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Kathmandu, August 2. The market capitalization is the latest total value of all listed stocks in the market. At the close of trading on Thursday, it reached 47 trillion 65 billion. This capitalization amount is the highest so far.
Capitalization is the size of the market. According to this market capitalization, the largest stock market in the world is the New York Stock Exchange in the United States. Its total capitalization is $290 billion.
Now big investors are not happy with the way capitalization is calculated in this market. They have been saying that the current capitalization calculation method is flawed. Because of the current calculation method, the market size looks much larger than it actually is.
Investors are concerned that when the size of capital is seen as larger than it actually is, it may have an impact on the future policy-making process and may have a positive impact on the market.
“On one hand, the capitalization amount is much larger than the actual amount and is wrong. On the other hand, when this capitalization amount starts to be larger than the gross domestic product (GDP) tomorrow, the market will raise objections and the construction party can adopt a harsh policy on the market, which will affect the free operation of the market. That is why the market value calculation method of the market should be corrected immediately,” said Ambika Prasad Paudel, an investor and former president of the Nepal Investors Forum.
What are the flaws in the market’s capitalization in the eyes of investors?
In the Nepali stock market, the stocks of banks and financial institutions are divided into two categories – one is the founder group and the other is the general group. There are also two types of stock prices for the two groups. The capitalization calculation of stocks always has two prices and is forced to be done at the same price.
Let’s understand this through an example. The number of listed shares of Nabil Bank, the largest commercial bank in terms of capitalization, is 275 million 69 thousand 984 shares. Of these, the number of general group shares is 112 million 2448 thousand 885 shares, accounting for 41.56%, and the remaining 15 million 81 million 21 thousand 99 shares, accounting for 58.44%. The last trading price of Nabil common shares is Rs 660, and the last trading price of founder shares is Rs 307.
NEPSE currently considers the value of all shares as 660 when calculating capital. This brings the total capital of Nabil to 1 trillion 78 billion. However, if calculated according to investors’ statements, the total capital of Nabil is only 1 trillion 22 billion. Calculation: (15,81,21099×307)+(11,24,48,885×660).
The capital of Nabil Bank alone was $56 billion more than the actual amount. The capital of each bank and financial institution calculated based on this is higher than the actual amount. The number of founder shares in each bank and financial institution is higher than the common shares, but all shares are calculated based on the common stock value.
“When you calculate capitalization the same way, you see the reality when founders and the general public are valued differently,” Paudel said.
Similarly, the existence of several companies in the market came to an end. The capitalization of a dozen defunct companies was also counted in NEPSE.
Arun Botany Industry, Virat Sooz, Butwal Yarn Factory, Himalayan Floor, Gorakhkali Rubber Industry, Harisidhi Brick Industry, Jyoti Spinning Mill, Nepal Vegetable Ghee Industry, Raghupati Jute Mill, Bhrikuti Paper Factory, Shriram Sugar Mill, Capital Merchant Finance Capital Amount, Crystal Finance, Himalayan Finance, Remembrance Finance, Nepal Share Markets, Yak and Yeti Hotel are also being added.
The total market value of these 19 companies has added up to 5.5 billion every day. It also shows that the size of the stock market is larger than the real market.
What does NEPSE say?
NEPSE said the current calculation method is a general method and no changes are planned. “If you only look at the total capital of a general group, then investors will look at the circulating market value,” said NEPSE spokesperson Murahari Parajuli.
In other markets of the world, the general public and founders do not trade at separate prices, everyone has the same price. Therefore, the capitalization is consistent. However, in Nepal, the general public and founders trade at different prices as far as banks and financial institutions are concerned.
Questions are now being raised about the method of calculation of capitalisation as founders and common people are trading at different prices. NEPSE officials claim that the problem is not with the method of calculation but with differentiating the value of shares of the same company between founders and common people.
Gopal Bhatt, a capital markets expert and former executive director of Nepal Rastra Bank, said there is no need to argue about capitalisation. Since founder shares are not traded but common shares are traded, NEPSE uses the total equity in the market as the common share value to calculate capitalisation. This is one of NEPSE’s calculation methods,” he said. “There is a separate method to look at the total capitalisation of common shares that are being traded.”
The only indicator that represents the market value of common shares is float market capitalization, which NEPSE shows separately on its website. “We have shown the share trading of the public by differentiating between the sensitive float index and its capitalization,” said Parajuli, a NEPSE spokesperson.
There is a huge difference between the float and total market capitalization. The float is currently equivalent to Rs 16,800 crore. The total capital is Rs 47,650 crore. So the total capital is very large. NEPSE said no one should worry about the size of the capital.
The NEPSE index will also decline based on changes in market capitalization. From January 30, 2050, the NEPSE calculation will start with the total capitalization of all companies as 100.
For example, if the amount of capital injected on one day is 10 billion and the amount of capital injected on the next day reaches 10.2 billion, NEPSE will also rise by 2% to 120 points. In other countries in the world, the index decreases according to the total capital.
Investors said the NEPSE index would also be more realistic if the new method was adopted to calculate market capitalisation.
Investors compare capitalization to GDP and panic
Warren Buffett, a famous investor in the world’s stock market, defines market capitalization exceeding GDP as “overvaluation”. Before investing, he set up a separate index to compare total capitalization with GDP. He believes that investors should invest cautiously at this time.
But later, after determining that the total capitalization of various developed countries will never be lower than GDP, Buffett himself said that there is no need to compare total capitalization with GDP.
Now some investors in Nepal have started to formulate strategies by comparing market capitalization and GDP. The current market capitalization has reached 47 trillion 65 billion. Similarly, the current GDP is 57 trillion 40 billion. In this way, if no other new stocks are added, even if the market rises only 20%, it will meet the GDP.
As a result, some investors doubt that the market will be able to outperform GDP, or that strict policies will not allow it to rise.
Bhat, former executive director of Rashtra Bank, said there is no need to be afraid of this. He said that even now, the market capitalization of developed countries in the world is larger than GDP, so there is no need to panic because of the comparison between market capitalization and GDP.
Neighboring India has a market cap of 122% of GDP, or 22% higher than GDP. The United States also has a market cap of 190% of GDP. Similarly, Japan has a market cap of 153% of GDP.
Apart from this, the market capitalization of many countries including Australia, Canada, Saudi Arabia, South Korea, Netherlands, Switzerland, South Africa, Iran, Sweden, and the United Arab Emirates exceeds GDP. Therefore, experts say that there is no need to be afraid of comparing market capitalization with GDP. However, in the future, when Nepal’s market capitalization is higher than its GDP, tightening market-related policies based on this may backfire.
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