Introduction

Nepal Stock Exchange, in short NEPSE, is established under the company act,
operating under Securities Exchange Act, 1983.

The basic objective of NEPSE is to impart free marketability and liquidity to the
government and corporate securities by facilitating transactions in its trading floor
through member, market intermediaries, such as broker, market makers etc. NEPSE
opened its trading floor on 13th January 1994.

Government of Nepal, Nepal Rastra Bank, Nepal Industrial Development corporation

and members are the shareholders of NEPSE.

History
The history of securities market began with the floatation of shares by Biratnagar
Jute Mills Ltd. and Nepal Bank Ltd. in 1937. Introduction of the Company Act in
1964, the first issuance of Government Bond in 1964 and the establishment of
Securities Exchange Center Ltd. in 1976 were other significant development relating
to capital markets.

Securities Exchange Center was established with an objective of facilitating and

promoting the growth of capital markets. Before conversion into stock exchange it
was the only capital markets institution undertaking the job of brokering,
underwriting, managing public issue, market making for government bonds and
other financial services. Nepal Government, under a program initiated to reform
capital markets converted Securities Exchange Center into Nepal Stock Exchange in
1993.

The only secondary capital market in Nepal, NEPSE operates under Securities Act,
2007.

Market Capitalization

Market Capitalization measures the total worth of shares floated in the economy
which is a summation of price per share multiplied by number of shares of each
company. At the end of Asadh 2067. The total market capitalization in NEPSE has
reached to Rs. 376.87 billion which is 9.41 percent more thant that of previous
quarter end.

Group wise composition of market capitalization of listed companies:

S.N Group No. of Market Compositio

o (sectors) llisted Capitalizati n (In
Compani on (Rs. In Percentage
es billion) )

1 Commercial 23 206.28 54.74%

Banks

2 Manufacturin 18 7.59 2.01%

g and
processing
companies

3 Hotels 4 5.29 1.40%

4 Others 2 69.02 18.31%

5 Hydro power 4 19.96 5.30%

6 Trading 4 1.62 0.43%

companies

7 Insurance 19 9.76 2.59%

companies

8 Finance 62 29.87 7.93%

companies

9 Development 40 27.49 7.29%

Banks

Total 176 376.87 100%

Indices:

Nepse index group consists of various indices and they are calculated on the basis
of market capitalization. Among the major indicators, NEPSE index is the oldest one
which is being calculated form the initial days of Nepal Stock Exchange. Similarly
the other indices are float index, sensitive index and group wise index.
NEPSE INDEX:

Nepse index is calculated by considering all listed shares including the promoter
shares of all the listed companies in NEPSE.

NEPSE INDEX Current

= MV of all shares listed in NEPSE
*100

Market value of all shares listed in NEPSE

on base year
Base Year is Feb 12th 1994 or Magh 30th 2050.

Float Index:

NEPSE started calculating float index from Bhadra 26, 2065 (Base Date). This index
represents the market capitalization of securities which are floated to public. Float
index excludes promoter’s holding, government holding, strategic holding and other
locked in shares like employees share- that will not come to the market for trading
in the normal course. It takes into account the securities held by general public that
are readily available for trading in the market.

Float Index = Current MV of all shares listed in NEPSE floated to general public
*100

MV of shares in Base year

Base year is 26th Bhadra, 2065 or 11th September 2008.

Sensitive Index:

Sensitive index is the index calculated from the market capitalization of companies
classified under group “A”.

Sensitive Index = Current MV of all shares listed in NEPSE under Group “A” *100

MV of shares in Base year

Base year is 26th Bhadra, 2065 or 11th September 2008.

Sensitive Float Index:

Sensitive float index represents the market capitalization of securities of companies

listed under group “A” which are floated to public.

Sensitive Float Index = Current MV of all shares listed in NEPSE under Group “A”

Floated to public__________________________ *100

MV of shares in Base year

Base year is 26th Bhadra, 2065 or 11th September 2008.

The need for float index:

The NEPSE index considered Nepal’s benchmark equity index takes into account all
the listed companies in the country giving investors an insight on the performance
of the overall equity market. The standard NEPSE index is designed on a “Market
Capitalization- Weighted” methodology, where stocks with the largest market
capitalization carries the greates weight in the index, thus making the value of the
index very vulnerable to the price movement of such companies. The companies
like Nepal Telecom, Nabil Bank and Standard Chartered Bank comprises
approximately 32% of the entire market in terms of market capitalization. So any
changes in price of the shares of these company impacts the index substantially.
Commercial banks, development banks and finance companies together comprises
of almost 70% of the entire market in terms of market capitalization and Nepal
Telecommunication claims 18% of the weight of the market. Most of the shares of
these companies are held by promoters and by government in case of NT, which are
not available in market for trading. For example out of 150 million unit of shares of
NT only 532,000 unit of shares are available for trading which is 3.55% of the total
shares. Of all listed securities only 29.8% of shares are available to public and the
remaining portion is held by promoters and governments. Furthermore out of the
listed securities in the index about 1/3rd do not trade regularly due to which price
fluctaution of active sectors are not reflected accurately. The NEPSE index takes
into account all the promotor shares, government holdings , strategic shares,
employee shares and all other locked in shares while calculating the index which
gives a distorted picture of the overall market performance to the investors.
So, NEPSE introduced float index and sensitive float index to give more realistic
picture of the market performance to the investors. Free –float methodology refers
to an index construction methodology that takes in to consideration only the free-
float market capitalisation of a company for the purpose of index calculation and
assigning weight to stocks in index. A free float index reflects the market trends
more rationally as it takes into consideration only those shares that are available for
trading in the market or the shares issued to general public. It excludes promoters’
holding, government holding , strategic holding and other locked in shares like
employee shares. The market capitalisation of each company is reduced to the
extent of its readily available shares in the market and reduces the concentration of
the top few companies. In this way big companies with sizeable amount of locked in
shares are also included while preventing their undue influence on the index at the
same time.The undue influence of large number of locked in shares, which is
almost 71.20% is checked. It will give the investors more clear picture of the real
market and boost their confidence.