Kathmandu [Nepal], Sept 15 – Nepal’s Ministry of Finance has unveiled a 21-point action plan to strengthen and revive the country’s sluggish capital market, proposing changes ranging from market-based IPO pricing and lower capital gains tax for long-term investors to greater participation by institutional investors and Non-Resident Nepalis.
The Capital Market Strengthening and Revival Action Plan, 2083 aims to restore investor confidence and make Nepal’s securities market more competitive, transparent and investment-friendly.
The plan comes amid a prolonged slowdown in the economy and capital market, compounded by the economic impact of the August 26 flash floods. The government said the measures are intended to support broader economic expansion and improve the functioning of the banking, financial, industrial, infrastructure, investment and capital market sectors.
One of the key proposals is to introduce a market-oriented system for initial public offerings, including a price discovery mechanism. The Securities Board of Nepal (SEBON) will issue general IPO eligibility guidelines immediately and develop sector-specific criteria for hydropower, manufacturing and processing, hotels and tourism, agriculture and pharmaceuticals.
SEBON is expected to introduce the new public issuance and allotment system by the end of Poush 2083.
The government also plans to expand the range of financial instruments available to investors by developing corporate bonds, money-market instruments and exchange-traded funds. Guidelines and supporting infrastructure are targeted by the end of Mangsir 2083.
The plan proposes restructuring the Nepal Stock Exchange (NEPSE), while retaining the existing NEPSE Index as an All Equity Index and introducing a new benchmark index. The new index will consider tradable shares, market capitalisation, financial condition, liquidity, corporate governance and information disclosure.
NRN and institutional investment
The government also plans to facilitate Non-Resident Nepalis (NRNs) in Nepal’s secondary securities market. Proposed amendments to the Foreign Investment and Technology Transfer Act and the Foreign Exchange (Regulation) Act are to be submitted to the Cabinet by the end of Ashwin 2083.
Institutional participation is another major focus. The government plans to establish the legal and policy framework for institutional investors to participate in both primary and secondary markets.
It also plans to facilitate portfolio rebalancing by institutions that are heavily concentrated in bank deposits, including the Employees Provident Fund, Citizen Investment Trust, Social Security Fund, insurance companies and mutual funds, with the aim of increasing their investment in securities.
Changes to capital gains tax
The action plan proposes a new capital gains tax structure for listed securities held by resident individuals.
Under the proposal, gains on listed securities held for more than 365 days would be taxed at 3.75 per cent, compared with 5 per cent for securities held for 365 days or less.
The plan also proposes allowing losses from listed securities transactions to be adjusted against gains from listed securities transactions within the same income year. Capital gains tax would be treated as final tax on net gains after incorporating gains, losses and settlements.
The government also plans to introduce modern margin lending through SEBON-licensed securities brokers, with the system targeted to come into operation by the end of Poush 2083.
New rules for banks
The Nepal Rastra Bank and SEBON will jointly review existing limits and arrangements governing banks and financial institutions’ investment in the capital market.
The review will examine direct and indirect exposure, systemic and contagion risks, liquidity, returns, depositor protection, risk weights and collateral adequacy with completion targeted by the end of Kartik 2083.
Separately, the central bank will require banks and financial institutions to formulate investment policies aimed at reducing speculative risk in secondary-market securities investments. The policies will include a minimum 45-day holding period for such investments.
The plan also calls for reforms to securities brokers, the legal framework for margin lending, intraday trading, securities borrowing and lending, short selling, share buybacks and share splits.
It proposes a risk-based regulatory framework for private equity and venture capital and plans to strengthen the capacity of CDS and Clearing Limited, Nepal’s central depository system operator.
The Finance Ministry has directed the relevant regulatory and institutional bodies to implement the reforms within the specified deadlines.
The government expects the package to address structural weaknesses in Nepal’s capital market, broaden investment opportunities, strengthen market infrastructure and encourage greater participation by domestic and international investors.
