Description

BSE Index Services announces methodology changes to BSE Focused IT Index, increasing constituent count from 10 to 14 and revising weight capping constraints.

Summary

BSE Index Services Pvt Ltd has announced significant methodology changes to the BSE Focused IT Index pursuant to SEBI Circular No.HO/47/15/11(1)2025-MRD-TPD1 dated October 30, 2025. The key changes include expanding the index constituent count from 10 to 14 companies and revising weight capping constraints to reduce concentration risk. The new methodology gives preference to companies with derivative linkage and implements stricter individual and aggregate weight caps.

Key Points

  • Index constituent count increased from 10 to 14 companies
  • Top constituent companies increased from 7 to 11 (with derivative linkage)
  • Individual constituent weight cap reduced from 33% to 20%
  • Top 3 stocks aggregate weight cap reduced from 63% to 45%
  • New constraint: Top 5 stocks aggregate weight capped at 60%
  • Universe remains BSE 500 companies in Information Technology sector
  • Derivative linkage constraints maintained: individual non-derivative linked stocks capped at 5%, aggregate at 20%
  • Buffer zone for existing constituents adjusted from rank 8-12 to rank 12-17

Regulatory Changes

Previous Methodology:

  • Top 7 companies with derivative linkage selected mandatorily
  • Existing constituents ranked 8-12 selected to reach target of 10
  • Single constituent weight cap: 33%
  • Top 3 constituents aggregate weight cap: 63%

New Methodology:

  • Top 11 companies with derivative linkage selected mandatorily
  • Existing constituents ranked 12-17 retained to reach target of 14
  • Single constituent weight cap: 20%
  • Top 3 constituents aggregate weight cap: 45%
  • Top 5 constituents aggregate weight cap: 60%
  • Excess weight redistributed proportionally across uncapped stocks

Compliance Requirements

  • Index rebalancing will apply quarterly, effective as of market open on the Monday following the third Friday of March, June, September, and December
  • Constituent selection prioritizes companies with derivative linkage
  • Float-adjusted market capitalization remains the basis for weighting
  • Weight redistribution must maintain ranking consistency with free-float market capitalization rankings
  • Derivative market linkage constraints must be maintained: individual non-derivative stocks ≤5%, aggregate ≤20%

Important Dates

  • Notice Date: December 5, 2025
  • Reference Circular: SEBI Circular No.HO/47/15/11(1)2025-MRD-TPD1 dated October 30, 2025
  • Quarterly Rebalancing: Effective market open on Monday following third Friday of March, June, September, and December

Impact Assessment

Market Impact:

  • Reduced concentration risk through lower weight caps benefits index stability
  • Increased constituent count from 10 to 14 provides better sector representation
  • Passive funds and ETFs tracking this index will need to rebalance portfolios
  • Companies newly included or excluded will see passive flow impacts

Operational Impact:

  • Enhanced diversification with 40% more constituents
  • Derivative-linked stocks continue to receive preference in selection
  • Lower individual caps (20% vs 33%) prevent single-stock dominance
  • Top-heavy concentration reduced significantly (top 3: 45% vs 63%)

Trading Impact:

  • Index reconstitution may trigger significant trading volumes in IT sector stocks
  • Derivative instruments based on this index may see adjusted correlations
  • Weight redistribution at quarterly rebalancing will create systematic trading opportunities

Impact Justification

Methodology change affects index composition and weightage distribution for BSE Focused IT Index, impacting passive funds and derivative-linked securities but limited to IT sector constituents.