ILLUSTRATION: VINCENT KILBRIDE
ON THE MORNING of September 18th 2025, Nepal’s stock exchange reopened after a week-long closure during the Gen Z protests that had toppled the government. The market lasted four minutes. Within two minutes the NEPSE index fell 4%, triggering a circuit breaker; after a second halt and a final plunge, the index had shed 6% and trading was suspended for the day. Transactions worth Rs728m changed hands in those four minutes, almost all of it selling. Banks and investment stocks each fell more than 5%; the trading group dropped 9.34%.
That episode captured the core weakness of Nepal’s capital markets. By many measures NEPSE looks respectable. Its market capitalisation hit $34bn in March, about 73% of GDP—a ratio that would turn heads in many rich countries. The number of dematerialised trading accounts has quadrupled since 2020, to 6.9m. Initial public offerings are so consistently oversubscribed that the regulator hands out shares by lottery. On a good day, Rs4-5bn changes hands before lunch.
Look closer, and the fragility appears. More than half of market capitalisation sits in banks, financial institutions and insurance companies—a sector that owns shares in other sectors, which then list their own shares on the same exchange. Financiers owning financiers. Hydropower, which the government bills as the engine of national transformation, accounts for 16% of market capitalisation despite having 97 of the 284 listed companies. Most of those firms are small and thinly traded. A bad monsoon or a delayed power deal with India can send the hydropower sub-index down 15% in a week.
The real trouble is who does the trading. NEPSE is a retail-driven market where sentiment, not value, moves prices. The same hydropower company can trade at Rs200 in a moment of political excitement and Rs130 six months later, with no change in its generation capacity or debt. Investors follow TikTok tips and YouTube stock-pickers, as the regulator itself has noted, pouring money in at the peak and fleeing at the trough. The 2021–2023 bear market wiped out 30-50% from peak prices. Those who bought at NEPSE’s high of above 3,000 in 2021 sat on savage losses for three years.
The solution is not mysterious. Nepal has three big pools of long-term savings: the Employees Provident Fund (EPF), the Citizen Investment Trust (CIT) and the Social Security Fund (SSF). Together they control some Rs910bn. The EPF alone manages more than Rs500bn from 578,000 formal workers; the CIT has nearly Rs300bn from 800,000 Nepalis; the SSF has Rs110bn from 2.9m contributors. That is patient capital—exactly the kind that stock markets were designed to work with. Patient capital buys at reasonable prices, holds through earnings cycles, and exits slowly enough that it does not crash prices for the retail investors behind it.
For most of their existence, all three were legally barred from putting much into equities. Their mandates pushed them into government bonds and bank fixed deposits. As recently as 2019, the EPF’s direct share allocation was less than Rs23bn out of a Rs343bn fund. The official rationale was prudence: pension money is sacrosanct, and the market too volatile. Circular reasoning, of course. The market was volatile partly because no institutions were in it to provide steady buying and selling.
Recently the government expanded the permitted investment universe for all three funds to include mutual funds, private equity and venture capital. Real progress. Yet it fell short of what a growing market actually needs. The ordinance says nothing about direct equity allocations and sets no minimum percentage of assets that must go into listed securities. It does not create a governance structure that would protect fund managers who make contrarian equity bets from political pressure when those bets go temporarily wrong. Insurance companies, which held technical reserves of Rs283.9bn even in 2019 and have grown since, are still restricted to putting 10% of those reserves into listed securities, and only 1.5% into private equity funds.
The mismatch between available capital and deployed capital is not just a regulatory failure; it is a political-economy problem. The EPF and CIT are government-controlled, with boards that would rather explain a 5% return on fixed deposits than a 15% loss on equities in a bad year. The incentive to avoid embarrassment points towards parking money in bank deposits, even when deposit rates have collapsed. Nepal Telecom recently disclosed that its interest income from bank deposits fell by more than 20% in the first three quarters of fiscal 2025-26 as market rates declined. Pension funds face the same headwind, and the low-return trap will only tighten as the deposit cycle stays loose.
A secondary damage: commercial banks, starved of institutional equity buyers, have instead expanded their share-pledge loans to Rs136.71bn, up from Rs101bn a year earlier. These are loans against listed shares. When share prices fall, the collateral falls; when banks make margin calls, retail investors sell; when retail investors sell, prices fall further. A pro-cyclical loop that an institutional base would dampen. Institutions do not take share-pledge loans. They do not need to.
Nepal’s mutual fund industry is growing but still tiny. Fifty-six funds manage AUM of about Rs62bn, up from Rs15bn a decade ago. That is 1.3% of NEPSE’s market capitalisation. A market cannot price assets reliably when the entire professionally managed fund universe equals a rounding error on the balance sheet of three pension funds. In India, by contrast, institutional investors—mutual funds, insurers and foreign portfolio investors—account for a third of daily equity turnover. In Nepal, that figure is a fraction of a fraction.
The government talks of a digital economy and capital-markets deepening. The budget due on May 29th is expected to build on the ordinance. The regulator’s mandate was recently expanded to cover investment companies with paid-up capital above Rs50m, addressing gaps at the market’s edge. But none of this confronts the core problem.
Two changes would transform the picture. First, a clear legislative obligation—not a permission—for the EPF, CIT and SSF to allocate a specified share of assets to listed equities and registered funds. A 15% equity allocation from the EPF alone would put some Rs75bn into the market, exceeding the entire AUM of Nepal’s 56 mutual funds combined. A market with that kind of institutional foundation would look nothing like the one that lost 4% in two minutes on September 18th.
Second, an independent governance structure for those allocations—one that insulates fund managers from the political cycle, makes their investment mandates public and subjects their decisions to professional scrutiny rather than ministerial approval.
Neither change is beyond Nepal’s capacity. The new government came to power on the grievance that state institutions had been captured by political interest. Freeing pension capital from the same capture would fit that spirit. It would also be sound financial policy. A market that serves the economy as a pricing mechanism, a capital-allocator and a savings vehicle cannot be built on millions of retail accounts moved by social‑media sentiment and political weather. It is built, slowly, by institutions that take the long view. ■
