Description

SEBI mandates constituent and weight adjustments in existing Non-Benchmark Indices (NBIs) to comply with prudential norms for derivatives trading, with phased implementation for BANKNIFTY over four monthly tranches.

Summary

SEBI has issued implementation guidelines for eligibility criteria on existing Non-Benchmark Indices (NBIs) that have derivatives contracts. Stock exchanges must adjust constituents and weights in existing NBIs to comply with prudential norms stipulated in SEBI circular SEBI/HO/MRD/TPD-1/P/CIR/2025/79 dated May 29, 2025. BANKEX and FINNIFTY will implement changes in a single tranche, while BANKNIFTY will follow a phased approach over four monthly tranches to ensure orderly rebalancing.

Key Points

  • Stock exchanges must adjust existing NBIs to meet new eligibility criteria rather than creating separate indices
  • Four prudential norms apply: minimum 14 constituents, top constituent weight ≤20%, top three constituents combined weight ≤45%, descending weight structure for all constituents
  • BANKEX (BSE) and FINNIFTY (NSE) will implement compliance in a single tranche
  • BANKNIFTY (NSE) will implement compliance over four monthly tranches
  • Decision based on public consultation held August 18, 2025, and Secondary Market Advisory Committee (SMAC) recommendations
  • Implementation considers impact on passive funds tracking indices and derivatives contracts

Regulatory Changes

Eligibility Criteria for Non-Benchmark Indices

As per SEBI circular SEBI/HO/MRD/TPD-1/P/CIR/2025/79 dated May 29, 2025, derivatives on NBIs must meet:

  1. Minimum constituents: At least 14 stocks
  2. Top constituent weight: Maximum 20%
  3. Top three constituents combined: Maximum 45%
  4. Weight structure: Descending order (all constituents’ weights must be lower than higher-weighted constituents)

Implementation Methodology

Single Tranche Implementation (BANKEX and FINNIFTY):

  • Constituent and weight adjustments completed in one instance

Phased Implementation (BANKNIFTY):

  • Four monthly tranches for orderly rebalancing
  • New constituents added in Tranche 1
  • Top 3 constituents assigned target weights achievable by end of Tranche 4
  • Weight adjustments checked at each tranche; excess weight reduced equally over remaining tranches
  • Example: If Rank 1 constituent weighs 28% (target 20%, excess 8%), weight reduced by 2% in first tranche to 26%, then re-evaluated and adjusted in subsequent tranches based on price movements

Compliance Requirements

For Stock Exchanges

  • Must undertake constituent and weight adjustments in existing NBIs to comply with prudential norms
  • Execute single tranche adjustments for BANKEX and FINNIFTY
  • Implement four monthly tranches for BANKNIFTY rebalancing
  • Re-evaluate constituent weights at the beginning of each tranche to confirm compliance with prudential norms
  • Account for inter-tranche price movements when calculating weight adjustments for subsequent tranches

Process

  • Stock exchanges were required to submit proposals for NBIs with derivatives contracts within 30 days of SEBI circular dated May 29, 2025
  • Adjustments must ensure orderly rebalancing of AUM tracking the indices
  • Weight adjustment methodology must follow prescribed calculation: remaining excess weight divided equally across remaining tranches

Important Dates

  • May 29, 2025: SEBI circular SEBI/HO/MRD/TPD-1/P/CIR/2025/79 issued
  • August 18, 2025: Public consultation conducted on implementation approach
  • October 30, 2025: Current circular issued with implementation guidelines
  • Phased implementation: BANKNIFTY adjustments over four monthly tranches (specific dates not provided in circular)

Impact Assessment

Market Impact

High impact on derivatives market: Changes affect three major derivative indices - BANKEX (BSE), FINNIFTY (NSE), and BANKNIFTY (NSE)

Passive fund management: Structural adjustments will impact passive funds and ETFs tracking these indices, requiring portfolio rebalancing

Derivatives contracts: Existing futures and options contracts on these indices may experience volatility during adjustment periods

Implementation Considerations

BANKNIFTY phased approach: The four-tranche methodology for BANKNIFTY acknowledges the significant market impact and need for orderly transition, suggesting this index has substantial tracking AUM

Price movement adjustments: The methodology accounts for inter-tranche price movements by re-evaluating weights at each stage, providing flexibility while maintaining compliance trajectory

Risk mitigation: Phased implementation reduces shock to passive fund portfolios and derivatives markets compared to single-tranche adjustment

Operational Impact

  • Index providers must recalculate and rebalance index compositions
  • Market participants must adjust derivatives strategies based on new index structures
  • Passive fund managers need to realign portfolios across multiple tranches for BANKNIFTY-tracking products

Impact Justification

Mandatory structural changes to major derivative indices affecting passive funds and derivatives contracts; phased implementation for BANKNIFTY indicates significant market impact requiring careful management