Nepal's capital market is preparing for one of its most significant reforms. The Chairman of the Securities Board of Nepal (SEBON), Dr. Gopal Prasad Bhatta, has announced that short selling will soon be introduced in Nepal's stock market.

The objective is simple: investors should be able to earn returns whether the market rises or falls. This aligns Nepal's capital market with international financial markets where investors can profit from both bullish and bearish trends.

In this article, we explain what short selling is, how it works, why SEBON is introducing it, and what Nepal can learn from global markets.

What is Short Selling?

Short selling is an investment strategy where an investor profits from a decline in a stock's price.

Instead of buying shares first, the investor:

• Borrows shares from another investor or institution.

• Sells them at the current market price.

• Waits for the price to decline.

• Buys the same shares back at a lower price.

• Returns the borrowed shares.

• Keeps the price difference as profit (after deducting fees and costs).

Unlike traditional investing, short selling allows investors to benefit even during a falling market.

How Does Short Selling Work?

Imagine a company's share price is Rs. 500.

An investor believes the price will fall.

The investor borrows one share and immediately sells it for Rs. 500.

A few weeks later, the share price drops to Rs. 350.

The investor buys the share back for Rs. 350, returns it to the lender, and earns a gross profit of Rs. 150, excluding borrowing costs and transaction charges.

However, if the share price rises to Rs. 700, the investor must still buy it back, resulting in a loss of Rs. 200.

Why is SEBON Introducing Short Selling?

According to SEBON Chairman Dr. Gopal Prasad Bhatta, Nepal currently has a mindset that the stock market should always rise.

Whenever the market falls, many investors become concerned and often expect regulators to intervene.

SEBON believes the market should function naturally based on supply and demand rather than always moving upward.

The introduction of short selling aims to:

• Create opportunities in both rising and falling markets.

• Improve market efficiency.

• Encourage research-based investment decisions.

• Reduce speculative buying.

• Strengthen price discovery.

How Will Short Selling Work in Nepal?

Although SEBON has not yet released the complete operational framework, the proposed mechanism is expected to include:

• Borrowing eligible shares before selling them.

• Selling borrowed shares through NEPSE.

• Buying them back later.

• Returning the borrowed shares.

• Paying applicable borrowing fees and brokerage charges.

SEBON is expected to introduce detailed eligibility criteria, settlement procedures, margin requirements, and risk management rules before implementation.

Benefits of Short Selling

1. Investors Can Earn in Falling Markets

Traditional investors profit only when prices increase.

Short sellers can benefit when prices decline.

This creates investment opportunities regardless of market direction.

2. Better Price Discovery

Short sellers often identify overvalued companies.

Their participation helps stocks trade closer to their fair value.

3. Increased Liquidity

More buying and selling activity generally increases market liquidity and improves trading efficiency.

4. Encourages Research-Based Investing

Instead of relying on market rumours, investors need strong analysis before taking short positions because losses can be significant.

5. A More Mature Capital Market

Most developed financial markets support both buying and short selling.

Introducing this mechanism could make Nepal's capital market more sophisticated.

Risks of Short Selling

While short selling offers opportunities, it also carries significant risks.

Unlimited Loss Potential

A stock can only fall to zero, but it can theoretically rise without limit.

Therefore, losses on a short position can be much larger than losses from a normal investment.

Borrowing Costs

Investors must pay fees to borrow shares.

These costs reduce overall returns.

Short Squeeze

If many short sellers rush to buy back shares simultaneously, prices can rise rapidly, increasing losses.

Margin Requirements

Most markets require short sellers to maintain collateral, helping reduce settlement and counterparty risks.

Global Perspective: How Short Selling Works Around the World

United States

The New York Stock Exchange (NYSE) and NASDAQ allow regulated short selling under strict rules, including margin requirements and disclosure obligations.

India

The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) permit short selling and securities lending and borrowing under regulations issued by the Securities and Exchange Board of India (SEBI).

United Kingdom

Short selling is widely used by institutional investors and hedge funds, with reporting obligations for significant short positions.

Japan, Singapore and Hong Kong

These major Asian markets allow regulated short selling while requiring robust settlement systems, risk controls, and transparency.

Temporary Restrictions During Crises

During periods of extreme market volatility, some countries have temporarily restricted short selling to help maintain orderly trading.

What Nepal Can Learn from Global Markets

International experience shows that successful short selling depends on:

• Strong securities lending systems.

• Effective market surveillance.

• Transparent reporting.

• Robust risk management.

• Strict enforcement against market manipulation.

These safeguards help maintain investor confidence while supporting efficient markets.

How Short Selling Could Transform NEPSE

The introduction of short selling may:

• Increase daily trading volume.

• Improve liquidity.

• Enhance price discovery.

• Reduce excessive speculation.

• Encourage professional investment strategies.

• Make Nepal's stock market more attractive to institutional investors.

SEBON's Broader Capital Market Reform

Short selling is part of SEBON's wider reform agenda.

The regulator has also announced:

• The Capital Market Development Roadmap 2083.

• Capital Market Policy for Fiscal Year 2083/84.

• Measures to reduce the spread of market rumours.

• Greater coordination with government agencies on financial crime, inspections, and investor protection.

These initiatives aim to build a more transparent, efficient, and resilient capital market.

Conclusion

The planned introduction of short selling marks a major step in the evolution of Nepal's capital market.

If implemented with appropriate regulations, investor education, and effective risk controls, it can improve market efficiency, enhance liquidity, and allow investors to benefit from both rising and falling markets.

However, short selling is a sophisticated investment strategy and may not be suitable for every investor. Before using it, investors should fully understand the risks, borrowing obligations, and potential for losses.

As Nepal aligns its market practices with global standards, this reform could contribute to a more balanced and mature investment environment.

Frequently Asked Questions (FAQs)

Is short selling legal in Nepal?

SEBON has announced that it plans to introduce short selling soon. Detailed operational rules are expected before implementation.

Can retail investors use short selling?

The final eligibility criteria have not yet been announced. SEBON will specify who can participate under the new framework.

Can I lose money through short selling?

Yes. If the share price rises instead of falling, the short seller incurs a loss, which can exceed the initial sale amount.

Why do developed countries allow short selling?

Short selling improves liquidity, supports price discovery, and enables investors to manage risk through hedging strategies.

Will short selling make NEPSE more efficient?

If supported by strong regulations and investor education, short selling can contribute to a more liquid, transparent, and efficient capital market.