Every Nepali investor knows one way to make money on a share. You buy it, you wait, and you hope it goes up. That is the entire playbook on NEPSE today. There is no legal way to profit when you think a stock is overpriced and heading down. You can sit out, or you can sell what you already own, and that is it. Short selling on NEPSE would break that limit, and the Securities Board of Nepal (SEBON) has now formally started the process to allow it.
Here is the position this piece takes before the mechanics. Short selling is not a gambling tool bolted onto the market, whatever the Viber groups will tell you once it launches. It is the missing half of price discovery. A market that can only bet up is a market where bad news takes far too long to reach the price, and where every bubble inflates unopposed because nobody is allowed to lean against it. Short selling NEPSE would make the market healthier and more honest. It would also hand retail investors a brand new way to lose money fast, faster than buying ever could. Both things are true at once, and anyone selling you only one of them is not being straight with you.
What SEBON has actually proposed
Start with the status, because the internet is already running ahead of the facts.
Short selling appears in two SEBON documents released within weeks of each other in mid-2026. The first is the ten-year Capital Market Development Blueprint, unveiled around July 15, 2026, under chairman Dr. Gopal Prasad Bhatta. According to reporting by Nepalnews and Bajarko Chirfar, the blueprint splits its reforms into three phases: Foundation Building (2026 to 2027), Expansion and Modernization (2028 to 2030), and Internationalization (2031 to 2036). Short selling sits in the Foundation phase, alongside T+1 settlement, intraday trading, and a market maker system.
The second document is more concrete. On July 31, 2026, SEBON published a consultation paper, formally the “Concept Paper on Policy, Legal, Structural and Technical Arrangements for Margin Lending, Securities Lending and Borrowing, and Covered Short Selling in Nepal’s Securities Market, 2083,” and invited stakeholder feedback, as reported by Bajarko Chirfar and NEPSE Trading. The plan is to roll the reforms out in a deliberate order during the current fiscal year: margin lending first, then intraday trading, then securities lending and borrowing, and covered short selling last. SEBON has said it will draft three separate regulations, a Margin Lending Regulation, a Securities Lending and Borrowing Regulation, and a Covered Short Selling Regulation, once it has weighed the feedback.
Read that sequence carefully, because it tells you something. Short selling is deliberately at the back of the queue. It cannot function until the plumbing in front of it exists. So when someone claims short selling is arriving “within three months,” treat that as the most optimistic possible reading of a plan that depends on several other systems being built first. The direction is real. The date is not fixed.
One more word matters in all of this: “covered.” SEBON is proposing covered short selling, not naked short selling. The difference is the whole game, and we will get to why.
How short selling actually works
If you have only ever bought and held, the mechanics of shorting feel backwards. They are, and that is the point.
A normal trade is buy low, sell high, in that order. A short sale reverses it. You sell high first, then buy low later, and you pocket the difference. The obvious problem is that you cannot sell a share you do not own. That is where securities lending and borrowing, usually shortened to SLB, comes in.
Walk through it step by step. You believe Company X, trading at NPR 1,000 a share, is overvalued and will fall. You do not own it. So you borrow 100 shares of Company X from someone who does own them and is willing to lend, through the SLB system, for a fee. You immediately sell those borrowed shares in the market at NPR 1,000 each and collect NPR 1 lakh. Now you wait. If you are right and the price drops to NPR 800, you buy 100 shares back for NPR 80,000, return the borrowed shares to the lender, and keep the NPR 20,000 difference, minus the borrowing fee and transaction costs. You never owned the company. You rented its shares, sold them, and bought them back cheaper.
The lender, meanwhile, earns a fee for shares that were just sitting in their demat account. For a long-term holder who was never going to sell anyway, that fee is found money. This is why SLB has to exist before short selling can. The short seller needs a pool of shares to borrow, and the lenders are ordinary investors and institutions willing to rent out their holdings. No lending pool, no shorting.
“Covered” simply means the short seller has genuinely borrowed the shares before selling them, so there is always real stock backing the sale. Naked short selling, which SEBON is not proposing, is selling shares you have neither bought nor borrowed, betting you can find them later. Naked shorting is banned in most serious markets precisely because it lets sellers conjure selling pressure out of nothing. SEBON starting with the covered version is the cautious, correct choice. It keeps every short sale tied to a real, borrowed share.
Why a one-directional market is a problem
This is where the argument lives, and it is worth slowing down for.
NEPSE today is a one-way street. The only people who can express a negative opinion on a stock are those who already hold it, and all they can do is sell their own position and step aside. Everyone who thinks a share is wildly overpriced but does not own it can do precisely nothing about it. Their skepticism never reaches the price.
Think about what that does. When good news or hype pushes a stock up, buyers pile in and there is no counterweight. Nobody in the market is structurally positioned to say, with their own money, “this is too expensive.” The result is a market prone to overshooting on the way up, where prices can drift far from anything the fundamentals justify, and stay there, because the machinery to push back does not exist. Nepali investors have watched this happen. A sector catches fire, valuations detach from earnings, and the correction, when it finally comes, is brutal and sudden rather than gradual. If you want the underlying idea of how sentiment swings a market from euphoria to fear, our explainer on bull and bear markets on NEPSE lays out the cycle.
Short selling is the counterweight. When a short seller believes a stock is overpriced, they sell borrowed shares, which adds supply and gently pushes the price toward what the evidence supports. When enough informed skeptics can act, prices reflect both optimism and doubt, not just optimism. That is what economists mean by price discovery, the process of a market grinding its way toward a fair price using all available opinions, not half of them. SEBON itself makes this case in its consultation paper, arguing that covered short selling will improve two-way transactions, price discovery, liquidity, and hedging capacity. On the theory, the regulator is right.
There is a second, less obvious benefit. Short sellers are often the market’s most motivated researchers. Someone who has put real money on a stock falling has every incentive to dig into inflated earnings, hidden debt, or governance games, and to make what they find public. In deeper markets, short sellers have exposed frauds that regulators and auditors missed for years. NEPSE will not get that overnight, and Nepal’s disclosure standards are thin, but the incentive to scrutinize rather than cheerlead is a genuinely new thing for this market.
Where retail investors get hurt
Now the other half of the truth, and this is the part the launch-day hype will bury.
Buying a share and shorting a share are not mirror images of risk. They are wildly different animals, and the difference is the single most important thing a retail investor must understand before touching a short. When you buy a stock, the worst case is total loss. The share goes to zero and you lose your money. Painful, but bounded. You cannot lose more than you put in. Your downside is 100 percent and no more.
Shorting has no such floor. When you short, your loss grows as the stock rises, and a stock can rise without limit. Short a share at NPR 1,000 and it climbs to NPR 3,000, you are down NPR 2,000 on a NPR 1,000 bet, a 200 percent loss, and it can keep going. Your profit is capped, because the best case is the stock falling to zero. Your loss is theoretically unlimited. That asymmetry is the reverse of normal investing, and it punishes exactly the behavior retail investors are prone to: holding a losing position and hoping it comes back. When you are long and wrong, waiting sometimes rescues you. When you are short and wrong, waiting can bankrupt you.
Now layer in NEPSE’s specific hazards. Individual stocks on NEPSE can move up to 15 percent in a single session under the exchange’s circuit limits, per NEPSE’s revised trading rules from April 2026. A short seller can be down 15 percent by the close of one bad day, with the borrowing clock still running. Then there is the short squeeze. If many people have shorted the same thin stock and it starts rising, every short seller needs to buy shares back to cut their losses, and that buying pushes the price up further, forcing still more shorts to buy, in a spiral. On a market as thinly traded as NEPSE, where a handful of buyers can move a price, a squeeze could be vicious. The people most likely to be caught in it are undercapitalized retail traders who shorted because a Viber tip said the stock would crash.
And shorting is not free to hold. You pay a borrowing fee for as long as the position is open, so time works against you even if the price goes nowhere. A long-term buy-and-hold investor can wait out a flat market for years at no carrying cost. A short seller bleeds fees every day the thesis takes to play out. The structure rewards being right quickly and punishes being right slowly, which is a very different discipline from the patient accumulation most Nepali investors are taught.
What has to be built first, and what to watch
Even granting that short selling belongs in a modern market, it will not arrive cleanly, and the reasons are structural.
The SLB pool has to exist and be deep enough. Short selling needs a reliable supply of lendable shares, which means institutions and long-term holders have to be willing to rent out their stock, and the systems to track those loans, collateral, and returns have to work flawlessly. Nepal is building this from scratch. In a market where much of the float is held by promoters and long-term retail holders who may be reluctant to lend, the borrowable pool could start small and concentrated in a few large names.
Surveillance has to be real-time. Short selling opens a new avenue for manipulation, the bear raid, where a coordinated group shorts a stock and spreads negative rumors to drive it down and profit. Catching that needs the kind of AI-assisted monitoring the blueprint promises, live before short selling launches, not bolted on after the first scandal. The same concern applies to intraday trading, and we walk through the surveillance and liquidity problems in detail in our piece on how day trading will work on NEPSE.
The eligibility rules will matter enormously. Sensible short-selling regimes do not let you short every stock. They restrict it to large, liquid, well-governed names where a squeeze is harder to engineer and price discovery is genuinely useful. Watch closely which securities SEBON declares eligible when the Covered Short Selling Regulation is drafted. A narrow, liquid list is a sign the regulator is managing the risk. A wide-open list would be a warning.
Tax treatment needs clarity too. Profits from shorting are still capital gains, and Nepal now taxes short-term share gains, those on positions held under a year, at 10 percent as a final tax, and long-term gains at 7.5 percent, under the Finance Bill 2083 for fiscal year 2083/84, up from the old 5 percent and 7.5 percent, as reported by Rising Nepal and The Himalayan Times. Almost every short position will be short-term by nature, so the 10 percent rate is the one that applies, and the cost mechanics deserve their own attention, which we cover in Nepal’s new capital gains tax for 2026/27. How borrowing fees and losses net against gains for a short seller is exactly the kind of detail SEBON and the tax authority will need to spell out.
The verdict
Short selling NEPSE is a genuinely good reform aimed at a genuinely real problem. A market that can only go long is a market with one eye closed, slow to price in bad news and prone to bubbles that nobody is allowed to fight. Adding covered short selling, backed by proper securities lending, gives the market its missing half and moves NEPSE closer to how functioning exchanges actually work. On the principle, SEBON deserves credit for taking the cautious route, covered rather than naked, sequenced behind the systems it depends on.
The warning is separate from the verdict, and just as firm. Short selling is not a tool for most retail investors, and it will be sold to them as if it were. The risk profile is inverted from everything a NEPSE investor has learned. Capped gains, uncapped losses, a carrying cost that bleeds you daily, and squeeze risk that a thin market makes worse. When it launches, the pitch will be that you can finally make money in a falling market. What will go unsaid is that you can lose far more than your stake doing it, and that the people best positioned to profit are well-capitalized professionals with strict risk limits, not someone shorting on a tip with money they cannot afford to lose.
So welcome the reform and respect the instrument. If short selling makes NEPSE price stocks more honestly, every investor benefits, including the ones who never place a single short. But if you are tempted to short a stock yourself, understand the asymmetry cold before you do, because this is the one corner of the market where being wrong does not just cost you what you put in.
This is analysis, not financial advice.
