Description

BSE announces methodology changes to BSE Focused IT Index including expansion from 10 to 14 constituents and revised capping constraints, effective from quarterly rebalancing.

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 index will expand from 10 to 14 constituents, with revised selection criteria prioritizing derivative-linked stocks. The constituent weighting methodology has been substantially revised with more stringent capping constraints to improve diversification.

Key Points

  • Index constituent count increases from target of 10 to 14 stocks
  • Top 11 companies with derivative linkage automatically included (previously top 7)
  • Selection buffer range expands from ranks 8-12 to ranks 12-17 for existing constituents
  • Universe remains BSE 500 Information Technology sector stocks
  • Individual constituent weight cap reduced from 33% to 20%
  • Top 3 stocks aggregate weight cap reduced from 63% to 45%
  • New capping constraint: Top 5 stocks aggregate weight capped at 60%
  • Derivative linkage constraints remain: 5% individual cap and 20% aggregate cap for non-derivative linked stocks

Regulatory Changes

The methodology changes are implemented pursuant to SEBI Circular No.HO/47/15/11(1)2025-MRD-TPD1 dated October 30, 2025. The changes affect:

Index Construction Process:

  • Automatic inclusion threshold increased to top 11 derivative-linked companies (from top 7)
  • Buffer zone for existing constituents shifted to ranks 12-17 (from ranks 8-12)
  • Enhanced preference for derivative-linked stocks throughout selection process

Constituent Weighting Framework:

  • Single constituent maximum weight: 20% (reduced from 33%)
  • Top 3 constituents combined: 45% maximum (reduced from 63%)
  • Top 5 constituents combined: 60% maximum (new constraint)
  • Excess weight redistribution remains proportional across uncapped stocks

Compliance Requirements

For Index Tracking Products:

  • Portfolio managers and fund houses tracking BSE Focused IT Index must adjust holdings to reflect new constituent list and weighting constraints
  • Derivative strategies based on index composition require review and adjustment

Implementation Timeline:

  • Capping constraints applied quarterly effective market open on Monday following third Friday of March, June, September, and December
  • Constituent selection follows standard quarterly rebalancing schedule

Market Participants:

  • Derivative traders must note expanded constituent count and revised weightings
  • Passive investment products must align with new methodology

Important Dates

  • October 30, 2025: SEBI Circular issued
  • December 5, 2025: BSE announces methodology changes
  • Quarterly Rebalancing: Effective market open on Monday following third Friday of March, June, September, and December
  • Next Implementation Dates:
    • December 2025 (following third Friday)
    • March 2026
    • June 2026
    • September 2026

Impact Assessment

Index Composition Impact:

  • Expansion from 10 to 14 constituents increases index diversification
  • Mid-tier IT stocks with derivative linkage gain inclusion opportunity
  • Stocks ranked 8-11 (previously outside automatic inclusion) now automatically included if derivative-linked

Weighting Impact:

  • Reduced concentration risk with 20% single stock cap vs previous 33%
  • Large-cap IT stocks will see reduced individual weightings
  • Improved balance across top constituents with stricter top-3 and new top-5 caps
  • Small and mid-cap index constituents gain relatively higher representation

Market Operations Impact:

  • Index funds and ETFs will experience rebalancing trades during quarterly reviews
  • Derivative contracts based on BSE Focused IT Index may see volatility during transition
  • Enhanced liquidity focus through derivative linkage preference supports trading efficiency

Investment Product Impact:

  • Passive funds tracking the index will incur rebalancing costs
  • Performance tracking characteristics will change due to broader constituent base
  • Risk profile improves with better diversification across 14 stocks vs 10

Impact Justification

Methodology change affects index constituents and weightings for BSE Focused IT Index, impacting derivative-linked IT stocks and passive funds tracking this index