NEPSE: A Mechanism for Capital Formation or a Tunnel for Planned Exit?
Nepal's capital market is increasingly acting as a mechanism that transfers small investors' capital into the pockets of promoters and institutional investors, rather than creating new wealth. The planned exit of promoters as lock-in periods expire and the quick-profit mentality pose challenges to making NEPSE a hub for long-term capital formation.
In a busy café in Kathmandu or a living room at home, thousands of Nepalis spend their days watching red and green colors on mobile apps. Some buy shares by saving a portion of their salary, others by selling assets, and some by taking loans. All these investors share the same dream: "The stock market will make me rich." But it's time to ask an uncomfortable question: "Does our capital market really create new wealth? Or is it just a well-organized system that transfers small investors' wealth into the pockets of the big players?"
Looking deeper, Nepal's capital market appears to be more a place of value transfer than value creation. Where the channels for money to flow out are wider and more organized than those for money to flow in.
Planned Exit of Promoters After Lock-in Period
Shares of promoters and employees of listed companies are legally subject to a three-year lock-in period. This provision gives promoters the opportunity to plan their exit from the market in advance. As soon as the period ends, promoter shares enter the market, ordinary investors buy them at a premium, and that amount goes into the promoter's pocket.
What needs to be understood here is that the money from this share sale is not new capital for the company. Not a single rupee is added to the company's balance sheet because this is merely a secondary market transaction. Instead, the money that goes with the promoter is usually invested in another business, real estate, vehicles, or assets other than the capital market. Thus, even though ordinary investors feel they have become owners of the company, they are actually unknowingly participating in the promoter's capital flight plan.
The same trend applies equally to institutional investors. Most institutional investors, when investing early as promoters in a listed company, have already set an exit plan and predetermined the share issuance. That is, as soon as their investment begins, they have also built the path to exit it.
In such a situation, the question of how much money these institutions will take out as soon as promoter shares are unlocked must also be placed at the center of this debate. Because if the main objective of investment is to make quick profits and exit rather than to strengthen the company in the long term, it raises serious questions about the interests of ordinary investors.
The Tendency to Make Small Investors ATMs
In Nepal, the large population filling IPO forms does not aim for long-term investment. It is to earn quick profits (listing gain). Selling as soon as the upper circuit hits on the first day of listing has become common.
A Machine That Drains More Capital Than It Brings In?
Combining the above trends reveals a serious pattern: the pace of fresh capital exiting the market is much faster than the pace of entering. As long as no one stays as a long-term holder and everyone keeps running in the strategy of selling to others to escape, this market remains limited to a zero-sum game in the real sense. Where those who enter late often have to bear the losses of those who entered early and exited early.
Other Factors Add to This
The Mirage of Bonus Shares
Bonus shares show paper assets but do not bring cash into hand; instead, they increase the company's capital and dilute future profits and earnings per share, creating a compulsion for investors to sell when they need liquidity.
Market or Tunnel of Exit?
Although NEPSE shows billions in daily transactions, a large portion is not newly created wealth — it is merely a transfer from one group (new, small investors) to another group (promoters, short-term traders, lending banks). As long as the culture of investing the capital raised by companies in real productive projects and returning it as returns does not take root, and investors do not shift their mentality from quick profits to long-term partnership, the risk of NEPSE remaining a tunnel for planned exit rather than a mechanism for national capital formation appears equally urgent.