Market Participants in NEPSE

First published 21 Aug 2026 · Last verified 29 Aug 2026

A market is not an abstraction. It is a collection of human beings and institutions, each with distinct objectives, constraints, information sets, and behavioural tendencies, interacting through a common mechanism — the price auction — to buy and sell claims on productive enterprises. The character of a market, its volatility, its efficiency, its susceptibility to manipulation and euphoria, its capacity for rational price correction — all of these emerge from the specific mix of participants who trade within it.

NEPSE's participant structure is unusual by any global standard. It is one of the most retail-dominated equity markets in Asia. Its institutional investor base is thin, constrained by mandate and bureaucratic culture. Its mutual fund sector is small and limited in depth. Its broker network, though recently subject to consolidation pressure, remains fragmented by the standards of comparable markets. Foreign institutional participation is legally restricted and practically minimal. And it has no market makers whatsoever — a structural absence with profound consequences for liquidity and price formation.

This chapter maps NEPSE's participant landscape in full: who participates, how they are structured, what drives their behaviour, how they interact, and — most critically — what the specific composition of participants means for the investor trying to understand why NEPSE behaves the way it does and how to position a portfolio intelligently within it.

Lesson 9.1 — Retail Investors: The Dominant Force and the Structural Consequences

The Scale of Retail Dominance

In most developed equity markets, retail investors — individual citizens trading their personal savings — constitute a minority of daily trading volume, typically 15–25%. The majority is accounted for by institutional participants: mutual funds, pension funds, hedge funds, insurance companies, proprietary trading desks, and market makers. These institutional participants bring larger capital pools, more analytical resources, longer investment horizons (in some cases), and more disciplined risk management frameworks.

NEPSE inverts this structure completely. Retail investors account for an estimated 80–85% of daily trading volume. Institutional participants — Citizen Investment Trust, Employee Provident Fund, insurance companies, mutual funds — account for the remainder, and even their institutional character is limited, as we will examine in subsequent lessons. Nepal's stock market is, in the most literal sense, a people's market: its prices are set primarily by the aggregated decisions of hundreds of thousands of individual Nepali citizens, most of them trading through mobile phones, most of them making decisions based on a combination of social media sentiment, informal tip networks, and intuition rather than systematic fundamental analysis.

Who Are Nepal's Retail Investors?

The demographic composition of NEPSE's retail investor base has shifted dramatically over the past decade. The pre-MeroShare era (before approximately 2016) retail investor was predominantly urban, male, middle-aged, and connected to the market through broker relationships. The post-MeroShare era has seen the investor base expand to include a substantially younger cohort — university students and recent graduates in their twenties, members of the diaspora in Gulf countries and further abroad, small businesspeople and traders in district-level cities and towns, and housewives and female entrepreneurs who were largely absent from the market a decade earlier.

The common thread across this diverse demographic is limited formal financial education. Nepal's school and university curriculum has not historically included personal finance, investment principles, or capital market mechanics as standard subjects. Most retail investors in NEPSE have learned about the market through family members, colleagues, social media content, and their own trial and error — a learning process that is expensive in the tuition paid through early investment losses and that systematically reinforces certain cognitive biases and behavioural patterns.

The Behavioural Profile of the NEPSE Retail Investor

Understanding the systematic behavioural patterns of NEPSE's retail base is one of the most practically useful analytical frameworks an investor can develop. These patterns are not unique to Nepal — they are well-documented in behavioural finance literature globally — but they manifest with particular intensity in a retail-dominated, illiquid market with rapid digital information spread.

Herding. NEPSE retail investors exhibit strong herding behaviour — the tendency to follow the crowd rather than form independent judgments. When a stock begins rising, the movement attracts attention through social media, broker networks, and word of mouth. Each incremental price rise attracts new buyers who fear missing out, which produces further price rises, attracting yet more buyers. This momentum cascade can drive stocks far above any reasonable fundamental value. The reversal, when it comes, is equally cascade-driven: early sellers trigger price declines, which trigger stop-losses and margin calls, which trigger forced selling, which produces further declines. In a market dominated by institutional investors with contrarian mandates and long horizons, these cascades are dampened. In NEPSE, they are amplified.

Recency bias. Retail investors systematically overweight recent experience in forming expectations about future outcomes. Investors who entered NEPSE during the 2020–21 bull market, and who experienced rapid gains in their first year of participation, formed expectations of market returns based on that exceptional period. When the 2022 correction began, these investors initially interpreted it as a temporary dip — a buying opportunity — rather than a structural reversal, because their mental model of 'normal' was calibrated to the extraordinary. Conversely, investors who experienced the 2018–20 correction first, before the pandemic boom, may have remained underexposed to equity for too long as prices recovered, anchored to their loss experience.

Dividend and bonus fixation. A distinctive feature of NEPSE retail psychology is the extraordinary focus on dividend and bonus share announcements relative to fundamental earnings quality. The announcement of a bonus share — a capitalisation of retained earnings through new share issuance — is invariably greeted with buying pressure, even though a bonus share (like a stock split) does not increase the company's intrinsic value per rupee of outstanding equity. Investors who buy a stock at NPR 1,000 before a 50% bonus issue, expecting to benefit from the bonus, typically ignore that the post-bonus price adjusts proportionally downward. This fixation creates predictable trading patterns around announcement dates that can be observed and potentially exploited by more analytically grounded investors.

Margin overuse. NEPSE retail investors have a historical propensity to use margin lending — borrowing against their share portfolios to purchase additional shares — beyond levels consistent with their actual risk tolerance and financial capacity. Margin lending amplifies both gains and losses. In rising markets, investors who borrowed to buy more experienced spectacular returns that reinforced the behaviour. In falling markets, the same leverage produced margin calls that forced selling at depressed prices, locking in losses that took years to recover. The 2021–22 cycle produced a generation of Nepali investors who have experienced margin calls first-hand — a painful but potentially durable lesson in leverage risk.

IPO lottery mentality. As discussed in Chapter 2, the consistent IPO listing premium in Nepal's market history has conditioned retail investors to treat every IPO application as a lottery ticket with a positive expected value. This mentality drives extraordinary IPO oversubscription (100–200x is not uncommon for popular issues) and crowds out fundamental analysis of the issuing company's actual quality. When IPOs list below their issue price — as happens periodically, particularly in weak market conditions — investors who applied on auto-pilot absorb losses that a prospectus-reading approach might have avoided.

The Structural Consequences of Retail Dominance

The behavioural patterns of retail investors, operating in aggregate across hundreds of thousands of accounts, produce structural market characteristics that every NEPSE participant must understand and incorporate into their investment approach.

First, sentiment-driven volatility. NEPSE's price movements are disproportionately large relative to fundamental developments. A change in NRB's policy stance — an event that in a deeper, institutionally-dominated market would produce a measured re-pricing over days as algorithms and analysts process the implications — can produce a 5–8% single-day move in NEPSE as retail investors react in a coordinated, socially-mediated panic or euphoria. The speed of social media information propagation means that sentiment shifts are immediate and simultaneous across the retail base.

Second, calendar-driven patterns. NEPSE retail behaviour exhibits predictable calendar patterns driven by dividend season (the period around June–July when companies announce year-end dividends and the fiscal year closes), AGM season, and IPO allotment periods. Understanding these seasonal patterns — when retail investors are likely to be buyers (ahead of dividend announcements, at the start of a new fiscal year) and when they are likely to be sellers (after dividend records dates, when book-closure ends) — is a form of practical market knowledge that complements fundamental analysis.

Third, the thin-market premium. Because retail investors in illiquid NEPSE stocks trade in small quantities, a relatively small coordinated buying campaign can push prices significantly above fundamental value — and a relatively small coordinated selling campaign can push them significantly below. This creates opportunities for well-capitalised, patient investors who understand fundamental value and can wait for the retail herd to push prices to attractive entry points in the correction phase.

Lesson 9.2 — Institutional Investors: CIT, EPF, Insurance Companies — Who They Are and How They Move the Market

The Institutional Investor Landscape

Despite being vastly outnumbered by retail participants in transaction count, institutional investors in NEPSE matter disproportionately on days when they choose to act. Their larger average transaction sizes, longer-horizon mandates (in theory), and — in some cases — more analytically disciplined investment processes mean that institutional buying or selling can move prices decisively and signal valuation inflection points to the broader market. Understanding who Nepal's institutional investors are, what mandates they operate under, and how their constraints shape their market behaviour is therefore critical intelligence.

Citizen Investment Trust (CIT)

Citizen Investment Trust is Nepal's oldest and most prominent institutional investor, established in 1991 under the Citizen Investment Trust Act 2047. CIT's primary business is the management of retirement savings schemes — most notably its Unit Scheme, which functions as an open-ended mutual fund accessible to Nepali citizens, and its Retirement Savings Scheme, which accumulates contributions from employed Nepalis (particularly civil servants and semi-government employees) toward retirement.

CIT's investment mandate is broad — it can invest in equities, government bonds, debentures, and real estate — but its risk profile is constrained by the fact that it manages retirement savings for hundreds of thousands of Nepali citizens who depend on these funds for post-employment income. This creates an institutional conservatism: CIT allocates the majority of its portfolio to lower-risk instruments (government bonds, fixed deposits, treasury bills) and maintains an equity allocation that is significant in absolute terms but represents a minority of its total assets under management.

CIT's equity investments in NEPSE tend to be concentrated in the large-cap banking sector — the same concentration bias that characterises the headline NEPSE index. CIT rarely holds meaningful positions in smaller hydropower developers, microfinance companies, or manufacturing stocks, because the liquidity of those stocks is insufficient to allow CIT to build or exit positions of any significant size without materially moving the price.

CIT's market impact is primarily felt on two dimensions: as a buyer in large-cap banking stocks when valuations reach levels that its internal processes flag as attractive (providing a valuation floor of sorts), and as a seller during market peaks when its portfolio rebalancing or redemption needs require equity liquidation. CIT's portfolio decisions are not disclosed in real time — it is not required to disclose its trading activity the way a listed company must disclose material events — so market observers infer its activity from price action in specific stocks and from CIT's periodic portfolio disclosures.

Employee Provident Fund (EPF)

The Employee Provident Fund is Nepal's largest pension savings institution, managing the accumulated retirement contributions of Nepal's formal sector employees. EPF's investible assets have grown substantially over the past decade as formal sector employment has expanded and contribution rates have been maintained. As of recent estimates, EPF manages assets of several hundred billion rupees — making it, in absolute terms, a larger pool of capital than CIT.

EPF's investment mandate is even more conservative than CIT's. As a pension fund managing the retirement security of working Nepalis, EPF is structurally averse to equity risk and has historically allocated the overwhelming majority of its portfolio to government bonds and bank fixed deposits. Its equity allocation to NEPSE, while real, has been a small fraction of its total assets.

The significance of EPF for NEPSE investors lies not in its current equity activity but in its potential. If EPF were to shift its equity allocation from, say, 5% to 15% of assets — a move comparable to what pension funds in peer emerging markets have done — the capital inflow into NEPSE would be transformative. Such a shift has been discussed at the policy level but faces regulatory barriers (EPF's enabling legislation restricts certain categories of investment), governance barriers (EPF's board must approve material changes to investment policy), and political barriers (the prospect of pension fund money being 'at risk' in the equity market is politically sensitive). Investors who follow this policy discussion — and who position themselves ahead of any regulatory change enabling greater EPF equity participation — stand to capture significant upside from the institutional demand surge that would result.

Insurance Companies: Life and Non-Life

Nepal's insurance sector — regulated by Beema Samiti (Insurance Board) — comprises approximately nineteen life insurance companies and twenty non-life insurance companies as of 2024, most of them listed on NEPSE. Collectively, insurance companies represent a significant pool of investible assets — life insurance companies, in particular, accumulate substantial reserves from long-duration policy premiums.

Beema Samiti's investment regulations require insurance companies to maintain specified proportions of their investible assets in approved categories: a minimum in government securities, a portion in infrastructure bonds, and a permitted allocation to equity. The equity allocation is capped by regulation, which limits the maximum position any single insurance company can take in a listed security — preventing concentrated risk-taking and ensuring diversification.

Insurance companies are among the more analytically disciplined participants in NEPSE, because Beema Samiti requires them to justify their equity investments through documented investment policies and board-approved frameworks. However, their investment teams are small (many insurance companies have only one or two investment professionals), and their analytical capabilities — while improving — remain limited compared to global standards.

The behaviour of insurance company equity portfolios is particularly significant around year-end (Ashadh — the end of Nepal's fiscal year in mid-July): insurance companies often rebalance their portfolios in line with regulatory requirements at fiscal year end, creating identifiable seasonal buying or selling patterns in specific securities.

How Institutional Investors Move the Market

Despite their individually constrained mandates, Nepal's institutional investors can move NEPSE prices significantly when they act, precisely because of their relative size compared to average retail transaction volumes. A CIT decision to deploy NPR 500 million into a specific banking stock — a transaction that would be unremarkable in the context of India's or any developed market — can move a NEPSE-listed bank's price by 5–8% over a week of systematic accumulation.

The practical implication for retail investors: watching for unusual volume accumulation in large-cap stocks — significantly above average daily turnover, sustained over several sessions — can sometimes signal institutional accumulation or distribution. This is not a foolproof signal, but combined with fundamental analysis and valuation context, it can provide useful corroboration of a thesis.

Lesson 9.3 — Mutual Funds in Nepal: Structure, NAV, Available Schemes, and Their Limited Market Depth

The Mutual Fund Ecosystem

Mutual funds in Nepal are registered and regulated under the Securities Act 2063 and the Mutual Fund Regulation 2067. A mutual fund is a pooled investment vehicle — it collects capital from multiple investors, issues units (not shares) representing proportional ownership of the pool, and invests the pooled capital across a portfolio of securities. The fund's Net Asset Value (NAV) — calculated daily as (total assets minus total liabilities) divided by total units outstanding — represents the per-unit value of the fund, the price at which investors can subscribe or redeem.

Nepal's mutual fund sector has grown meaningfully since the first funds were launched in the early 2010s, but remains small relative to the overall market and to comparable sectors in peer countries. By 2024, Nepal had approximately 25–30 registered mutual fund schemes, collectively managing assets of NPR 100–150 billion — a fraction of NEPSE's total market capitalisation and a tiny proportion of total household financial savings in the country.

Types of Schemes

Closed-end schemes. Most mutual funds in Nepal operate as closed-end schemes — they raise a fixed amount of capital through a public issue (similar to an IPO), list the fund units on NEPSE, and trade on the exchange like any other security. Investors who want to enter or exit the fund after the initial offering do so by buying or selling units on NEPSE, not by subscribing or redeeming directly with the fund. This means that the market price of a closed-end fund unit on NEPSE can, and frequently does, diverge from the fund's underlying NAV.

Open-end schemes. A smaller number of Nepali mutual funds operate as open-end schemes — investors can subscribe (buy units at NAV) or redeem (sell units back to the fund at NAV) on any business day. This structure ensures that the unit price always equals NAV, eliminating the discount-to-NAV problem that plagues closed-end funds. Open-end schemes in Nepal include CIT's Unit Scheme (technically the oldest and largest), and a growing number of schemes launched by private fund managers.

The Discount-to-NAV Problem

One of the most persistent anomalies in Nepal's mutual fund market is the phenomenon of closed-end funds trading at significant discounts to their NAV on NEPSE. A fund with an NAV of NPR 15 per unit may trade on NEPSE at NPR 11 or NPR 12 — a discount of 25–30%. For a sophisticated investor, this raises an obvious question: why would you pay NPR 11 to acquire a claim on assets worth NPR 15?

The answer lies in the specific character of NEPSE's retail investor base. Retail investors, unfamiliar with NAV mechanics, often treat mutual fund units as ordinary stocks — valuing them based on momentum, recent price performance, and peer sentiment rather than on the relationship between market price and underlying asset value. This creates a structural mispricing that has persisted for years in the Nepali mutual fund market.

For the analytically literate investor, closed-end funds trading at deep discounts to NAV represent a structured opportunity: buying a diversified portfolio of NEPSE equities at a 20–30% discount to their current market value. The risk is that the discount does not close — that the fund continues to trade at a discount for the duration of the investment. But when the discount is wide enough, and when the underlying portfolio is of identifiable quality, the margin of safety is substantial.

Fund Managers and Their Limited Analytical Capacity

Nepal's mutual funds are managed by licensed Fund Management Companies (FMCs) — separate entities from the fund itself, which serve as investment managers and earn a management fee (typically 1–1.5% of NAV annually) for their services. The quality of fund management varies significantly across Nepal's FMC sector. A handful of the larger, more established fund managers have developed genuine research capabilities — analysts who track listed companies systematically, build financial models, and make investment decisions based on documented frameworks.

The majority, however, operate with small investment teams — sometimes a single fund manager and one or two junior analysts — whose analytical toolkit and time budget are insufficient for rigorous coverage of the full listed universe. In practice, this means that many Nepali mutual funds are implicitly index-hugging: they hold the large-cap banking stocks that dominate the NEPSE index in approximately market-weight proportions, avoiding the active stock selection risk that could differentiate their performance but also avoiding the genuine value creation that active management promises.

Mutual Funds as a Retail Investor Tool

For retail investors who lack the time, expertise, or inclination to analyse individual companies, mutual funds offer a legitimate alternative: professional management, diversification across multiple securities, and a regulated framework with daily NAV disclosure. In theory, investing in a well-managed NEPSE mutual fund is better than speculating in individual stocks based on social media tips.

In practice, the calculus is complicated by several factors: management fees erode returns over time; the quality of fund management is difficult for retail investors to assess; closed-end fund discounts create an additional layer of complexity; and the performance record of most Nepali mutual funds — which have predominantly been launched since 2010 and have therefore operated through one or two market cycles at most — is insufficient to distinguish genuine investment skill from market beta exposure. An investor evaluating a Nepali mutual fund should focus on the fund's stated investment philosophy, the consistency of its portfolio composition with that philosophy, the quality of its quarterly reports, and the NAV performance relative to the NEPSE benchmark — adjusted for the fund's sector concentration.

Lesson 9.4 — Licensed Brokers: The 50-Broker System, Commission Structure, and Limitations

The Broker's Role in NEPSE

Every transaction on NEPSE must be executed through a licensed stockbroker. An investor cannot place orders directly on the NEPSE trading system — they must instruct a licensed broker, who executes the order on their behalf through the NATS platform. This intermediation requirement is universal in organised exchanges globally; what is distinctive about NEPSE's broker structure is the limited number of licensed brokers, their geographic concentration, their fee structure, and the quality and service level they provide.

The 50-Broker System: Historical Context

Nepal has traditionally operated with approximately 50 licensed stockbrokers — a number that has been remarkably stable for years and that is extraordinarily small relative to the market's number of investors and transactions. For context: India's NSE has thousands of registered trading members; even Bangladesh's Dhaka Stock Exchange, a comparably sized frontier market, has a larger broker network. Nepal's 50-broker cap has its origins in the early years of NEPSE when trading volumes were tiny and the viability of a larger broker network was questionable. It was never substantially revised as volumes grew.

The consequence of this limited broker network is significant. The 50 licensed brokers are geographically concentrated in Kathmandu — very few have branches in major provincial cities like Pokhara, Biratnagar, Butwal, or Dharan. Investors outside the Kathmandu Valley historically faced barriers to market access: they had to use brokers through informal relationships, sub-broker networks, or by physically travelling to Kathmandu. The digital revolution — online trading through broker platforms and the TMS (Trading Management System) interface — has materially reduced this geographic barrier, but the broker network remains thin.

Broker Commission Structure

SEBON sets the maximum commission rates that brokers can charge investors. The commission structure is tiered by transaction value — higher value transactions attract a lower percentage commission. The broad structure is as follows:

In addition to broker commission, investors pay a SEBON regulatory fee (currently 0.015% of transaction value), a CDSC depository fee, and a capital gains tax on profit from share sales (currently 7.5% for individuals on listed securities held less than one year and 5% for those held more than one year). The total transaction cost — commissions plus fees — is higher than in more competitive broker markets (India's discount brokerage revolution, led by Zerodha and similar platforms, brought equity transaction costs to near zero for many trade types). This higher transaction cost structure modestly penalises active trading and supports a buy-and-hold approach from a pure cost efficiency standpoint.

Service Quality and Technology

The quality of brokerage services in Nepal varies enormously across the 50 licensed brokers. The largest and most established brokers — several of which are affiliates of commercial banks and financial institutions — offer functional online trading platforms, mobile apps, research reports, and client relationship services. Several smaller brokers continue to operate primarily through phone-based order execution, with basic or absent online infrastructure.

The TMS (Trading Management System), operated by NEPSE and accessible through broker interfaces, is the primary online trading interface for retail investors. While functional, TMS has historically faced capacity challenges during periods of high market activity — when every retail investor wants to trade simultaneously, the system has experienced slowdowns and outages that prevented order execution at critical moments. These technical limitations have real financial consequences for investors who rely on timely order execution.

The Broker Consolidation Debate

SEBON and market analysts have periodically proposed a reduction in the number of licensed brokers through mandatory consolidation — merging the 50 into a smaller number of better-capitalised, better-serviced firms. The argument for consolidation is compelling: larger broker firms could invest in better technology, provide genuine research services, maintain branches in provincial cities, and offer more sophisticated services including portfolio management, investment advice, and institutional-grade execution.

The argument against consolidation — or more precisely, the political economy that has prevented it — is that the existing 50 broker license holders represent established economic interests with significant political connections. Forced consolidation would require some license holders to surrender valuable franchises, a prospect that faces organised opposition. The result is that the consolidation discussion continues without resolution, and investors continue to be served by a broker network whose fragmentation limits the quality of market infrastructure relative to what Nepal's market size and participant base would warrant.

Sub-Brokers: The Informal Extension

Beyond the 50 licensed brokers, a network of informal sub-brokers operates in Nepal — individuals who facilitate investor access to licensed brokers, often in geographic areas where licensed brokers have no presence. Sub-brokers collect orders from investors, route them through a licensed broker's account, and earn a share of the commission. Their operation exists in a regulatory grey zone: SEBON has regulations for formal sub-broker registration, but many informal participants operate without registration.

For investors using sub-broker networks — particularly in provincial areas — the risks are real: the sub-broker has no regulatory accountability for order execution quality, client fund safety, or advice accuracy. Cases of sub-broker fraud — collecting investor funds without routing them to the market, or diverting client accounts — have occurred and received limited regulatory redress. Investors should, where at all possible, establish direct relationships with licensed brokers through digital platforms rather than operating through informal sub-broker channels.

Lesson 9.5 — FII Restrictions, Allowed Limits, and Their Minimal Presence in NEPSE

The Foreign Institutional Investor Framework

Foreign Institutional Investors (FIIs) — foreign mutual funds, hedge funds, pension funds, sovereign wealth funds, and other institutional entities seeking to invest in Nepali equities — are permitted to invest in NEPSE, but within a framework of restrictions that has, in practice, produced minimal actual FII participation. Understanding both the framework and its practical consequences is important for assessing NEPSE's future trajectory and for understanding what a meaningful opening of the market to foreign capital would imply.

Legal Framework for FII Investment

SEBON's Foreign Investment in Securities Regulation 2075 (2018 AD) is the primary regulatory instrument governing FII access to NEPSE. Under this framework, foreign institutional investors may invest in listed equities, government bonds, and units of registered mutual funds, subject to the following conditions: the FII must be registered with SEBON as a foreign investor; it must invest through a licensed Nepali broker; it must maintain its investments through a dedicated non-resident account with a domestic bank; and it is subject to restrictions on the maximum ownership it can accumulate in any individual listed company.

The foreign ownership ceiling in any single listed company is set at 30% of paid-up capital — a limit that applies to aggregate foreign ownership (all foreign investors combined in a single company). For companies in specific sectors — banking and financial institutions, insurance, media, airlines — lower foreign ownership caps may apply under sector-specific regulations. Promoter-held shares typically cannot be sold to foreign investors without additional regulatory approval.

Capital Account Restrictions: The Practical Barrier

While the FII framework exists on paper, Nepal's capital account is not fully convertible — foreign investors cannot freely move capital in and out of Nepal on demand. Foreign exchange transactions related to investment must be routed through the banking system with NRB oversight, and repatriation of investment proceeds (both principal and returns) requires documentary compliance that adds friction, cost, and delay relative to markets with more open capital accounts.

These capital account restrictions are the primary practical barrier to FII participation in NEPSE — more significant than the ownership ceilings, the registration requirements, or the taxation framework. A global fund manager considering deploying capital into an emerging or frontier equity market faces a binary question: can I get my money in and out efficiently when I need to? For Nepal, the answer is: yes, but with significant friction. This friction is enough to make most international institutional funds — which manage liquidity against their own investor redemption obligations — unwilling to build meaningful allocations to NEPSE.

Why FII Participation Matters — or Could

At its current minimal level, FII participation in NEPSE is not a meaningful driver of market prices or liquidity. FII ownership across most NEPSE-listed stocks is well below 5% — in most cases, effectively zero. This absence has a compounding effect on NEPSE's market quality: without FII participation, NEPSE lacks the global capital that would bring with it more sophisticated valuation frameworks, better corporate governance demands, and the stabilising influence of investors with genuinely long-term mandates and non-correlated information sets.

The potential upside from meaningful FII liberalisation — a genuine opening of Nepal's capital account for institutional foreign investors, perhaps within a phased framework that starts with a pilot of registered frontier market funds — is substantial. A sustained inflow of even modest FII capital into NEPSE would improve liquidity, compress bid-ask spreads, improve price discovery, and raise market standards as listed companies sought to meet the more demanding disclosure and governance expectations of international investors. Whether such liberalisation will occur, and on what timeline, is fundamentally a question of Nepal's macroeconomic policy trajectory — specifically, the pace of current account improvement, foreign exchange reserve accumulation, and the government's appetite for financial sector reform.

Lesson 9.6 — NRN Investors: Rules, Account Types, and Repatriation Rights

Who Are NRN Investors?

Non-Resident Nepalis (NRNs) — Nepali citizens and persons of Nepali origin living and working outside Nepal — represent a distinct and growing participant category in NEPSE. Defined under the Non-Resident Nepali Act 2064 and related regulations, NRNs include Nepali citizens with foreign residency, Nepali-origin individuals who have taken foreign citizenship, and their dependants who maintain ties to Nepal. The NRN population is estimated at 2–3 million individuals globally, with the largest concentrations in India, the Gulf countries (Qatar, UAE, Saudi Arabia, Kuwait, Malaysia), the United States, the United Kingdom, and Australia.

NRN remittances have been the single largest source of foreign exchange for Nepal for over a decade — exceeding 25% of GDP in recent years. The aggregate financial resources of the NRN community far exceed what is currently channelled into NEPSE, and expanding NRN investment participation in Nepal's capital market is a stated policy priority of both the Government of Nepal and the Non-Resident Nepali Association (NRNA).

The NRN Investment Account Framework

NRN investors may participate in NEPSE through a Non-Resident Nepali Investment Account (NRNIA), held with a commercial bank in Nepal. The NRNIA is a dedicated account in Nepali rupees that serves as the settlement account for all NEPSE transactions — IPO applications, secondary market purchases and sales, dividend receipts, and bonus share credits. The NRNIA must be funded by remittance from abroad — the foreign currency is converted at the prevailing NRB exchange rate — and investment proceeds, when repatriated, are converted back to foreign currency at the prevailing rate.

The NRNIA framework also provides access to IPO allocations. NRNs have a dedicated allocation in many IPOs — typically 5% of total issue size is reserved for NRN investors — which is separate from the general public allocation. This reserved allocation is significant: it means that NRN investors face less competition for a specific allotment share, improving their allotment probability relative to the oversubscribed general public pool.

Repatriation Rights

The ability to repatriate investment proceeds — to convert the Nepali rupee proceeds of NEPSE investments back to foreign currency and send the money abroad — is the most critical practical consideration for NRN investors. Under current regulations, NRN investors may repatriate: the principal amount of their initial investment (the foreign currency originally remitted to fund the NRNIA), dividends received on listed securities, and capital gains after applicable tax deductions.

Repatriation is processed through the banking system, requires documentation of the original investment and the tax payment on any gains, and is subject to NRB's foreign exchange regulations. In practice, repatriation has functioned relatively smoothly for NRN investors who have maintained clean NRNIA records — though the documentation requirements and bank processing timelines create friction that domestic investors do not face.

The exchange rate risk is an important consideration for NRN investors that is absent for domestic participants. A NRN who invests in NEPSE and earns a 20% return in Nepali rupees may find that the rupee has depreciated against their home currency (whether the US dollar, UAE dirham, or UK pound) during the same period, eroding the foreign-currency-equivalent return. Nepal's rupee is pegged to the Indian rupee (NPR 1.60 per INR), and the INR-USD rate therefore largely determines the NPR-USD rate. NRN investors should factor exchange rate risk into their expected return calculation and their risk management framework.

Tax Treatment for NRN Investors

NRN investors are subject to the same capital gains tax as domestic investors on their NEPSE gains (7.5% for securities held less than one year; 5% for securities held more than one year, as of the current tax regime). Dividends received are subject to a 5% withholding tax at source — withheld by the distributing company before the dividend is credited to the NRNIA. Double taxation treaty provisions may apply depending on the NRN's country of residence, potentially reducing the effective tax burden, but treaty applicability requires verification with a tax professional.

Lesson 9.7 — Promoter Shareholders vs. Public Shareholders: Lock-In Rules and Power Asymmetry

The Two Classes of Shareholders

In Nepal's listed company universe, the shareholder base is divided into two legally and practically distinct categories: promoter shareholders and public shareholders. This distinction, embedded in the Companies Act 2063 and SEBON's regulations, creates a fundamental power asymmetry that every public shareholder must understand — because it shapes corporate decision-making, dividend policy, governance quality, and the risk of promoter self-dealing in ways that directly affect the returns available to ordinary investors.

Promoter Shareholders: Who They Are

Promoter shareholders are the founding and controlling shareholders of a listed company — the individuals, families, or institutions who established the company and who collectively hold the majority of shares before the public offering. Under SEBON's regulations, promoter shares are defined as those held by the company's founder shareholders, institutional promoters, and strategic investors — categories that are specified in the company's founding documents and its prospectus.

In Nepali commercial banks, promoter shareholding typically constitutes 51% of paid-up capital, with the remaining 49% offered to the public through IPOs and FPOs. In other sectors, promoter proportions vary — some hydropower companies have higher promoter proportions, while some companies that have raised capital through multiple rounds of FPOs have diluted promoter stakes to lower levels.

Promoters are not a homogeneous group. In banking, prominent promoter categories include politically connected businesspeople, business families with established commercial networks, professional investors who participated in bank founding rounds, and institutional promoters (other banks, development banks, or business conglomerates). The character of the promoter group is one of the most important and least systematically analysed factors in assessing the governance risk of any specific NEPSE investment.

Lock-In Periods and Their Practical Significance

Promoter shares are subject to lock-in periods — restrictions on sale that prevent promoters from exiting their investment in the listed company for a specified period after listing. Under SEBON's regulations, the standard lock-in period for promoter shares in NEPSE-listed companies is three years from the date of listing for the initial promoter contribution, with additional restrictions applying to subsequent promoter share contributions and to shares held by related parties.

The purpose of lock-in periods is to align promoter incentives with long-term company performance — if promoters cannot sell their shares for three years, they are more motivated to manage the company for sustainable value creation than for a short-term price spike followed by an exit. In practice, the effectiveness of this incentive alignment depends on whether promoters are genuinely long-term committed to the business or are treating their promoter shareholding primarily as a financial investment with an anticipated exit.

After the lock-in period expires, promoter shares become freely transferable, subject to SEBON's disclosure requirements for significant shareholding changes. A promoter who sells a significant stake — typically above 0.5% of paid-up capital in a single transaction — must disclose the transaction to NEPSE and SEBON. This disclosure requirement, while creating some transparency, does not prevent the sale; it only ensures that the market is informed after the fact.

The Power Asymmetry: How It Manifests

The most consequential dimension of the promoter-public shareholder divide is the governance power asymmetry it creates. Because promoters collectively hold the majority of shares in most NEPSE-listed companies, they control the Annual General Meeting — the forum at which shareholders vote on board composition, dividends, auditor appointments, capital raises, and related party transactions. A promoter group with 51% of shares can, in effect, pass any ordinary resolution — including related party transactions that may benefit promoters at public shareholders' expense — over the objection of all public shareholders combined.

Board composition. Promoters control the nomination and election of the majority of board members. While SEBON requires listed companies to have independent directors — a minimum proportion of the board that is elected by public shareholders rather than proposed by promoters — the selection of 'independent' directors in Nepal has not always reflected genuine independence. Some independent directors have had professional relationships with promoters that compromise their independence in practice. An investor assessing governance quality should examine the actual independence of the board's independent directors — their professional background, their other directorships, and their behaviour in board meetings (reflected in meeting minutes where available).

Dividend policy. Promoters determine dividend policy through their board majority. In some Nepali companies, promoters have managed dividend policy to align with their personal tax situations, estate planning objectives, or reinvestment needs — not necessarily with public shareholder income expectations. A promoter who has large personal expenses outside the company may prefer high cash dividends; one who is building a broader business empire may prefer the company to retain earnings for growth or acquisition — regardless of what generates the highest risk-adjusted return for public shareholders.

Related party transactions. Perhaps the most significant risk of the promoter-public shareholder divide is the potential for related party transactions — deals between the listed company and entities in which the promoters have interests — that transfer value from the public shareholders to the promoters. Nepali regulations require disclosure and audit committee approval for related party transactions, but the audit committee's independence from promoter influence varies, and SEBON's enforcement of related party transaction standards has been inconsistent. Investors should read the related party transaction disclosures in every annual report of a holding with particular scrutiny.

Promoter Share Pledging: A Hidden Risk

A practice that has created significant investor risk in NEPSE is the pledging of promoter shares against bank loans. Promoters who need personal or business capital, but whose promoter shares are locked in and cannot be sold, frequently pledge those shares as collateral for bank loans. When the promoter defaults on the loan and the bank seizes and sells the pledged shares, it creates sudden forced selling in the market — often in large volumes relative to the stock's normal daily turnover — causing sharp price declines that harm public shareholders who had no part in the promoter's financing decision.

SEBON's regulations require disclosure of promoter share pledges above specified thresholds, and NEPSE publishes data on pledged promoter shares. Monitoring the pledged share percentage for a listed company's promoter group is a practical risk management tool: high and rising promoter pledge levels signal financial stress in the promoter group and create latent forced-selling risk that, if triggered, can dramatically impact the stock price.

Lesson 9.8 — Market Makers: Why NEPSE Has None and the Liquidity Consequences

What Is a Market Maker?

A market maker is a participant — typically a licensed broker, financial institution, or designated specialist firm — that commits to continuously quoting both a bid price (at which it will buy a security) and an ask price (at which it will sell a security) for specified minimum quantities, throughout the trading day. By standing ready to buy or sell at any moment during market hours, the market maker provides liquidity to other participants: if you want to sell, the market maker will buy; if you want to buy, the market maker will sell. In exchange for this service, the market maker earns the bid-ask spread — the small difference between its buying and selling prices — as compensation for the inventory risk it absorbs.

Market making is a foundational institutional feature of all developed equity markets. On the NYSE, designated market makers (DMMs) are assigned to specific stocks and are legally obligated to provide continuous two-sided quotes. On NASDAQ, multiple competing market makers quote simultaneously in each stock, providing competitive liquidity. Even in most mid-tier emerging markets — India's BSE and NSE, Thailand's SET, Malaysia's Bursa — some form of market making or liquidity provision exists for less-traded securities.

NEPSE Has No Market Makers

Nepal Stock Exchange has no market makers. None. Zero. Every transaction on NEPSE depends on the coincidence of a willing buyer and a willing seller at the same price, at the same time. There is no designated participant whose role and regulatory obligation is to stand ready to provide a two-sided market in any security during trading hours. This is not a minor technical gap — it is a foundational structural absence with profound consequences for NEPSE's liquidity profile, price formation quality, and the risk faced by individual investors.

Consequence 1: Bid-Ask Spreads Are Wide and Variable

Without market makers narrowing the gap between bid and ask prices through continuous quoting, NEPSE bid-ask spreads are determined solely by the coincident preferences of retail buyers and sellers. In liquid, high-volume stocks — major commercial banks on active trading days — the spread may be acceptably narrow. But in less-traded stocks — smaller hydropower developers, manufacturing companies, many microfinance institutions — the spread can be 2–5% or more of the stock's price.

A bid-ask spread of 3% means that an investor who buys a stock and immediately sells it loses 3% plus transaction costs — a meaningful barrier to efficient trading that does not exist in market-made securities. It also means that price quotations in illiquid stocks are not meaningful representations of executable prices: the last traded price in a stock that has not traded for two days is not the price at which you can actually buy or sell; the real executable price may be significantly different from the screen price.

Consequence 2: Price Discontinuities and Gaps

In market-made securities, price discovery is continuous: there is always a market maker willing to transact, so prices move in small increments reflecting new information. In NEPSE's unmade market, information can arrive — a quarterly result, a regulatory announcement, an NRB policy change — when no natural buyer or seller is present in a specific stock. The result is a price gap: the stock's price at the next transaction can be significantly different from the last price, because there was no market maker absorbing the information flow and gradually adjusting quotes. These gaps create risk for investors whose orders are waiting in the system at prices that are no longer relevant to current conditions.

Consequence 3: The Lower-Circuit Trap

The most severe practical consequence of the absence of market makers occurs during market stress. When negative news or sentiment drives retail investors to sell, and no institutional buyer is stepping in (because there are no institutional buyers obligated to do so), a stock can hit its lower circuit limit within minutes of opening. Without a market maker willing to buy at, or near, the limit price, the stock remains locked at the lower circuit — any sell orders at prices below the circuit cannot execute, but there may be no buyers even at the circuit price.

In a market-made system, this situation would not persist: the market maker, contractually obligated to provide a buy quote, would absorb some of the selling pressure. In NEPSE, a lower-circuit lock can persist for days — each day the stock opens and hits its lower circuit, falls another 15%, and closes. An investor trapped in such a position cannot exit regardless of their willingness to accept a loss. They must wait for a natural buyer to emerge or for the circuit to stabilise prices long enough for market psychology to shift.

Consequence 4: Illiquidity Premium and Valuation Discount

The absence of market makers in NEPSE creates what finance academics call an illiquidity premium in reverse — rather than compensation for holding illiquid assets, investors demand a discount to fair value before buying them. A hydropower company with sound fundamentals and a reasonable DCF valuation of NPR 300 per share may trade at NPR 220 in NEPSE's unmade market, because potential buyers know that exiting the position will be difficult if their investment thesis changes. This structural discount — the liquidity discount — means that NEPSE stocks can be genuinely cheap relative to fundamental value for extended periods, simply because the market mechanism to close that gap is absent.

For the long-horizon investor, this liquidity discount is an opportunity: you buy fundamentally sound businesses at prices below intrinsic value, and you hold long enough that either the business's earnings growth closes the gap, or market conditions improve sufficiently that other buyers enter. The risk is that the exit remains difficult — you may have to sell at an equally large discount when you choose to exit, if market conditions have not improved. True long-horizon investing in NEPSE's unmade market requires an acceptance that position exits may be slow, costly in spread terms, and subject to significant price impact.

The Case for Market Making in NEPSE

SEBON and NEPSE have acknowledged the absence of market makers as a market quality gap and have discussed the introduction of a market making framework. The technical requirements for a functioning market making system are not trivial: market makers need access to efficient securities borrowing (to sell short when they have excess buy orders, they need to borrow shares), risk management tools (hedging their inventory against price moves), and adequate compensation through the bid-ask spread to justify the inventory risk they take on. All of these elements are currently absent or underdeveloped in NEPSE's ecosystem.

The introduction of securities lending (allowing institutional investors to lend their long-term holdings to market makers temporarily), combined with a formal market maker licensing regime under SEBON, would be transformative for NEPSE's market quality. The timeline for such a development depends on regulatory willingness, technological infrastructure investment, and the availability of sufficiently capitalised institutions willing to take on the market maker role. Investors who anticipate this development — and who understand how market quality improvements have driven re-rating of comparable frontier markets — may find it an important structural theme in their NEPSE investment thesis.

In NEPSE, the absence of market makers is not a footnote — it is the defining structural feature that makes every liquidity analysis, every entry and exit decision, and every position sizing calculation different from what applies in deeper markets.