Key Takeaways
- • SEBON has proposed a new 'NEPSE Benchmark Index' (NBI) under its 'Working Paper on Restructuring of Benchmark Index in Securities Market, 2081', which would calculate an index using only tradable shares available to the general public.
- • The existing NEPSE index, based on full market capitalization, gives heavy weight to founder, government, strategic, cross-held and lock-in shares, which can make daily index movements unrepresentative of actual trading.
- • The proposal would retain the current index as the 'NEPSE All Equity Index' and run the free-float benchmark alongside it, a structure that could create confusion if the two indices move in opposite directions.
- • The article notes that the existing 'Float Index', calculated since September 15, 2008, has not gained market acceptance, and that weak governance and data infrastructure pose implementation risks.
- • Suggested reforms include at least six months of parallel testing (versus the three-month schedule in the paper), a single-company weight cap of 10, 12.5 or 15 percent, and an integrated data system between SEBON, NEPSE and CDSC.
Summary
Nepal's Securities Board of Nepal (SEBON) has proposed a restructured benchmark for the Nepal Stock Exchange, according to a report published by Ratopati. The NEPSE index, which started at a base of 100 on Magh 30, 2050 BS, has served as the market's official measure for roughly three decades without a formal policy review of how accurately it reflects actual trading. SEBON's 'Working Paper on Restructuring of Benchmark Index in Securities Market, 2081' proposes keeping the current index as the 'NEPSE All Equity Index' to measure total capitalization of all listed companies, while a separate 'NEPSE Benchmark Index' (NBI) would include only shares the general public can buy and sell daily. Founder, government, strategic, cross-holding and lock-in shares would be excluded from the index weights.
The article situates the proposal within international practice. The Bombay Stock Exchange moved the Sensex to a free-float method in 2003 and the National Stock Exchange did the same for the Nifty 50 in 2009. As of March 30, 2026, the Nifty 50 represented approximately 53.73 percent of the free-float market capitalization of NSE-listed companies. The article also cites free-float practices at Sri Lanka's Colombo Stock Exchange (ASPI, since January 2022), Malaysia's FTSE Bursa Malaysia (minimum 15 percent free float), and Bangladesh (since 2013).
The article argues the current structure inflates the index. In hydropower, manufacturing and newly listed companies, 70 to 85 percent of shares can remain locked under founders and project-affected persons, allowing a small amount of capital to lift prices and, through total capitalization, the overall index. SEBON's working paper illustrates the distortion with a hypothetical three-company market totaling 200 billion: company A, worth 100 billion with 20 percent of shares traded, carries a 50 percent index weight, while company C, worth 40 billion with 90 percent traded, carries 20 percent. Under a free-float method, the investable capital is 86 billion, raising C's weight to about 42 percent and reducing A's to about 23 percent.
The article links the structure to the absence of passive products. Index funds and exchange-traded funds have not launched in Nepal because locked-in shares are not available for purchase in the secondary market, and the article says the new benchmark would also allow fair measurement of large institutional holders such as the Citizen Investment Trust, the Employees Provident Fund and the Social Security Fund, and would enable index futures and options.
The article also raises implementation concerns. NEPSE has calculated a 'Float Index' since September 15, 2008, yet investors and analysts have not adopted it as a standard in the intervening 16 years. The article argues that governance problems, including insider trading, opaque financial statements, information leakage and weak regulation, are more fundamental than index methodology. Data is another constraint, as adjusting founder-share conversions and lock-in expiries between CDSC and NEPSE can take months.
For policy design, the article recommends reviewing the working paper's timeline: it proposes five to ten years of historical backtesting and at least six months of parallel calculation, but allocates only three months for implementation. It suggests six months of parallel testing, public consultation, and parallel publication of both indices. It also recommends an integrated data system among SEBON, NEPSE, CDSC and listed companies, with clear rules for bonus shares, rights issues, mergers and lock-in expiries, and a weight cap of 10, 12.5 or 15 percent for single companies, subject to historical testing.
The article situates the proposal within international practice. The Bombay Stock Exchange moved the Sensex to a free-float method in 2003 and the National Stock Exchange did the same for the Nifty 50 in 2009. As of March 30, 2026, the Nifty 50 represented approximately 53.73 percent of the free-float market capitalization of NSE-listed companies. The article also cites free-float practices at Sri Lanka's Colombo Stock Exchange (ASPI, since January 2022), Malaysia's FTSE Bursa Malaysia (minimum 15 percent free float), and Bangladesh (since 2013).
The article argues the current structure inflates the index. In hydropower, manufacturing and newly listed companies, 70 to 85 percent of shares can remain locked under founders and project-affected persons, allowing a small amount of capital to lift prices and, through total capitalization, the overall index. SEBON's working paper illustrates the distortion with a hypothetical three-company market totaling 200 billion: company A, worth 100 billion with 20 percent of shares traded, carries a 50 percent index weight, while company C, worth 40 billion with 90 percent traded, carries 20 percent. Under a free-float method, the investable capital is 86 billion, raising C's weight to about 42 percent and reducing A's to about 23 percent.
The article links the structure to the absence of passive products. Index funds and exchange-traded funds have not launched in Nepal because locked-in shares are not available for purchase in the secondary market, and the article says the new benchmark would also allow fair measurement of large institutional holders such as the Citizen Investment Trust, the Employees Provident Fund and the Social Security Fund, and would enable index futures and options.
The article also raises implementation concerns. NEPSE has calculated a 'Float Index' since September 15, 2008, yet investors and analysts have not adopted it as a standard in the intervening 16 years. The article argues that governance problems, including insider trading, opaque financial statements, information leakage and weak regulation, are more fundamental than index methodology. Data is another constraint, as adjusting founder-share conversions and lock-in expiries between CDSC and NEPSE can take months.
For policy design, the article recommends reviewing the working paper's timeline: it proposes five to ten years of historical backtesting and at least six months of parallel calculation, but allocates only three months for implementation. It suggests six months of parallel testing, public consultation, and parallel publication of both indices. It also recommends an integrated data system among SEBON, NEPSE, CDSC and listed companies, with clear rules for bonus shares, rights issues, mergers and lock-in expiries, and a weight cap of 10, 12.5 or 15 percent for single companies, subject to historical testing.
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