SEBI seeks public comments on eligibility criteria for derivatives on non-benchmark indices

In order to prevent concentration of derivatives indices in a few stocks, market regulator SEBI on Monday invited public comments on a proposal for implementing eligibility criteria for non-benchmark indices.In its circular issued in May, SEBI had mandated that non-benchmark indices eligible for derivatives must have a minimum of 14 constituents, with the top stock capped at 20% weight and the top three together at 45%. Further, stock weights must follow a descending order.

To comply with these norms, two approaches have been proposed: either launch new indices that meet the requirements while allowing existing ones to continue, or modify existing indices by adjusting their constituents and weights, SEBI said in its consultation paper.

BSE has one such index, BANKEX, with 10 constituents. As no exchange-traded funds (ETFs) track it, the bourse favours adjusting the weights directly.NSE has two indices—Nifty Bank, with 12 stocks and ₹34,251 crore ETF assets under management (AUM), and Nifty Financial Services, with 20 constituents and ₹511 crore AUM. The weight of some stocks in these indices currently ranges as high as 29-33%, while others are as low as 0.4-2%.

After discussions with mutual funds and industry representatives, NSE has also supported adjusting existing indices to avoid disruption, preserve liquidity, and maintain the brand identity of the benchmarks.

However, given the significant ETF exposure, the exchange has suggested a phased, four-stage “glide path” for Nifty Bank over four months, while adjustments in Nifty Financial Services could be carried out in one tranche.

SEBI has sought public comments untill September 8 on whether existing indices should be adjusted instead of creating new ones and, if so, on the modalities of such adjustments.