Introduction
The Government of Nepal, Ministry of Finance, has announced an immediate Capital Market Strengthening and Revival Action Plan, 2083 in response to the sluggishness observed in the Nepalese economy over recent years and the slowdown affecting the banking and financial sectors, industry, commerce, infrastructure development, investment and capital markets.
The Action Plan also takes into account the additional economic pressure caused by the Bhotekoshi River flood of Bhadra 10, 2083 and seeks to implement the commitments announced through the Government's Annual Policy and Programme and the Budget Statement for Fiscal Year 2083/84.
The 21-point plan covers the primary and secondary securities markets, institutional investors, corporate and specialized bonds, market infrastructure, margin lending, intraday trading, securities lending and borrowing, private equity and venture capital, banking-sector investment in the capital market, and tax measures intended to encourage longer-term investment.
Rather than focusing solely on short-term market support, the Action Plan proposes a series of regulatory, institutional, infrastructural and policy reforms intended to strengthen the capital market.
1. Reform of Initial Public Offering Framework
The Nepal Securities Board is expected to immediately issue guidelines establishing general qualifications for an Initial Public Offering (IPO) in the primary market.
For public offerings based on a market-oriented pricing system, sector-specific qualifications are to be developed for industries including:
• Hydropower;
• Manufacturing and processing;
• Hotel and tourism;
• Agriculture; and
• Pharmaceutical industries.
The Action Plan also proposes the development of a price discovery system and securities allocation system, together with the necessary policy and legal reforms.
Analysis
The proposal indicates a move toward a more differentiated IPO framework rather than applying identical eligibility requirements across all sectors. Sector-specific criteria could allow regulatory requirements to better reflect the economic and financial characteristics of different industries.
The reference to market-oriented pricing and price discovery is particularly relevant to the development of a more market-based primary issuance mechanism.
2. Development of Mutual Funds, Bond Markets, Money Markets and ETFs
The Action Plan proposes the development of instruments including:
• Mutual funds;
• Bond markets;
• Money markets; and
• Exchange-Traded Funds (ETFs).
The relevant policy is to be made public, followed by the formulation of guidelines and development of necessary infrastructure by mid-Mangsir 2083.
The objective is to develop mutual funds and related instruments as professional, diversified, transparent, risk-aware, technology-friendly and long-term investment mechanisms.
Analysis
A wider range of collective investment and market instruments can provide investors with alternatives to direct investment in individual shares. The development of ETFs and deeper bond and money markets could also broaden the structure of Nepal's capital market beyond equity trading.
3. Institutional Reform and Strengthening of Securities Brokers
The Board will make public a policy for the institutional reform and strengthening of the securities brokerage business.
The objective is to transform securities brokers into modern, professional, robust, technology-based and multi-faceted securities financial-service institutions consistent with prevailing international practices and standards.
Analysis
This proposal goes beyond the traditional role of brokers as intermediaries for buying and selling securities. The proposed transformation could expand the institutional capacity of brokerage businesses and support the development of a broader range of capital-market services.
4. Securities Act Reform and New Securities Instruments
Separate bills related to securities regulation and market infrastructure are proposed to facilitate timely improvements to the Securities Act, 2063.
The proposed framework would facilitate the operation of securities-market instruments and activities including:
• Margin lending;
• Intraday trading;
• Securities lending and borrowing; and
• Short selling.
Analysis
These instruments can materially change the structure of Nepal's secondary securities market. Their effective implementation, however, requires appropriate regulatory safeguards, market infrastructure, risk-management mechanisms and investor protection arrangements.
5. Restructuring of Nepal Stock Exchange Limited
The restructuring of Nepal Stock Exchange Limited (NEPSE) will be taken forward in accordance with the report submitted by the Government of Nepal's task force constituted for the institutional strengthening, structural reform and capacity building of NEPSE.
Analysis
The proposal places NEPSE's institutional structure and capacity at the centre of capital-market reform. A stronger exchange infrastructure is important for supporting new products, improving market efficiency and handling increased trading activity.
6. Introduction of a New Benchmark Index
The existing NEPSE Index will continue to be maintained as an All Equity Index.
At the same time, a new benchmark index is proposed by mid-Mangsir 2083 based on indicators including:
• Tradable shares;
• Market capitalization;
• Financial condition of companies;
• Liquidity of transactions;
• Institutional governance; and
• Information-flow status.
Analysis
The proposed distinction between an All Equity Index and a benchmark index could provide investors with a more representative market-performance indicator. Incorporating tradability, liquidity and financial condition may also make the benchmark more suitable for investment analysis than an index based only on broad market capitalization.
7. Participation of NRNs in the Secondary Securities Market
The Government proposes to submit amendments to the Foreign Investment and Technology Transfer Act, 2075 and the Foreign Exchange (Regulation) Act, 2019 to allow Non-Resident Nepalis (NRNs) to participate in the secondary securities market.
The amendment proposal is to be submitted to the Council of Ministers by mid-Asoj 2083.
Analysis
The proposal seeks to create a legal and foreign-exchange framework through which NRNs can participate in Nepal's secondary securities market. Its practical implementation will depend on the detailed amendments and the mechanisms subsequently established for investment, repatriation, settlement and compliance.
8. Development of the Corporate Bond Market
The Action Plan seeks to promote market-based financing over bank-based financing through the development of the corporate bond market.
The bond regulations already made public by the Board are to be implemented by the end of Asoj 2083, with necessary amendments.
Analysis
A stronger corporate bond market could provide companies with an alternative source of financing apart from bank loans. For investors, it could also create additional fixed-income investment opportunities.
The effectiveness of such a market will depend on issuance standards, disclosure, credit assessment, liquidity, investor participation and secondary-market infrastructure.
9. Specialized Bonds
The Action Plan encourages the issuance of specialized bonds, including:
• Green bonds;
• Disaster bonds;
• Social bonds;
• Project-specific bonds; and
• Environmental bonds.
A policy framework is proposed by mid-Asoj 2083 covering investment of such funds and information relating to the relevant disasters or purposes.
Analysis
Specialized bonds can connect capital-market financing with specific economic, environmental and social objectives. A clear framework regarding the use of proceeds and disclosure will be important for maintaining investor confidence and ensuring that funds are used for their stated purposes.
10. Secondary Market for Treasury Bills and Development Bonds
To establish an active secondary market for Treasury Bills and Development Bonds, the Board will review transaction fees and prepare the necessary policy and market infrastructure by mid-Asoj 2083.
Analysis
A functioning secondary market can improve liquidity and price discovery for government securities. It can also provide investors with greater flexibility to enter or exit fixed-income investments before maturity.
11. Share Split, Dividend and Share Buyback Framework
The Board will consult stakeholders and prepare the necessary regulatory, policy and rule-making framework by mid-Magh 2083 concerning provisions relating to listed companies.
The framework will address practical implementation of provisions concerning:
• Consolidation or division of all or part of a company's share capital into shares having a value greater than or less than the face value;
• Distribution of dividends from distributable accumulated profits; and
• Buyback of the company's own shares.
Analysis
The proposal seeks to establish clearer regulatory treatment for corporate actions such as share splits and share buybacks. A defined framework could provide greater consistency in the approval and implementation of such actions by listed companies.
12. Approval and Implementation of Capital-Market Regulations
The Government of Nepal, Ministry of Finance, is expected to approve and implement regulations and directives including:
• Bond Regulations;
• Margin Loan Transaction Regulations;
• Intraday Transaction Regulations; and
• Other related rules and directives.
The target is mid-Asoj 2083.
Analysis
The implementation of these regulations is important because several other measures in the Action Plan depend on the establishment of an operational legal framework.
13. Operationalization of Margin Lending
The Action Plan proposes modernization and systematization of the share-purchasing system and the introduction of a mechanism for borrowing and investing through securities brokers licensed by the Board in accordance with the Margin Loan Transaction Regulations.
The target is mid-Poush 2083.
Analysis
The operationalization of margin lending would introduce a formal mechanism for leveraged securities investment through licensed securities brokers. Its implementation will require appropriate margin requirements, collateral arrangements, risk controls, disclosure and monitoring systems.
14. Further Amendment of the Securities Act, 2063
Further amendments to the Securities Act, 2063 are proposed, including provisions relating to:
• Investigation of securities-related offences by the Securities Board of Nepal; and
• The ability of private companies to issue bonds.
Analysis
The proposed amendments address both regulatory enforcement and the potential expansion of corporate debt financing. The ability of private companies to access bond financing could broaden the sources of capital available outside traditional bank lending.
15. Participation of Institutional Investors in Primary and Secondary Markets
The Action Plan proposes policy, legal and infrastructure arrangements to facilitate the entry and participation of institutional investors in both primary and secondary securities markets.
(a) Institutional investment framework
The Board will make the necessary legal and other reforms to establish:
• Investment policies;
• Transaction structures; and
• Infrastructure arrangements
for institutional investors by mid-Mangsir 2083, consistent with the institutional investment policies, rules, guidelines and regulatory arrangements formulated by the Board.
(b) Primary-market participation
The Board will facilitate institutional investors' participation in the primary securities market through appropriate policies, rules and guidelines.
Analysis
Institutional investors can play an important role in providing depth and stability to capital markets. The Action Plan therefore seeks to address not only investment limits but also the legal, structural and operational arrangements necessary for institutional participation.
16. Portfolio Rebalancing by Institutional Investors
The Action Plan proposes legal, policy and structural facilitation to enable institutional investors with significant concentrations in bank deposits to rebalance their portfolios toward securities.
The institutions specifically identified include:
• Employees Provident Fund;
• Citizens Investment Fund;
• Social Security Fund;
• Insurance companies;
• Mutual funds; and
• Other institutional investors.
The target is mid-Mangsir 2083.
Analysis
The proposal seeks to diversify institutional investment away from excessive concentration in bank deposits. Greater institutional participation in securities could increase the depth of Nepal's capital market while providing institutional investors with additional investment avenues.
17. Structural Reform of CDS and Clearing Limited
A study on structural reforms of CDS and Clearing Limited is proposed by mid-Falgun 2083.
The objective is to enhance its institutional capacity to effectively operate new securities-related financial services and strengthen the Central Depository Service System.
Analysis
The introduction of new market instruments will require corresponding improvements in clearing, settlement and depository infrastructure. Strengthening CDS and Clearing Limited is therefore closely connected with the wider modernization of Nepal's securities market.
18. Regulatory Framework for Private Equity and Venture Capital
The Board will undertake necessary studies and prepare legal and market infrastructure for the PE/VC sector.
The framework is intended to be consistent with applicable international best practices and to facilitate:
• Capital mobilization;
• Investment;
• Dividend distribution;
• Capital withdrawal; and
• Investment-related requirements.
The Action Plan also proposes classification of private equity and venture capital based on their role in providing capital to:
• Early-stage enterprises;
• Innovation-based businesses;
• Small and medium enterprises with high growth potential;
• Technology-focused businesses; and
• High-risk, high-return projects.
Analysis
A structured PE/VC framework could provide alternative financing channels for businesses that may not be suited to conventional bank financing or public offerings. The emphasis on classification and transparent processes indicates an intention to establish a more organized regulatory environment for alternative investment.
19. Review of Banks and Financial Institutions' Capital-Market Investment
The Securities Board and Nepal Rastra Bank will jointly review the existing arrangements governing investments by banks and financial institutions in the capital market by mid-Kartik 2083.
The review will consider matters including:
• Investment limits;
• Risk weights;
• Collateral adequacy;
• Capital mobilization;
• Direct and indirect exposure;
• Interrelationships and chain effects;
• Financial interests;
• Systemic risk;
• Liquidity;
• Returns; and
• Depositor protection.
Analysis
The proposal recognizes that banks and financial institutions have interconnected relationships with the capital market. A review based on both investment opportunities and systemic-risk considerations could help establish a framework that considers financial-sector stability alongside capital-market development.
20. Tax Measures to Encourage Long-Term Securities Investment
One of the most significant components of the Action Plan relates to taxation of securities investment.
The proposal seeks to make the existing tax system more investment-friendly by encouraging long-term investment in the securities market.
(a) Tax on gains from listed securities
For resident natural persons, gains arising from the disposal of interests in an entity listed on the securities exchange are proposed to be subject to:
• 3.75% where the interests have been held for more than 365 days; and
• 5% where the interests have been held for 365 days or less.
The tax is to be levied by the body operating the securities exchange market.
Analysis
The proposed differential rate links the tax burden to the holding period. The lower rate for securities held for more than 365 days is intended to encourage longer-term investment.
(b) Adjustment of losses from disposal of listed securities
The Action Plan also proposes a mechanism for adjusting losses arising from the disposal of listed securities.
Where a resident natural person or resident entity paying tax under Section 95(2)(a) incurs a loss calculated under Section 37 from the disposal of listed securities during an income year, the loss is proposed to be adjusted in the same income year.
The proposal further refers to improving the profit-tax calculation method through the profit/loss transaction and clearing system so that, where there is a net profit, capital gains tax at the specified rate is taken as the final tax.
Analysis
This proposal is important because it addresses the calculation of securities-market gains and losses rather than focusing solely on the applicable tax rate. A mechanism that recognizes relevant losses within the same income year could make the tax calculation more closely aligned with the investor's net securities-market result.
21. Measures to Reduce Speculative Risk in Banks and Financial Institutions
Regarding investments by banks and financial institutions in the secondary securities market, Nepal Rastra Bank will make arrangements requiring the boards of directors of banks and financial institutions to establish an investment policy.
The proposed arrangement includes a minimum investment period of 45 days with the stated objective of minimizing speculative risk.
Analysis
The proposal seeks to distinguish securities investment from short-term speculative activity within the banking and financial sector. Requiring formal investment policies and a minimum investment period would introduce an additional governance framework for such investments.
Cross-Cutting Implications of the Action Plan
The 21-point Action Plan can broadly be understood through six interconnected reform areas.
1. Modernization of the Primary Market
The proposed IPO eligibility guidelines, sector-specific requirements and market-oriented pricing mechanisms indicate an effort to modernize Nepal's primary securities market.
The proposed price discovery mechanism is particularly relevant because it could influence how securities are priced and allocated in public offerings.
2. Expansion of the Secondary Market
Margin lending, intraday trading, securities lending and borrowing, short selling and a new benchmark index are among the proposed reforms affecting the secondary market.
These measures could introduce new market mechanisms, but their effectiveness will depend on the supporting regulatory, technological and risk-management infrastructure.
3. Greater Institutional Participation
The Action Plan specifically identifies institutional investors as an important component of capital-market development.
Employees Provident Fund, Citizens Investment Fund, Social Security Fund, insurance companies and mutual funds are identified in connection with portfolio diversification and increased investment in securities.
4. Development of Alternative Sources of Finance
Corporate bonds, specialized bonds and PE/VC are given significant attention.
Together, these measures seek to expand financing options beyond traditional bank-based lending and equity issuance.
5. Strengthening of Market Infrastructure
NEPSE restructuring, CDS and Clearing Limited reform, new market infrastructure, and regulatory modernization are important supporting elements of the Action Plan.
New financial instruments cannot operate effectively without corresponding improvements in trading, clearing, settlement, disclosure and risk-management systems.
6. Tax Treatment and Investment Behaviour
The proposed tax measures distinguish between securities held for more than 365 days and those held for 365 days or less.
The proposed treatment of securities-market losses is also significant because the tax outcome would be connected to the calculation of gains and losses within the same income year.
Implementation Will Be Critical
The Action Plan contains an extensive list of reforms, but its impact will depend substantially on implementation.
Several measures require coordination among:
• Ministry of Finance;
• Securities Board of Nepal;
• Nepal Rastra Bank;
• Nepal Stock Exchange Limited;
• CDS and Clearing Limited;
• Institutional investors;
• Securities brokers; and
• Other relevant market participants.
In addition, several proposals require amendments to existing legislation before they can become operational. This is particularly relevant to margin lending, intraday trading, securities lending and borrowing, short selling, NRN participation, private-company bond issuance and institutional investment.
The development of market infrastructure must therefore progress alongside regulatory reform.
Conclusion
The Capital Market Strengthening and Revival Action Plan, 2083 presents a broad reform agenda covering Nepal's primary and secondary securities markets, institutional investors, market infrastructure, alternative financing, banking-sector participation and taxation.
The plan proposes 21 measures ranging from sector-specific IPO requirements and a new benchmark index to corporate bonds, specialized bonds, margin lending, intraday trading, PE/VC regulation, institutional portfolio rebalancing and securities-tax reforms.
A notable feature of the Action Plan is that it does not treat capital-market development as an isolated securities-market issue. It connects capital-market infrastructure with banking-sector regulation, institutional investment, corporate financing, alternative investment and taxation.
The practical outcome of the Action Plan will ultimately depend on the timely formulation of regulations, necessary legislative amendments, development of supporting infrastructure and effective coordination among the relevant institutions.
If implemented through clear rules and appropriate market safeguards, the proposed reforms would establish a substantially broader framework for the future development of Nepal's capital market.
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