Nepal’s stock market capitalization surges to record high: Investors raise concerns over calculation method

KATHMANDU: Nepal’s stock market has reached an unprecedented milestone with its total market capitalization surpassing NPR 4.765 trillion as of the close of trading on Thursday. This record-high valuation highlights the rapid growth of the Nepal Stock Exchange (NEPSE), driven by increased investor participation and rising stock prices. However, this milestone has also sparked a debate among large investors regarding the accuracy and fairness of the current method used to calculate market capitalization.

Market capitalization, which represents the total value of all listed shares, is a crucial indicator of the stock market’s size and health. It is calculated by multiplying the current market price of a company’s shares by the total number of shares outstanding. In global markets, this metric is used to gauge the size of a stock exchange, with the New York Stock Exchange (NYSE) leading the world with a capitalization of approximately USD 29 trillion.

In Nepal, the NEPSE uses a similar method to calculate market capitalization, but some investors argue that the current approach inflates the market’s size, creating a distorted picture of the stock market’s true value. This has led to concerns that the inflated figures could have negative implications for future policy-making and the overall health of the financial market.

The Debate Over Market Capitalization Calculation

One of the main points of contention among investors is the way NEPSE calculates market capitalization for shares with different classes, specifically promoter and public shares. In Nepal, many companies, particularly banks and financial institutions, have two classes of shares: promoter shares, which are held by the company’s founders and insiders, and public shares, which are traded by the general public. These two classes often have different market values, with promoter shares typically trading at a discount compared to public shares.

Despite this price difference, NEPSE currently calculates market capitalization by using the same market price for both promoter and public shares. This practice has led to a significant overestimation of the market capitalization for many companies.

For example, Nabil Bank, one of the largest listed companies on NEPSE, has a total of 270.5 million shares, with 41.56% being public shares and 58.44% being promoter shares. The latest trading price for Nabil Bank’s public shares was NPR 660, while the promoter shares were valued at NPR 307.

Using the public share price to calculate the market capitalization of all of Nabil Bank’s shares results in a total market capitalization of NPR 178 billion. However, if the calculation were based on the actual prices of both share classes, the market capitalization would be closer to NPR 122 billion. This discrepancy of NPR 56 billion highlights the potential distortion caused by the current calculation method.

Impact on Policy and Investor Confidence

The inflated market capitalization figures have raised concerns among investors that future policy decisions could be influenced by an inaccurate representation of the market’s size. There is a fear that if market capitalization continues to grow rapidly and surpasses Nepal’s Gross Domestic Product (GDP), it could prompt policymakers to introduce restrictive measures that could stifle market growth.

“On one hand, the market capitalization is exaggerated and incorrect, and on the other, if it surpasses the GDP, it could lead to restrictive policies against the market,” said Ambika Prasad Poudel, a former president of the Nepal Investors Forum. “This could negatively impact the market’s freedom and its ability to function efficiently. Therefore, the method of calculating market capitalization needs to be corrected immediately.”

Poudel’s concerns are shared by many other investors who worry that an inflated market capitalization could lead to unwarranted government intervention in the stock market. They argue that the current calculation method fails to accurately reflect the true value of the market and could have long-term consequences for investor confidence and market stability.

The Issue of Dormant Companies

In addition to the debate over share classes, there is also concern about the inclusion of dormant companies in the market capitalization calculation. NEPSE continues to include the market value of several companies that have been inactive for years, further inflating the overall market capitalization. These companies, which include Arun Vanaspati Industry, Birat Shoe, and others, add an estimated NPR 5.5 billion to the market’s total value daily.

The inclusion of these defunct companies raises questions about the accuracy of NEPSE’s market capitalization figures and the overall health of the stock market. Investors argue that removing these inactive companies from the calculation would provide a more realistic picture of the market’s size and growth potential.

NEPSE’s Response and Global Practices

Despite these concerns, NEPSE officials defend the current method of calculating market capitalization, arguing that it aligns with global standards. NEPSE spokesperson Murahari Parajuli stated that the method used is consistent with international practices, where the total market value of all listed shares is used to calculate market capitalization.

“Investors who want to see only the public share’s total capitalization can refer to the float market capitalization,” Parajuli said. “Globally, stock market capitalization is calculated based on the total value of all listed shares, without distinguishing between different share classes.”

However, critics argue that the unique characteristics of Nepal’s stock market, particularly the presence of distinct share classes with different market values, warrant a different approach to calculating market capitalization. They suggest that NEPSE should adopt a more nuanced method that takes into account the price differences between promoter and public shares.

Comparisons with GDP and International Markets

The debate over market capitalization has also been fueled by comparisons with Nepal’s GDP. Some investors have expressed concern that the stock market’s rapid growth could lead to a situation where market capitalization exceeds GDP, prompting government intervention. As of the latest figures, Nepal’s market capitalization stands at NPR 4.765 trillion, while GDP is estimated at NPR 5.704 trillion.

In other countries, it is common for market capitalization to exceed GDP. For example, in India, market capitalization is 122% of GDP, while in the United States, it is 190%. Despite this, some investors in Nepal fear that the government might implement restrictive policies if the market capitalization-to-GDP ratio continues to rise.

Former NRB Executive Director Gopal Bhatt downplayed these concerns, stating that there is no need to panic over market capitalization exceeding GDP. He pointed out that in many developed countries, market capitalization regularly surpasses GDP without causing significant issues. However, he cautioned that if the government were to introduce restrictive policies based on this comparison, it could have a negative impact on the market.