Understanding the NEPSE 30 Index

GP Sir
Posted by GP Sir 6 days Ago

Unlocking the Potential: Understanding the NEPSE 30 Index

Welcome to Market Renovate, your trusted source for in-depth insights into financial markets. Previously, we posted a comprehensive blog article on NEPSE 50. In this blog post, we will explore the significance and mechanics of the NEPSE 30 Index, a groundbreaking development in Nepal’s financial landscape. This comprehensive guide combines information from multiple sources, ensuring you have a complete understanding of this vital topic.

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In an intriguing twist, the Nepal Stock Exchange (NEPSE) is gearing up for the launch of the ‘NEPSE 30’ index after the previous attempt to introduce the ‘Nepse 50’ index faced challenges. This move, as unveiled in public drafts by NEPSE, represents a significant development in Nepal’s financial landscape, and opinions and suggestions from stakeholders have been actively sought. Much like a well-crafted recipe, the ‘NEPSE 30’ index is designed to be a value-weighted index based on market capitalization, encompassing free-float shares in the market.

It’s poised to encompass the share trading of 30 carefully selected companies, which will be chosen based on stringent criteria set by NEPSE. These criteria include a track record of profitability over the last three years, an earnings per share exceeding 10 percent of the paid-up capital, and EPS surpassing the inflation rate. Furthermore, companies must have issued at least 25 percent of their shares to the public and boast a minimum of 20,000 shareholders. In addition, they should exhibit an average daily turnover of at least NPR 2.5 million over the last six months, with an average daily share trading volume of 5,000 units.

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NEPSE’s vision for the ‘NEPSE 30’ index is to strengthen secondary market transactions and bolster the development, operation, and management of indices. It’s set to become an index based on market capitalization, including freely tradable (free float) shares. While the previous plan involved the ‘Nepse 50’ index, the decision to introduce ‘NEPSE 30’ reflects a considered approach. Murahari Parajuli, Spokesperson of NEPSE, explained that this choice stemmed from a comprehensive evaluation of all aspects, ultimately leading to the conclusion that ‘NEPSE 30’ would be more manageable and effective in the current financial landscape.

NEPSE’s journey towards the ‘NEPSE 30’ index is a testament to its commitment to enhancing the efficiency and transparency of Nepal’s stock market, and stakeholders eagerly await its launch.

Read the NEPSE 30 Permission Paper from Board

What is the NEPSE 30 Index?

The NEPSE 30 Index, is a value-weighted index aimed at enhancing the efficiency of secondary market transactions. It includes the top 30 performing equity stocks traded on the Nepal Stock Exchange (NEPSE) and serves as a reliable indicator of market performance. To qualify for inclusion, companies must meet stringent criteria, including positive earnings, strong financial health, and active trading. The index’s calculation method considers factors like market capitalization, earnings per share, and trading activity.

With its annual rebalancing and base market capitalization date, the NEPSE 30 Index is set to provide enhanced transparency, diverse investment opportunities, and increased investor confidence, ushering in a new era for Nepal’s stock market.

The Significance of NEPSE 30 Index

The introduction of the NEPSE 30 Index signifies a significant leap in Nepal’s financial landscape. Here’s why it matters:

  1. Enhanced Market Transparency: The NEPSE 30 Index brings a new level of transparency to the Nepalese stock market. Investors can now gauge market performance accurately, making more informed investment decisions.
  2. Diverse Investment Opportunities: With a diverse range of sectors represented in the index, investors have access to a broad spectrum of investment opportunities. This diversity reduces risk and offers potential for higher returns.
  3. Increased Investor Confidence: The stringent criteria for inclusion in the NEPSE 30 Index assure investors of the financial health and stability of the included companies. This boosts investor confidence and encourages more participation in the stock market.

How Companies Qualify for NEPSE 30 Index

To be included in the prestigious NEPSE 30 Index, companies must meet a series of rigorous criteria:

Positive Earnings and Strong Financial Health: Companies must have recorded positive earnings for at least three of the past five fiscal years, including the most recent year. Additionally, the company’s book value must exceed its paid-up capital, indicating a strong financial position.

Also read: Difference Between NEPSE and NEPSE 30

Earnings Per Share (EPS): The latest earnings per share (EPS) must be greater than 10% of its face value and must remain higher than the inflation rate for the same year. This ensures that the company is performing well and generating profits for its shareholders.

Market Capitalization: Either 25% of its shares issued to the public or its free-float market capitalization must be at least 1% of the total free-float market capitalization. This ensures that the company has a significant presence in the market and is actively traded.

Minimum Shareholders: The company must have a minimum of 20,000 shareholders, indicating broad ownership and support.

Average Daily Turnover, Volume, and Transactions: In the last six months, the company must have maintained an average daily turnover of NPR 25 lakhs, an average daily volume of 5,000 units, and an average of 40 transactions per day. This indicates that the company is actively traded and has a strong market presence.

Trading Activity: The company’s shares must have been traded on at least 75% of total trading days within the last six months, ensuring high liquidity.

How NEPSE 30 Index is Calculated

The calculation of the NEPSE 30 Index is a meticulous process that ensures the representation of the best-performing companies in the market. Here’s how it’s done:

  1. Initial Company Selection: Companies meeting the criteria mentioned earlier are initially listed in NEPSE 30 Index.
  2. Weight Assignment: Each listed company is assigned weights based on factors like free-float market capitalization, last year’s earnings per share, transaction amount, number of transactions, and transaction share.
  3. Sectoral Classification: Companies are classified into six sectoral groups: banks and financial institutions, microfinance, insurance (life, non-life, reinsurance), hydropower, manufacturing, and trade and services.
  4. Top Companies Selection: The top eight companies with the highest weights from each sector are selected for inclusion in the NEPSE 30 Index.
  5. Exceeding 30 Companies: If the number of selected companies exceeds 30, 30 companies with the highest total weighted scores are included, ensuring representation from each sector.
  6. Less Than 30 Companies: If the number of selected companies is less than 30, companies are added to reach a total of 30, based on their total weight.

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Base Market Capitalization and Rebalancing in NEPSE 30 Index

The base market capitalization date is set as Poush 30th, 2079. This date serves as a reference point for market performance analysis. The NEPSE 30 Index undergoes rebalancing annually on the last Friday of Bhadra and the last Friday of Falgun. During rebalancing, companies are evaluated based on their market capitalization, liquidity, and other factors, ensuring the index remains relevant and accurate.

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Why NEPSE 30 Index Matters for Nepal?

The NEPSE 30 Index is not just another financial instrument; it represents a significant step toward aligning Nepal’s stock market with international best practices. Here’s why it’s so crucial:

  1. Informed Investment Decisions: The NEPSE 30 Index serves as a reliable compass for investors navigating the ups and downs of the market. It empowers them to make informed investment decisions.
  2. Increased Investment Opportunities: With a diversified index, investors gain access to a wider range of investment opportunities. This diversity can lead to improved portfolio performance.
  3. Visibility and Credibility: Companies included in the NEPSE 30 Index benefit from increased visibility and credibility. This can attract more investors and foster growth.

Conclusion

In conclusion, the NEPSE 30 Index is poised to be a game-changer in Nepal’s financial landscape. It offers transparency, diverse investment opportunities, and increased investor confidence. With rigorous selection criteria and careful calculation, this index represents the best of the Nepalese stock market.

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