Addressing Issues in NEPSE

Nepal’s financial market, as represented by the Nepal Stock Exchange (NEPSE), is currently facing a critical juncture. Once considered a promising avenue for investment and economic growth, it has now become tainted with widespread misconduct and unethical behaviors that undermine its integrity. While there has been a surge in trading activity and a notable increase in retail investors, this rise has also brought about a troubling trend: organized malpractices aimed at deceiving, exploiting, and ultimately depriving small investors of their investments.

One of the most prevalent forms of market manipulation involves the artificial inflation of share prices through coordinated trading. This strategy targets small-cap companies with limited shares in circulation. Groups of traders work together to corner these stocks by buying up substantial quantities and controlling their availability. By conducting a series of synchronized buy and sell orders across multiple accounts, they create a false impression of heightened interest and demand in the market. This manufactured momentum attracts unsuspecting retail investors who interpret the surge as a positive sign of growth or a rally based on news. However, in reality, they are falling victim to a well-orchestrated scheme. Once the orchestrators have driven up the prices and enticed enough buyers, they quickly sell off their shares at inflated prices, leaving latecomers holding overpriced assets.

This deceptive practice is made possible through the use of multiple dematerialized and Trading Management System (TMS) accounts, often registered under the names of family members or associates. While these accounts are technically distinct, they are effectively controlled by a single individual, enabling the manipulators to manipulate shares and fabricate market demand. By taking advantage of NEPSE’s lenient regulations on multiple accounts per person and the lack of thorough Know Your Customer (KYC) checks, those behind these schemes can conceal their actions with relative ease. The absence of stringent enforcement mechanisms further complicates the identification of these fraudulent activities and the holding of perpetrators accountable.

Market manipulation frequently intersects with insider trading, which remains prevalent due to weak regulatory enforcement. Individuals with privileged access to internal company information use it to time their trades strategically. In some cases, prices are artificially inflated through internal transactions before being aggressively promoted to the public. Retail investors are then exposed to these overvalued stocks, unaware that their fundamental value does not support their inflated prices. Once the truth comes to light, the perpetrators have already exited, leaving ordinary investors to bear substantial losses.

A concerning aspect of these illicit practices is the exploitation of social media platforms for misinformation and artificial hype. Platforms like Facebook, YouTube, and emerging voice-based platforms such as Clubhouse are increasingly being utilized to enhance the visibility of illiquid or fundamentally unsound stocks. Individuals posing as analysts or experts create a buzz around these stocks with bold predictions of significant price gains. These discussions are strategically timed with manipulative trades in the market, creating a self-reinforcing cycle that convinces the public of the stock’s potential. When the facade crumbles, it is often too late for retail investors to salvage their investments.

Furthermore, manipulative actors employ fund transfers between associated accounts to obfuscate financial trails. By moving money across multiple bank accounts under false ownership, they can finance stock purchases or disguise the origins of their investments. Such financial opacity not only complicates regulatory oversight but also diminishes the prospects of legal intervention. In extreme cases, these actors may even default on their financial obligations to stakeholders.