The Securities and Exchange Board of India (Sebi) on Thursday announced new, staggered deadlines for derivative eligibility rules, giving market participants an extended transition period. The move provides relief from a 29 May directive that brought in stricter rules to de-risk these indices by capping the influence of their top stocks.
In a circular, Sebi gave a phased approach for the BankNifty and FinNifty on the National Stock Exchange (NSE) and BSE‘s Bankex indices.
The regulations mandate that any index with a derivatives contract must have at least 14 stocks. Furthermore, no single stock can have a weight of over 20%, and the top three constituents combined cannot exceed 45%.
Following a consultation, market participants informed Sebi that adjusting existing indices was preferable to creating new ones. This approach helps preserve the liquidity and market-making ecosystems built around these indices and avoids disruption for linked derivative contracts and exchange-traded funds (ETFs).
Both the NSE and BSE opted to rework their existing indices to meet the new norms. The NSE identified that its Nifty Bank index (12 stocks) and Nifty Financial Services or FinNifty (20 stocks) would be impacted, while the BSE noted its Bankex index (10 stocks) would be affected.
Initially, all exchanges were required to comply with these norms by 3 November. However, acknowledging the significant impact these adjustments could have on passive funds and the derivatives market, Sebi conducted a public consultation and engaged with its Secondary Market Advisory Committee (SMAC).
The primary concern was the potential for market disruption, especially for indices such as BankNifty that have a substantial amount of assets under management (AUM) tracking them.
Based on the feedback, Sebi decided that compliance will be achieved by adjusting the constituent weights within the existing indices, rather than creating entirely new ones.
Phased transition
The most significant change is the special dispensation for BankNifty. To ensure an orderly rebalancing, the adjustment for this index will be implemented in a phased manner over four monthly tranches. The deadline for its full compliance has been extended to 31 March .
The process will involve gradually reducing the weights of top constituents in each tranche and redistributing the excess weight among the other stocks in the index, ensuring a smooth transition.
For BSE’s Bankex and NSE’s FinNifty derivatives, the compliance process will be completed in a single adjustment. The final date for these indices to adhere to the new prudential norms has been pushed to 31 December.
