Banking News – Nepal’s Securities Board of Nepal (SEBON) has announced plans to introduce short selling in the country’s capital market under its Capital Market Reform Roadmap 2083 (2026/27). The move is expected to introduce a new trading mechanism that allows investors to potentially profit even during declining market conditions.

Short selling is a trading strategy in which an investor borrows shares they do not own, sells them in the market at the current price, and later repurchases the same shares at a lower price to return them to the lender. The investor earns a profit from the difference between the selling price and the repurchase price, after deducting applicable fees.

In neighboring India, the Securities and Exchange Board of India (SEBI) has implemented detailed regulations governing short selling to ensure transparency, fairness, and market discipline. Under SEBI rules, naked short selling—selling shares without first borrowing them—is strictly prohibited.

Unlike conventional investing, where investors aim to buy low and sell high, short selling follows the opposite approach: sell first at a higher price and buy back later at a lower price. This enables traders to benefit from falling share prices.

How Short Selling Works

Consider a simple example:

Suppose the share price of Company A is Rs. 1,000 per share, and an investor expects the price to decline.

The investor borrows 100 shares through a broker and immediately sells them in the market for Rs. 100,000 (100 × Rs. 1,000).

A few days later, the share price falls to Rs. 800 per share. The investor then buys back the same 100 shares for Rs. 80,000 and returns them to the original lender.

In this scenario, the investor earns a gross profit of Rs. 20,000 (Rs. 100,000 − Rs. 80,000), excluding brokerage fees and other transaction costs.

However, short selling also carries significant risks. If the share price rises instead of falling—for example, to Rs. 1,200 per share—the investor would have to repurchase the shares at a higher price, resulting in a loss of Rs. 20,000 in this example.

As SEBON moves toward introducing short selling in Nepal, investors are expected to gain an additional trading tool. However, market participants will also need to understand the associated risks and adopt prudent risk management strategies before engaging in such transactions.