Description
SEBI mandates phased implementation of prudential norms for derivatives on non-benchmark indices including BANKNIFTY, FINNIFTY, and BANKEX with revised constituent and weight adjustments.
Summary
SEBI has issued guidelines for implementing eligibility criteria for derivatives on existing Non-Benchmark Indices (NBIs) following public consultation. The circular mandates constituent and weight adjustments in existing NBIs to comply with prudential norms specified in SEBI circular dated May 29, 2025. BANKNIFTY will undergo phased implementation over four monthly tranches, while BANKEX and FINNIFTY will implement changes in a single tranche.
Key Points
- New prudential norms apply to all existing non-benchmark indices with derivative contracts
- Minimum of 14 constituents required for all NBIs
- Top constituent weight capped at 20%
- Combined weight of top three constituents limited to 45%
- Descending weight structure mandatory for all constituents
- BANKNIFTY rebalancing will occur over four monthly tranches
- FINNIFTY and BANKEX will implement changes in single tranche
- Changes based on Secondary Market Advisory Committee (SMAC) recommendations
Regulatory Changes
Eligibility Criteria for NBI Derivatives (as per SEBI/HO/MRD/TPD-1/P/CIR/2025/79):
- Minimum Constituents: At least 14 stocks must be included in the index
- Top Constituent Weight: No single constituent can exceed 20% weight
- Top Three Constituents: Combined weight cannot exceed 45%
- Weight Structure: All constituents must follow descending weight order (no constituent can have higher weight than those ranked above it)
Implementation Approach:
- Stock exchanges must adjust constituents and weights in existing NBIs rather than creating separate indices
- Changes designed to minimize impact on passive funds tracking these indices
- Phased approach for BANKNIFTY to ensure orderly rebalancing
Compliance Requirements
For Stock Exchanges:
- Undertake necessary constituent and weight adjustments in existing NBIs to meet eligibility criteria
- For BANKNIFTY: Implement compliance over four monthly tranches
- New constituents added in Tranche 1
- Top 3 constituents adjusted to target weights by end of Tranche 4
- Weight reductions distributed equally across remaining tranches
- Re-evaluate weights at beginning of each tranche to account for price movements
- For BANKEX (BSE) and FINNIFTY (NSE): Implement compliance in single tranche
- Follow the adjustment methodology illustrated in the circular for weight rebalancing
Example Methodology:
- If Rank 1 constituent has 28% weight with 20% target (8% reduction needed)
- Tranche 1: Reduce by 2% (8% ÷ 4 tranches) to 26%
- Re-evaluate before each subsequent tranche
- Adjust remaining reduction equally over remaining tranches
Important Dates
- Circular Date: October 30, 2025
- Original SEBI Circular: May 29, 2025 (SEBI/HO/MRD/TPD-1/P/CIR/2025/79)
- Public Consultation: August 18, 2025
- Implementation Timeline:
- BANKNIFTY: Four monthly tranches (specific dates to be announced by NSE)
- FINNIFTY and BANKEX: Single tranche (dates to be announced)
Impact Assessment
Market Impact:
- Major restructuring of three widely-traded index derivative products
- BANKNIFTY is one of the most liquid derivative contracts in India - phased approach mitigates market disruption
- Weight adjustments in top constituents will affect derivative pricing and hedging strategies
Operational Impact:
- Passive funds and ETFs tracking these indices must rebalance portfolios
- Derivative traders need to adjust positions and strategies
- Four-tranche approach for BANKNIFTY provides time for orderly adjustment of significant AUM
- Single-tranche approach for FINNIFTY and BANKEX suggests smaller AUM or less disruptive adjustments
Stakeholder Impact:
- Index fund managers: Portfolio rebalancing required
- Derivative traders: Strategy adjustments needed for hedging and speculation
- Market makers: Liquidity provision strategies need revision
- Stock exchanges: Technical implementation of phased rebalancing mechanism
Risk Mitigation:
- Phased implementation reduces market volatility risk
- Re-evaluation between tranches accounts for inter-tranche price movements
- Prudential norms improve index diversification and reduce concentration risk
Impact Justification
Significant regulatory change affecting major derivative indices BANKNIFTY, FINNIFTY, and BANKEX. Will impact passive funds, derivatives trading, and requires phased rebalancing of constituents and weights over multiple months.