Nepal’s capital market, historically monopolized by the Nepal Stock Exchange (NEPSE), faces limitations amidst rapid economic growth and global financial shifts. A single exchange can no longer adequately address future challenges and opportunities, making structural reforms and modernization crucial. The establishment of a second stock exchange is a prominent topic, with three companies already applying for licenses. This article will explore the future of Nepal’s capital market, including its history, current hurdles, prospects, the importance of competition, and international practices, emphasizing its role in national economic development.
Why another stock exchange? A look at history and policy
The debate for a second stock exchange in Nepal isn’t new; it’s been ongoing for decades. Various governments and regulators have repeatedly recognized its necessity. This isn’t a sudden decision, but a natural progression of the capital market’s development and a result of extensive studies.
Several high-level committees have stressed the need for a second exchange. In 2008-09, a committee led by Lalmani Joshi concluded that an alternative was vital for market growth and ending the monopoly. Similarly, Bhishma Dhungana’s committee pointed out that a second exchange was crucial for introducing competition and diversification. More recently, the Chintamani Siwakoti report also confirmed the need for another exchange after analyzing the current market, its limited technical infrastructure and expected future trading pressure. This isn’t just a technical or economic necessity; it has received backing from the nation’s top policymakers and the judiciary. Parliament’s Finance Committee recommended the government establish another stock exchange. Plus, the Supreme Court dismissed a petition trying to stop the new exchange’s establishment, effectively legalizing the government’s process.
Current limitations and growing trading pressure
Nepal’s capital market has seen substantial growth in the last decade, with increased investor numbers and market capitalization. However, the existing infrastructure and technology haven’t kept pace, creating hurdles for sustainable development. The Nepal Stock Exchange (NEPSE), currently the sole operator, lists approximately 250 companies, predominantly from banking, insurance, and hydropower, revealing a significant lack of sectoral balance.
NEPSE’s capacity is critically challenged. Hundreds of upcoming IPOs and nearly 700 hydropower projects are in the pipeline, and over 2,000 more companies are projected to qualify for public issuance within a few years. This anticipated surge risks overwhelming the single exchange, potentially causing listing delays and operational bottlenecks, which could increase market risk and hurt investor confidence. Furthermore, NEPSE’s frequent server outages and system crashes during peak trading highlight a ‘single-point failure’ vulnerability. Public discussions, including in Parliament, also cite existing infrastructure as a factor in market irregularities, underscoring the need for greater transparency.
Introducing a modern, technologically advanced second stock exchange offers a vital solution. It would distribute the growing trading volume, promote sectoral diversification, attract new listings, and enhance capital access for Small and Medium-sized Enterprises (SMEs). This competition promises improved market transparency, fairness, and overall resilience, fostering a more robust and dynamic financial landscape crucial for Nepal’s economic future.
NRN investment and broad market expansion
he 2082/83 (2025-26 AD) budget marks a significant move to internationalize Nepal’s capital market by allowing Non-Resident Nepalis (NRNs) to invest in the secondary market. This is expected to inject new capital, energy, and expertise, boosting liquidity and easing capital raising for companies, thereby strengthening Nepal’s global economic ties. However, attracting NRNs hinges on a reliable, secure, and user-friendly trading system.
NRN participation is projected to dramatically increase trading volume and investor numbers, potentially bringing in billions and multiplying current volumes. Given the existing system’s frequent operational issues, a rapid upgrade to NEPSE’s infrastructure is crucial. If this isn’t feasible, establishing a second stock exchange becomes essential to provide robust, stable, and cutting-edge technology to handle this massive trading volume and further connect NRNs to Nepal’s development.
Monopolies, as demonstrated by the transformative impact of Ncell’s entry on Nepal Telecom, generally stifle innovation and degrade service quality, ultimately harming investors. NEPSE’s current monopoly similarly restricts competition, hindering overall market efficiency and service improvement.
Introducing a second stock exchange would be a revolutionary step for Nepal’s capital market. It would compel NEPSE to adopt modern technology, agile services, and greater transparency. This competition directly benefits investors and companies through improved broker services, competitive trading fees, and the development of faster, more reliable trading systems, alongside the introduction of new financial products.
Crucially, a competitive market offers systemic resilience. If the existing system faces technical issues or crashes, an alternative exchange could act as a vital backup, ensuring market continuity and stability. This significantly reduces systemic risk, especially during peak trading times where NEPSE halts can impact millions in transactions and investor morale. A second exchange would provide a reliable alternative, minimizing investor losses and bolstering confidence, which is paramount for market stability and healthy economic growth.
Open market, private sector, and investor focus
Despite Nepal being in an era of open economy and Globalization, our capital market still has limited options. The Securities Board of Nepal (SEBON) hasn’t yet permitted derivative and commodity trading, and the Nepal Stock Exchange (NEPSE) doesn’t offer these instruments. This leaves us behind in global market competition, limiting market depth and liquidity, and depriving Nepali investors of worldwide opportunities. In this situation, establishing a second stock exchange could introduce new dimensions by setting up separate systems for derivative and commodity trading.
Following Globalization principles, competition is essential in the financial sector, promoting active private sector involvement. A second exchange could compel NEPSE to adopt modern technology, efficient services, and greater transparency, potentially improving the market’s overall efficiency and quality. This competition could lead to better broker services, competitive trading fees, the development of faster and more reliable systems, and the introduction of new products. Consequently, the market could become safer and more efficient, offering investors more opportunities for portfolio diversification and risk management.
International practice: The success of the Indian stock market
International experience also confirms the need for multiple stock exchanges; many developed and developing nations worldwide successfully operate more than one. This trend shows that competition, not monopoly, is accepted as the best path for market development.
The Indian share market is a prime example. The Bombay Stock Exchange (BSE), established in 1875, was initially based on an older, traditional system. However, the establishment of the National Stock Exchange (NSE) in 1992 revolutionized the Indian capital market. From the start, NSE adopted modern technology and a nationwide automated trading system, forcing BSE to upgrade its technology and modernize. Today, both BSE and NSE are considered major and successful stock exchanges globally, handling billions of US dollars in transactions every year. Specifically, NSE is one of the world’s largest derivatives exchanges and holds a leading position in equity trading. The healthy competition between these two exchanges significantly helped make the Indian capital market one of the world’s largest and most dynamic. It increased market liquidity, offered investors more options, introduced new financial products, and made the overall market more agile and transparent. This has significantly contributed to the Indian economy, making up a large share of the country’s Gross Domestic Product (GDP).
The success of the Indian market clearly shows the positive impact a second stock exchange could have on Nepal’s capital market development. If a second stock exchange adopts modern technology and international standards, it could also make it easier to connect Nepal’s capital market with others globally through cross-listing or dual-listing. This would give Nepali companies access to international capital and attract foreign investors to Nepal.
Political stability and pace of development
In Nepal, it’s currently hard for any single party to win a clear majority, often leading to hung parliaments and coalition governments. Different political parties’ self-interests and priorities can slow down the strengthening and development of existing institutions. When policy decisions are delayed and implementation is sluggish, citizens miss out on economic opportunities.
A lack of modernization and efficiency in the capital market not only costs investors but also deprives them of new business opportunities. Until political commitment and consistency ensure existing institutions are fully empowered and capable, citizens will continue to pay the price. It’s the state’s duty to ensure safe, transparent, and efficient access to the capital market for its citizens. Maintaining a monopoly for too long and delaying institutional reforms due to political disagreements directly harms the entire economy and millions of investors. Therefore, developing a competitive system immediately is essential.
Future outlook: A new era for the capital market
Nepal’s capital market must evolve from its traditional structure into a modern and dynamic one, and establishing a second stock exchange is a crucial step. A new exchange should bring in the latest technologies like high-speed trade matching engines, real-time data feeds, advanced risk management systems, and strong cybersecurity protocols. This would make transactions faster, safer, and more transparent, potentially guiding the market towards becoming a ‘smart market.’ It could also use artificial intelligence (AI) and machine learning to analyze market trends, empowering investors to make better decisions. Emerging technologies like blockchain could make securities clearing and settlement processes more efficient and secure. Beyond traditional equity trading, the new exchange should also promote new financial products like bond markets, corporate bonds, and green bonds. This would deepen the market and give companies more options for raising capital.
Revenue growth from capital market: Supporting the upcoming budget
Nepal’s capital market has the potential to support the ambitious budget for the upcoming fiscal year 2082/83 (2025-26 AD). As the government worries about a potential debt increase of up to around NPR 600 billion due to weak revenue collection and reduced foreign aid, expanding the capital market to boost revenue could be a significant solution. This potential lies in a sharp increase in stock trading and the emergence of a commodity exchange. The fact that over NPR 12.20 billion in Capital Gains Tax (CGT) was collected from the stock market alone by mid-March 2081/82 (2024-25 AD) confirms this. Furthermore, setting up and actively running a commodity exchange would open new revenue streams through fees and taxes from commodity trading, a sector currently underutilized in Nepal.
Conclusion: An essential step for national prosperity
Establishing a second stock exchange in Nepal isn’t just about competition; it’s essential for the nation’s economic development, capital market modernization, expansion, and internationalization. This is a crucial step for investor rights, capital market stability, and overall national prosperity. It would not only boost national revenue from the capital market but also open up new income sources from derivative and commodity markets.
The growing pressure from company listings, the chance to attract NRN investment, the need for new market segments like commodities and derivatives, the efficiency and service quality gained from competition, systemic risk management, the demands of globalization, and the push for private sector promotion all strongly support the need for a second stock exchange. International practices, especially the success of the Indian market, clearly demonstrate how a multi-exchange system can make a market mature and dynamic. To address the current single system’s technical flaws and frequent problems that cause financial losses and a crisis of trust for investors, and to embrace the huge potential for future capital market expansion, a second exchange appears to be a possible and necessary option.
