Finance Ministry leads capital market reform; Nepal Rastra Bank lifts past lending restrictions to revive investor confidence

KATHMANDU: In a decisive move aimed at reviving Nepal’s sluggish capital market, the Ministry of Finance has directed all related agencies to immediately implement key recommendations proposed by the Capital Market Reform Task Force. The task force submitted its comprehensive report to Finance Minister Rameshwor Khanal on September 25 (Ashoj 9), prompting swift coordination among major regulatory bodies including the Nepal Rastra Bank (NRB), Securities Board of Nepal (SEBON), Nepal Stock Exchange (NEPSE), CDS and Clearing Limited, and the Revenue Department.

Following the directive, the Nepal Rastra Bank late on Wednesday issued a new circular removing the previous ceiling of Rs 250 million on share mortgage lending imposed on banks and financial institutions. The central bank also reduced the lock-in period for listed companies’ share sales from one year to six months, and lifted the 20 percent transaction limit, signaling a major regulatory shift designed to stimulate trading activity and investor morale.

Officials said the government expects this liberalization to restore market momentum, enable banks to rebalance their balance sheets, and ease liquidity pressure within the financial system. The move comes after sustained pressure from investors and the private sector, who had long demanded flexibility in share-backed lending policies that they argued were suffocating market liquidity.

Three-Phase Reform Strategy

The Ministry of Finance confirmed that the reform report divides the capital market overhaul into three phases — short-term, medium-term, and long-term.

Short-term measures (within three months) include:

Removing the ceiling on share mortgage loans.

Scrapping restrictive provisions that limit investments in listed company shares and corporate bonds.

Allowing borrowers to pay delayed interest on share mortgage loans by mid-January (Poush-end) without penalty if they clear dues by mid-October (Ashoj-end).

Implementing margin trading through licensed brokers.

Standardizing investor identification numbers (BOIDs) via CDSC.

Restructuring the NEPSE index to include all listed shares.

Treating tax on non-commercial share sales as a final withholding tax.

Mandating organized institutions to pay taxes on bonus shares.

Establishing a grievance management mechanism for investors.

Launching nationwide investor literacy programs.

However, both SEBON and NEPSE have indicated that implementation of these reforms could be delayed due to ongoing employee protests, though official instructions from the ministry have been received.

Medium- and Long-Term Structural Reforms

The task force has also laid out broader policy and structural reforms for sustainable market growth.

Medium-term plans include:

Introducing tax incentives for collective investment schemes.

Allowing Non-Resident Nepalis (NRNs) to invest in the capital market using foreign currencies.

Permitting insurance companies to participate in securities trading.

Enhancing the price discovery mechanism for transparency and market efficiency.

Long-term goals focus on institutional strengthening:

Enacting a separate Capital Market Act to replace fragmented regulations.

Bringing in strategic partners to modernize and partially privatize NEPSE.

Launching short selling and derivatives trading systems.

Strengthening the government bond market to diversify investment instruments.

NRB’s Regulatory Revision

The central bank’s latest circular effectively reverses the restrictions introduced by former governor Maha Prasad Adhikari, who had imposed lending caps to contain speculative risks. Under the revised provisions, banks can now buy and sell shares within six months and, if necessary, trade up to 100 percent of their investment portfolios.

This regulatory relaxation, combined with the ministry’s reform roadmap, is expected to inject fresh energy into Nepal’s capital market, which has faced prolonged stagnation due to policy confusion, weak governance, and lack of investor confidence.

Market and Investor Outlook

Economists and capital market experts view the ministry’s initiative as a turning point for Nepal’s financial ecosystem. By easing credit restrictions and modernizing regulatory structures, the reform is expected to:

Restore transparency and trust among investors.

Improve liquidity and trading volumes in NEPSE.

Encourage institutional participation in the secondary market.

Support the government’s fiscal and economic recovery goals.

The Finance Ministry has emphasized that capital market revival remains a top national priority and that all related agencies will be held accountable for ensuring timely implementation of the reforms.