Will NEPSE Get a Short Selling and Derivative Market? The Operational Reality

For the last three decades, the Nepal Stock Exchange (NEPSE) has fundamentally operated as a "one way street." The retail dominated market structure dictated that participants could only generate positive returns when equity prices went up. When a bear market arrived, liquidity routinely evaporated as investors scrambled to hold or panic sell, leading to massive volatility and predictable cycles of boom and bust.

However, the fiscal framework unveiled by Finance Minister Dr. Swarnim Wagle has laid out a highly anticipated policy roadmap to introduce advanced financial instruments: Intraday Trading, Short Selling, and Derivatives Instruments.

How Short Selling Works? Profiting in a Downturn

Short selling is the exact reverse of traditional stock trading, allowing you to profit when a company's stock price drops. Instead of buying a stock low and selling it high, you sell high first and buy low later. The process works in a simple loop: you borrow shares you don't own from another investor through your broker, immediately sell them at the current high market price, and hold onto that cash.

Once the stock price goes down as expected, you go back into the market, buy the shares back at the new cheaper price, and return them to the original lender. The cash difference between your initial high sale and your cheap purchase is your profit. However, this method also has risk; if the stock price unexpectedly goes up instead of down, you are still legally forced to buy those shares back at a higher price to return them, which can lead to rapid financial losses. E.g. You sell the XYZ stock at NPR 260 expecting it will go down towards 250/240, if it goes down as you expected then you will buy the share and make profit, however if it goes upward like 270/280 then you will loose your amount. The difference between your sell price and buy price is a profit or loss.

Why Every Nepalese Investor Wants Short Selling in NEPSE?

Historically, Low-cap companies, particularly within the volatile hydropower sector could easily have their prices predicted or artificially driven up due to low float. If short selling is legally and operationally enabled, institutional players can actively bet against overvalued companies, forcing stock prices to align closer to actual corporate earnings and intrinsic valuations. In the current structure of NEPSE, trader and investors only gain when market goes up and everyone loose when market goes down. To encounter this issue, developed country uses short selling technique to make market transparent. In India Futures and options (F&O) based short selling began around 2000, when derivatives trading was formally introduced to replace the badla system. The first index futures contracts were launched in June 2000, followed by stock options in June 2001 and stock futures in November 2001.

In Nepal Finance Minister Dr. Wagle just announced that Nepal will also introduce the short selling and derivative instruments in the NEPSE within this F.Y. 2083/84. It’s not just an announcement it’s a hope of the thousands of investors that are active in capital market, but questions remain critical, will it actually arrive within a year or it’s just the announcement. Currently the SEBON chairman position is also vacant and who comes in the position and what technique he/she uses to develop the market will tell that short selling will be introduce in the market or not.

Is NEPSE ready to handle Derivative Market: Technicality

Technically NEPSE has a weak system, as a result of this sometimes NEPSE official website goes down, TMS goes down and sometimes total capitalization comes after an hour, that shows how week Nepal securities system. Implementing short selling and derivative market will requires modern system and need to completely change or upgrade the system of NEPSE. Currently YCO Pvt. Ltd. Technically Managed the NEPSE Online Trading System.

The Execution Challenge: What Needs to Happen Next

While the regulatory vision established by the Finance Ministry has injected immense optimism into the market, actual execution rests squarely on the shoulders of the Securities Board of Nepal (SEBON) and CDSC (Central Depository Services and Clearing).

Before a single short sell order can go live, Nepal requires a bulletproof, automated Online Trading Management System platform. This platform must function cleanly to ensure that shares can be borrowed safely, margin calls can be executed algorithmically, and clearing banks can mitigate systemic default risks if a trading desk or broker faces a liquidity mismatch.

Dr. Wagle’s budget has successfully separated NEPSE's tax concerns from its structural modernization by classifying Capital Gains Tax as a Final Tax (7.5% long-term, 10% short-term). With that long-standing tax ambiguity completely removed, the introduction of intraday trading, short-selling, and derivatives is exactly what Nepal needs to transform its capital market from a speculative arena into a highly sophisticate and advance investment destination.