Moving away from the traditional, one-sided investment model—where investors only profit when share prices rise—the regulatory body aims to introduce these state-of-the-art financial instruments to make the Nepal Stock Exchange (NEPSE) mature, multidimensional, and dynamic according to international standards.
SEBON Chairman Gopal Prasad Bhatta emphasized that these instruments will be implemented in a phased manner to enhance market liquidity and pricing efficiency. Under the proposed model, intraday net settlements will allow investors to buy and sell shares within a single trading day, while short sales will enable traders to borrow and sell shares they do not own, paving the way to profit during market downturns. Industry experts expect intraday trading to become operational within three to six months, with short selling following within a year.
Key Opportunities and Market Relevance
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Two-Way Profitability: Investors will no longer be forced to wait out long bear markets, as short selling allows them to turn price drops into profitable opportunities.
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Fair Price Discovery: Short selling places downward pressure on artificially inflated or cornered stocks, bringing share prices down to realistic valuations and preventing market bubbles.
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Increased Transparency: Inspired by global activist short sellers, the mechanism can act as an institutional watchdog, helping expose financial irregularities and corporate fraud.
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Enhanced Liquidity: Intraday operations allow traders to leverage short-term price fluctuations, dramatically boosting daily market volume and participant engagement.
Challenges and Implementation Risks
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Technological and Structural Gaps: NEPSE, CDSC, and connected banking systems currently lack the real-time settlement infrastructure and advanced software required to handle high-speed intraday transactions.
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Lack of Securities Lending Framework: Short selling requires a legal and operational Securities Lending and Borrowing (SLB) mechanism, which is not yet established in Nepal.
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Risk of Market Manipulation: Experts warn that without strict oversight, complex shorting tools could be exploited by syndicates through insider trading and rumor-mongering, disproportionately harming retail investors.
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Extreme Price Volatility: Short positions carry the risk of a "short squeeze," where sudden buying pressure forces share prices to spike unnaturally, potentially causing massive institutional and retail losses.
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Low Investor Literacy: Citing studies from neighboring markets like India’s SEBI—where up to 70% of retail intraday traders face losses—stakeholders caution that inadequate financial discipline among small investors could lead to severe socio-economic distress.
Market analysts and former regulatory heads suggest that SEBON should first focus on upgrading IT hardware and software, establishing strict short-position disclosure rules, and testing margin trading fully before launching short sales into the market.
