Sebi Seeks Public Comments on New Eligibility Criteria for Derivatives on Non-Benchmark Indices

The Securities and Exchange Board of India (Sebi) is seeking public feedback on a proposal to establish eligibility criteria for non-benchmark indices. This move aims to prevent the concentration of derivatives indices in a limited number of stocks. In May, Sebi issued a circular mandating that non-benchmark indices eligible for derivatives must include at least 14 constituents. Additionally, the weight of the top stock should not exceed 20%, and the combined weight of the top three stocks should be capped at 45%.

To comply with these guidelines, Sebi has outlined two potential approaches. One option is to introduce new indices that meet the requirements while allowing existing ones to remain unchanged. Alternatively, existing indices could be modified by adjusting their constituents and weights. This was detailed in Sebi's consultation paper.

Indices Adjustments and Stakeholder Opinions

BSE's BANKEX index currently consists of 10 constituents. As there are no exchange-traded funds (ETFs) tracking it, BSE prefers to directly adjust the weights of its constituents. Meanwhile, NSE manages two indices: Nifty Bank, which includes 12 stocks with ETF assets under management (AUM) of Rs 34,251 crore, and Nifty Financial Services, comprising 20 constituents with an AUM of Rs 511 crore.

The weight distribution in these indices varies significantly, with some stocks having weights as high as 29-33%, while others range from 0.4-2%. After discussions with mutual funds and industry representatives, NSE has expressed support for adjusting existing indices to avoid disruption, preserve liquidity, and maintain the brand identity of these benchmarks.

Proposed Implementation Timeline

Given the substantial ETF exposure, NSE has proposed a phased approach for implementing changes to the Nifty Bank index over four months. In contrast, adjustments to the Nifty Financial Services index could be completed in a single tranche. This phased implementation aims to minimise market disruption while ensuring compliance with Sebi's guidelines.

Sebi is inviting public comments on whether existing indices should be adjusted instead of creating new ones. The regulator is also seeking input on the modalities of such adjustments. The deadline for submitting comments is September 8.

This initiative reflects Sebi's commitment to maintaining a balanced and fair market environment by preventing excessive concentration in derivatives indices. By considering public feedback and industry insights, Sebi aims to implement changes that align with market needs while safeguarding investor interests.

With inputs from PTI