Opinion Piece: Is the Red List of 51 "Overvalued" Companies Published by SEBON Ethical?

Article by Suraj Marahatta

Investors are all alarmed and in a state of shock at the moment. SEBON, the regulatory body of the Nepalese stock market, published a list of 51 companies that it thinks are "overvalued". But is it under SEBON's best interest to publish the list to protect investors with a small amount of capital? Or is it a way to send the market in a panic sell mode so that people on the boards of SEBON can buy back in cheap?

(Disclaimer: The author takes sole responsibility for the views presented. This is an article submitted by a guest author.)

Let's have a small discussion.

Research From SEBON:

After an intense reflection, it was my understanding that SEBON is a regulatory body of NEPSE. The term "regulatory body" might be a matter of curiosity for most people. It means that the major role of SEBON is to regulate the market. No regulatory body in the world should publish its childish research with little to no understanding of the nature of the businesses. The list was directed at the current PE ratio of the companies. 

Most of the hydropower companies are growth companies whose projects are under construction. It is natural for the PE of these companies to be high. The net profit figure of the insurance companies is without the profit generated from the actuarial valuation of assets and liabilities. Hence, the high PE valuation does not reflect the "overvaluation".

There is no such thing as overvalued or undervalued. This concept is relative. For instance, if the stock price has risen from Rs. 50 to Rs. 500, it is perceived as overvalued for the people who have bought the stock of the company at Rs. 50. If a person is willing to buy the stock at Rs. 500, he believes that the current stock price is undervalued and the stock price can move further up. 

If he makes a profit, it can be deemed that his analysis is correct, and if he incurs a loss based on his analysis, it can be deemed that his analysis is incorrect. The regulatory body should not act as an analyst when it has no clue how to analyze the actual valuation of the companies. It is investors who decide whether the companies are overvalued or undervalued.

Double Standards on Market Manipulation:

The double standards of SEBON are to be condemned in this section. We are all aware of the fact that the recent press release of SEBON was directed at a handful of investors who provide stock tips on newspaper columns, television shows, and social media. They were warned of possible penalties for such behavior as the prices of the scrips can fluctuate with rumors.

Now, the question of curiosity is, who is going to notify SEBON that publishing the list of 51 companies it deems are "overvalued" can and in fact will fluctuate the prices of the stocks. Only the investors have the right to interpret whether the stock prices are overvalued or undervalued, not the regulatory body. SEBON should not misuse its power. The regulatory body must know its place.

Conclusion:

Nobody can make a profit consistently in any stock markets of the world. Multiplication of the capital is a zero-sum game. The loss of one person makes a profit for another person. This is the nature of any market in the world. If people cannot tolerate the heat of the kitchen, they shouldn't enter the kitchen. Nobody but themselves can save people from incurring losses in the stock market.

If people are blindly throwing money into the companies without executing proper research and analysis, they and only they should be responsible for the losses incurred. They are putting money in the market with an expectation of making a profit. No one can save the irrational bull that is jumping on the top of the steep hill from falling.

SEBON should strive to provide accurate data on the performance of the market. The regulatory body can increase awareness of the fact that tools such as fundamental analysis and technical analysis exist. But what a regulatory body should not do is publish a list of companies that it deems are overvalued. It is investors who decide whether the companies are overvalued or undervalued, not the regulatory body of the market.

Article by Suraj Marahatta