglamorous bolt.

“The day the SLB framework is published in workable form is the day this stops being a speech and starts being a market.”