Growing Role of Retail Investors and New Challenges for Nepal Market

Nepal’s stock market has been going through a rough patch in recent years unprecedented boom in retail investment. This is evidenced by the rapid growth in the number of DEMAT accounts: if in the first eight months of the 2022/23 financial year their number increased from 3.789 million to 5.654 million¹, then by June 2024 it approached 6.3 million ², and as of June 2025, it reached 6,816,972. In parallel, the number of users of the Mero Share online platform also grew, exceeding 5.8 million by June 2025.³Trading activity on the Nepal Stock Exchange (NEPSE) has also seen significant activity with daily turnover reaching Rs 522.3 million in March 2025.⁴, and on certain days in June 2025 – 8.68 billion rupees⁵ and even 9.90 billion rupees.⁶This surge in interest from individuals is partly due to technological innovations, in particular the introduction of the Trade Management System (TMS), which has greatly simplified access to the market.¹The COVID-19 pandemic also played a significant role, limiting traditional economic activities and pushing the population to look for alternative sources of income and investment opportunities.¹

This massive influx of retail investors marks an important stage in the development of Nepal’s capital market, contributing to its democratization. However, this process comes with new and significant challenges. The stock market is an important tool for mobilizing capital and achieving sustainable development goals, as recognized by the Government of Nepal.⁸The importance of the market is also underlined by its size: NEPSE’s market capitalization was already 95% of the country’s GDP as of February 4, 2021.⁸, and by June 2025 it reached 4.38 trillion Nepalese rupees.⁹In a situation where retail investors make up the vast majority of market participants (around 99% as of 2021)⁸, and this trend continues), their behavior and level of financial preparation become critical factors for the overall stability of the market. Instability caused by irrational actions of unprepared investors or market manipulation can undermine confidence in the financial system and slow down the economic development of the country.

The key dilemma facing Nepal today is how to balance increased access to the stock market with the need to protect retail investors from rising risks. The rapid growth of DEMAT accounts and the active use of online platforms indicate not just a quantitative increase in investors, but also a qualitative change in their profile, with more tech-savvy but potentially less financially literate people entering the market. The COVID-19 pandemic, which has become a catalyst for both the digitalization of payments⁷, as well as for the influx of private investors into the stock market¹, created a specific context in which many new entrants may be motivated by the search for quick money rather than long-term investment strategies. This, in turn, increases their vulnerability to various “financial traps”. Given the systemic importance of the stock market for the Nepalese economy, the problems of retail investors cease to be a private matter and acquire macroeconomic significance that can affect the stability of the entire financial system. This study is devoted to analyzing this complex situation and finding ways to address it.

1. Nepal’s Retail Investment Landscape: Opportunities and Vulnerabilities

1.1. The phenomenon of retail investor in Nepal: portrait and behavioral characteristics

The rise of retail investors in Nepal has become a phenomenon. As noted, as of mid-March 2023, almost every fifth resident of the country (19.4%) was involved in securities trading in one way or another.¹By June 2025, the number of DEMAT accounts exceeded 6.8 million, and the number of users of the Mero Share platform exceeded 5.8 million.³These figures reflect not only growing interest in the stock market, but also a significant expansion in the availability of financial infrastructure. The mass scale of this phenomenon means that any problems faced by retail investors are of national importance and require close attention from regulators and policymakers.

Digitalization has played a key role in democratizing market access, particularly the introduction of the Trade Management System (TMS) by the Nepal Stock Exchange (NEPSE). The system has enabled hundreds of thousands of Nepalese to trade securities from home, significantly reducing transaction costs and barriers to entry.¹As of 2025, 350 individual investors have registered with TMS to participate in just one of the studies.¹⁰, which indirectly indicates the widespread use of the platform. However, simplification of access, being an undoubted progress, also carries certain risks. Digital channels accelerate the spread of not only useful information, but also rumors, disinformation, which can increase the irrational behavior of investors, especially those who do not have sufficient experience and knowledge.

Behavioural aspects play a significant role in the Nepalese stock market. Research shows that local investors’ decisions are often influenced by cognitive biases. Among the most common is herd behaviour, where investors follow the crowd without doing their own research.¹¹; overconfidence in one’s ability to predict the market; disposition effect, which is a reluctance to take losses and sell winning assets prematurely; loss aversion, which causes one to avoid risk even when the outlook is good; and representativeness, where recent events or striking examples have a disproportionate effect on expectations.¹¹Investors often rely on rumors and market hype rather than fundamental analysis of companies.¹⁴The type of news and its relevance also have a significant impact on investment decisions.¹⁶These behavioral patterns are particularly common in emerging markets, where information asymmetries and a lack of quality analytics are common.¹²Understanding these psychological aspects is critical to developing effective investor protection measures and financial education programs, as a market driven by emotion rather than fundamentals is more prone to volatility, bubbles, and subsequent sharp corrections.

The democratization of market access through digital platforms, without adequate growth in financial literacy, creates a “perfect storm” for behavioral errors and increased vulnerability to manipulation. The ease with which new, often inexperienced, investors can enter the market¹, combined with a generally low level of financial knowledge in the country.¹⁷In such an environment, behavioral biases such as herd behavior and overconfidence are widespread.¹¹, make retail investors an easy target for manipulators and lead them to make suboptimal and sometimes disastrous financial decisions.

Given that retail investors constitute the vast majority of NEPSE participants⁸, their collective behavior, even if irrational at the individual level, becomes a significant market factor. This behavior can have a significant impact on asset pricing and the overall stability of the exchange. Mass irrational actions, such as panic selling or speculative buying, can lead to significant price fluctuations unrelated to the fundamentals of companies, creating systemic risks for the entire market.¹⁵

Investors’ dependence on news and its relevance¹⁶, especially in conditions of possible information asymmetry and the ease of spreading rumors through informal channels¹⁴, creates fertile ground for manipulation. Manipulators can exploit this by spreading false or misleading information through the media and social media in order to influence stock prices, especially in the digital media age where the speed of information dissemination is extremely high.

Table 1: Growth Dynamics of Retail Investors in Nepal (2021-2025)

Note: Data is collected from various sources and may have different calculation methods and reporting periods. “N/A” indicates that data is not available in the provided materials. Currency conversion has not been performed to preserve the accuracy of the original data.

This chart clearly demonstrates the exponential growth of retail investor engagement in the Nepal stock market over the past few years. The increase in DEMAT accounts and Mero Share users, as well as the significant trading volumes, highlight the scale of the phenomenon. This influx of investors, on the one hand, indicates growing confidence in the market and its accessibility, but on the other hand, it raises the issue of financial literacy and protection of the rights of these numerous, but often inexperienced, participants.

1.2. “Financial Traps” and Systemic Risks for Retail Investors

The increasing participation of retail investors in the Nepal stock market has unfortunately been accompanied by a rise in the number of “financial traps” that threaten their savings and undermine confidence in the market as a whole. One of the most serious problems is market manipulation. This practice includes a wide range of unfair practices, such as disseminating false or misleading news, artificially creating the appearance of high demand or supply for certain stocks in order to influence their price.²¹A worrying sign is that more than 26% of companies listed on NEPSE are loss-making, yet their shares may be trading at unreasonably high prices precisely because of manipulation.²²Weak enforcement by regulators²¹and low level of financial literacy of investors¹⁷create fertile ground for such abuses. The concentration of the market in a few sectors, primarily banking and finance, can also facilitate coordination of the actions of manipulators.²¹The consequences of such actions are devastating: they lead to unfair redistribution of capital, financial losses for bona fide investors, and may discourage both local and potential foreign investors who are desperately needed for the development of Nepal’s economy.

Insider trading – is another major threat to retail investors. This practice, whereby individuals with non-public material information about a company use it to trade securities to gain an unfair advantage, is in direct violation of fair market principles. Nepal has seen several high-profile cases highlighting this problem, including the case of former Ridi Hydropower Company Chairman Guru Prasad Neupane, who was charged with insider trading between March 2021 and July 2022.¹, and the case of Gyanendra Lal Pradhan of Nepal Hydro Developer Limited, who was fined and suspended from management positions in April 2023.¹The Sarbottam Cement IPO scandal has caused particular resonance, in which, according to an investigation by Himal Khabar, the heads of NEPSE and SEBON allegedly purchased shares in the company for their relatives at prices significantly below market prices shortly before the public offering.¹There was also an investigation into alleged insider trading in Karnali Development Bank Limited in late 2023 after Nepal Rastra Bank announced that the bank was in financial trouble, which led to abnormal growth in the bank’s shares.¹These cases highlight systemic problems in corporate governance and the potential ineffectiveness of existing controls and penalties. Proposed legislative amendments to increase penalties for insider trading are a step in the right direction, but their success will depend on effective enforcement.¹

Particularly dangerous for inexperienced investors are Pump and Dump schemes (pump and dump). These schemes involve artificially inflating the price of an asset, usually a low-liquidity stock (the “pump”), through coordinated buying and the spread of positive, often false, rumors. Once the price peaks, the scheme’s organizers sell their shares en masse (the “dump”), crashing the price and leaving misled investors with significant losses.²³Manipulators often choose shares of companies with small capitalization for these purposes, since their prices are easier to influence.²²The low liquidity of some securities on NEPSE and the lack of investor awareness of such fraudulent practices make them particularly vulnerable.¹Even Nepal’s finance minister has pointed out the need to eradicate such schemes to improve the health of the market.²⁴

Finally, risks associated with margin trading should not be underestimated, especially for unprepared market participants. Although specific data on the volume of margin trading in Nepal is limited in the materials provided, the overall picture is of low levels of financial literacy¹⁷and investors’ propensity for risky, speculative behavior¹¹indicates a high risk potential. Margin trading allows investors to trade amounts greater than their own capital using borrowed funds provided by a broker. This can greatly increase both potential profits and potential losses. Failure to understand these mechanisms and risks by financially illiterate investors can lead to catastrophic financial consequences, including the complete loss of the invested funds and the emergence of debt obligations to the broker. An example from the region is the situation in Bangladesh, where aggressive and poorly controlled margin lending has led to serious problems in the stock market in the past.²⁶It is important that access to higher risk instruments such as margin trading is accompanied by an adequate assessment of the investor’s risk profile, the provision of full and clear information about all associated risks and, possibly, additional requirements for the investor’s level of qualification.

The depth of Nepal’s investor protection problem is underscored by the fact that scandals like the Sarbottam Cement case have involved not just ordinary market participants, but individuals holding high-ranking positions in regulatory bodies.¹When regulators themselves, who are supposed to keep the market fair and transparent, become involved in questionable practices, it creates a fundamental conflict of interest and does far more damage to investor confidence than abuses by private companies or individuals. Such incidents call into question the very foundation of the regulatory system and its ability to protect the rights of ordinary investors.

Manipulators often focus on low-liquidity stocks and securities of companies with weak financial indicators.¹This indicates that they are deliberately exploiting market inefficiencies and the lack of analytical skills of a significant portion of retail investors. The latter, lacking the ability or skills to conduct deep fundamental analysis, are easily swayed by artificially created hype and promises of quick profits, without distinguishing real growth potential from speculative “pumping”.

Apart from market manipulation, retail investors in Nepal may also face operational risks associated with the brokers themselves. There have been reports of some brokerage firms delaying or failing to pay clients after stocks have been sold.²², indicate possible problems with their solvency, operational efficiency, or even integrity. This is another “trap” that undermines confidence not only in specific stocks, but in the market infrastructure as a whole, creating additional barriers to safe investing.

2. Financial Literacy in Nepal: Current Status and Strategic Need for Improvement

2.1. Diagnostics of the level of financial literacy: results of national studies

Assessing the current level of financial literacy of the Nepalese population is a key step in understanding the vulnerabilities of retail investors. The baseline survey conducted by Nepal Rastra Bank (NRB) in 2022 provided important data on this issue. The overall national financial literacy score was 57.9% (or 11.59 out of a maximum of 20 points). When looking at the components in more detail, the financial knowledge of the population was rated at 47.3% (3.31 out of 7), financial behavior at 63.5% (5.71 out of 9), and financial attitudes at 64.1% (2.56 out of 4).¹⁷An alarming sign is the fact that only 27.5% of the adult population achieved the minimum target for all three components of financial literacy simultaneously.¹⁸These figures highlight significant gaps, particularly in the area of ​​fundamental financial knowledge. Despite relatively better performance in behavior and attitudes, a lack of basic knowledge can lead to poor financial decisions, even with the right intentions. Low knowledge makes investors particularly vulnerable to complex financial products, aggressive marketing, and fraudulent schemes.

The NRB survey also found significant socio-demographic and regional gaps in financial awareness. The highest financial literacy score was recorded in Bagmati province, where the capital Kathmandu is located, while the lowest was in Madhesh province. There are also significant differences by gender, with men on average performing better than women, with a 7.5 percentage point difference in overall score and a particularly noticeable 17.9 percentage point difference in financial knowledge. Age also plays a role, with young people aged 18-30 performing better (63.2% overall score) than older people aged 60 and above (27.9%). Formal education level is positively correlated with financial literacy. In addition, formal sector workers in industry and services, as well as urban residents, are generally more financially literate than the rural population and agricultural workers.¹⁷These gaps highlight the need to develop targeted financial education programs that take into account the specific needs and barriers of different population groups. Uneven distribution of financial literacy can exacerbate existing social inequalities, as less knowledgeable groups are more likely to suffer financial losses and miss out on opportunities to improve their well-being.

There is a direct and clear link between low financial literacy and increased exposure to investment risks. Research confirms that a lack of financial knowledge is associated with debt problems, less active or suboptimal participation in the stock market, choosing more expensive and less profitable financial products, and ineffective management of personal savings.²⁷In the Nepalese context, it is noted that many retail investors tend to “play the market”, basing their decisions on market psychology, rumors and heuristics rather than on in-depth analysis of companies’ fundamentals.¹⁵Financial literacy, as research shows, can negatively moderate (that is, weaken) the influence of behavioral biases on investment decisions.¹³Lack of knowledge means that investors are unable to adequately assess the risks associated with various financial instruments, do not fully understand the essence of these instruments and, most dangerously, are not always able to recognize fraudulent schemes and unfair practices. This is directly related to the central theme of this study: financial illiteracy turns potential investment opportunities into real “financial traps”.

Paradoxically, young people (18-30 years old) demonstrate relatively higher rates of financial literacy compared to other age groups¹⁸, may be particularly vulnerable in the stock market. This is because young people are active users of digital technologies and social media, which often become a source of unverified information, investment “advice” from unqualified “gurus” and contribute to the spread of herd behavior.¹¹In addition, overconfidence, which is a common behavioral distortion,¹¹, may be more characteristic of this age group. Thus, even with certain knowledge, specific channels of obtaining information and psychological characteristics can make young investors prone to risky behavior, which requires a special approach when developing educational programs for this audience.

A high percentage of Nepal’s population (71.83%) relies on informal channels such as family and friends to manage their financial needs (savings, borrowing)¹⁸, indicating persistent barriers to access to formal financial institutions or deeply ingrained cultural practices. It may also indicate a certain distrust of the formal financial system. Such reliance on informal networks may also spill over into investment behavior, where advice from friends or word of mouth may carry more weight than professional analysis, thereby reinforcing the herd effect and reducing the quality of investment decisions.

Despite the NRB’s efforts to promote financial literacy, the very fact that there is a need for a specific Financial Literacy Directive for banks and financial institutions (BFIs)²⁸and the fact that BFIs “hardly implement” the rule on investing 1% of their profits in financial literacy programs indicates insufficient attention to this issue on the part of financial institutions themselves. Such an attitude on the part of key market players with resources and direct access to clients significantly slows down progress in raising the overall level of financial culture in the country and requires more effective mechanisms of control and stimulation on the part of the regulator.

Table 2: Key indicators of financial literacy in Nepal (based on NRB survey, 2022)

Note: “N/A” indicates that there are no detailed data for that particular breakdown in the materials provided, or the data are presented in aggregate form. “Higher/Lower” indicates the relative level compared to other groups or the average, as described in the texts. Percentages for the knowledge, behavior, and attitude components are calculated as the ratio of the average score to the maximum score for the component.

This table clearly illustrates the current level of financial literacy in Nepal and the existing disparities. The low level of financial knowledge is particularly noticeable, which is a critical factor in investor vulnerability. Gaps between gender groups, age groups and regions indicate the need for a differentiated approach to the design and implementation of educational programs. These official data from the central bank provide quantitative evidence of the scale of the problem and help identify priority areas for improvement.

2.2. Public and private initiatives to improve financial literacy: assessing the effectiveness

Recognizing the importance of financial education, Nepal’s regulators, primarily Nepal Rastra Bank (NRB) and Securities Board of Nepal (SEBON), have taken steps to develop and implement educational programs. The NRB, with technical and financial support from the Alliance for Financial Inclusion (AFI), has formulated the Financial Literacy Framework-2020, which serves as a guiding principle for financial education activities.²⁹As part of this work, NRB organizes special programs for students, produces educational materials such as the booklet “Money Tree” (“Paisako Bot”), and creates audiovisual content including theme songs to popularize financial knowledge.²⁹SEBON is also actively involved in creating investor awareness, especially during Global Money Week, by collaborating with the Stock Brokers Association of Nepal (SBAN) and other market players to organise awareness activities such as morning jogs and radio talk shows.³⁰Regulators play a key coordinating and guiding role in these processes. However, as the data from the national financial literacy survey show, current efforts may not be sufficient to cover all target groups and significantly improve the overall level of knowledge and skills of the population.

An important element of the financial literacy strategy is the involvement of banks and financial institutions (BFIs). The NRB Directive requires BFIs to invest at least 1% of their annual net profit in financial literacy programmes, with a special focus on women and marginalised groups.²⁸However, the directive itself notes that BFIs are “unlikely to implement” this rule.²⁸This gap between regulatory requirements and their actual implementation is a major obstacle. This may be due to the lack of effective control mechanisms on the part of the regulator or insufficient incentives for BFIs, which may view such programs as an additional burden rather than an investment in market development and improving the quality of their client base. Without the active and conscientious participation of BFIs with a wide branch network and direct access to clients, the implementation of large-scale and effective financial education programs appears difficult.

Evaluation of the effectiveness of current programs shows a mixed picture. On the one hand, research confirms that financial literacy has a positive effect on the adoption and use of digital payment systems³¹and facilitates more informed investment decisions.¹³On the other hand, the general level of financial knowledge of the population remains at a moderate level.²⁵, especially in areas critical to investors such as understanding credit products, taxes, stock market operations, analyzing company financial statements, and insurance.²⁷The experience of foreign aid in the education sector in Nepal is also mixed: despite some growth in the coverage of educational services, the quality of education and the solution of systemic problems remain pressing challenges.³²This suggests that existing financial literacy programs need to be seriously revised in terms of their content (with an emphasis on practical skills, understanding risks, and recognizing fraudulent schemes), methodology (implementation of interactive formats, active use of digital channels for delivering information), and coverage (with special attention to the most vulnerable groups of the population). Ineffective programs are not only wasted resources, but also missed opportunities to strengthen the financial health of the nation and the stability of the financial market.

Insufficient implementation of the NRB rule on 1% of BFI contributions to financial literacy programs²⁸may be associated not only with the unwillingness of the banks themselves to bear additional costs, but also with the lack of clear metrics for the effectiveness of such programs and transparent reporting mechanisms. This allows some BFIs to approach the implementation of this requirement formally, carrying out events “for the sake of appearances” that do not bring real benefit to the population.

The experience of neighboring countries such as India and Bangladesh, where regulators (SEBI and BSEC respectively) are actively involved in investor protection issues and implement large-scale educational programs²⁶, can serve as a valuable reference for Nepal. However, direct transfer of models without taking into account local specifics may not be effective. It is necessary to adapt successful practices to the socio-cultural and economic conditions of Nepal, especially given the lower overall literacy level and the specific development of the financial market.

Despite all efforts to improve financial literacy, a significant portion of the population remains highly dependent on informal sources of financial advice (family, friends)¹⁸and the strong influence of “market noise” and rumors on investment decisions¹⁴indicate that formal educational programs have yet to gain full credibility or become a primary source of information for many investors. This may be because the content offered is perceived as too theoretical, disconnected from the practical needs and realities that retail investors face, or because the delivery channels are not effective enough to reach the target audience.

3. Protecting the Rights of Retail Investors: The Regulatory Environment and Its Effectiveness

3.1. The Role of SEBON and NEPSE in Ensuring a Fair and Transparent Market

There is a legal framework for investor protection in Nepal. The Securities Board of Nepal (SEBON) was established under the Securities Act, 2063 N.Y. (2006/2007 A.D.) and is vested with the functions of a securities market regulator.⁴⁸Its responsibilities include supervision of the activities of the Nepal Stock Exchange (NEPSE), brokerage companies, merchant bankers, investment funds, and control over the issuance of securities (IPO, FPO, etc.).⁴⁸The Securities Act 2063 (2006) contains basic provisions prohibiting insider trading.¹, and SEBON Securities Regulation 2064 (2007/2008) provides a more detailed definition of this violation.¹Thus, formally, the legal basis for protecting investors has been created, but its real effectiveness directly depends on the quality of law enforcement practice.

SEBON’s supervisory and enforcement practices have been controversial. On the one hand, the regulator has initiated investigations into a number of high-profile insider trading cases, including those against the former chairman of Ridi Hydropower Company, the head of Nepal Hydro Developer Limited, the Sarbottam Cement IPO, and suspicious transactions in Karnali Development Bank shares.¹In some cases, sanctions were imposed, such as a fine of Rs 75,000 and a ban on holding leadership positions for Gyanendra Lal Pradhan.¹By comparison, statistics from the US Securities and Exchange Commission (SEC) show a much larger scale of enforcement activity, although direct comparisons are difficult due to differences in the sizes of markets and regulatory systems.⁴⁹On the other hand, investors and experts often express dissatisfaction with SEBON’s performance, pointing to delayed responses to violations, weak enforcement of insider trading and market manipulation, and a lack of transparency in the regulatory decision-making process.⁴⁸

There are a number of serious challenges to the effective operation of SEBON. One of the key issues is the potential conflict of interest, such as the participation of private sector representatives, such as the Federation of Nepal Chambers of Commerce and Industry (FNCCI), on the board of SEBON.¹This may affect the objectivity of decisions taken. There is also a lack of qualified technical experts on the regulator’s staff and possible political influence on personnel appointments.⁴⁸There are issues with delays in IPO approvals and issuance of licenses to market participants, which creates uncertainty and slows down the development of the market. In addition, SEBON’s powers to conduct investigations and gather evidence may be limited.¹All of these factors combine to weaken the regulator’s ability to effectively perform its supervisory and protective functions. The proposed restructuring of SEBON’s board, aimed at strengthening its independence and professionalism, is intended to address some of these issues, but its success will depend on political will and the quality of implementation.⁴⁸Without overcoming these systemic challenges, it is impossible to ensure reliable protection of the rights of retail investors and increase confidence in the Nepal stock market.

Proposal to remove FNCCI representatives from SEBON board¹and simultaneously increasing the number of independent technical experts⁴⁸is a direct recognition of the problem of conflicts of interest and lack of specialized knowledge that have previously hampered effective regulation of the market. The addition of high-ranking officials such as the Secretary of Revenue of the Ministry of Finance and the Deputy Governor of Nepal Rastra Bank to the board, instead of representatives from the business community and the Ministry of Justice, is aimed at enhancing the objectivity, technical competence and independence of SEBON, as well as better coordinating its activities with the overall economic and monetary policies of the state.

Delays in IPO approval and issuance of licenses to new market participants not only harm businesses by creating an atmosphere of uncertainty, but also indirectly affect the interests of retail investors. Such delays limit the choice of high-quality investment instruments available on the market and delay the entry of potentially attractive companies into the stock exchange. This narrows the opportunities for diversification of retail investors’ portfolios and can lead to lost profits.

Despite the formal establishment of SEBON as a separate regulatory body,⁸, its real independence and ability to withstand political pressure or the influence of major market players remain in question. This is a fundamental obstacle to effective investor protection. Scandals such as the Sarbottam Cement case, which involved senior management of regulatory bodies,¹, only heightened these concerns. The proposed restructuring of SEBON’s board⁴⁸is a step in the right direction, but its ultimate success will depend on the existence of real political will for change and on the practical implementation of the declared principles of independence and professionalism.

3.2. Directions for reform to strengthen investor protection and increase market confidence

To strengthen the protection of retail investors and increase confidence in the Nepalese stock market, comprehensive reforms are needed, covering both the legislation and institutional arrangements. An important step in this direction is analysis and adoption of proposed legislative changes. In particular, the Securities (First Amendment) Bill, 2024, provides for significantly tougher penalties for insider trading, including fines of up to Rs 30 million and imprisonment of up to three years. In addition, the bill proposes to expand the powers of SEBON by giving it access to investigate bank transactions in cases of market abuse.¹These measures are certainly progressive, but their real effectiveness will depend on the consistency and severity of law enforcement practices. Strengthening sanctions can have a deterrent effect on potential violators only if punishment is inevitable and there is no selectivity in its application.

The key aspect of the reforms is the need to strengthen institutional independence and expand the powers of SEBON. The proposals to restructure SEBON’s board, which aim to exclude representatives of the private sector (such as FNCCI) and the Ministry of Justice, while including more independent experts and senior representatives of the Ministry of Finance and NRB, are intended to enhance the professionalism of the regulator and reduce the risks of conflicts of interest.⁴⁸However, in addition to personnel changes, SEBON needs to increase its staff of qualified specialists (lawyers, analysts, IT specialists), as well as modern technologies for monitoring market activity.⁴⁸A strong, independent and well-equipped regulator is the key to trust in the market on the part of all its participants.

In the era of digitalization implementation of advanced technologies (RegTech and SupTech) to monitor market activity and detect abuses is becoming a pressing need. Proposals to use artificial intelligence (AI) and blockchain technology to detect signs of insider trading, track complex manipulation schemes, and improve overall transaction transparency¹ deserve the utmost attention. Such technologies can significantly improve the effectiveness of surveillance, especially in the fast-growing and increasingly digitalized Nepali market, allowing SEBON to move from a reactive response to breaches that have already occurred to a proactive identification and prevention of potential threats.

Finally, it is extremely important for Nepal to study and adapt successful international experience in the field of retail investor protection, especially the experience of countries in the region with similar problems or more developed markets. The practice of India, where the Securities and Exchange Board of India (SEBI) pursues an active policy to protect investors, can serve as a valuable example. SEBI applies a wide range of measures, including strengthening disclosure requirements for companies, strict regulation of mutual funds and financial influencers, active fight against insider trading, transition to an accelerated T+1 settlement cycle, implementation of large-scale educational programs for investors, regulation of IPO procedures, raising corporate governance standards, mandatory registration of investment advisers, and regulation of algorithmic trading.³³An important element of the Indian system is the Investor Education and Protection Fund (IPEF), which is designed to compensate investors for losses in certain cases and to fund educational initiatives.³⁴The Bangladesh Securities and Exchange Commission (BSEC) is also active in promoting financial literacy by requiring market participants to set up specialized units and conducting nationwide education campaigns.²⁶Adapting these time-tested and proven approaches to the specifics of the Nepalese market can significantly speed up the reform process and improve its overall effectiveness.

Table 3: Comparative Analysis of Investor Protection and Financial Education: Nepal, India, Bangladesh

This table provides a visual comparison of the approaches of regulators in three South Asian countries to investor protection and financial literacy. It is clear that India, which has a more developed market, also has a more comprehensive protection system, including a dedicated fund and an online complaints platform. Nepal is in the process of reforming its system, and the experience of its neighbors can be very useful in determining priorities and choosing the most effective tools.

Proposed expansion of SEBON’s powers to access bank transactions for investigations¹ is critical to effectively combating insider trading and other complex financial fraud. However, such an expansion of powers will inevitably raise issues of banking secrecy and may encounter some resistance from the banking sector. It is therefore essential to develop clear legal protocols and oversight mechanisms for the use of these powers to prevent potential abuse and to ensure a balance between the need for effective investigation and the protection of confidential information of bank customers.

Successful implementation of modern technological solutions such as RegTech and SupTech¹, will depend not only on the purchase of the relevant software, but also on a number of related factors. These include the availability of sufficient qualified personnel at SEBON who are able to effectively use these systems and interpret the data received, as well as the willingness of the state and the regulator itself to invest in the constant updating of these technological platforms and staff training. Without resolving the personnel issue and ensuring sustainable funding for the support and development of these systems, the benefits of their implementation may be limited and short-lived.

Focus on reforming the structure and composition of the SEBON board⁴⁸is an important but not sufficient condition for a comprehensive market recovery. Equally important is the reform of the Nepal Stock Exchange (NEPSE) itself as the front office of the market. This includes upgrading its technology infrastructure (including the TMS trading system, the effectiveness of which in preventing manipulation may require further assessment¹), improving the rules for listing and delisting companies, and strengthening the mechanisms of self-regulation of the brokerage community. A comprehensive reform should affect all links in the chain of regulation and functioning of the stock market in order to ensure its integrity and effectiveness.

4. The Path to a Stable and Mature Stock Market: Synergy of Education, Protection and Trust

4.1. The relationship between financial literacy, investor protection and macroeconomic stability of the stock market

The stability and maturity of the Nepalese stock market are inextricably linked to the level of financial literacy of its participants and the effectiveness of mechanisms to protect their rights. Research shows that investor behavioral biases, such as herding or overreaction to news, can lead to inefficient asset pricing and increased market volatility.¹¹Low levels of financial literacy among a large portion of the Nepalese population¹⁵, exacerbates these problems by making retail investors more susceptible to panic and irrational decisions. This, in turn, can amplify market volatility, as evidenced by the NEPSE volatility survey.¹⁵Financially literate investors, on the other hand, are able to make more balanced and informed decisions, are less prone to emotional reactions to market events, and have a better understanding of the nature of risks. This helps reduce excessive volatility and create a more predictable market environment.

Effective protection of investors’ rights plays an equally important role. When investors feel protected from fraud, manipulation and unfair practices, their trust in the market increases. This, in turn, stimulates the inflow of long-term investments rather than short-term speculation, which is the key to sustainable development of the capital market. A stable stock market, based on trust and informed decisions of its participants, becomes an important source of financing for the real sector of the economy and a reliable tool for savings and capital growth for the population.

The critical role of investor confidence for the long-term and sustainable development of capital markets cannot be overstated. High-profile cases of market manipulation, insider trading and ineffective or even corrupt regulation¹ deal a serious blow to this trust. Restoring and maintaining a high level of trust should be a key task for regulators and all professional market participants. Without trust, the stock market will not be able to effectively perform its main functions of mobilizing capital and its optimal distribution in the economy, which will negatively affect the rate of economic growth and the well-being of citizens.

Underestimating so-called “soft” factors, such as investor confidence and their perception of the fairness of market mechanisms, can lead to even technically sophisticated and well-thought-out reforms failing to produce the expected effect. If investors have personal experience of injustice, see impunity for manipulators, or do not trust regulators because of their perceived bias or incompetence²², they will be overly cautious or avoid participating in the market altogether. Trust is built not just by the presence of formal rules, but by their consistent, impartial and effective application. Therefore, along with legislative and institutional reforms, there must be a concerted effort to increase the transparency of regulators, create a culture of accountability and demonstrate real success in combating abuses.

The boom and bust cycles in NEPSE are largely driven by the behaviour of numerous retail investors¹, may have negative macroeconomic implications that extend far beyond the stock market itself. Sharp price drops and massive investor losses may lead to a reduction in consumer spending due to the so-called “negative wealth effect.” In addition, instability in the stock market may negatively affect the investment plans of companies that look to the market as a source of funding and the overall sentiment in the business community. Thus, the problems of retail investors, their financial literacy and security, as well as the volatility of NEPSE, are directly related to the broader economic processes in Nepal.

4.2. Comprehensive recommendations for key stakeholders

Building a stable, mature and credible stock market in Nepal requires coordinated and focused efforts from all key stakeholders.

For regulators (SEBON, NRB):

1. Development and implementation of a long-term national strategy for improving financial literacy: This strategy should include clearly defined target groups, specific measurable performance indicators (KPIs) and regular monitoring and evaluation mechanisms. Particular attention should be paid to vulnerable groups identified through national studies.¹⁷
2. Strengthening supervision of the implementation of BFI requirements for investing in financial literacy: It is necessary to develop transparent criteria for assessing the effectiveness of BFI programs and introduce effective sanctions for failure to comply or formal compliance with the requirements for deducting 1% of profits for educational initiatives.²⁸
3. Completion of the SEBON reform: It is essential to ensure that SEBON is truly independent from political and industry influence, strengthen its staff with highly qualified specialists and provide it with modern technical equipment for effective supervision.⁴⁸
4. Active use of new powers and tougher sanctions: SEBON should vigorously use its enhanced powers to investigate market abuse, including access to banking information (subject to the necessary procedures), and consistently enforce the enhanced penalties for insider trading and market manipulation provided for in the new legislation.¹
5. Accelerating the implementation of RegTech and SupTech: It is necessary to actively implement modern technologies for monitoring market activity, identifying suspicious transactions and analyzing big data, which will increase the regulator’s proactivity.¹
6. Study and adaptation of best international practices: The experience of countries in the region, especially India (SEBI) and Bangladesh (BSEC), in creating investor protection funds (similar to the Indian IPEF)³⁴), developing effective educational programmes and grievance redress mechanisms, should be carefully studied and adapted to the Nepalese context.
7. Improving coordination:There is a need to establish effective cooperation between SEBON, NRB, law enforcement agencies and other government agencies to comprehensively combat financial crimes and protect investors’ rights.

For professional market participants (brokers, investment consultants):

1. Development and strict adherence to codes of professional ethics: Industry associations should play an active role in setting high standards of conduct for their members.
2. Ensuring complete transparency: Clients must receive comprehensive and understandable information about the fees, potential risks and conflicts of interest associated with the products and services offered.
3. Conducting our own educational programs: Brokers and advisors must be responsible for improving the financial literacy of their clients by explaining not only the potential benefits but also all the associated risks of investing.
4. Good application of Know Your Customer (KYC) procedures: These procedures should not be a formality. It is necessary to conduct a real assessment of the client’s risk profile, his financial goals and level of knowledge before offering any investment products.
5. Refusal to promote products that do not match the client’s profile: The interests of the client must be a priority.

For retail investors:

1. Caveat Emptor Principle: Investors must be aware of their personal responsibility for the decisions they make.
2. Actively seek knowledge from reliable sources: It is necessary to use information from the official websites of regulators, take educational courses, read authoritative financial publications, and not rely solely on advice from social networks or from friends.
3. Developing critical thinking: It is important to learn to critically evaluate any investment advice and “unique” offers, especially those promising quick and high returns without risk.
4. Investment diversification: You should not invest all your funds in one asset or sector.
5. Use borrowed funds carefully: Do not invest your last or borrowed funds without fully understanding all the risks, especially when it comes to margin trading.
6. Seeking professional advice: If necessary, you should consult licensed and independent financial advisors.

The success of any reforms and initiatives in Nepal will depend to a large extent on the existence of strong political will and the ability of the authorities to overcome resistance from vested interests, such as those who benefit from opaque markets or weak regulatory mechanisms. Political instability, which characterizes Nepal⁵⁴, may make it difficult to implement consistent and long-term reforms.

Creating a culture of long-term investment among retail investors, as opposed to the prevailing speculative behavior¹⁵, requires a comprehensive approach. In addition to educational programs, it is important to ensure the availability of high-quality and understandable long-term investment instruments on the market, such as well-regulated mutual investment funds, pension products. SEBON has already noted the need to develop the mutual fund market and the debt market.⁸In addition, a stable macroeconomic environment, predictable inflation and reduced political risks⁵⁴are also important factors that help investors develop a long-term planning horizon.

Conclusion: Investing in knowledge and trust is the foundation of the future of Nepal’s stock market

Nepal’s stock market is on the cusp of a major transformation. The surge in retail investor activity is opening up new opportunities for domestic capital mobilization and economic growth. However, as this study shows, this process is accompanied by significant challenges. Low levels of financial literacy among a large part of the population¹⁷coupled with the prevalence of such “financial traps” as market manipulation²¹and insider trading¹, creates a high-risk environment for unprepared investors. The regulatory system, despite the steps taken to improve it, still faces problems in the areas of law enforcement, institutional independence and resource provision.¹

Overcoming these challenges requires a comprehensive and coordinated approach. The key areas should be:

• Large-scale and targeted financial literacy programs, covering all segments of the population, with an emphasis on practical skills and risk awareness.
• Strengthening the protection of investors’ rights through improving legislation, strengthening the independence and capacity of regulatory bodies (SEBON, NEPSE), introducing modern supervision technologies and the inevitability of punishment for market abuses.
• Increasing transparency and accountability of all market participants, including issuing companies, brokers and the regulators themselves.

Investing in the financial knowledge of the population and building a system that inspires trust is not only desirable, but absolutely necessary for the development of a healthy, stable and inclusive stock market in Nepal. Only a synergy of efforts by the government, regulators, professional market participants, educational institutions and the citizens themselves will transform the stock market from a potential source of risk into an effective tool for long-term economic development and improving the well-being of the Nepalese people. The future of the Nepalese stock market directly depends on how successfully the country can respond to this key challenge.

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