Contrary to popular belief, launching short selling does not require an overhaul of the Securities Act, 2063 (2007). With existing regulatory powers, the Securities Board of Nepal (SEBON) could roll out short selling within six months.
The Legal Foundation: Why the Act Is Already Ready
New financial instruments only require statutory amendments if existing law explicitly bans them or excludes them from core definitions. The Securities Act, 2063 contains no such prohibition.
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Section 2(g) — Broad Definition of "Sale": Defines a securities transaction as the issue, purchase, sale, or exchange of securities. Short selling is simply selling borrowed assets—it naturally fits under the definition of a "sale."
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Section 5(j) — SEBON’s Operational Mandate: Grants SEBON full authority to manage secondary market transactions to develop Nepal's capital market.
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Section 116 — Power to Frame Rules: Empowers SEBON to draft necessary regulations with Government of Nepal approval to fulfill the Act’s objectives.
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Section 118 — Power to Issue Directives: Authorizes SEBON to release guidelines at any time to regulate market operations immediately.
Previously, margin trading was introduced via guidelines under this exact framework without amending the primary Act. Short selling can follow the same path.
What NEPSE and CDSC Must Build
While SEBON provides the legal clearance, Nepal Stock Exchange (NEPSE) and CDS and Clearing (CDSC) must prepare the operational infrastructure.
1. NEPSE (Trading Infrastructure)
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Update business regulations to define eligible short-sale stocks and price restrictions (e.g., uptick rules).
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Upgrade the Trade Management System (TMS) to include a dedicated "Short Sale" option so the system recognizes borrowed shares instead of rejecting orders for missing demat holdings.
2. CDSC (Securities Lending and Borrowing)
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Build a robust Securities Lending and Borrowing (SLB) platform.
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Allow long-term shareholders to list holdings as available to lend.
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Automate borrowing fee/interest calculations, collateral management, and automated clearing/settlement.
How Covered Short Selling Works
To minimize systemic risk, Nepal should exclusively adopt Covered Short Selling—where shares must be borrowed before execution.
Step-by-Step Example
Assume Nabil Bank trades at NPR 600, but analysis indicates an upcoming earnings drop.
| Step |
Action |
Financial Flow |
| 1. Borrow |
Borrow 100 units of Nabil Bank via CDSC's SLB system |
Put up collateral deposit with broker |
| 2. Sell |
Sell 100 units at NPR 600 on NEPSE TMS |
+ NPR 60,000 received (100 shares owed) |
| 3. Price Drops |
Nabil Bank drops to NPR 500 after 4 days |
Market move creates profit opportunity |
| 4. Cover |
Buy back 100 units from open market at NPR 500 |
- NPR 50,000 spent |
| 5. Return |
Return 100 units to lender |
Collateral unlocked |
| Result |
Gross Profit: NPR 60,000 − NPR 50,000 = NPR 10,000 (minus borrowing fees/commissions) |
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Risk & Margin Management: If the price rises instead of falling (e.g., to NPR 700), the position incurs a loss. Brokers enforce an initial margin and trigger margin calls if prices move adversely, preventing market manipulation and default risks.
Market Benefits
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Fair Price Discovery: Dampens artificial asset bubbles by allowing traders to penalize overvalued companies.
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Continuous Liquidity: Keeps trading volumes active during bear trends when conventional buying dries up.
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Portfolio Hedging: Enables institutional and long-term investors to offset spot market losses during broader downturns.
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Passive Yield for Investors: Long-term holders earn a steady 5–8% annual fee by lending idle shares without selling their underlying positions.
The legal hurdle to short selling in Nepal is a myth—the primary obstacle is operational readiness at NEPSE and CDSC. If SEBON exercises its authority under Sections 116 and 118, Nepalese capital markets can transition into a two-way market within six months.
