Tradable-only benchmark would break state giants' index grip

The index traders watch at every close is about to measure a different market. A working paper from the securities regulator proposes a benchmark built only from shares that can genuinely change hands, which would break the outsized grip that state-controlled companies such as Nepal Telecom hold on the headline number and give traders a gauge that mirrors what they can actually buy and sell.

What the proposal does

The Securities Board of Nepal has circulated the paper for a new benchmark, tentatively named the NEPSE Benchmark Index (NBI), with the final name left for consultation with the exchange. The existing NEPSE Index would remain but be relabelled the NEPSE All Equity Index. Today's index counts the full market capitalisation of every listed share, so founders' shares, strategic government holdings and locked-in shares all count at face value even though none of them trades. The proposed benchmark excludes those categories and counts only ordinary shares that can change hands.

The difference shows up in the weights. Take a bank whose ordinary stock fetches Rs 300 on the floor while its founders' lots change hands at Rs 100: the current formula books both at Rs 300. The new method would leave founders' shares out of the calculation altogether.

Who loses the most

The board's own illustration is Nepal Telecom, the country's largest listed company at roughly Rs 165 billion of market capitalisation. The state holds 91.53 per cent of the company, and only 8.47 per cent of its shares sit with the public and trade. That untraded government block counts in full toward the existing index, which is why the telecom company's moves dominate the number traders see. Under the proposed benchmark, its influence would shrink to the float alone — setting the precedent that any large company with a thin tradable base loses its index sway.

NEPSE already runs a float index based on tradable shares, published since 15 September 2008 and covering roughly one-third of listed stock, alongside a sensitive index for Class A companies that dates to 31 December 2006 and 12 sectoral indices. The main gauge itself started from a base value of 100 on 12 February 1994.

The tape before the paper

The market had been quiet while this was in motion. NEPSE closed at 2,634.17 on 16 October, up 0.31 per cent on the day, 1.63 per cent over five sessions and just 0.83 per cent over 20, still below its 52-week high of 2,969.5. With the headline number that flat, the change in what the benchmark counts is the bigger event for traders.

What to watch

The next milestone is the consultation with the exchange and the board's final methodology, including the base value and start date for the new series. Until the first NBI print appears, traders cannot know how far the new gauge will diverge from the NEPSE Index — that gap is the market test to watch.