SEBON proposes new NEPSE benchmark index based on tradable shares

Kathmandu, October 25

The Securities Board of Nepal (SEBON) has presented a proposal to develop a new benchmark index for the country’s stock market, aiming to better reflect the price movements of shares actually available for trading.

The proposed index could be named the NEPSE Benchmark Index (NBI), although SEBON said Nepal Stock Exchange (NEPSE) could hold further consultations on the name.

Under the proposal, the existing NEPSE Index would be retained as the NEPSE All Equity Index, while the new benchmark would be calculated based on the prices of publicly traded shares.

The current NEPSE Index is calculated using the total market capitalisation of all listed shares. However, SEBON argues that this method does not accurately reflect the shares available for daily trading because it also includes founders’ shares, government holdings and shares under lock-in periods.

“The NEPSE Index gives greater weight to a company’s total market capitalisation, meaning the impact of shares actually available for trading may not be fully reflected,” SEBON said in its working paper. “Founders’ shares, government holdings and locked-in shares may increase market capitalisation, even though they may not be available for daily trading.”

The board also pointed out that founders’ shares in listed banks and financial institutions are valued at the same price as ordinary shares when calculating the existing index, even though founders’ shares often trade at lower prices.

For example, if a bank’s ordinary shares trade at Rs 300 while its founders’ shares trade at Rs 100, the current NEPSE calculation still values the founders’ shares at Rs 300.

Under the proposed benchmark, founders’ shares would be excluded, and the calculation would use the prices of ordinary shares available for trading.

Government holdings would have less influence

The proposed methodology would exclude founders’ shares, strategic shareholdings held by the government or government agencies, shares that are not traded, shares restricted by lock-in periods and other shares confirmed to be unavailable for trading.

These shares are currently included in the calculation of the NEPSE Index.

Nepal Telecom illustrates how the existing methodology can affect the benchmark. The company has the country’s largest market capitalisation, at around Rs 165 billion, giving it a substantial influence on the NEPSE Index.

However, 91.53 per cent of Nepal Telecom is government-owned and is not traded on the stock market. Only 8.47 per cent is publicly held and available for trading.

Under the proposed benchmark, only the publicly traded portion would be considered, substantially reducing the company’s influence on the index.

As a result, a company could have a large total market capitalisation but have a relatively small impact on the new benchmark if only a limited proportion of its shares is available for trading.

SEBON has also proposed a calculation methodology for the new index. The existing NEPSE Index began on February 12, 1994, with a base value of 100.

Existing sensitive and float indices

NEPSE already calculates a Sensitive Index and a Float Index alongside the main benchmark.

The Sensitive Index is based on the base-year and current market prices of shares issued by companies classified under the exchange’s Class A category. Its calculation began on December 31, 2006.

The Float Index, meanwhile, is calculated using the base and current market prices of shares available for trading. It excludes founders’ shares and is based on the tradable portion of listed shares, which accounts for roughly one-third of the total.

The Float Index began on September 15, 2008, and is considered more representative of actual market activity because it focuses on tradable shares.

In addition to these indices, NEPSE calculates 12 sectoral indices covering commercial banks, development banks, finance companies, microfinance, life insurance, non-life insurance, manufacturing and processing, hotels and tourism, investment, trading, hydropower and other companies.

The proposed benchmark would provide another measure of market performance, with greater emphasis on the shares investors can actually buy and sell.

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