Nepal's stock market nears 8 million Demat accounts but lags in modern tools

Nepal's stock market has crossed a significant user milestone, with the number of Demat accounts nearing eight million. This surge in public participation, however, masks underlying structural weaknesses in the capital market. Experts point to a heavy reliance on a single trading instrument and regulatory frameworks that lag behind digital advancements.

The Central Depository System and Clearing Limited (CDSC) reported that Demat accounts, crucial for electronic securities storage, reached 8,009,623. This metric is widely used to gauge retail investor engagement, as Demat accounts are mandatory for Initial Public Offerings (IPOs) and secondary market trading.

Despite the impressive user numbers, financial experts highlight the Nepal Stock Exchange's (Nepse) lack of depth. Unlike international markets offering complex hedging tools like derivatives and short-selling, Nepal's market is strictly equity-only. The growth in retail investing is largely attributed to user-friendly digital platforms such as 'Mero Share,' which manages Demat accounts, and the Trading Management System (TMS) for executing trades.

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While public participation in our stock market relative to overall population size represents a remarkable achievement, we rank among the weakest globally in terms of trade execution, regulatory supervision, and risk management.

However, the number of active traders on the secondary market remains low, with only about 400,000 out of 4.7 million TMS account holders executing at least one transaction annually. Market participation fluctuates with index trends, expanding in bullish phases and contracting in downturns.

Ambika Prasad Paudel, former chairman of the Nepal Investors Forum, emphasized that retail enthusiasm does not equate to market maturity. He criticized the mandatory 10-kitta allotment policy and the lack of incentives for institutional investors, urging policymakers to shift focus towards attracting institutional capital for sustainable market development.

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Our single biggest structural flaw is the continued promotion of the mandatory 10-kitta (10 units) allotment policy. Over the past seven to eight years, institutional investors have been discouraged rather than incentivised, at times facing restrictions that virtually limit their trading flexibility.