A stock index represents the performance of stock market. Investors see stock index mainly to know about the market trend and investors sentiments.
Nepal Stock Exchange (NESPE) started to calculate its NEPSE Index since Magh 30, 2050 (Feb 12, 1994). Since then investors are blindly following NEPSE Index to know about the market trend. But the question arises can we blindly trust NEPSE Index? Does NEPSE index reflecting true market sentiments and market trend?
The overall stock market of Nepal is solely reflected by NEPSE Index. When the NEPSE index rises, investors understand that the price of listed companies rises and vice versa. But can we generalize that the effect of price rise of every listed companies is same while calculating NEPSE Index?
First lets us understand how NEPSE Index is calculated
NEPSE Index is calculated based on its overall value (total market capitalization) of all listed companies and the market capitalization is calculated by multiplying the number of listed shares of an individual company with its latest market price.
NEPSE Index = (
Latest Total Market Capitalization/Base Period Total Market Capitalization) * 100
Where, Latest Total Market Capitalization = Rs 1,911,769.58 Million (August 18, 2017)
Base Period Total Market Capitalization (adjusted) = Rs 117,304.46 Million (Feb 12, 1994)
Base Index Value = 100 (Feb 12, 1994)
The value based index which NEPSE is using to calculate its NEPSE Index is dominated mainly by the companies with highest market capitalization.
Out of total market capitalization of Rs 1,911,769.58 million of 211 listed companies in NEPSE, 30 major companies’ market capitalization stands at Rs 1,269,296.50 million which is 66.39% of total market capitalization.
Table: Market Capitalization of Major 30 Companies listed on Nepal Stock Exchange (NEPSE)
| S.NO. |
Company |
Market Capitalization (Rs.) |
Weight (%) |
| 1 |
Nabil Bank |
107,408,096,748 |
5.62% |
| 2 |
Nepal Telecom Limited |
104,850,000,000 |
5.48% |
| 3 |
Standard Chartered Bank Limited |
85,720,601,736 |
4.48% |
| 4 |
Everest Bank Limited |
82,924,141,266 |
4.34% |
| 5 |
Nepal Investment Bank Limited |
71,150,916,760 |
3.72% |
| 6 |
Nepal Life Insurance Limited |
66,573,214,900 |
3.48% |
| 7 |
Nepal SBI Bank Limited |
63,791,954,445 |
3.34% |
| 8 |
Himalayan Bank Limited |
60,045,132,725 |
3.14% |
| 9 |
Rastriya Beema Company Limited |
47,327,978,750 |
2.48% |
| 10 |
NMB Bank Limited |
34,312,022,064 |
1.79% |
| 11 |
National Life Insurance Limited |
33,549,703,488 |
1.75% |
| 12 |
Agricultural Dev. Bank Limited |
31,398,422,400 |
1.64% |
| 13 |
Global IME Bank Limited |
31,270,921,992 |
1.64% |
| 14 |
Life Insurance Company Limited |
31,017,905,100 |
1.62% |
| 15 |
NIC Asia Bank Limited |
30,919,799,988 |
1.62% |
| 16 |
Siddhartha Bank Limited |
30,512,742,990 |
1.60% |
| 17 |
Prime Commercial Bank Limited |
28,717,462,188 |
1.50% |
| 18 |
Nepal Bank Limited |
28,527,639,540 |
1.49% |
| 19 |
Sanima Bank Limited |
28,307,251,242 |
1.48% |
| 20 |
Unilever Nepal Limited |
27,574,965,000 |
1.44% |
| 21 |
Chilime Hydro Power Limited |
27,066,207,325 |
1.42% |
| 22 |
Bank of Kathmandu Limited |
26,909,372,802 |
1.41% |
| 23 |
Nepal Bangladesh Bank Limited |
26,140,619,110 |
1.37% |
| 24 |
Citizens Intenational Bank Limited |
26,133,493,380 |
1.37% |
| 25 |
Sunrise Bank Limited |
26,017,290,967 |
1.36% |
| 26 |
Machhapuchhre Bank Limited |
25,127,782,960 |
1.31% |
| 27 |
Laxmi Bank Limited |
25,036,673,230 |
1.31% |
| 28 |
Prabhu Bank Limited |
23,231,537,900 |
1.22% |
| 29 |
Janata Bank Nepal Limited |
19,232,658,225 |
1.01% |
| 30 |
HIDCL |
18,500,000,000 |
0.97% |
|
Total Market Capitalization of Major 30 Companies |
1,269,296,509,221 |
66.39% |
|
Total Market Capitalization of All 211 listed Companies |
1,911,769,580,000 |
|
Here, we can clearly understand that NEPSE index is dominated mainly by the companies with highest market capitalization. The above listed 30 companies have major contribution in NEPSE Index movement whereas the other listed 181 companies have very little contribution in NESPE index trend.
It is understood that most of the listed companies do not have same effects on NEPSE Index fluctuation then why NEPSE Stock Exchange (NEPSE) have included all listed companies while calculating Index. This is something really important which investors must ponder while following NEPSE index.
What are the major flaws of NEPSE Index?
- NEPSE Index is mainly dominated by few companies with largest market capitalization but NEPSE considers all listed companies while calculating NEPSE Index.
- Around 66% shares of listed companies are of promoter and government which are non-tradable shares but NEPSE includes these shares too while calculating NEPSE Index. The valuation of promoter and government shares are based on latest market price which is not a true valuation.
What can be done to make NEPSE Index more realistic?
- NEPSE must include few major best performing companies with largest market capitalization representing from all sectors while calculating NEPSE Index. The new index can be named as NEPSE 30 like world major indices DOW 30, S&P 500, Sensex 30, Nifty 50.
- All the non-tradable shares like promoter, government and lock in shares must be excluded while calculating index. Therefore, NEPSE Index must include floated shares only.
- Since NEPSE does not represent the medium and small size companies we can come up with Mid Cap-NEPSE representing medium size companies and Small Cap-NEPSE representing small size companies.
The major objective of watching any stock indices by investors is to know about the market sentiment and market trend. For this we investors need to understand how the stock index is calculated and the concerned authorities must make index more realistic so that it reflect the true market sentiments. The timely alteration on NEPSE index calculation and introduction of new index is very much essential for the overall development of capital market of Nepal.
-Sandeep Bikram Rana
