During the height of the COVID-19 pandemic, when stock markets worldwide were plummeting, NEPSE was soaring
Fresh out of postgraduate studies, I had the opportunity to train at a well-regarded bank in Cologne, Germany. The experience, much like a first love, left an enduring impression. One key lesson from that time has remained etched in my memory: before buying any share, thoroughly and minutely understand the financial health of the company. My German mentors repeated this principle with unwavering consistency. It was their golden rule of investing, and they warned against ever violating it.
Years later, living in the United States, I engaged in occasional personal trading on the NYSE and NASDAQ. The amounts were small, mostly managed during downtime from daily chores. Yet, friends and colleagues often asked how I managed to fare better than them. I would offer the same advice I had learned years earlier –study the company's financials and regulatory disclosures. In the US, listed firms are legally required to disclose accurate, comprehensive information. Investors can also choose from various account types – self-directed, broker-advised, or robo-managed – each with a clear regulatory framework and accountability.
After returning to Nepal, I considered investing in the domestic capital market as a way to remain financially independent. Large-scale ventures and confrontational trade unions were not avenues I wished to pursue. Investing in shares seemed manageable and independent – at least on the surface.
The Nepal Stock Exchange (NEPSE) was established in 1993 under the Securities Exchange Act to facilitate organised securities trading. The Securities Board of Nepal (SEBON) was set up as the regulatory body to oversee the development and integrity of the capital market. NEPSE today functions not just as a trading platform but also facilitates IPOs, manages bond transactions, and promotes financial awareness. While the market is still evolving, investors now have access to a broader array of instruments, including mutual funds, corporate debentures, and government bonds.
Before investing, I made it a point to study NEPSE's recent history – reviewing publicly available documents, financial news, and speaking with seasoned market participants. What I found was deeply unsettling. During the height of the COVID-19 pandemic, when stock markets worldwide were plummeting, NEPSE was soaring. Snorting, stumping and with nostrils flaring, the NEPSE Bull charged ahead – unyielding and untamed – while bulls in stock exchanges across the world lay dormant. This divergence defied economic logic. Nepal was not immune to the pandemic's effects – on the contrary, the economy shrank and corporate earnings declined. Yet the stock index reached record highs.
This bullish surge was not an isolated anomaly. Companies with no operational activity, mounting losses, or executives facing criminal charges saw their share prices skyrocket. Some shares with book values under Rs. 100 were being traded above Rs. 3,000. Even firms with no earnings or dividends showed inflated valuations. These cases spanned sectors – from hydropower and cement to insurance and banking.
Such irrational movements could not be explained by fundamentals, market optimism, or scarcity of floating shares. What emerged instead was a disturbing pattern of manipulation – hallmarks of a pump-and-dump scheme. A coordinated group of insiders appeared to be inflating prices before offloading them to unsuspecting investors. Rational investing met its limit in NEPSE, where manipulation often trumped merit.
More troubling were allegations of rampant and unabated insider trading. The chairman of SEBON was removed from his post after reports linked him to improper trading activities. Around the same time, the CEO of NEPSE resigned following similar accusations. Both had ties to powerful political figures, raising questions about how long such malpractices had gone unchecked. The present SEBON chairman and officials are also being investigated for corruption and manipulation by the Nepal's anti-corruption authority.
Media reports highlighted instances where politically connected individuals received free or preferential shares of significant value. The former SEBON chairman, allegedly a former central bank official, was said to have been appointed on the recommendation of the President of Nepal. The independence of market regulators came under serious doubt.
Market integrity was further compromised by allegations of share cornering (where shares are bought in large quantity to create scarcity to jack up prices), circular trading (where shares are bought and sold repeatedly within a closed group to create artificial volume), and preferential IPO approvals in exchange for commissions. Authorities from the anti-corruption body have even raided NEPSE for evidence of internal collusion. Suggestions to establish a second stock exchange – while appealing on the surface – risk replicating these same systemic flaws unless deep-rooted reforms are enacted.
The most disheartening part of this saga is the fate of well-intentioned investors –those who did their homework, tracked charts and ratios, and followed the rulebook. Many now hold shares that have lost substantial value. They were advised to "hold and wait." Perhaps a better suggestion would be to hold, wait, and pray.
Banking and financial institutions (BFIs) were considered relatively safer and did outperform other sectors. But even here, the reliability of financial statements remains a matter of trust, not certainty.
For most investors in Nepal, especially retail participants, NEPSE remains an enigma. It rewards manipulation more often than diligence. It celebrates speculative surges while punishing rational investment behaviour. The tools of analysis and the ethos of transparency, which underpin modern financial markets, are still struggling to take root.
For me, deciphering the enigmatic smile of the Mona Lisa might be easier than unraveling the enigma of NEPSE – the fundamentals I learned and applied abroad might not work here.
