Unlocking Value: Why Share Buybacks are Crucial for NEPSE's Evolution

Nepal Stock Exchange (NEPSE) stands at a critical juncture, striving to evolve from a retail-dominated, equity-heavy market with nascent infrastructure into a sophisticated financial hub. While regulators like the Nepal Securities Board (SEBON) and NEPSE are actively pursuing reforms such as intraday trading, margin lending, derivatives, and a complete system overhaul, a crucial mechanism for market maturity and investor value remains conspicuously absent from public discourse: share buybacks. This oversight is particularly striking when compared to developed markets like the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange (LSE), and Euronext, which leverage buybacks as a fundamental tool for capital management and shareholder returns.

**Understanding Share Buybacks**

A share buyback, or stock repurchase, is a corporate action where a publicly traded company uses its accumulated cash reserves to buy back its own outstanding shares from the open market. Conceptually, it is the inverse of an Initial Public Offering (IPO). Instead of issuing new shares to raise capital from the public, a company uses its own funds to absorb existing shares from the market, effectively reducing the total number of shares in circulation. Once repurchased, these shares are typically either retired or held as "treasury stock," losing their voting rights and eligibility for dividends.

The immediate financial impact of a buyback is significant. Even if a company's net profit remains constant, a reduction in the number of outstanding shares instantly alters key financial metrics. The most prominent of these is Earnings Per Share (EPS), calculated as:

`EPS = Net Income / Total Outstanding Shares`

When the denominator (total outstanding shares) decreases, the resulting EPS figure increases. This, in turn, leads to a notable reduction in the Price-to-Earnings (P/E) ratio and the Price-to-Book (P/B) ratio. For investors, a higher EPS coupled with lower P/E and P/B ratios makes a stock appear more financially attractive and undervalued, signaling a potentially lucrative investment opportunity. In mature global markets, share buybacks are a routine occurrence and a primary method for companies to return value to their shareholders.

**Why Companies Opt for Buybacks**

When a company commits substantial capital to repurchase its own shares, it sends a powerful message to the market: "We believe our stock is undervalued, and buying it back is the best investment we can make right now." This signaling effect can boost investor confidence and drive up share prices.

Beyond signaling, buybacks offer distinct advantages, particularly concerning taxation. In many jurisdictions, investors are immediately taxed on cash dividends. With a buyback, however, the company enhances the share price, and investors only incur capital gains tax when they choose to sell their shares. This deferral allows investors greater control over their tax liabilities. Furthermore, by reducing the supply of shares, buybacks increase the intrinsic value of each remaining share, directly benefiting existing shareholders through capital appreciation.

**The Meta (Facebook) Case Study**

The effectiveness of share buybacks is vividly illustrated by companies like Meta Platforms (formerly Facebook). Meta initiated its share repurchase program in 2017, and by 2025, it had spent approximately $173.99 billion on buybacks. Following a significant decline in its share price in 2022 after the COVID-19 pandemic, Meta aggressively allocated billions of dollars to buybacks. This strategic move played a crucial role in the subsequent rebound and substantial appreciation of its stock. Meta's buyback strategy is widely cited among investors as a successful example of value creation.

Data indicates that Meta's consistent share repurchases contributed significantly to its stock price rising from $178.62 in 2022 to $667.21 by the end of 2025. This price surge is largely attributed to its robust stock repurchase program. Similarly, other major U.S. corporations such as Microsoft, Alphabet (Google), and Apple also deploy billions of dollars into stock repurchases. These tech giants often prioritize buybacks over dividend payments, recognizing that buybacks typically generate higher returns through capital gains, especially given the often-heavy taxation on cash dividends. This preference underscores why buybacks are a favored strategy in developed economies.

**Share Buybacks in Nepal: A Regulatory Conundrum**

A common misconception in Nepal is that NEPSE completely prohibits companies from buying back their own shares. Legally, Nepal's Company Act, 2063 (Section 61) does not forbid share buybacks. However, the regulatory restrictions are so stringent that, in practice, hardly any company utilizes this option. The Act stipulates a critical limitation: "The value of shares repurchased by a company cannot exceed twenty percent of its total paid-up capital and general reserve," and this is permitted only after fulfilling rigorous legal criteria.

In developed markets, companies typically repurchase stock when they possess substantial cash reserves and perceive their shares to be undervalued. In Nepal, however, listed companies—predominantly banks, insurance companies, and hydropower entities—tend to distribute profits through bonus shares (stock dividends) or cash dividends. Moreover, Nepali companies rarely possess the vast, idle cash reserves required to navigate the stringent regulatory hurdles outlined in the Company Act. This preference for bonus shares, while seemingly beneficial, can lead to an oversupply of shares in the market, diluting value over time.

**The Urgent Need for Buybacks in NEPSE**

NEPSE currently lists 276 companies, with an additional 104 companies in SEBON's IPO pipeline as of June 5, 2026. The stability of any stock market hinges on the delicate balance between demand and supply. NEPSE faces an immense supply-side pressure due to the continuous influx of new IPOs, large volumes of bonus shares, and rights issues, while demand has remained relatively stagnant.

Share buybacks could serve as a vital mechanism to absorb this excess supply and restore market equilibrium. Currently, shares of fundamentally strong sectors like commercial banks, insurance companies, and other large corporations appear to be undervalued or stagnant due to this oversupply. Consequently, investors in these solid companies are not realizing adequate returns, while highly speculative, low-supply, and financially weaker companies have often seen disproportionate gains. The basic economic principle dictates that price is determined by supply and demand.

NEPSE and its regulators should seriously consider discouraging excessive bonus and cash dividends, and instead, encourage companies to repurchase their own shares. This shift would foster higher returns for shareholders through capital appreciation. Furthermore, NEPSE's average P/E ratio, often exceeding 40, positions it as one of the most expensive stock markets globally, contrasting sharply with developed markets where average P/E ratios typically range between 20 and 25.

While the government's recent budget announcement includes policies to attract Non-Resident Nepali (NRN) investors to expand the capital market, NEPSE's high valuations are a significant deterrent for foreign investment. If the government and SEBON were to promote stock repurchases and relax the associated regulations, the market's P/E ratio and the overall supply of shares would significantly decrease in the coming years. Stock repurchases would bring valuations to a more realistic and attractive level, thereby drawing in foreign investors. Ultimately, the introduction of a practical buyback mechanism is essential to ensure fair and sustainable returns for NEPSE investors in the future, fostering a more mature and resilient capital market.