NSE, BSE prefer adjustments in existing indices to meet Sebi’s norms for F&O indices, Sebi seeks public feedback

NSE, BSE prefer adjustments in existing indices to meet Sebi’s norms for F&O indices, Sebi seeks public feedback

India’s leading stock exchanges, NSE and BSE, have both favoured tweaking the structure of their existing non-benchmark indices rather than creating new ones, as they respond to Sebi’s prudential norms for eligibility of derivatives on such indices.

In a consultation paper released on August 18, 2025, Sebi stakeholders’ feedback on how to operationalize rules laid down in its May 29 circular. The regulator had mandated that Non-Benchmark Indices must have at least 14 constituents, with no single stock carrying more than 20 percent weightage, the weightage of top three stocks together capped at 45 percent, and a descending weight structure for all constituents. The move aims to ensure that indices supporting derivatives contracts remain broad-based and not concentrated in just few stocks.

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BSE backs quick fix for Bankex

BSE in its feedback, suggested to Sebi that it has only one Non-Benchmark Index affected i.e. the Bankex, which currently comprises 10 constituents. Also, no ETFs or index funds track Bankex, the exchange said the simplest way would be a one-time adjustment of constituents and weights to bring the index in line with Sebi’s prescribed thresholds.

NSE for adjustment path for Nifty Bank and Fin Nifty

NSE, said it has two indices, Nifty Bank with 12 constituents and Nifty Financial Services or Fin Nifty with 20 constituents are widely tracked, with ETF and index fund assets under management (AUM) of around Rs 34,251 crore and Rs 511 crore, respectively, as of June 30, 2025.

NSE has argued against creating new indices, noting that this could fragment liquidity, disrupt the derivatives market built around these benchmarks, and confuse investors with multiple indices in the same space. NSE said, the weightage of constituents in one index is in the range of around 29 percent to 2 percent and in another index is in the range of around 33 percent to 0.4 percent.

For Fin Nifty, where the passive fund exposure is smaller, it is proposed that a single-tranche adjustment could suffice.

NSE carried out discussions with various market participants including Mutual Funds, AMFI representatives, etc. During the discussions, it was represented by market participants that using existing Non-Benchmark Indices for derivatives over prescribing new indices for them would be beneficial on account of following reasons:

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What’s the proposal for glide path?

A glide path approach has been proposed for such indices, having weightage of top constituent more than Sebi’s prescribed 20 percent. For example, if the top stock currently has a weight of 28 percent against the required cap of 20 percent, the excess would be trimmed in stages, with adjustments recalibrated each month to account for price movements. This staggered approach would allow large passive funds to realign portfolios in an orderly way, minimizing sudden inflows and outflows in individual stocks.

The new constituents would be added in tranche1.The top 3 constituents will have a target weight at the end of tranche 4. In each 4 adjustment, the weight of top 3 constituents would be checked and if the weights are beyond the prudential norms, the excess would be targeted for reduction equally over the remaining tranches.

How adjustments will take place?

At each trance a formula will be followed like in start of the month 1 it will be (Actual weight -desired weight)/4, for start of month 2 it will be (Actual weight -desired weight)/3, for start of the third month it will be (Actual weight -desired weight)/2 and at the start of the fourth month, will be (Actual weight -desired weight). The excess weight after adjustment from the top constituents would be distributed amongst the other constituents as long as they meet the prudential norm.

Sebi has invited feedback from stakeholders on whether exchanges should proceed with weight and constituent adjustments in their existing indices, and whether the proposed modalities, including glide path plan are appropriate. Sebi has sought comments on the proposal until September 8, 2025.

Why this proposal?  

Sebi was of the view that higher concentrtion of few select stocks in indices may lead to manipulation.  In the recent interim order of Jane Street, Sebi had alleged that Jane Stret Group entities manipulated Nifty Bank by taking opposite positions in the Index and three key constituents of the index, HDFC Bank, ICICI Bank and Kotak Mahindra Bank which had a total weightage of 65 percent among the 12 constituents.